<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996
REGISTRATION NO. 333-06643
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3573 77-0364572
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
166 Baypointe Parkway, San Jose, CA 95134, Telephone: (408) 468-1800
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
------------------------
DAVID T. MITCHELL
Chief Executive Officer
JTS Corporation
166 Baypointe Parkway, San Jose, CA 95134, (408) 468-1800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
With Copies to:
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JEFFREY D. SAPER, ESQ. ANDREI M. MANOLIU, ESQ.
J. ROBERT SUFFOLETTA, ESQ. MATTHEW W. SONSINI, ESQ.
Wilson Sonsini Goodrich & Rosati, P.C. Cooley Godward Castro Huddleson & Tatum
650 Page Mill Road Five Palo Alto Square
Palo Alto, California 94304 Palo Alto, California 94306
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
The proposed sale will take place upon the merger (the "Merger") of Atari
Corporation, a Nevada Corporation ("Atari"), with and into JTS Corporation (the
"Registrant").
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
JTS CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------- --------------------------------------------
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(Information about the Transaction)
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................ Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............. Summary; Risk Factors; Introduction
4. Terms of the Transaction.................... Summary; Introduction; The Proposed Merger
and Related Transactions; Description of
Capital Stock of Atari and JTS; Comparison
of Rights of Stockholders of Atari and JTS
5. Pro Forma Financial Information............. Unaudited Pro Forma Condensed Combined
Financial Information
6. Material Contacts with the Company being
Acquired.................................. The Proposed Merger and Related Transactions
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable
8. Interests of Named Experts and Counsel...... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
(Information about the Registrant)
10. Information with Respect to S-3
Registrants............................... Not Applicable
11. Incorporation of Certain Information by
Reference................................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants............................... Not Applicable
13. Incorporation of Certain Information by
Reference................................. Not Applicable
14. Information with Respect to Registrants
other than S-2 or S-3 Registrants......... Summary; Risk Factors; Introduction; Voting
and Proxies; The Proposed Merger and Related
Transactions; Stock Price and Dividend
Information; Unaudited Pro Forma Condensed
Combined Financial Statements; Information
Regarding JTS Corporation; Description of
Capital Stock of Atari and JTS; Index to
Financial Statements
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<PAGE> 3
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FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------- --------------------------------------------
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(Information about the Company being Acquired)
15. Information with Respect to S-3 Companies... Summary; Risk Factors; Introduction; Voting
and Proxies; The Proposed Merger and Related
Transactions; Stock Price and Dividend
Information; Unaudited Pro Forma Condensed
Combined Financial Statements; Information
Regarding Atari; Description of Capital
Stock of Atari and JTS; Index to Financial
Statements
16. Information with Respect to S-2 or S-3
Companies................................. Not Applicable
17. Information with Respect to Companies other
than S-2 or S-3 Companies................. Not Applicable
(Voting and Management Information)
18. Information, if Proxies, Consents or
Authorizations are to be Solicited........ Summary; Introduction; Voting and Proxies,
The Proposed Merger and Related
Transactions; Information Regarding Atari
Corporation; Information Regarding JTS
Corporation; Description of Capital Stock
of Atari and JTS.
19. Information, if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer...................... Not Applicable
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<PAGE> 4
ATARI CORPORATION
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 328-0900
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of Atari
Corporation ("Atari") will be held at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari,
on Tuesday, July 30, 1996, at 9:00 a.m.
At the Special Meeting, you will be asked to consider and vote upon the
approval of an Amended and Restated Agreement and Plan of Reorganization dated
as of April 8, 1996 (the "Merger Agreement"), between Atari and JTS Corporation
("JTS") and the merger of Atari with and into JTS (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock and each outstanding option to acquire Atari Common Stock will
become an option to acquire an equal number of shares of JTS Common Stock.
Following consummation of the Merger (assuming no exercise of outstanding
options to purchase Atari Common Stock or JTS Common Stock after May 22, 1996),
Atari stockholders immediately prior to the Merger will hold an aggregate of
63,735,718 shares of JTS Common Stock representing approximately 62% of the
outstanding capital stock of JTS.
Atari's Board of Directors has unanimously approved the Merger and the
Merger Agreement and has determined that they are fair to, and in the best
interests of, Atari and its stockholders. The Board of Directors recommends a
vote FOR the Merger and the Merger Agreement.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken at the Special Meeting and a proxy card. The Joint Proxy
Statement/Prospectus provides more detailed information regarding the proposed
Merger and related matters, includes information about Atari and JTS and
discusses the Board's reasons for recommending the Merger.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED
AND VOTED AT THE SPECIAL MEETING.
July 15, 1996
Sincerely,
Sam Tramiel
President
<PAGE> 5
ATARI CORPORATION
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CALIFORNIA 94086
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
To the Stockholders of Atari Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Atari Corporation, a Nevada corporation ("Atari"), will be held on
Tuesday, July 30, 1996, at 9:00 a.m. at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari.
A Proxy Card and Joint Proxy Statement/Prospectus for the Special Meeting
are enclosed.
The Special Meeting is for the purpose of considering and acting upon:
1. A proposal to approve (a) the Amended and Restated Agreement and Plan
of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between
Atari and JTS Corporation, a Delaware corporation ("JTS"), and (b) the merger of
Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger
Agreement, each outstanding share of Atari Common Stock will be converted into
one share of JTS Common Stock, and each outstanding option to acquire Atari
Common Stock will become an option to acquire JTS Common Stock.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Merger is more fully described in, and the Merger Agreement is attached
in its entirety to, the Joint Proxy Statement/Prospectus accompanying this
Notice.
Only stockholders of record at the close of business on June 28, 1996 (the
"Record Date") are entitled to notice of, and to vote at, the Special Meeting or
at any postponement(s) or adjournment(s) thereof.
Approval of the Merger and the Merger Agreement will require the
affirmative vote of the holders of a majority of the shares of Atari Common
Stock outstanding on the Record Date.
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
July 15, 1996
By Order of the Board of Directors
Sam Tramiel
President
<PAGE> 6
JTS CORPORATION
166 BAYPOINTE PARKWAY
SAN JOSE, CALIFORNIA 95134
(408) 468-1800
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of JTS
Corporation ("JTS") will be held at JTS' offices located at 166 Baypointe
Parkway, San Jose, California on Tuesday, July 30, 1996 at 9:00 a.m.
At the Special Meeting, you will be asked to consider and vote upon the
approval of an Amended and Restated Agreement and Plan of Reorganization dated
as of April 8, 1996 (the "Merger Agreement"), between JTS and Atari Corporation
("Atari"), and the merger of Atari with and into JTS (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock. Following consummation of the Merger (assuming no exercise of
outstanding options to purchase JTS Common Stock or Atari Common Stock after May
22, 1996), the former stockholders of Atari will hold an aggregate of 63,735,718
shares of JTS Common Stock representing approximately 62% of the outstanding
capital stock of JTS.
JTS' Board of Directors has unanimously approved the Merger and the Merger
Agreement and has determined that they are fair to, and in the best interests
of, JTS and its stockholders. The Board of Directors recommends a vote FOR the
Merger and the Merger Agreement.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken at the Special Meeting and a proxy card. The Joint Proxy
Statement/Prospectus provides more detailed information regarding the proposed
Merger and related matters, includes information about JTS and Atari and
discusses the Board's reasons for recommending the Merger.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. IN
ORDER TO ENSURE THAT YOUR VOTE WILL BE COUNTED, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON. IF YOU ATTEND THE
SPECIAL MEETING IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
July 15, 1996
Sincerely,
David T. Mitchell
Chief Executive Officer and President
<PAGE> 7
JTS CORPORATION
166 BAYPOINTE PARKWAY
SAN JOSE, CALIFORNIA 95134
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
To the Stockholders of JTS Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of JTS Corporation, a Delaware corporation ("JTS"), will be held on
Tuesday, July 30, 1996, at 9:00 a.m., at JTS' offices located at 166 Baypointe
Parkway, San Jose, California.
The Special Meeting is for the purpose of considering and acting upon:
1. A proposal to approve (a) the Amended and Restated Agreement and Plan
of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between JTS
and Atari Corporation, a Nevada Corporation ("Atari"), and (b) the merger of
Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger
Agreement, each outstanding share of Atari Common Stock will be converted into
one share of JTS Common Stock, and each outstanding option to acquire Atari
Common Stock will become an option to acquire JTS Common Stock.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Merger is more fully described in, and the Merger Agreement is attached
in its entirety to, the Joint Proxy Statement/Prospectus accompanying this
Notice.
Only stockholders of record of JTS Common Stock and JTS Series A Preferred
Stock at the close of business on June 18, 1996 (the "Record Date") are entitled
to notice of, and to vote at, the Special Meeting, or at any postponement(s) or
adjournment(s) thereof.
Approval of the Merger and the Merger Agreement will require the
affirmative vote of the holders of (a) a majority of the shares of JTS Common
Stock and JTS Series A Preferred Stock outstanding on the Record Date, voting
together, and (b) at least two-thirds of the shares of JTS Series A Preferred
Stock outstanding on the Record Date, voting separately as a class. If the
Merger is consummated, stockholders of JTS who do not vote in favor of the
Merger and the Merger Agreement and who otherwise comply with Section 262 of the
Delaware General Corporation Law or Chapter 13 of the California General
Corporation Law will be entitled to statutory appraisal or dissenters' rights.
See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters'
Rights" and Appendices D-1 and D-2 to the accompanying Joint Proxy
Statement/Prospectus.
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
July 15, 1996
By Order of the Board of Directors
David T. Mitchell
Chief Executive
Officer and President
<PAGE> 8
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
JTS CORPORATION
PROSPECTUS
------------------------------------
JOINT PROXY STATEMENT
ATARI CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
JTS CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
------------------------------------
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") of Atari Corporation ("Atari") and JTS Corporation
("JTS") is being used (a) to solicit proxies on behalf of Atari from holders of
the outstanding Common Stock of Atari (the "Atari Common Stock") in connection
with the Special Meeting of Stockholders of Atari to be held on July 30, 1996
(the "Atari Special Meeting"), and (b) to solicit proxies on behalf of JTS from
holders of the outstanding JTS Common Stock (the "JTS Common Stock") and JTS
Series A Preferred Stock (the "JTS Series A Preferred Stock") in connection with
the Special Meeting of Stockholders of JTS to be held on July 30, 1996 (the "JTS
Special Meeting").
At the meetings referred to above, the stockholders of Atari and JTS will
be asked to consider and vote upon the approval of (a) the Amended and Restated
Agreement and Plan of Reorganization between Atari and JTS dated as of April 8,
1996 (the "Merger Agreement"), a copy of which is attached hereto as Appendix A
and incorporated herein by reference, and (b) the merger of Atari with and into
JTS (the "Merger").
Upon consummation of the Merger, Atari will be merged with and into JTS,
the separate existence of Atari will cease, JTS will remain as the surviving
corporation and all of the rights, privileges, powers, franchises, properties,
assets, liabilities and obligations of Atari will be vested in JTS. At the
effective time of the Merger, each outstanding share of Atari Common Stock will
be converted into one share of JTS Common Stock. See "The Proposed Merger and
Related Transactions--Summary of the Merger Agreement--Manner and Basis of
Converting Atari Common Stock."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
JTS under the Securities Act of 1933, as amended (the "Securities Act"), for the
offering of up to 63,735,718 shares of JTS Common Stock in connection with the
Merger. This prospectus does not cover resales of the JTS Common Stock to be
issued in connection with the Merger and no person is authorized to use this
prospectus in connection with any resale.
The information set forth in this Joint Proxy Statement/Prospectus
regarding Atari has been furnished by Atari and the information set forth in
this Joint Proxy Statement/Prospectus regarding JTS has been furnished by JTS.
This Joint Proxy Statement/Prospectus is being mailed to stockholders of
Atari and JTS on or about July 15, 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS
ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
------------------------------------
NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED PURSUANT TO THIS
JOINT PROXY STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JULY 15, 1996.
<PAGE> 9
TABLE OF CONTENTS
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SUMMARY............................................................................. 6
The Parties to the Proposed Merger................................................ 6
Atari Special Meeting of Stockholders............................................. 6
JTS Special Meeting of Stockholders............................................... 7
The Merger........................................................................ 7
Market Price of Common Stock...................................................... 11
Risk Factors...................................................................... 11
Atari Historical Selected Consolidated Financial Data............................. 12
JTS and Moduler Electronics Unaudited Selected Financial Data..................... 13
Atari and JTS Unaudited Selected Pro Forma Combined Financial Data................ 14
Comparative Per Share Data........................................................ 15
RISK FACTORS........................................................................ 16
Risk Factors Related to the Business of Atari..................................... 16
Risk Factors Related to the Business of JTS....................................... 18
Other Risk Factors Related to the Merger.......................................... 24
INTRODUCTION........................................................................ 27
VOTING AND PROXIES.................................................................. 28
Date, Time and Place of Special Stockholder Meetings.............................. 28
Record Date and Outstanding Shares................................................ 28
Voting and Revocability of Proxies................................................ 28
Stockholder Votes Required........................................................ 29
Solicitation of Proxies; Expenses................................................. 30
Appraisal and Dissenters' Rights.................................................. 30
THE PROPOSED MERGER AND RELATED TRANSACTIONS........................................ 31
Background and Board Recommendations.............................................. 31
Summary of the Merger Agreement................................................... 39
Certain Other Items Related to the Merger......................................... 46
Related Transactions.............................................................. 48
Appraisal and Dissenters' Rights.................................................. 49
Certain Federal Income Tax Considerations......................................... 53
STOCK PRICE AND DIVIDEND INFORMATION................................................ 55
JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS.................. 56
JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................... 57
ATARI CORPORATION AND JTS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS.............................................................. 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION AND
PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE QUARTER
ENDED MARCH 31, 1996.............................................................. 67
INFORMATION REGARDING ATARI CORPORATION............................................. 68
Business of Atari................................................................. 68
Selected Consolidated Financial Data of Atari..................................... 73
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Atari............................................................ 74
Management of Atari............................................................... 79
Principal Stockholders of Atari................................................... 80
INFORMATION REGARDING JTS CORPORATION............................................... 82
Business of JTS................................................................... 82
JTS and Moduler Electronics Unaudited Selected Financial Data..................... 91
Management's Discussion and Analysis of Financial Condition and Results of
Operations of JTS.............................................................. 92
Management of JTS................................................................. 96
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2
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Certain Transactions................................................................ 103
Principal Stockholders of JTS....................................................... 106
DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS....................................... 108
Atari Capital Stock............................................................... 108
JTS Capital Stock................................................................. 108
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ATARI AND JTS AND THE COMBINED COMPANY...... 111
LEGAL MATTERS....................................................................... 116
EXPERTS............................................................................. 116
STOCKHOLDER PROPOSALS............................................................... 117
INDEX TO FINANCIAL STATEMENTS....................................................... F-1
APPENDICES
A Amended and Restated Agreement and Plan of Reorganization...................... A-1
B-1 Form of Atari Voting Agreement................................................ B-1-1
B-2 Form of JTS Voting Agreement.................................................. B-2-1
C Montgomery Securities Fairness Opinion......................................... C-1
D-1 Section 262 of the Delaware General Corporation Law........................... D-1-1
D-2 Chapter 13 of the California General Corporation Law.......................... D-2-1
</TABLE>
3
<PAGE> 11
AVAILABLE INFORMATION
Atari is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such material may also be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, material filed by Atari can be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of Atari and JTS to approve the Merger and the Merger
Agreement constitutes an offering of the JTS Common Stock to be issued in
connection with the Merger. Accordingly, JTS has filed with the Commission a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to such offering. This Joint Proxy
Statement/Prospectus constitutes the prospectus of JTS that is filed as part of
the Registration Statement. Other parts of the Registration Statement are
omitted from this Joint Proxy Statement/Prospectus in accordance with the rules
and regulations of the Commission. Copies of the Registration Statement,
including exhibits thereto, may be inspected, without charge, at the offices of
the Commission referred to above, or obtained at prescribed rates from the
Public Reference Section of the Commission at the address set forth above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SHARES OF JTS COMMON STOCK TO BE ISSUED IN THE MERGER, OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
4
<PAGE> 12
TRADEMARKS
This Joint Proxy Statement/Prospectus contains registered and other
trademarks and tradenames of Atari, JTS and other companies.
------------------
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth below. Reference is made to the particular
discussions set forth under "Information Regarding Atari
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of Atari" and "Information Regarding JTS
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of JTS." In connection with forward-looking statements
that appear in these disclosures, stockholders of Atari and JTS should carefully
review the factors set forth in the Joint Proxy Statement/Prospectus including,
but not limited to, those discussed under "Risk Factors -- Risk Factors Related
to the Business of Atari -- Significant Operating Losses; Disappointing Sales of
Jaguar Products," "-- Risk of Substantial Inventory Write-Downs," "-- Risk of
Potential Liabilities," "-- Intellectual Property," "-- Competition," "-- Risks
of Bridge Loan to JTS," "-- Reduction in Voting Control; Loss of Management
Control," "-- Risk Factors Related to the Business of JTS -- Limited Operating
History; Working Capital Deficit; Independent Accountants' Report and
Explanatory Paragraph," "-- Need for Additional Financing," "-- Highly
Competitive Market," "-- Uncertainty of Market Acceptance; Lengthy Sales Cycle,"
"-- Rapid Technological Change," "Recent Significant Appreciation in Price of
Atari Common Stock," "-- Availability of Components and Materials; Dependence on
Suppliers," "-- Cyclical Nature of Disk Drive and Computer Industries,"
"-- Dependence on Compaq Relationship; Customer Concentration," "-- Reliance on
Licensed Technology," "-- Intellectual Property and Proprietary Rights,"
"-- Expansion of Manufacturing Capacity," "-- Production Yields; Product
Quality," "-- Management of Growth," "-- Variability of Operating Results,"
"-- Dependence on Single Manufacturing Facility," "Risks of International Sales
and Manufacturing," "-- Dependence on Key Management Personnel," "-- Other Risk
Factors Related to the Merger," "-- Utilization of Net Operating Losses,"
"-- Control by Affiliates; Anti-takeover Effects" and "-- Diversion of
Management Attention." Certain statements contained within this Joint Proxy
Statement/Prospectus have been specifically identified as forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. However, the failure to specifically identify other
statements as forward-looking statements shall not be construed to imply that
such statements do not necessarily qualify as such within the meaning of the
applicable Securities Act and Exchange Act provisions.
5
<PAGE> 13
SUMMARY
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Atari Corporation, a Nevada corporation ("Atari"), with and into
JTS Corporation, a Delaware corporation ("JTS"), and certain related matters.
Upon consummation of the Merger, the separate existence of Atari will cease and
JTS will remain as the surviving corporation. Such corporation is sometimes
referred to herein as the "Combined Company." Unless otherwise indicated, all
references herein to Atari include Atari and its subsidiaries, and all
references herein to JTS include JTS and its subsidiaries, including Moduler
Electronics (India) Pvt. Ltd. ("Moduler Electronics").
The following is intended as a summary of the information contained in this
Joint Proxy Statement/Prospectus, is not intended to be a complete statement of
all material features of the proposals to be voted on, and is qualified in its
entirety by the more detailed information appearing elsewhere in this Joint
Proxy Statement/Prospectus and attached Appendices, including the Amended and
Restated Agreement and Plan of Reorganization attached hereto as Appendix A (the
"Merger Agreement") and the forms of Voting Agreement attached hereto as
Appendix B-1 and B-2 (the "Voting Agreements"), all of which are important and
should be carefully reviewed.
In May 1996, the JTS stockholders approved, subject to the closing of the
Merger, (i) an amendment and restatement of the JTS Certificate of Incorporation
to, among other things, increase the authorized shares of JTS Common Stock, and
(ii) an amendment and restatement of the JTS Bylaws. In addition, the holders of
the JTS Series A Preferred Stock elected to convert all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock immediately prior
to the closing of the Merger. Unless otherwise indicated, all information
contained herein reflects the foregoing changes to the Certificate of
Incorporation and Bylaws of JTS and the conversion of all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock.
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and 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
factors set forth in this Joint Proxy Statement/Prospectus.
THE PARTIES TO THE PROPOSED MERGER
Atari Corporation. Atari markets video game consoles, related software and
peripheral products and multimedia entertainment software for various platforms.
Atari's principal products are its Jaguar 64-bit interactive multimedia
entertainment system, Jaguar software and Jaguar peripherals. Due to
disappointing sales of Jaguar and related products, in late 1995 Atari
significantly downsized its Jaguar operations, and decided to focus its efforts
on selling its inventory of Jaguar and related products and to emphasize its
licensing and development activities related to multimedia entertainment
software for various platforms.
Atari was incorporated in Nevada in May 1984. Atari maintains its executive
offices at 455 South Mathilda Avenue, Sunnyvale, California 94086, and its
telephone number is (408) 328-0900.
JTS Corporation JTS designs, manufactures and markets hard disk drives for
the personal computer industry. JTS has developed two product families of hard
disk drives: the 3-inch form factor Nordic product family for notebook computers
and the 3.5-inch form factor Palladium product family for desktop personal
computers. In addition, JTS is developing a 5.25-inch form factor disk drive for
desktop personal computers.
JTS was incorporated in Delaware in February 1994. JTS maintains its
executive offices at 166 Baypointe Parkway, San Jose, California 95134, and its
telephone number is (408) 468-1800.
ATARI SPECIAL MEETING OF STOCKHOLDERS
Time, Date, and Purpose. The Atari Special Meeting of Stockholders (the
"Atari Special Meeting") will be held at the offices of Wilson Sonsini Goodrich
& Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to
Atari, on Tuesday, July 30, 1996 at 9:00 a.m. The purpose of the Atari Special
Meeting is for Atari stockholders to consider and vote upon a proposal to
approve the Merger and the Merger Agreement.
6
<PAGE> 14
Record Date; Stockholder Approval. The record date for stockholders of
Atari entitled to vote at the Atari Special Meeting is June 28, 1996 (the "Atari
Record Date"). Approval of the Merger and the Merger Agreement requires the
affirmative vote of holders of a majority of the shares of Atari Common Stock
outstanding on the Atari Record Date.
JTS SPECIAL MEETING OF STOCKHOLDERS
Time, Date and Purpose. The JTS Special Meeting of Stockholders (the "JTS
Special Meeting") will be held at the offices of JTS located at 166 Baypointe
Parkway, San Jose, California, on Tuesday, July 30, 1996 at 9:00 a.m. The
purpose of the JTS Special Meeting is for JTS Stockholders to consider and vote
upon a proposal to approve the Merger and the Merger Agreement.
Record Date; Stockholder Approval. The record date for stockholders of JTS
entitled to vote at the JTS Special Meeting is June 18, 1996 (the "JTS Record
Date"). Approval of the Merger and the Merger Agreement requires the affirmative
vote of holders of (a) a majority of the shares of JTS Common Stock and JTS
Series A Preferred Stock outstanding on the JTS Record Date, voting together,
(b) a majority of the shares of JTS Common Stock outstanding on the JTS Record
Date, voting separately as a class, and (c) at least two-thirds of the shares of
JTS Series A Preferred Stock outstanding on the JTS Record Date, voting
separately as a class.
THE MERGER
Effect of the Merger. Upon consummation of the Merger, Atari will be
merged with and into JTS, the separate existence of Atari will cease, JTS will
remain as the surviving corporation and all of the rights, privileges, powers,
franchises, properties, assets, liabilities and obligations of Atari will be
vested in JTS. At the Effective Time (as such term is defined below), each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock. See "The Proposed Merger and Related Transactions -- Summary of
the Merger Agreement -- Manner and Basis of Converting Atari Common Stock."
Immediately after giving effect to the Merger, assuming that no
stockholders of JTS perfect appraisal or dissenters' rights and assuming no
exercise of outstanding options to purchase Atari Common Stock or JTS Common
Stock after May 22, 1996, the shares of JTS Common Stock issued in the Merger
upon conversion of the Atari Common Stock will represent approximately 62% of
the outstanding shares of the Combined Company.
If the Merger does not receive all necessary stockholder approvals or the
Merger is not consummated for any other reason, Atari currently intends to
continue operating its business as presently conducted and will focus on its
existing licensing and software development activities. Atari also expects to
evaluate other strategic business opportunities. If the Merger does not receive
all necessary stockholder approvals or the Merger is not consummated for any
other reason, JTS expects to continue to operate its business as currently
planned and to pursue alternative sources of funding to provide necessary
working capital and to permit the expansion of its operations.
Atari Board of Directors. The Board of Directors of Atari has unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is fair to, and in the best interests of Atari and its stockholders. The Atari
Board of Directors unanimously recommends approval of the Merger Agreement and
the Merger by the Atari stockholders. The primary factors considered and relied
upon by the Atari Board of Directors in reaching its recommendation are referred
to in "The Proposed Merger and Related Transactions -- Recommendation of the
Board of Directors of Atari."
JTS Board of Directors. The Board of Directors of JTS has unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is fair to, and in the best interests of JTS and its stockholders. The JTS Board
of Directors unanimously recommends approval of the Merger Agreement and the
Merger by the JTS stockholders. The primary factors considered and relied upon
by the JTS Board of
7
<PAGE> 15
Directors in reaching its recommendation are referred to in "The Proposed Merger
and Related Transactions -- Recommendation of the Board of Directors of JTS."
Stockholder Votes Required. To approve the Merger, a majority of the
shares of Atari Common Stock must approve the Merger. It is expected that all of
the shares of Atari Common Stock owned by directors and executive officers of
Atari and their affiliates will be voted for approval of the Merger. These
shares constitute approximately 44% of the total number of outstanding shares of
Atari Common Stock. Approval of the Merger also requires the vote of holders of
a majority of the JTS Common Stock and Series A Preferred Stock (voting
together), a majority of the JTS Common Stock (voting separately as a class) and
at least two-thirds of the JTS Series A Preferred Stock (voting separately as a
class). It is expected that all of the shares of JTS Common Stock and Series A
Preferred Stock owned by directors and executive officers of JTS and their
affiliates will be voted for approval of the Merger. These shares constitute
approximately 96% of the total number of JTS Common Stock and 48% of the total
number of JTS Series A Preferred Stock.
Opinion of Montgomery Securities. Montgomery Securities ("Montgomery"),
financial advisor to Atari, has delivered to the Atari Board of Directors its
written opinion, dated February 5, 1996, to the effect that the conversion ratio
of Atari Common Stock into JTS Common Stock is fair to Atari from a financial
point of view, as of that date. Reference is made to the full text of the
opinion, a copy of which is attached hereto as Appendix C. See "The Proposed
Merger and Related Transactions -- Background and Board Recommendations -- Atari
Financial Advisor."
Effective Time. The Merger will be consummated on the date that the
Certificate of Merger is filed with the Nevada Secretary of State and the
Delaware Secretary of State (the "Effective Time"). The Effective Time is
expected to occur as soon as practicable after approval of the Merger and the
Merger Agreement at the Atari and JTS Special Meetings and satisfaction or
waiver of the conditions precedent to the Merger, as set forth in the Merger
Agreement.
Listing of Common Stock. The Atari Common Stock is listed on the American
Stock Exchange under the symbol "ATC." There is no public market for the JTS
Common Stock or the JTS Series A Preferred Stock. Upon consummation of the
Merger, it is expected that the JTS Common Stock will be listed on the American
Stock Exchange under the symbol "JTS", and that the Atari Common Stock will be
delisted from the American Stock Exchange.
Exchange of Shares. Exchange of Atari Common Stock certificates for JTS
Common Stock certificates will be made upon surrender of Atari Common Stock
certificates to Registrar and Transfer Company, Cranford, NJ, as exchange agent.
Atari stockholders will be provided with a letter of transmittal and related
materials for the exchange of their certificates after the Effective Time.
ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE INSTRUCTIONS AND TRANSMITTAL FORMS AFTER COMPLETION OF THE MERGER.
Assumption of Atari Options. Upon consummation of the Merger, each option
to purchase Atari Common Stock then outstanding will be assumed by JTS and will
be converted automatically into an option to purchase the same number of shares
of JTS Common Stock at an exercise price per share equal to the exercise price
per share of the Atari option. The other terms of the Atari options, including
vesting schedules, will remain unchanged.
Registration Statement on Form S-8. Within five days following the closing
of the Merger, JTS will file a Registration Statement on Form S-8 with the
Commission with respect to the shares of JTS Common Stock issuable upon exercise
of the assumed Atari options and JTS options granted or available for grant
under the JTS amended and restated 1995 Stock Option Plan (the "Restated Plan").
Assumption of Atari Debentures. Upon consummation of the Merger, all of
Atari's obligations under its outstanding 5 1/4% convertible subordinated
debentures due April 29, 2002 (the "Atari Debentures") will be assumed by JTS.
The Atari Debentures are presently convertible into Atari Common Stock at a
conversion
8
<PAGE> 16
price of $16.3125 per share, and following the Merger will be convertible into
JTS Common Stock at the same conversion price. The other terms of the Atari
Debentures will remain unchanged.
Conditions to Consummation of the Merger. Consummation of the Merger is
subject to various conditions precedent, including Atari and JTS stockholder
approvals of the Merger and the Merger Agreement, the receipt of certain
consents and approvals from various third parties and governmental agencies,
receipt of opinions of counsel regarding certain legal matters, including
opinions of tax counsel to the effect that the Merger will qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that stockholders of JTS holding not more than 5% of
the JTS capital stock entitled to vote at the JTS Special Meeting shall be
entitled to exercise appraisal or dissenters' rights. Each of the parties to the
Merger Agreement may, at its option, waive compliance with any condition
precedent to its obligation to consummate the Merger. In the event that a
condition to consummation of the Merger is not satisfied, each party whose
obligation to consummate the Merger is subject to satisfaction of such condition
intends to evaluate whether it would be in the best interests of that party and
its stockholders to waive the condition and consummate the Merger. In the event
that a condition to consummation of the Merger is waived by one of the parties
and applicable law requires that party to resolicit stockholder approval,
stockholder approval will be resolicited prior to consummation. For example,
stockholder approval would be resolicited in the event that such waiver would
result in an alteration or change in (a) the amount or kind of consideration to
be received by the Atari stockholders in exchange for their shares of Atari
Common Stock as a result of the Merger, (b) any term of the Certificate of
Incorporation of JTS to be effected by the Merger or (c) any of the terms and
conditions of the Merger Agreement if such alteration or change would adversely
affect the holders of JTS Common Stock or Atari Common Stock. Neither Atari nor
JTS presently has any intention of waiving any terms or conditions of the Merger
Agreement.
Termination and Amendment of Merger Agreement. The Merger Agreement may be
terminated, notwithstanding its approval by the stockholders of Atari or JTS,
(a) by mutual written agreement of the parties, (b) by Atari if there has been a
breach of any representation, warranty, covenant or agreement in the Merger
Agreement on the part of JTS which has or can reasonably be expected to have a
material adverse effect on JTS and its subsidiaries, taken as a whole, or upon
the occurrence of certain other events, (c) by JTS if there has been a breach of
any representation, warranty, covenant or agreement in the Merger Agreement on
the part of Atari which has or can reasonably be expected to have a material
adverse effect on Atari and its subsidiaries, taken as a whole, or upon the
occurrence of certain other events, or (d) by Atari or JTS if (i) the closing of
the Merger does not occur by July 31, 1996, (ii) there should be a final
nonappealable order of federal or state court preventing consummation of the
Merger, (iii) the JTS or Atari stockholders do not approve the Merger at their
respective stockholders' meetings, or (iv) the Atari Board of Directors shall
have accepted, approved or recommended to the Atari stockholders a superior
acquisition proposal. In addition, the Merger Agreement may be amended by the
mutual consent of the parties at any time prior to the Effective Time, whether
or not the Merger has been approved by the stockholders of Atari or JTS but,
after any such approval, no amendment will be made which by law requires further
approval by such stockholders without such further approval. See "The Proposed
Merger and Related Transactions -- Summary of the Merger Agreement --
Termination, Amendment and Waiver."
Availability of Appraisal and Dissenters' Rights. Under Section 262 of the
Delaware General Corporation Law ("DGCL"), a copy of which is attached hereto as
Appendix D-1, and Chapter 13 of the California General Corporation Law ("CGCL"),
a copy of which is attached hereto as Appendix D-2, stockholders of JTS may,
under certain circumstances and by following prescribed statutory procedures,
have the right to seek appraisal of the "fair value" of such stockholders'
shares. The failure of a stockholder choosing to execute such right to follow
such procedures may result in termination or waiver of appraisal and dissenters'
rights. See "The Proposed Merger and Related Transactions -- Appraisal and
Dissenters' Rights." The obligation of Atari to consummate the Merger is subject
to the condition that the holders of not more than 5% of the JTS capital stock
entitled to vote at the JTS Special Meeting shall have asserted and not
effectively withdrawn or lost the right to obtain the fair value of such
holders' shares pursuant to the applicable provisions of the DGCL and CGCL.
9
<PAGE> 17
The stockholders of Atari are not entitled to statutory appraisal or
dissenters' rights pursuant to the applicable provisions of the Nevada General
Corporation Law ("NGCL").
Resale of JTS Common Stock. The shares of JTS Common Stock to be issued to
former holders of Atari Common Stock in the Merger have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), by a Registration
Statement on Form S-4, of which this Joint Proxy Statement/Prospectus is a part,
thereby allowing such shares of JTS Common Stock to be traded without
restriction under the Securities Act by all such holders not deemed to be
"affiliates" (as such term is defined for purposes of Rule 145 promulgated under
the Securities Act) of Atari prior to the consummation of the Merger. See "The
Proposed Merger and Related Transactions -- Certain Other Items Related to the
Merger -- Resale of JTS Common Stock."
Certain Federal Income Tax Considerations. The obligations of each of
Atari and JTS to consummate the Merger are conditioned upon receipt of opinions
from their respective legal counsel that the Merger will qualify as a
reorganization for federal income tax purposes under Section 368(a) of the Code
and that, accordingly, no gain or loss ordinarily will be recognized by JTS or
Atari nor by Atari stockholders upon their receipt of shares of JTS Common Stock
in exchange for their shares of Atari Common Stock, except to the extent of cash
received for fractional shares, if any. Such legal opinions will be subject to
certain limitations and qualifications and will be based upon certain factual
assumptions and representations. Furthermore, such opinions will not be binding
on the Internal Revenue Service. In view of the complexities of federal income
and other tax laws, each Atari and JTS stockholder should consult with their own
tax advisors as to the specific tax consequences of the Merger, including the
applicable federal, state, local and foreign tax consequences to them of the
Merger in their specific circumstances.
Accounting Treatment. For accounting purposes, the Merger is treated as if
Atari acquired JTS. A new basis of accounting will be established for the assets
and liabilities of JTS. The new basis reflects the allocation of the purchase
price to the JTS assets and liabilities on the basis of their fair values at the
time the proposed transaction was announced. The aggregate purchase price to be
allocated includes the outstanding common stock of JTS, valued using $2.50 per
share which is the representative value of the Atari Common Stock at the time
the proposed transaction was announced, as well as the value of JTS options and
warrants and direct costs of the acquisition. Subsequent to the Merger, the
financial statements of the Combined Company will reflect the combined financial
position, results of operations and cash flows of Atari and JTS based on the new
basis of accounting for JTS and the historic cost basis of Atari. Pro forma
combined condensed financial statements are presented herein giving effect to
the Merger as if the transaction occurred, for purposes of the pro forma
combined financial position of the Combined Company, on March 31, 1996, and for
purposes of the pro forma combined results of operations of the Combined
Company, on the first day of each of the periods presented. The allocation of
the purchase price in the pro forma statements was based on an independent
analysis of the tangible and intangible assets of JTS, which will be revised as
updated information becomes available at the Effective Time. Under the purchase
accounting method, giving effect to the Merger, existing technology and goodwill
in the amount of approximately $22.0 million and $11.7 million, respectively,
are expected to be recognized by the Combined Company. It is anticipated that
the Combined Company will amortize the resulting existing technology and
goodwill over periods of three and seven years, respectively, which will have an
adverse effect on its results of operations. In addition, upon the consummation
of the Merger, in the third quarter of calendar year 1996, the Combined Company
expects to expense approximately $100.0 million of purchased in-process
technology. See "Unaudited Pro Forma Combined Condensed Financial Statements."
Atari Loan to JTS. In connection with the merger, on February 13, 1996,
Atari loaned $25.0 million to JTS pursuant to a Subordinated Secured Convertible
Promissory Note (the "Note") which is secured by substantially all of the assets
of JTS. Interest accrues on the unpaid principal amount of the Note at the rate
of 8.5% per annum. The Note was amended in June 1996 to increase the amount lent
pursuant thereto to $30.0 million. The Note provides that JTS shall repay the
outstanding principal and interest under the Note on September 30, 1996 if the
Merger has not occurred prior to such time. In the event that the Merger
Agreement is terminated, either party may, under certain conditions, elect to
convert the outstanding indebtedness under the Note into shares of JTS Series A
Preferred Stock. The Note is expressly subordinated
10
<PAGE> 18
to outstanding indebtedness in connection with JTS' primary bank loan agreement,
up to an amount of $5.0 million at any given time.
Related Transactions. In connection with the Merger, the parties have
effected or will effect a number of related party transactions, including the
grant of certain stock options by JTS. In addition, pursuant to the Voting
Agreements, certain stockholders of Atari and JTS have agreed to vote the shares
of Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock held by
them for the approval of the Merger and the Merger Agreement. See "The Proposed
Merger and Related Transactions -- Related Transactions."
Interests of Certain Persons. Certain members of the management of JTS
have certain interests in connection with the Merger that are in addition to the
interests of stockholders of JTS generally. See "The Proposed Merger and Related
Transactions -- Certain Other Items Related to the Merger -- Interests of
Certain Persons in the Merger."
Differences in Rights of Stockholders. Upon consummation of the Merger,
stockholders of Atari will become stockholders of JTS. As a result, their rights
as stockholders, which are now governed by the NGCL and the Articles of
Incorporation and Bylaws of Atari, will be governed by the DGCL and the
Certificate of Incorporation and Bylaws of the Combined Company. Because of
certain differences between the provisions of the NGCL and the Articles of
Incorporation and Bylaws of Atari, on the one hand, and the DGCL and the
Certificate of Incorporation and Bylaws of the Combined Company, on the other
hand, the current rights of the stockholders of Atari will change after the
Merger. See "Comparison of Rights of Stockholders of Atari and JTS."
MARKET PRICE OF COMMON STOCK
Atari Common Stock is traded on the American Stock Exchange under the
symbol "ATC." There is no public market for the JTS Common Stock or the JTS
Series A Preferred Stock. The closing price per share of Atari Common Stock was
$1 7/8 at February 12, 1996, the last day of trading before the announcement of
the Merger, and $ at July , 1996, the latest trading day before the
filing of this Joint Proxy Statement/ Prospectus with the Commission.
RISK FACTORS
The consummation of the Merger and the Merger Agreement and an investment
in the shares of JTS Common Stock each involve a high degree of risk. Before
voting on the Merger, stockholders of Atari and JTS should carefully consider
the information set forth in "Risk Factors."
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<PAGE> 19
ATARI HISTORICAL SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data of Atari have
been derived from the historical consolidated financial statements of Atari and
should be read in conjunction with such consolidated financial statements and
notes thereto, included elsewhere herein, with the exception of the Atari
Consolidated Statement of Operations Data prior to fiscal 1993 and the Atari
Consolidated Balance Sheet Data prior to December 31, 1994, which were derived
from historical consolidated financial statements not included herein. The
unaudited quarterly financial data reflects 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.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, FISCAL YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues................... $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Cost of revenues................. 6,211 3,846 44,234 35,200 42,768 132,455 189,598
Research and development
expenses....................... 201 1,815 5,410 5,775 4,876 9,171 15,333
Marketing and distribution
expenses....................... 758 2,576 12,726 14,651 8,980 31,125 48,249
General and administrative
expenses....................... 1,251 1,795 5,921 7,169 7,558 16,544 23,495
Restructuring charges............ -- -- -- -- 12,425 17,053 --
Operating loss................... (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683)
Other income (expense), net(1)... 6,343 685 3,507 33,441 (1,631) (4,145) 42,288
Income tax credit................ -- -- -- -- 264 434 54
Income (loss) from continuing
operations..................... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659
Discontinued operations.......... -- -- -- -- -- 9,000 --
Income (loss) before
extraordinary
credit......................... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659
Extraordinary credit............. -- 47 582 -- -- 104 1,960
Net income (loss)................ (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619
Earnings (loss) per common share:
Income (loss) from continuing
operations..................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.44) 0.41
Income (loss) before
extraordinary
credit......................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)................ (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets...................... $ 55,976 $ 65,126 $113,188 $ 51,388 $109,551 $239,296
Working capital..................... 47,200 55,084 92,670 33,896 75,563 159,831
Total assets........................ 68,406 77,569 131,042 74,833 138,508 253,486
Current liabilities................. 8,776 10,042 20,518 17,492 33,988 79,465
Long-term obligations............... 42,354 42,354 43,454 52,987 53,937 48,492
Shareholders' equity................ 17,276 25,173 67,070 4,354 50,583 125,529
</TABLE>
- ---------------
(1) Includes a gain from the sale of marketable securities of $6.3 million in
1996, a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
12
<PAGE> 20
JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA
The following unaudited selected pro forma combined financial data of JTS
and Moduler Electronics presents the pro forma combined financial position and
results of operations of JTS and Moduler Electronics as of and for the year
ended January 28, 1996 and for the three months ended April 28, 1996 and April
30, 1995. These unaudited selected pro forma financial data combine JTS and
Moduler Electronics giving effect to the JTS and Moduler Electronics
combination, which was accounted for as a purchase. The April 28, 1996 balance
sheet reflects the acquisition of Moduler Electronics which took place on April
4, 1996. Intercompany balances and transactions have been eliminated in the
presentation. This financial data should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and related notes
and the historical financial statements and related notes of JTS and Moduler
Electronics which are included elsewhere herein. All amounts are stated in
thousands, except per share amounts.
<TABLE>
<S> <C>
Statement of Operations Data:
Year Ended January 28, 1996 (Pro forma) --
Net revenues........................................................ $ 18,777
Gross margin (deficit).............................................. (14,849)
Research and development............................................ 13,375
Selling, general and administrative expenses........................ 5,777
Operating loss...................................................... (34,001)
Net loss............................................................ (35,170)
Loss per common share(1)............................................ (7.63)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 28, 1996 APRIL 30, 1995
<S> <C> <C>
Quarters ended April 28, 1996 and April 30, 1995 (Pro
forma) --
Total revenues.............................................. $ 17,581 $2,077
Operating loss.............................................. (12,098) (1,203)
Net loss.................................................... (12,820) (1,143)
Net loss per share(1)....................................... (1.47) (.26)
</TABLE>
<TABLE>
<CAPTION>
APRIL 28, 1996 JANUARY 28, 1996
(ACTUAL) (PRO FORMA)
-------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Current assets.......................................... $ 30,474 $ 12,722
Equipment and leasehold improvements, net............... 16,212 14,795
Total assets............................................ 46,871 28,111
Current liabilities..................................... 61,669 30,615
Long-term debt.......................................... 6,381 6,248
Redeemable Series A Preferred Stock..................... 29,697 29,696
Stockholders' deficit................................... (50,876) (38,448)
</TABLE>
- ---------------
(1) Excludes JTS Series A Preferred Stock, warrants and options as their effect
would be antidilutive.
13
<PAGE> 21
ATARI AND JTS UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth the unaudited selected pro forma combined
financial data for the periods and as of the date indicated which are derived
from the Unaudited Pro Forma Combined Condensed Financial Statements (the "Pro
Forma Financial Statements") which present the pro forma combined condensed
financial position and results of operations of Atari and JTS. The unaudited pro
forma condensed combined balance sheet has been prepared as if the Merger, which
will be accounted for as a purchase of JTS by Atari, was consummated as of March
31, 1996. The unaudited pro forma condensed combined statements of operations
give effect to the Merger as if the acquisition were completed at the beginning
of the periods presented. The Pro Forma Financial Statements combine the
historical results of operations of Atari for the year ended December 31, 1995
with the JTS and Moduler Electronics unaudited pro forma combined results of
operations for the year ended January 28, 1996 and the historical financial
position and results of operations of Atari as of and for the quarter ended
March 31, 1996 with the historical financial position and results of operations
of JTS as of and for the quarter ended April 28, 1996.
The unaudited selected pro forma combined financial data is provided for
illustrative purposes only and is not necessarily indicative of the combined
financial position or combined results of operations that would have been
reported had the Merger occurred on the dates indicated, nor do they represent a
forecast of the combined financial position or results of operations for any
future period. No pro forma adjustments have been included herein which reflect
potential effects of (a) efficiencies which may be obtained by combining Atari
and JTS operations or (b) costs of restructuring, integrating or consolidating
their operations. The unaudited selected pro forma combined financial data
should be read in conjunction with the Pro Forma Financial Statements and
related notes, and the historical financial statements and related notes of
Atari and JTS which are included elsewhere herein. All amounts are stated in
thousands, except for per share amounts.
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Pro Forma Combined Statement of Operations Data:
Net revenues.................................................. $ 18,853 $33,403
Cost of revenues.............................................. 27,725 86,177
Selling, marketing, general and administrative expenses....... 5,530 26,097
Research and development expenses............................. 7,607 18,785
Operating loss................................................ (22,009) (97,656)
Net loss before extraordinary credit.......................... (22,506) (95,318)
Loss per common share before extraordinary credit............. (0.22) (0.92)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C> <C>
Pro Forma Combined Balance Sheet Data:
Current assets................................................ $ 61,450
Working capital............................................... 14,805
Total assets.................................................. 126,756
Current liabilities........................................... 46,645
Long-term debt................................................ 48,735
Stockholders' equity.......................................... 31,376
</TABLE>
14
<PAGE> 22
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Atari
and pro forma combined per share data giving effect to the JTS and Moduler
Electronics combination and the Atari and JTS Merger as if the combination and
Merger were effective January 1, 1995 for the loss per common share data for the
year ended December 31, 1995 and January 1, 1996 for the loss per common share
data for the quarter ended March 31, 1996, and March 31, 1996 for book value per
common share data using the purchase method of accounting. The pro forma
combined per share data are derived from financial information in the Pro Forma
Financial Statements. The pro forma data are not necessarily indicative of
amounts which would have been achieved had the Merger been consummated at the
beginning of the period presented and should not be construed as representative
of future operations. This data should be read in conjunction with the Pro Forma
Financial Statements and notes thereto included elsewhere herein, and the
separate historical financial statements and notes thereto of Atari, JTS and
Moduler Electronics, also included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED ATARI,
JTS AND JTS AND
ATARI MODULER MODULER
HISTORICAL ELECTRONICS(1) ELECTRONICS(2)
---------- -------------- --------------
<S> <C> <C> <C>
Loss per common share before extraordinary credit for
the year ended December 31, 1995................... $(0.79) $(7.63) $(0.92)
Loss per common share for the quarter ended March 31,
1996............................................... $(0.01) $(1.47) $(0.22)
Book value per common share at March 31, 1996........ $ 0.27 $(5.40) $ 0.30
Tangible book value per common share at
March 31, 1996..................................... $ 0.26 $(5.42) $(0.03)
</TABLE>
- ---------------
(1) For purposes of this table, the period presented for the unaudited pro forma
combined net loss per share of JTS and Moduler Electronics is the fiscal
year ended January 28, 1996 and the quarter ended April 28, 1996 and the
book values are as of April 28, 1996. Outstanding JTS options, warrants and
JTS Series A Preferred Stock are excluded as their effect would be
antidilutive.
(2) The unaudited pro forma combined per share data assumes conversion of all
JTS Series A Preferred Stock outstanding into JTS Common Stock at the
effective date.
15
<PAGE> 23
RISK FACTORS
The following factors should be considered carefully in evaluating the
proposals to be voted on at the Atari Special Meeting and the JTS Special
Meeting. For periods following the Merger, references to the products, business,
results of operations or financial condition of JTS should be considered to
refer to JTS and Atari, unless the context otherwise requires.
RISK FACTORS RELATED TO THE BUSINESS OF ATARI
Significant Operating Losses; Disappointing Sales of Jaguar
Products. Atari has incurred significant operating losses for the past five
fiscal years. Most recently, Atari incurred an operating loss of $53.7 million
for fiscal 1995 and $24.0 million for fiscal 1994. Over the past several years,
Atari has undergone significant change. In 1992 and 1993, Atari significantly
downsized its operations, decided to exit the computer products business and
focused its efforts on its video game business. While restructuring, Atari
developed its 64-bit Jaguar interactive multimedia entertainment system, which
was introduced in the fourth quarter of 1993. For 1995 and 1994, net sales of
Jaguar and related software and accessories were $9.9 million and $29.3 million,
respectively, and were substantially below Atari's expectations. Atari
attributes the poor performance of Jaguar products to a number of factors
including (i) extensive delays in development of software for Jaguar which
resulted in reduced orders due to consumer concern as to when titles for the
platform would be released and how many titles would ultimately be available,
and (ii) the introduction of competing products by Sega Enterprises, Ltd.
("Sega") and Sony Corporation ("Sony") in May 1995 and September 1995,
respectively. Due to disappointing sales and competitive pricing pressures,
Atari reduced the suggested retail price of the Jaguar console from its original
price of $249.99 to its current price of $99.99. As a result of Jaguar price
reductions, the substantial curtailment of sales and marketing activities for
the Jaguar and the substantial curtailment of efforts by Atari and independent
software developers to develop additional software titles for the Jaguar, Atari
expects sales of Jaguar and related products to decline substantially in 1996
and thereafter.
The failure of Jaguar to achieve commercial acceptance has had a severe
financial impact on Atari. In this regard, Atari reported a net loss of $49.6
million for 1995 compared to net income of $9.4 million in 1994, and Atari's net
revenues declined from $38.7 million in 1994 to $14.6 million in 1995.
Accelerated amortization and write-offs of software development costs in the
amount of $16.6 million and inventory write-downs of $12.6 million contributed
significantly to the 1995 loss. The net loss for the first quarter of 1996 was
$800,000 compared to a net loss of $4.4 million for the first quarter of 1995
and Atari's net revenues declined from $4.9 million for the first quarter of
1995 to $1.3 million for the comparable period in 1996. The net loss in the
first quarter of 1996 was impacted by the $6.3 million gain from sale of
marketable securities offset by a $5.0 million inventory write-down in the
quarter. In response to these losses, the number of employees at Atari was
reduced from 101 at December 31, 1994 to 73 at December 31, 1995 and to 31 at
March 31, 1996. In addition to reductions in the Atari workforce, this
downsizing resulted in significant curtailment of research and development and
sales and marketing activities for Jaguar and related products. Accordingly,
Atari has 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.
See "Information Regarding Atari Corporation -- Business of Atari."
Risk of Additional Inventory Write-Downs. From the introduction of Jaguar
in late 1993 through May 1996, Atari sold approximately 135,000 units of Jaguar.
As of December 31, 1995, Atari had approximately 100,000 units of Jaguar in
inventory and the value of Jaguar inventory and related software was
approximately $9.9 million. Due to disappointing sales of Jaguar and increased
competition from products introduced by Sega and Sony, Atari reduced the
suggested retail price of Jaguar to $99.99 and recorded an inventory write-down
of $12.6 million in 1995. Despite the introduction of four additional game
titles in the first quarter of 1996, sales of Jaguar and related software have
remained disappointing due to uncertainty about Atari's commitment to the Jaguar
platform, increased price competition and pending competitive product
introductions. As a result of continued disappointing sales, management revised
estimates and wrote-down inventory by an additional $5.0 million in the first
quarter of 1996. As of the end of May 1996, Atari had approximately 90,000 units
of Jaguar in inventory.
16
<PAGE> 24
Volume sales of Jaguar and related software in 1996 have consisted
primarily of a large order from a new European customer. Atari is also pursuing
wholesale sales channels in the U.S. as well as licensing opportunities. There
can be no assurance that Atari's substantial unsold inventory of Jaguar and
related software can be sold at current or reduced prices, if at all. In
addition, any further decrease in the value of such inventory could result in
additional inventory write-downs by Atari.
Risk of Potential Liabilities. In connection with the restructuring of
Atari's business in 1992 and 1993 and Atari's decision in late 1995 to
significantly downsize its Jaguar operations, Atari has terminated and plans to
terminate numerous contracts and business relationships, including several
related to software development activities. Although Atari does not regard such
contracts or business relationships, either individually or in the aggregate, as
material, the termination of contracts and relationships has, from time to time,
resulted in litigation, diverting management and financial resources. There can
be no assurance that the parties to such contracts will not commence or threaten
to commence litigation related to such contracts. Any such litigation or
threatened litigation would further divert management and financial resources
and could have a material adverse effect on Atari's business, operating results
and financial condition. In addition, Atari holds several properties for sale,
some of which are currently being leased. The ownership and use of such
properties subjects Atari to numerous risks, including risks of environmental
and personal injury liabilities. Although Atari is attempting to sell certain of
such properties, such sales are not expected to eliminate all the risks
associated with Atari's ownership of such properties, including potential
environmental liabilities and ongoing indemnification and other contractual
obligations. At present, Atari has no such indemnification obligations and is
not aware of any such environmental liability.
Intellectual Property. Atari has exclusive use of its "Atari" name and
"Fuji" logo in all areas other than coin-operated arcade video game use. Atari
also has a portfolio of other intellectual properties including patents,
trademarks, and copyrights associated with its video game and computer
businesses. Atari believes its patents, trademarks and other intellectual
property are important assets. As of May 31, 1996, Atari held over 150 patents
in the United States and other jurisdictions which expire from 1996 to 2010 and
had applications pending for three additional patents. There can be no assurance
that any of these patent rights will be upheld in the future or that Atari will
be able to preserve any of its other intellectual property rights. Atari has in
the past received communications from third parties asserting rights to certain
of its intellectual property. Atari has also been involved in several major
lawsuits regarding its intellectual property, including a suit with Nintendo of
America, Inc. and its affiliates ("Nintendo.") which was settled in March 1994
and a suit with Sega which was settled in September 1994. In the event any third
party were to make a valid claim with respect to Atari's intellectual property
and a license were not available on commercially reasonable terms, Atari's
business, financial condition and results of operations would be materially and
adversely affected. Litigation, which has in the past resulted and could in the
future result in substantial costs and diversion of resources, may also be
necessary to enforce Atari's patents or other intellectual property rights or to
defend against third party infringement claims. The occurrence of litigation
relating to patent infringement or other intellectual property matters,
regardless of the outcome, could have a material adverse effect on Atari's
business, financial condition and results of operations.
Competition. The video game business is intensely competitive. Since its
introduction in late 1993, the Jaguar, Atari's principal product, has failed to
achieve broad market acceptance. Atari does not expect that the Jaguar, even at
its substantially reduced price, will ever become a broadly accepted video game
console, or that Jaguar technology will be broadly adopted by software title
developers. The video game industry is also characterized by unpredictable and
rapid shifts in the popularity of certain platforms, by severe price
competition, and by frequent new technology and product introductions. In this
regard, numerous companies have introduced or have developed and are expected to
introduce video game consoles that are or may become competitive with Jaguar. In
addition, an increasing number of entertainment titles are being developed for
or ported to the PC platform. Most of Atari's competitors have greater
experience and expertise in 3D graphics and multimedia technology and have
substantially greater engineering, marketing and financial resources than Atari.
17
<PAGE> 25
Risks of Bridge Loan to JTS. In February 1996, Atari loaned $25.0 million
to JTS in connection with the Merger, and in June 1996 the loan amount was
increased to $30.0 million. The loan is due to be repaid by JTS in September
1996 and is secured by substantially all of the assets of JTS. Atari's security
interest in such assets is junior to existing security interests in favor of a
bank and certain equipment lessors. In the event the Merger is not consummated,
there can be no assurance that Atari's security interest in such assets will
adequately protect Atari in the event JTS is unable to repay the loan. In
addition, the loan is convertible into shares of JTS Series A Preferred Stock at
the option of Atari or JTS upon the occurrence of certain conditions, including
a breach of the Merger Agreement by the other party. In the event such
conversion occurs, Atari would hold a significant percentage of JTS' outstanding
equity securities and would be subject to the numerous risks associated with
JTS' business. There can be no assurance that such securities would be freely
tradeable at the time of conversion, if ever. See "Risk Factors Related to the
Business of JTS."
Reduction in Voting Control; Loss of Management Control. Upon the closing
of the Merger, the stockholders of JTS prior to the Merger will own
approximately 38% of the outstanding voting securities of the Combined Company
(assuming no exercise of options or warrants after May 22, 1996). In addition,
it is anticipated that the executive officers of JTS prior to the Merger will
continue to serve as executive officers of the Combined Company and that none of
the executive officers of Atari prior to the Merger will serve as executive
officers of the Combined Company. Further, the Board of Directors of the
Combined Company will include five current JTS directors and two current Atari
directors. The current JTS officers and directors and their affiliates will own
approximately 23% of the outstanding voting securities of the Combined Company
(assuming no exercise of options or warrants after May 22, 1996). As a result,
such stockholders, acting together, could exert significant influence over
matters requiring approval of the stockholders of the Combined Company. Such
matters include the election of the members of the Combined Company's Board of
Directors, proxy contests, mergers involving the Combined Company, tender offers
or other transactions that could afford stockholders of the Combined Company the
opportunity to realize a premium over the then prevailing market price of the
Common Stock of the Combined Company.
RISK FACTORS RELATED TO THE BUSINESS OF JTS
Limited Operating History; History of Operating Losses; Working Capital
Deficit; Independent Accountants' Report with Explanatory Paragraph. JTS was
incorporated in February 1994 and did not commence production of hard disk
drives until October 1995. JTS experienced operating losses for its fiscal years
ended January 29, 1995 and January 28, 1996 of $5.2 million and $31.6 million,
respectively, which resulted from the substantial costs associated with the
design, development and marketing of new products, the establishment of
manufacturing operations and the development of a supplier base. At January 28,
1996, JTS had a working capital deficit of $15.2 million and a negative net
worth of $38.6 million. JTS has yet to generate significant revenues and cannot
assure that any level of future revenues will be attained or that JTS will
achieve or maintain successful operations in the future. Such factors have
raised substantial doubt about the ability of JTS to continue its operations
without achieving successful future operations or obtaining financing to meet
its working capital needs, neither of which can be assured. The report of
independent public accountants on JTS' financial statements includes an
explanatory paragraph describing uncertainties concerning the ability of JTS to
continue as a going concern. See "Notes to JTS Financial Statements."
Need For Additional Financing; Current Financing Plans. The hard disk
drive business is extremely capital intensive, and JTS anticipates that it will
need significant additional financing resources in the near term for facilities
expansion, capital expenditures, working capital, research and development and
vendor tooling. In this regard, JTS has held discussions with investment banking
firms regarding the possibility of raising additional capital through the
issuance of debt or equity securities. In June 1996, JTS retained an investment
banking firm to advise JTS with respect to the private issuance of between
$50-100 million of 10-year debt securities convertible into JTS Common Stock,
although the terms of such financing have not been established and the marketing
effort for such financing has not yet commenced. Recent comparable transactions
were priced to yield between 5.5-6.5% annually and included conversion premiums
over the market prices of the Common Stock of between 20-25%. JTS intends for
such financing to close as soon as practicable after the closing of the Merger
and the terms of the debt securities and the amount of the
18
<PAGE> 26
securities offered will not be determined until the closing of the financing, if
any. There can be no assurance that JTS will be able to consummate such
financing on terms acceptable to JTS or at all. As a result, the pro forma
financial statements included in this Joint Proxy Statement/Prospectus do not
reflect such transactions. The issuance of equity or convertible debt
securities, upon conversion, would result in dilution of the voting control of
existing stockholders, could result in dilution to earnings per share and would
provide to the holders of convertible debt securities seniority over the holders
of JTS Common Stock issued in the Merger. There can be no assurance that
additional funding will be available on terms acceptable to JTS or at all. The
failure to fund its capital requirements with additional financing would have a
material adverse effect on JTS' business, operating results and financial
condition. Furthermore, certain equipment and receivables financing as well as
term loans made to JTS and Moduler Electronics are contingent on JTS' ability to
comply with stringent financial covenants. In this regard, Moduler Electronics
did not obtain certain debt and equity capital required under one of its loan
agreements. JTS has informed the lender that it intends to provide such capital
by August 1996. In addition, certain of Moduler Electronics' loan agreements
require the lender's consent to mergers and similar transactions, which could be
interpreted to require the consent of the lending institution to the acquisition
of 90% of the capital stock of Moduler Electronics by JTS. Such consents were
not obtained, but the lending institution has continued to transact business
with Moduler Electronics and JTS since JTS' share acquisition in Moduler
Electronics. JTS believes that such matters regarding the Moduler Electronics
loan agreements will not have a material adverse effect on JTS' business,
operating results or financial condition. There can be no assurance that JTS
will be able to maintain its current financing facilities or obtain additional
financing as needed on acceptable terms or at all. If JTS is unable to obtain
sufficient capital, it would be required to curtail its facilities expansion,
capital expenditures, working capital, research and development and vendor
tooling expenditures, which would materially adversely affect JTS' business,
operating results and financial condition. See "Information Regarding JTS
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of JTS -- Liquidity and Capital Resources."
Uncertainty of Market Acceptance; Lengthy Sales Cycle. Since its inception
in February 1994, JTS has primarily engaged in research and development of its
core technology for hard disk drives. JTS' marketing strategy depends
significantly on its ability to establish distribution, licensing, product
development and other strategic relationships with major computer OEMs and on
the willingness and ability of these companies to utilize and to promote JTS'
hard disk drive technology and products. JTS' first commercial product line, the
Palladium family of hard disk drives, was introduced in September 1995 and is
targeted at the desktop personal computer market. JTS' second product line, the
Nordic family of hard disk drives, has been designed for notebook computers. See
"Information Regarding JTS Corporation -- Business of JTS -- Products." There
can be no assurance that any significant market for either product family will
develop. In particular, the Nordic drives use a 3-inch form factor, which JTS
has only recently introduced to the industry. At present, only a limited number
of computer manufacturers are developing or have plans to develop computers that
may accommodate Nordic drives. If additional computer manufacturers do not
modify their existing products or develop new products to accommodate 3-inch
form factor disk drives, sales of Nordic disk drives and, hence, JTS' business,
operating results and financial condition would be materially adversely
affected.
Qualifying hard disk drives for incorporation into a new computer product
requires JTS to work extensively with the customer and the customer's other
suppliers to meet product specifications. Customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with JTS' senior management, before making a purchasing decision.
Accordingly, JTS' products typically have a lengthy sales cycle during which JTS
may expend substantial financial resources and management time and effort with
no assurance that a sale will result.
Highly Competitive Market. The hard disk drive industry is intensely
competitive and dominated by a small number of large companies, including
Quantum Corporation ("Quantum"), Seagate Technology, Inc. ("Seagate"), Western
Digital Corporation ("Western Digital") and Maxtor Corporation ("Maxtor"). In
addition, a number of computer companies, such as Hewlett-Packard Co.
("Hewlett-Packard"), International Business Machines, Inc. ("IBM") and Toshiba
Corporation ("Toshiba"), have in-house or "captive" disk drive manufacturing
operations that produce disk drives for incorporation into their own computers
as well as
19
<PAGE> 27
for sale to other OEMs. Many of JTS' competitors have broader product lines than
JTS, and all have significantly greater financial, technical and marketing
resources. Furthermore, JTS has licensed key 3-inch form factor technology to
Western Digital, a potential competitor in the personal computer disk drive
market that could become a significant supplier of 3-inch form factor disk
drives to Compaq and other OEMs. See "Information Regarding JTS
Corporation -- Business of JTS -- Western Digital Arrangement." There can be no
assurance that JTS will develop and manufacture products on a timely basis with
the quality and features necessary to compete effectively. High volume hard disk
drive users typically will only utilize from two to four suppliers. As a result,
it may be necessary for JTS to displace competitors in many circumstances to
increase its net sales. In addition, JTS faces competition from the
manufacturing operations of its current and potential OEM customers, which could
initiate or increase internal production of hard disk drives and reduce or cease
purchasing from independent hard disk drive suppliers such as JTS. Moreover, the
hard disk drive industry is characterized by price erosion and resulting
pressure on gross margins. JTS expects that hard disk drive prices will continue
to decline in the future and that competitors will offer products which meet or
exceed the performance capabilities of JTS products. Due to such pricing
pressures, JTS' future gross margins will be substantially dependent upon its
ability to control manufacturing costs, improve manufacturing yields and
introduce new products on a timely basis. Any increase in price competition
would have a material adverse effect on JTS' business, operating results and
financial condition. JTS may also experience competition from other forms of
data storage, including optical storage, flash memory and holographic storage.
If JTS' current and prospective customers and end users were to adopt such data
storage products as an alternative to JTS' products, JTS' business, operating
results and financial condition would be adversely affected. See "Information
Regarding JTS Corporation -- Business of JTS -- Competition."
Rapid Technological Change; Short Product Life Cycles; Price Erosion. The
hard disk drive industry is characterized by rapid technological change, short
product life cycles and price erosion. As a result, JTS must continually
anticipate change and adapt its products to meet demand for increased storage
capacity. Although JTS intends to engage in a continuous process of developing
new products and production techniques, there can be no assurance that JTS will
anticipate advances in hard disk drive technology and develop products
incorporating such advances in a timely manner to compete effectively against
its competitors' new products. Due to the rapid technological change and
frequent development of new hard disk drive products, it is common in the
industry for the relative mix of customers and products to change rapidly, even
from quarter to quarter. For example, in the first half of 1996, the demand for
1 gigabyte 3.5-inch form factor hard disk drives decreased dramatically due to
increased availability of and demand for larger capacity disk drives. As a
result, pricing pressure on such disk drives, including those marketed by JTS,
increased and gross margins decreased. Generally, new products have higher
average selling prices than more mature products. Therefore, JTS' ability to
introduce new products in a timely fashion is an important factor in achieving
growth and profitability. In addition, JTS anticipates continued changes in the
requirements of its customers in the computer industry. There can be no
assurance that JTS will be able to develop, manufacture and sell products that
respond adequately to such changes or that future technological innovations will
not reduce demand for hard disk drives. JTS' business, operating results and
financial condition would be materially adversely affected if its development
efforts are not successful, if the technologies that JTS has chosen not to
develop prove to be competitive alternatives or by trends toward technology that
would replace hard disk drives as a storage medium, such as optical storage,
flash memory and holographic storage. As JTS increases its production and
shipment of hard disk drives and expands its product line, JTS' inventory levels
will increase. Due to the rapid rate of change in JTS' business, a large
inventory poses the risk of inventory obsolescence which could have an adverse
effect on JTS' business, operating results and financial condition. In this
regard, JTS anticipates incurring future inventory allowances, the level of
which will depend upon a number of factors, including manufacturing yields, new
product introductions, maturity or obsolescence of product designs, inventory
levels and competitive pressures.
Recent Significant Appreciation in Price of Atari Common Stock. The
closing price per share of Atari Common Stock was $1.875 at February 12, 1996,
the last day of trading before announcement of the agreement between JTS and
Atari to merge the two companies. The price of Atari Common Stock has
appreciated significantly since then, notwithstanding the absence of any
significant publicly available information regarding the financial results or
business operations of JTS or the Combined Company and the absence of any
material positive developments in the financial results or business operations
of Atari. See
20
<PAGE> 28
"Price Range of Common Stock." There can be no assurance that the recent price
appreciation of Atari Common Stock is indicative of the price that will prevail
for the JTS Common Stock following completion of the Merger.
Availability of Components and Materials; Dependence on Suppliers. JTS
relies on a limited number of suppliers for many components and materials used
in its manufacturing processes, including recording disks, head stack components
and integrated circuits. At present, JTS does not have multiple suppliers for
all of its materials and component requirements, and there can be no assurance
that JTS will secure more than one source for all of its requirements in the
future or that its suppliers will be able to meet its requirements on a timely
basis or on acceptable terms. Furthermore, JTS does not have contractual
arrangements with any of its sole source suppliers. In particular, JTS presently
relies on sole source suppliers for controller application specific integrated
circuits ("ASICs"), spindle motors, certain head stack components and disk
media. Delays in the receipt of certain components and materials have occurred
in the past, and there can be no assurance that delays will not occur in the
future or that suppliers will not extend lead times. Moreover, changing
suppliers for certain materials, such as spindle motors, could require
requalification of JTS' products with some or all of its customers.
Requalification could prevent early design-in wins or could prevent or delay
continued participation in hard disk drive programs for which JTS' products have
been qualified. In addition, long lead times are required to obtain many
materials, such as integrated circuits utilized in JTS' printed circuit board
assemblies ("PCBAs"). Regardless of whether these materials are available from
established or new sources of supply, these lead times could impede JTS' ability
to quickly respond to changes in demand and product requirements. Any
limitations on, or delays in, the supply of materials could disrupt JTS'
production volume and could have a material adverse effect on JTS' business,
operating results and financial condition. In this regard, in the fourth quarter
of fiscal 1996, JTS experienced delays in obtaining certain integrated circuits
required in the assembly of PCBAs due to the supplier's production problems,
which resulted in a significant reduction in production volume during such
period. Such production problems were corrected, but there can be no assurance
that production problems of this type or otherwise will not occur again in the
future. Furthermore, a significant increase in the price of one or more of these
components or materials could adversely affect JTS' business, operating results
and financial condition. In addition, there are only a limited number of
providers of hard disk drive manufacturing equipment, such as servo-writers,
burn-in equipment and final test equipment, and ordering additional equipment
for replacement or expansion involves long lead times, which limit the rate and
flexibility of capacity expansion. Failure to obtain such manufacturing
equipment on a timely basis could limit JTS' production of hard disk drives and
adversely affect JTS' business, operating results and financial condition. See
"Information Regarding JTS Corporation -- Business of JTS -- Manufacturing."
Cyclical Nature of Hard Disk Drive and Computer Industries. JTS' operating
results are dependent on the demand for hard disk drives, which in turn depends
on the demand for notebook and desktop personal computers. The hard disk drive
industry is cyclical and has experienced periods of oversupply, resulting in
significantly reduced demand for hard disk drives, as well as pricing pressures
and reduced production levels. The effect of these cycles has been magnified by
computer manufacturers' practice of ordering components, including hard disk
drives, in excess of their needs during periods of rapid growth. In recent
years, the disk drive industry has experienced significant growth, and JTS
intends to expand its capacity based on current and anticipated demand. There
can be no assurance that such growth will continue or that the level of demand
will not decline. A decline in demand for hard disk drives would have a material
adverse effect on JTS' business, operating results and financial condition.
Additionally, in the past some computer manufacturers have experienced
substantial financial difficulties due to the cyclical nature of the computer
industry and other factors. In this regard, certain personal computer
manufacturers have recently announced reductions in anticipated revenue growth.
Any increased price pressure in the personal computer industry could be passed
through to personal computer component suppliers, including manufacturers of
hard disk drives.To date, JTS has not incurred significant bad debt expense.
However, there can be no assurance that JTS will not face difficulty in
collecting receivables or be required to offer more liberal payment terms in the
future, particularly in a period of reduced demand. Any failure to collect or
delay in collecting receivables could have a material adverse effect on JTS'
business, operating results and financial condition.
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Dependence on Compaq Computer Relationship; Customer Concentration. JTS'
strategy to commercialize its products and achieve market acceptance has focused
in large part on the development of distribution, licensing, product development
and other strategic relationships with leading computer companies, other
manufacturers of computer peripherals and recognized distribution organizations.
Through these relationships, JTS seeks to establish its products and
technologies as industry standards. In this regard, JTS has entered into a
Development Agreement with Compaq Computer Corporation ("Compaq") pursuant to
which Compaq has agreed to design JTS' Nordic disk drives into at least one of
Compaq's products and to purchase a minimum number of hard disk drives from JTS
within two years following Compaq's acceptance of the first of such products. In
return, JTS has granted to Compaq certain pricing preferences and agreed to pay
royalties to Compaq on the sales of Nordic disk drives to third parties during
the term of the agreement. Compaq has also been granted a license to use the
Nordic designs to manufacture Nordic drives on a royalty-free basis in the event
that JTS fails to meet the agreed upon production schedule. The Development
Agreement also restricts JTS' ability to sublicense Nordic technology. The
Development Agreement has a five year term, which will automatically be renewed
under certain circumstances and may be terminated by either party only with
cause. In order to provide a second source of JTS' products, JTS has entered
into a Technology Transfer and License Agreement with Western Digital pursuant
to which Western Digital has the right to manufacture and sell Nordic disk
drives to Compaq. If either of these agreements were to terminate prematurely,
JTS' efforts to establish market acceptance of its products and, consequently
its business, operating results and financial condition would be adversely
affected. See "Information Regarding JTS Corporation -- Business of JTS --
Relationship With Compaq" and "-- Western Digital Arrangement." In fiscal 1996,
Olidata S.p.A, Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima
Technology, B.V. accounted for 34%, 12%, 11% and 10%, respectively, of JTS'
total revenue. In the quarter ended April 28, 1996, Peacock Systems GmbH,
Markvision International S.A. and FutureTech accounted for 43%, 18% and 14%,
respectively, of JTS' total revenues. JTS expects that sales to a relatively
small number of OEMs will account for a substantial portion of its net revenues
for the foreseeable future, although the companies that comprise JTS' largest
customers may change from period to period. The loss of, or decline in orders
from, one or more of JTS' key customers would have a material adverse effect on
JTS' business, operating results and financial condition. See "Information
Regarding JTS Corporation -- Business of JTS -- Patents and Licenses."
Reliance on Licensed Technology. JTS currently owns no patents and has
obtained licenses to a substantial portion of the technology used in its hard
disk drives pursuant to license agreements with Pont Peripherals Corporation,
TEAC Corporation and Western Digital. If such license agreements were
prematurely terminated or if JTS were enjoined from relying upon such licenses
due to JTS' alleged or actual breach of such agreements, JTS would be prevented
from manufacturing hard disk drives incorporating technology subject to such
licenses. As a result, JTS' business, operating results and financial condition
would be materially adversely affected. See "Information Regarding JTS
Corporation -- Business of JTS -- Patents and Licenses."
Intellectual Property and Proprietary Rights. Although JTS attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that JTS will be able to
protect its technology adequately or that competitors will not be able to
develop similar technology independently. There can be no assurance that patents
will be issued with respect to JTS' pending patent applications or that any
future patents will be sufficiently broad to protect JTS' technology. There can
be no assurance that any future patent issued to JTS will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection to JTS' products. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate JTS'
products or design around any possible patents issued to JTS in the future. In
addition, the laws of certain foreign countries may not protect JTS'
intellectual property rights to the same extent as do the laws of the United
States.
In recent years, the hard disk drive industry has experienced an increase
in litigation to enforce intellectual property rights. Thus, litigation may be
necessary to enforce any future JTS patents, copyrights or other intellectual
property rights, to protect JTS' trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or claims for indemnification resulting from infringement claims.
Such litigation, even if successful, could result in substantial costs and
diversion of resources and could have a material adverse effect on JTS'
business, operating results and financial condition.
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Alternatively, if any claims are asserted against JTS, JTS may seek to obtain a
license under the third party's intellectual property rights or to seek to
design around such claims. There can be no assurance, however, that a license
will be available on reasonable terms or at all, and it could be expensive and
time consuming or prove impossible for JTS to design around such claims. Any of
such alternatives could materially and adversely affect JTS' business, results
of operations and financial condition.
Expansion of Manufacturing Capacity. JTS' competitive position will depend
substantially on its ability to expand its manufacturing capacity. Accordingly,
JTS is continuing to make significant investments to expand such capacity,
particularly through the acquisition of capital equipment, facilities expansion
and the hiring and training of new personnel. JTS currently plans to add new
production lines at its existing manufacturing facility in Madras, India during
fiscal 1997 that will utilize all available floor space at this facility. There
can be no assurance that JTS will be able to expand such capacity in a timely
manner, that the cost of such expansion will not exceed management's current
estimates, that such capacity will not exceed the demand for JTS products or
that such additional capacity will achieve satisfactory levels of manufacturing
efficiency in a timely manner or at all. In addition, the expansion of
manufacturing capacity will significantly increase JTS' fixed costs. JTS'
profitability will depend on its ability to utilize its manufacturing capacity
in an effective manner, and JTS' inability to fully utilize its capacity would
have a material adverse effect on JTS' business, operating results and financial
condition. See "Information Regarding JTS Corporation -- Business of JTS --
Manufacturing."
Dependence on Single Manufacturing Facility. In fiscal 1996, substantially
all of JTS' manufacturing operations took place at Moduler Electronics in
Madras, India. Because JTS does not currently operate multiple facilities in
different geographic areas, a disruption of JTS' manufacturing operations
resulting from various factors, including sustained process abnormalities, human
error, government interventions or a natural disaster such as fire or flood,
could cause JTS to cease or limit its manufacturing operations and consequently
would have a material adverse effect on JTS' business, operating results and
financial condition.
Risks of International Sales and Manufacturing. In fiscal 1996 and the
three months ended April 30, 1996, substantially all of JTS' net sales consisted
of products sold to customers in Europe, Asia and Latin America, and JTS
anticipates that a substantial percentage of its products will be sold to
customers outside of the United States for the foreseeable future. Furthermore,
JTS expects to conduct substantially all of its manufacturing operations in
India, although JTS may evaluate alternative or additional locations from time
to time. Accordingly, JTS' operating results are subject to the risks of doing
business in a foreign country, including compliance with, or changes in, the law
and regulatory requirements of a foreign country, political instability, local
content rules, taxes, tariffs or other barriers, and transportation delays and
other interruptions. For example, the Indian government has granted JTS a five
year "tax holiday," and its subsidiary, Moduler Electronics, is located in the
Madras Export Processing Zone where it currently enjoys an exemption from Indian
taxes on export profits, although to date JTS has retained only minimal benefits
from such exemption. Such exemption may be terminated at any time for political
or economic reasons, in which event JTS may become subject to significantly
greater taxes on sales of disk drives outside of India at rates currently of up
to 46%. Furthermore, JTS does not have a long-term lease agreement, but rather
occupies the Madras facility pursuant to allotment letters from the Development
Commissioner of the Madras Export Processing Zone. Other benefits associated
with conducting business in India, which historically has experienced
considerable political instability, are subject to the vagaries of the Indian
government and may be withdrawn at any time. Although all of JTS' sales
presently are made in U.S. dollars, there can be no assurance that future
international sales will not be denominated in foreign currencies. Regardless of
whether JTS' sales are denominated in foreign currencies, JTS is, and will
continue to be, subject to risks related to foreign currency fluctuations.
Production Yields; Product Quality. The hard disk drive manufacturing
process is complex, and low production yields may result from a variety of
factors, including the introduction of new products, increased complexity in
product specifications, human error, the introduction of contaminants in the
manufacturing environment, equipment malfunction, use of defective materials and
components and inadequate testing. From time to time, JTS has experienced lower
than anticipated production yields as a result of such factors. Furthermore,
while JTS has implemented procedures to monitor the quality of the materials
received from its suppliers, there can be no assurance that materials will meet
JTS' specifications or that substandard materials will not adversely impact
production yields or cause other production problems. JTS' failure to maintain
high quality production standards or acceptable production yields would result
in loss of customers, delays in
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shipments, increased costs, cancellation of orders and product returns for
rework, any of which could have a material adverse effect on JTS' business,
operating results and financial condition. For example, JTS' cost of sales for
fiscal 1996 included a $4.3 million provision for inventory allowances
principally due to the costs for return of defective products, scrapped material
associated with unrepairable damage caused during the assembly process and
estimates of physical loss of inventory associated with high volume
manufacturing activities.
Variability of Operating Results. JTS' operating results are expected to
be subject to significant quarterly and annual fluctuations based upon a variety
of factors including market acceptance of JTS' products, timing of significant
orders, changes in pricing by JTS or its competitors, the timing of product
announcements by JTS, its customers or its competitors, changes in product mix,
manufacturing yields, order cancellations, modifications and quantity
adjustments and shipment reschedulings, the level of utilization of JTS'
production capacity, increases in production and engineering costs associated
with initial manufacture of new products, changes in the cost of or limitations
on availability of components and materials and customer returns. The impact of
these and other factors on JTS' revenues and operating results in any future
period cannot be predicted with certainty. JTS' expense levels are based, in
large part, on its expectations as to future revenues. Substantial advance
planning and commitment of financial and other resources is necessary for
expansion of manufacturing capacity, while JTS' sales are generally made
pursuant to purchase orders that are subject to cancellation, modification,
quantity reductions or rescheduling without significant penalties. Furthermore,
because the hard disk drive industry is capital intensive and requires a high
level of fixed costs, operating results are extremely sensitive to changes in
volume. Accordingly, if revenue levels do not meet expectations, operating
results and net income, if any, are likely to be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of JTS."
Management of Growth. JTS has recently experienced and may continue to
experience substantial growth in the number of its employees and the scope of
its operations. Such growth would further strain JTS' managerial, financial,
manufacturing and other resources. In addition, in order to manage its growth
effectively, JTS must implement additional operating, financial and management
information systems and hire and train additional personnel. In particular, JTS
must hire and train a significant number of additional personnel to operate the
highly complex capital equipment required by its manufacturing operations. There
can be no assurance that JTS will successfully implement additional systems in a
timely or efficient manner, to hire and properly train a sufficient number of
qualified personnel or to effectively manage such growth, and JTS' failure to do
so could have a material adverse effect on its business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of JTS" and "Information Regarding JTS
Corporation -- Business of JTS -- Employees."
Dependence on Key Management Personnel. JTS' operating results will depend
in significant part upon the continued contributions of its key management and
technical personnel, including Sirjang L. Tandon, its Chairman and Corporate
Technical Strategist, David T. Mitchell, its President and Chief Executive
Officer, Kenneth D. Wing, its Executive Vice President, Research and Development
Quality/Reliability, W. Virginia Walker, its Executive Vice President, Finance
and Administration, Chief Financial Officer and Secretary, and Steven L.
Kaczeus, its Chief Technical Officer, each of whom would be difficult to
replace. See "Information Regarding JTS Corporation -- Management of JTS." JTS
does not have an employment agreement with any of these individuals. The loss of
any of these key personnel could have a material adverse effect on the business,
operating results and financial condition of JTS. In addition, JTS' future
operating results depend in part upon its ability to attract, train, retain and
motivate other qualified management, technical, manufacturing, sales and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that JTS will be successful in attracting or retaining
such personnel. The loss of the services of existing personnel as well as the
failure to recruit additional personnel could materially adversely affect JTS'
business, operating results and financial condition. See "Information Regarding
JTS Corporation -- Business of JTS -- Employees."
Purchase Orders Subject to Cancellation, Modification and
Rescheduling. JTS' sales are generally made pursuant to purchase orders that
are subject to cancellation, modification, quantity reductions or rescheduling
without significant penalties. Changes in forecasts, cancellations, rescheduling
and quantity reductions may result in excess inventory costs, inventory losses
and under-utilization of production capacity and could have a
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material adverse effect on JTS' business, operating results and financial
condition. As a result of the foregoing, JTS' backlog as of any particular date
may not be representative of actual sales for any succeeding period.
Reduction in Voting Control. Upon the closing of the Merger, the Atari
stockholders immediately prior to the Merger will own approximately 62% of the
outstanding voting securities of the Combined Company (assuming no exercise of
options after May 22, 1996). As a result, such stockholders, acting together,
could determine the outcome of matters requiring approval of the stockholders of
the Combined Company. Such matters include the election of the members of the
Combined Company's Board of Directors, proxy contests, mergers involving the
Combined Company, tender offers or other transactions that could afford
stockholders of the Combined Company the opportunity to realize a premium over
the then prevailing market price of the Common Stock of the Combined Company.
Furthermore, following the Merger, members of the Tramiel family will own
approximately 27% of the outstanding voting securities of the Combined Company
(assuming no exercise of options after May 22, 1996). Jack Tramiel will also be
a member of the Combined Company's Board of Directors. As a result, the members
of the Tramiel family, acting together, could exert significant influence over
matters requiring approval of the stockholders of the Combined Company.
OTHER RISK FACTORS RELATED TO THE MERGER
Risks Associated with Fixed Exchange Ratio. All of the material terms of
the Merger, including the one-for-one exchange ratio, were agreed upon when the
initial merger agreement was signed on February 12, 1996. Although the structure
of the transaction was modified as reflected in the Merger Agreement which was
signed on April 8, 1996, such change did not materially modify the economic
terms of the Merger. Since February 12, 1996, there have been ongoing business
developments that have necessarily impacted Atari and JTS. With respect to
Atari, these developments include continued significant operating losses and
decreases in revenues, continued intense competition in the video game industry
and a significant increase in the trading price for the Atari Common Stock. With
respect to JTS, these developments include continued losses, delays in the
schedule for volume shipments of Nordic disk drives, reductions in the targeted
revenues, gross profit and net income for fiscal 1997, JTS' decision to pursue
additional financing as soon as practicable following the Merger and the fact
that Compaq has accepted the JTS Nordic 3-inch disk drive. Notwithstanding these
factors, there is no provision in the Merger Agreement for the rate at which the
Atari Common Stock will be exchanged for JTS Common Stock to be adjusted prior
to the closing of the Merger. In addition, the opinion of Montgomery Securities
that the conversion ratio of Atari Common Stock into JTS Common Stock was fair
to Atari, from a financial point of view, was delivered to the Atari Board of
Directors on February 5, 1996 and is applicable only as of such date. The Atari
Board of Directors evaluated the business developments described above at its
meeting on June 21, 1996 and unanimously affirmed its approval of the Merger. At
this meeting, the Atari Board of Directors also determined not to obtain an
updated fairness opinion from Montgomery with respect to the Merger.
Utilization of Net Operating Losses. As of December 31, 1995, Atari had
federal net operating losses ("NOLs") and tax credit carryforwards in the amount
of approximately $166.8 million, and as of January 28, 1996, JTS had federal
NOLs of approximately $27.0 million. Under the Internal Revenue Code of 1986, as
amended (the "Code"), certain changes in the ownership or business of a
corporation that has NOLs or tax credit carryforwards will result in the
inability to use or the imposition of significant restrictions on the use of
such NOLs or tax credit carryforwards to offset future income and tax liability
of such corporation, its subsidiaries or its successors. The Merger will
constitute a change in ownership with respect to JTS, and the Merger or
subsequent events may constitute an event with respect to Atari which results in
the imposition of restrictions on the ability of the Combined Company to utilize
NOLs and tax credit carryforwards of Atari or JTS. There can be no assurance
that the Combined Company will be able to utilize all or any NOLs or tax credit
carryforwards of Atari or JTS. The ability of the Combined Company to utilize
Atari's accumulated NOLs and tax carryforwards was a factor considered by the
boards of directors of Atari and JTS in concluding to approve the Merger and the
Merger Agreement and to recommend that the stockholders of Atari and JTS approve
the Merger and the Merger Agreement. See "The Proposed Merger and Related
Transactions -- Background and Board Recommendations -- Recommendation of the
Board of Directors of Atari" and "--Recommendation of the Board of Directors of
JTS."
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Control by Affiliates; Anti-takeover Effects. Upon completion of the
Merger, directors, officers and holders of 10% or more of the outstanding JTS
Common Stock will own approximately 35% of the outstanding shares of the
Combined Company (assuming no exercise of options or warrants after May 22,
1996). As a result, these affiliates of the Combined Company, acting together,
will have the ability to exert significant influence over the election of
directors and other corporate actions affecting the Combined Company. Certain
provisions of the Certificate of Incorporation and Bylaws of the Combined
Company and certain provisions of the DGCL, including Section 203 thereof, may
also discourage certain transactions involving a change in control of the
Combined Company. In addition to the foregoing, the ability of the Board of
Directors of the Combined Company to issue additional "blank check" preferred
stock without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Combined Company. See
"Information Regarding Atari Corporation -- Principal Stockholders of Atari,"
"Information Regarding JTS Corporation -- Principal Stockholders of JTS" and
"Description of Capital Stock of Atari and JTS."
Shares Eligible for Future Sale. Sales of substantial amounts of JTS
Common Stock in the public market after the consummation of the Merger could
adversely affect prevailing market prices. Following the Merger, the Combined
Company will have approximately 102,687,204 shares of Common Stock outstanding
(assuming no exercise of options or warrants after May 22, 1996). All of the
63,735,718 shares of JTS Common Stock to be issued to the former stockholders of
Atari in the Merger will be eligible for sale in the public market upon the
closing of the Merger. Of such shares, approximately 23,935,000 shares held by
affiliates of Atari will be subject to volume and other restrictions under Rule
145 of the Securities Act. In addition, 90 days following the consummation of
the Merger, approximately 3,900,000 shares of JTS Common Stock will become
eligible for sale in the public market pursuant to Rule 701 under the Securities
Act. In addition, in February and August 1997, approximately 16,200,000 shares
and 12,500,000 shares of JTS Common Stock, respectively, will become eligible
for sale in the public market pursuant to Rule 144 of the Securities Act upon
expiration of the two-year holding periods from the dates such shares were
issued.
In addition, the holders of approximately 57,200,000 shares of JTS Common
Stock outstanding as of the closing of the Merger will be entitled to certain
rights with respect to registration of such shares under the Securities Act. JTS
also intends to register for sale on a Form S-8 Registration Statement under the
Securities Act an aggregate of approximately 8,985,000 shares of JTS Common
Stock reserved for issuance under JTS' Restated Plan, 500,000 shares of JTS
Common Stock reserved for issuance under JTS' Non-Employee Directors' Plan, and
approximately 900,000 shares of JTS Common Stock reserved for issuance pursuant
to the exercise of options granted under Atari's 1986 Stock Option Plan which
will be assumed by JTS in the Merger. Former stockholders of JTS have not
previously had the opportunity to sell their shares in the public market.
Substantial sales of JTS Common Stock after the Merger could have a negative
impact on the market price and liquidity of the JTS Common Stock.
Diversion of Management Attention. Following the Merger, Atari and JTS
will operate as separate divisions of the Combined Company and the current
management of JTS will serve as the management of the Combined Company. The
Combined Company's management is expected to devote substantially all of its
time to the affairs of JTS following the Merger. If the management of the
Combined Company were unable to effectively manage the separate businesses, the
operating results and financial condition of the Combined Company could be
materially adversely affected.
No Prior Market; Liquidity; Stock Price Volatility. Prior to the Merger
there was no public market for JTS' capital stock. Although it is expected that
the JTS Common Stock will be listed on the American Stock Exchange upon the
closing of the Merger, there can be no assurance that an active public market
for the JTS Common Stock will develop or be sustained. The trading price of the
JTS Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by JTS or its competitors, general
conditions in the hard disk drive, computer or video game industries, changes in
earnings estimates or recommendations by analysts, or other events or factors.
In addition, the public stock markets have experienced extreme price and trading
volume volatility in recent months. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the JTS
Common Stock.
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INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by Atari and JTS of proxies to be voted at the Atari Special
Meeting and the JTS Special Meeting, respectively. This Joint Proxy
Statement/Prospectus is being mailed to stockholders of Atari and JTS on or
about July 15, 1996.
The purpose of the Atari and JTS Special Meetings is to consider and vote
upon a proposal to approve the Merger and the Merger Agreement. Upon
consummation of the Merger, Atari will be merged with and into JTS, the separate
existence of Atari will cease, JTS will remain as the surviving corporation and
all of the rights, privileges, powers, franchises, properties, assets,
liabilities and obligations of Atari will be vested in JTS. At the Effective
Time (as such term is defined below), each outstanding share of Atari Common
Stock will be converted into one share of JTS Common Stock and each outstanding
option to purchase Atari Common Stock will become an option to purchase JTS
Common Stock.
Based on the number of shares of outstanding Atari Common Stock, JTS Common
Stock and JTS Series A Preferred Stock as of May 22, 1996 (assuming no exercise
of outstanding options after such date), immediately after consummation of the
Merger (assuming the conversion of all outstanding shares of JTS Series A
Preferred Stock into shares of JTS Common Stock and that none of the holders of
JTS Common Stock or JTS Series A Preferred Stock perfects appraisal or
dissenters' rights), a total of 102,687,204 shares of JTS Common Stock would be
issued and outstanding, of which 63,735,718 shares, or 62%, would represent
shares issued in the Merger upon conversion of Atari Common Stock.
THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS HAVE UNANIMOUSLY
DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, ITS RESPECTIVE CORPORATION AND ITS RESPECTIVE STOCKHOLDERS.
THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS UNANIMOUSLY RECOMMEND THAT
THE STOCKHOLDERS OF ITS RESPECTIVE CORPORATION APPROVE THE MERGER AND THE MERGER
AGREEMENT.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
JTS under the Securities Act for the offering of JTS Common Stock in connection
with the Merger. This Joint Proxy Statement/Prospectus does not cover resales of
the securities of JTS to be received in connection with the Merger and no person
is authorized to use this prospectus in connection with any resale.
The principal offices of Atari are located at 455 South Mathilda Avenue,
Sunnyvale, California 94086, and its telephone number is (408) 328-0900. The
principal offices of JTS are located at 166 Baypointe Parkway, San Jose,
California 95134, and its telephone number is (408) 468-1800.
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VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL STOCKHOLDER MEETINGS
Atari. The Atari Special Meeting will be held at the offices of Wilson
Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California,
legal counsel to Atari, on July 30, 1996 at 9:00 a.m.
JTS. The JTS Special Meeting will be held at JTS's offices at 166
Baypointe Parkway, San Jose, California 95134, on July 30, 1996 at 9:00 a.m.
RECORD DATE AND OUTSTANDING SHARES
Atari. Stockholders of record of Atari Common Stock at the close of
business on June 28, 1996 (the "Atari Record Date") are entitled to notice of
and to vote at the Atari Special Meeting. At the Atari Record Date, there were
approximately 2,600 holders of record of Atari Common Stock and 63,735,718
shares of Atari Common Stock were issued and outstanding. Except for the
stockholders identified below under "Information Regarding Atari Corporation --
Principal Stockholders of Atari," there were no persons known to the management
of Atari to be the beneficial owners of more than 5% of the outstanding shares
of Atari Common Stock.
JTS. Stockholders of record of JTS Common Stock and JTS Series A Preferred
Stock at the close of business on June 18, 1996 (the "JTS Record Date") are
entitled to notice of and to vote at the JTS Special Meeting. At the JTS Record
Date, there were 16 holders of record of JTS Common Stock and 52 holders of
record of JTS Series A Preferred Stock and 9,255,116 shares of JTS Common Stock
and 29,696,370 shares of JTS Series A Preferred Stock were issued and
outstanding. Except for the stockholders identified below under "Information
Regarding JTS Corporation -- Principal Stockholders of JTS," there were no
persons known to the management of JTS to be the beneficial owners of more than
5% of the outstanding shares of any class of JTS capital stock.
VOTING AND REVOCABILITY OF PROXIES
All properly executed proxies that are not revoked will be voted at the
respective Atari and JTS Special Meetings and any postponement or adjournment
thereof, in accordance with the instructions contained therein. Proxies
containing no instructions regarding the proposals specified in the form of
proxy will be voted for approval of the Merger and the Merger Agreement at the
Atari and JTS Special Meetings, as the case may be. Each record holder of Atari
Common Stock as of the Atari Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders at the Atari Special Meeting. Each
record holder of JTS Common Stock and JTS Series A Preferred Stock as of the JTS
Record Date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
stockholders at the JTS Special Meeting.
If an executed proxy card is returned and a stockholder has abstained from
voting on any matter, the shares represented by such proxy will be considered
present at the applicable special meeting for purposes of determining a quorum
and for purposes of calculating the vote, but will not be considered to have
been voted in favor as to such matter. In the case of the Atari Special Meeting,
if an executed proxy is returned by a broker holding shares in street name which
indicates that the broker does not have discretionary authority as to certain
shares to vote on one or more matters, such shares will be considered
represented at the Atari Special Meeting for purposes of determining a quorum,
but will not be considered to be represented at the Atari Special Meeting for
purposes of calculating the vote with respect to such matter ("broker
non-votes"). Because approval of the Merger and the Merger Agreement requires,
in the case of Atari, the affirmative vote of a majority of the total number of
outstanding shares of Atari Common Stock entitled to vote at the Atari Special
Meeting, and in the case of JTS, the affirmative vote of a majority of the total
number of outstanding shares of JTS Common Stock and JTS Series A Preferred
Stock (voting together) and at least two thirds of the total number of
outstanding shares of JTS Series A Preferred Stock (voting as a separate class)
entitled to
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vote at the JTS Special Meeting, abstentions and, in the case of Atari, broker
non-votes, will have the same effect as a vote against the proposal.
The presence of a stockholder at the applicable special meeting for which
such stockholder has executed a proxy will not automatically revoke such
stockholder's proxy. A stockholder may, however, revoke a proxy at any time
prior to its exercise by filing a written notice of revocation with, or by
delivering a duly executed proxy bearing a later date to, the Corporate
Secretary at the address of the principal executive offices of the company to
which such proxy relates, or by attending the special meeting to which such
proxy relates and voting in person.
STOCKHOLDER VOTES REQUIRED
Atari. The presence, in person or by proxy, of a majority of the shares of
Atari Common Stock outstanding on the Atari Record Date is necessary to
constitute a quorum at the Atari Special Meeting. Approval of the Merger and the
Merger Agreement requires the affirmative vote of holders of a majority of the
shares of Atari Common Stock outstanding on the Atari Record Date.
It is expected that all of the 23,453,129 shares of Atari Common Stock
(excluding shares subject to stock options) beneficially owned by directors and
executive officers of Atari and their affiliates at the Atari Record Date (37%
of the total number of outstanding shares of Atari Common Stock) will be voted
for approval of the Merger and the Merger Agreement. As of the Atari Record
Date, JTS and its directors and executive officers and their affiliates
beneficially owned no shares of Atari Common Stock (excluding shares of Atari
Common Stock subject to the Voting Agreements). See "Information Regarding Atari
- -- Principal Stockholders of Atari."
JTS. The presence, in person or by proxy, of a majority of the shares of
JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record
Date is necessary to constitute a quorum at the JTS Special Meeting. Approval of
the Merger and the Merger Agreement requires the affirmative vote of holders of
(a) a majority of the shares of JTS Common Stock and JTS Series A Preferred
Stock outstanding on the JTS Record Date, voting together, (b) a majority of the
shares of JTS Common Stock outstanding on the JTS Record Date, voting separately
as a class, and (c) at least two thirds of the shares of JTS Series A Preferred
Stock outstanding on the JTS Record Date, voting separately as a class.
It is expected that all of the 9,068,020 shares of JTS Common Stock
(excluding shares subject to stock options) and 14,122,107 shares of JTS Series
A Preferred Stock beneficially owned by directors and executive officers of JTS
and their affiliates at the JTS Record Date (96% of the total number of
outstanding shares of JTS Common Stock and 48% of the total number of
outstanding shares of JTS Series A Preferred Stock) will be voted for approval
of the Merger and the Merger Agreement. As of the JTS Record Date, Atari and its
directors and executive officers and their affiliates beneficially owned no
shares of JTS Common Stock or JTS Series A Preferred Stock (except for shares of
JTS capital stock subject to the Voting Agreements). See "Information Regarding
JTS Corporation -- Principal Stockholders of JTS."
Voting Agreements. Pursuant to the Voting Agreements, certain stockholders
of Atari and JTS have agreed to vote all shares held by them in favor of the
Merger and the Merger Agreement. Specifically, holders of approximately 43% of
the shares of Atari Common Stock, 91% of the shares of JTS Common Stock and 70%
of the shares of JTS Series A Preferred Stock entitled to vote at the respective
stockholder meetings have entered into Voting Agreements and irrevocable
proxies. As a result, it is expected that the Merger and the Merger Agreement
will be approved by the holders of a majority of the shares of Atari Common
Stock outstanding on the Atari Record Date and by the holders of a majority of
the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on
the JTS Record Date (voting together), a majority of the shares of JTS Common
Stock outstanding on the JTS Record Date (voting as a separate class) and at
least two-thirds of the shares of JTS Series A Preferred outstanding on the JTS
Record Date (voting as a separate class). See "The Proposed Merger and Related
Transactions -- Related Transactions -- Voting Agreements."
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SOLICITATION OF PROXIES; EXPENSES
Atari and JTS will equally bear the costs of solicitation of proxies from
their stockholders, all printing and mailing costs in connection with the
preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and
JTS stockholders, all Commission filing fees with respect to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, and all
costs of qualifying the shares of JTS Common Stock under state blue sky laws. In
addition to solicitation by mail, the directors, officers and employees of Atari
and JTS may solicit proxies from stockholders by telephone, telegram or letter
or in person, but will not be specially compensated for such activities.
Brokers, nominees, fiduciaries and other custodians have been requested to
forward solicitation material to the beneficial owners of Atari Common Stock
held of record by them. Such custodians will be reimbursed by Atari for their
reasonable expenses incurred in that connection. If the Merger is consummated,
all costs and expenses incurred in connection with the Merger not previously
paid will be paid by the Combined Company.
APPRAISAL AND DISSENTERS' RIGHTS
Stockholders of record of JTS Common Stock and JTS Series A Preferred Stock
may under certain circumstances and by following procedures prescribed by
Section 262 of the DGCL or Chapter 13 of the CGCL, exercise either appraisal or
dissenters' rights and receive cash for their respective shares of capital stock
of JTS. The failure of any dissenting stockholder of JTS to follow the
appropriate procedures may result in the termination or waiver of such rights.
See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters'
Rights."
The stockholders of Atari are not entitled to appraisal or dissenters'
rights under the NGCL.
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THE PROPOSED MERGER AND RELATED TRANSACTIONS
BACKGROUND AND BOARD RECOMMENDATIONS
BACKGROUND OF THE MERGER
By the second half of 1995, Atari and its Board of Directors recognized
that despite the significant financial resources that had been devoted to the
Jaguar product, it was unlikely that 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, at its meeting on October 13, 1995, the
Atari Board of Directors determined to substantially reduce the resources
devoted to the Jaguar and related products, and to change Atari's strategic
focus by devoting its resources to PC software publishing and strategic
opportunities. In particular, the Atari Board of Directors directed management
to focus on evaluating strategic opportunities for Atari including potential
investments and acquisitions.
As part of Atari's efforts to pursue strategic opportunities, during the
fourth quarter of 1995, Atari management contacted various individuals and
investment advisors with respect to potential strategic investments or
acquisitions. These efforts resulted in Atari's evaluation of several strategic
opportunities, including a potential investment in or merger with an
entertainment software company, a video game software company, a computer video
game peripherals company and a potential investment or merger with JTS.
Since its inception in February 1994, JTS has continually sought to
identify new sources of financing to support the expansion of its manufacturing
facilities, capital expenditures and research and development activities. In
late 1995, JTS recognized the need for a significant infusion of capital within
the next three to four months to fund the growth of JTS' operations.
Accordingly, at a meeting held on October 30, 1995, the JTS Board of Directors
instructed members of management to explore various financing sources, including
the private placement of equity securities to one or more institutional
investors.
In early November 1995, Sam Tramiel contacted JTS to set up a meeting with
Sirjang L. "Jugi" Tandon, the Chairman of JTS, and David T. Mitchell, JTS'
President and Chief Executive Officer, to discuss possible strategic
opportunities between the companies. On November 16, 1995, Sam Tramiel and Mr.
Tandon met at the Las Vegas airport following the Comdex show. At the meeting,
Mr. Tandon stated that JTS was pursuing additional sources of financing, and Sam
Tramiel indicated that Atari was evaluating various strategic opportunities,
including potential investments and acquisitions. A follow-up meeting was
scheduled for early December to further discuss a possible investment in JTS by
Atari.
At a meeting held on November 29, 1995, the JTS Board of Directors
instructed Messrs. Tandon and Mitchell to accelerate their efforts to identify
new sources of financing. In this regard, JTS initiated discussions with two
investment banks (one of which was Montgomery) in December 1995 to explore the
possibility of a private placement to institutional investors which would result
in a substantial infusion of capital to JTS.
On December 14, 1995, Jack Tramiel and Sam Tramiel met with Messrs. Tandon
and Mitchell at JTS. At this meeting, the parties discussed a potential
investment by Atari in JTS and the possibility that Jack Tramiel would become a
director of JTS. Later that day, the Executive Committee of the Atari Board of
Directors (consisting of Jack Tramiel, Sam Tramiel and August J. Liguori) held a
special meeting to discuss the proposed transaction with JTS. At the meeting,
the Atari Executive Committee directed Mr. Liguori, Atari's former Chief
Financial Officer, to contact JTS to initiate due diligence.
On December 22, 1995, Mr. Liguori met with Mr. Mitchell and W. Virginia
Walker, JTS' Chief Financial Officer, at JTS to conduct an initial due diligence
review of JTS' business and financial condition.
On January 4, 1996, the Executive Committee of the Atari Board of Directors
held a special meeting to discuss Mr. Liguori's due diligence investigation of
JTS. At this meeting, the Atari Executive Committee authorized Jack Tramiel to
continue discussions with JTS regarding a potential investment or other
strategic business relationship between Atari and JTS and instructed Mr. Liguori
to continue due diligence activities. The Atari Executive Committee also
instructed Jack Tramiel to contact the other members of the Atari Board to
update them on the potential business opportunity involving JTS.
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On January 8, 1996, Jack Tramiel, Sam Tramiel and Mr. Mitchell met at Jack
Tramiel's home to further discuss a possible strategic transaction between Atari
and JTS. At this meeting, the parties considered a significant investment by
Atari in JTS and a merger of Atari and JTS. Mr. Mitchell indicated that JTS
would be interested in securing a bridge loan from Atari if a merger agreement
were signed. The parties also generally discussed that, if a merger were to
occur, the consideration would be common stock of the acquiring company and the
exchange ratio would be one-for-one.
On January 9, 1996, the JTS Board of Directors held a telephonic meeting at
which a possible investment by or merger with Atari was discussed. At the
meeting, the merits of such a transaction, including the general terms of a
possible merger, were considered and the JTS Board instructed members of
management to initiate a due diligence review of Atari. In addition, the JTS
Board agreed to retain the law firm of Cooley Godward Castro Huddleson & Tatum
("Cooley Godward") to assist in the evaluation of a possible business
combination with Atari.
On January 10, 1996, Mr. Mitchell and Ms. Walker met with Jack Tramiel and
Mr. Liguori at Atari to conduct a due diligence review of Atari. From January 11
through January 16, Ms. Walker and Mr. Liguori had numerous meetings and phone
calls and exchanged due diligence information and materials.
On January 17, 1996, a meeting was held at JTS to discuss the proposed
transaction. Present at the meeting were Jack Tramiel, Sam Tramiel and Mr.
Liguori of Atari and Mr. Tandon, Mr. Mitchell and Ms. Walker of JTS. Also
present were representatives from Wilson Sonsini Goodrich & Rosati, P.C.,
counsel to Atari, and a representative of Cooley Godward. At the meeting, there
was substantial discussion regarding a proposed merger of Atari and JTS. The
meeting focused on the business opportunities, business risks and financial
positions of Atari and JTS. The parties first discussed the general terms of the
proposed merger including that the Combined Company would be managed by the
current members of JTS management, that at the time the merger agreement was
signed Atari would extend to JTS a $25.0 million bridge loan, that the bridge
loan would be convertible into JTS Series A Preferred Stock, and that JTS would
issue warrants to Atari in connection with the bridge loan if the merger were
not consummated. The parties further discussed the proposed one-for-one exchange
ratio for the Atari Common Stock, JTS Common Stock and JTS Series A Preferred
Stock. The proposal to issue common stock of the surviving company in exchange
for the outstanding stock of the corporation to be acquired was based upon a
number of factors, including tax considerations, the preservation of the
surviving company's working capital and the desire to give the JTS and Atari
stockholders an opportunity to participate as equity holders in the surviving
company. The proposed one-for-one exchange ratio of JTS and Atari stock, as
well, was based upon numerous factors, including the valuation assigned to JTS
in its most recent round of preferred stock financing the financial forecasts of
JTS furnished to Atari, the due diligence review of the two companies, the
relative ownership interests of the JTS and Atari stockholders in the surviving
company and the historic and current trading prices of Atari Common Stock. At
the end of the meeting, Atari and JTS agreed to present the proposed transaction
to their respective boards of directors. Following the meeting, the Executive
Committee of the Atari Board of Directors met separately and considered the
advisability of obtaining a fairness opinion from an investment banking firm
with respect to the proposed merger, and Sam Tramiel was instructed to initiate
discussions with respect to obtaining such an opinion.
On January 19, 1996, Mr. Mitchell, Ms. Walker and representatives of Cooley
Godward reported to the JTS Board of Directors on the status of the negotiations
with Atari and the preliminary results of the JTS due diligence review of Atari.
The JTS Board discussed in substantial detail the merits and the risks of a
possible business combination with Atari, as well as the alternative sources of
financing then available to the company. Following discussion, the JTS Board of
Directors instructed management to continue to pursue all financing
alternatives, including a private equity placement and a possible transaction
with Atari.
Between January 20 and January 29, 1996, Atari's and JTS' management and
legal counsel continued their negotiations and due diligence reviews of the two
companies. In addition, counsel for Atari and JTS began preparation of a merger
agreement and bridge loan financing documentation.
On January 30, 1996, the JTS Board of Directors met to consider the results
of management's further due diligence review of Atari and the merits of a merger
between the two companies. The JTS Board discussed the
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terms of the proposed merger with representatives of Cooley Godward and reviewed
a draft of the merger agreement. In particular, the JTS Board considered the
possibility of obtaining bridge financing from Atari, the condition of Atari's
business and the JTS stockholders' interest in the combined company. The JTS
Board also discussed with management the status of a possible private equity
placement to meet the company's immediate capital requirements. The JTS Board
noted, among other factors, that a private equity placement would require three
months or longer to complete and that a business combination with Atari
represented an immediate source of financing. After further discussion, the JTS
Board of Directors unanimously approved the principal terms of the merger and
authorized management and Cooley Godward to proceed with the finalization of the
merger agreement and bridge loan documentation substantially on the terms
discussed by the JTS Board. A more detailed discussion of certain matters
considered by the JTS Board of Directors at this meeting is included under the
caption "-- Recommendation of the Board of Directors of JTS."
On January 30, 1996, JTS notified Montgomery that it was no longer
considering a private placement to institutional investors and that it was
engaged in merger discussions with Atari, and introduced Montgomery to Atari.
Atari informed Montgomery that it wished to retain Montgomery to render a
fairness opinion, and negotiations commenced between Atari and Montgomery
regarding the terms of that engagement. On January 31, 1996, Atari and
Montgomery entered into a written engagement letter, the terms of which are
summarized below under "-- Opinion of Montgomery Securities."
On February 1, 1996, the Atari Board of Directors held a telephonic meeting
to discuss the terms of the proposed merger with JTS. At the meeting, Jack
Tramiel, Sam Tramiel and Mr. Liguori reviewed with the Board the proposed terms
of the merger which had been discussed with JTS on January 17. Mr. Liguori also
presented the results of Atari's due diligence investigation of JTS. At the
meeting, the Atari Board instructed Jack Tramiel to proceed with merger
negotiations and due diligence pending further deliberations by the Atari Board.
On February 5, 1996, the Atari Board of Directors met at Atari's offices
beginning at 1:00 p.m. Present were the Atari directors, representatives of
Wilson Sonsini Goodrich & Rosati, P.C., legal counsel to Atari, and
representatives from Montgomery, Atari's financial advisor. The Atari Board
reviewed the status of the negotiations regarding the proposed merger of Atari
and JTS. In particular, the Board considered the one-for-one exchange ratio,
closing conditions and termination provisions. Mr. Liguori also reported on the
results of Atari's due diligence investigation of JTS. At the meeting,
Montgomery presented the results of its review of the transaction and delivered
its oral and written opinion that the conversion ratio of Atari Common Stock
into JTS Common Stock is fair to Atari from a financial point of view, as of
February 5, 1996. Following the Montgomery presentation, the Board conducted
substantial deliberations regarding the proposed transaction including the
future prospects for Atari's business and the risks and prospects associated
with the JTS business. At the end of the meeting, the Atari Board instructed Mr.
Liguori to conduct further due diligence with respect to JTS' transaction with
Moduler Electronics and other matters. The Board deferred a final decision on
the merger pending the results of Mr. Liguori's additional due diligence. The
meeting was adjourned at 7:00 p.m. on February 5 and continued for several hours
on the morning of February 6.
As the merger discussions continued, it became apparent that JTS'
acquisition of Moduler Electronics would not be completed prior to the signing
of the Merger Agreement. Accordingly, JTS agreed that the closing of JTS'
acquisition of Moduler Electronics would be a condition to Atari's obligation to
close the Merger. JTS also agreed not to effect the acquisition of Moduler
Electronics without the consent of Atari. Subsequent to the signing of the
merger agreement, JTS and Moduler Electronics negotiated the final documentation
related to the terms of their merger. As part of Atari's due diligence, Atari
was provided copies of the interim and definitive acquisition agreements.
From February 5, 1996 to February 12, 1996, Jack Tramiel, Sam Tramiel and
Mr. Liguori held a series of telephonic conversations and meetings with Mr.
Tandon, Mr. Mitchell and Ms. Walker regarding the proposed transaction and due
diligence matters. There were also numerous telephone calls among Jack Tramiel,
Sam Tramiel, Michael Rosenberg (an Atari director) and Leonard Schreiber (an
Atari director) regarding the proposed transaction and the results of the
ongoing due diligence review. Similarly, JTS
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management held a number of informal meetings with certain JTS Board members to
discuss the results the ongoing due diligence review.
On February 12, 1996, the Atari Board of Directors held two telephonic
meetings to discuss the final terms of the merger agreement and the additional
due diligence materials. Prior to the meeting, each member of the Board had been
provided with a draft of the proposed merger agreement and related documents,
including disclosure schedules provided by Atari and JTS. Based on such
information and further discussions, the Atari Board of Directors unanimously
approved the merger agreement and the transactions contemplated thereby.
The merger agreement and related documents were executed by the parties on
February 12, 1996, and a press release was issued on February 13, 1996.
On April 8, 1996, JTS and Atari amended and restated the merger agreement
to modify the legal structure of the Merger from a consolidation of JTS and
Atari into a newly-formed Delaware corporation to a merger of Atari with and
into JTS, with JTS as the surviving company. This change in the legal structure
of the Merger did not materially modify the economic terms of the merger. The
merger agreement, as so amended and restated, is attached hereto as Annex A.
On June 21, 1996, the Atari Board of Directors met to review the status of
the Merger. Jack Tramiel, who had attended recent JTS Board meetings, updated
the other members of the Board on the business prospects of JTS including the
financial targets discussed at the JTS Board meeting on June 18, 1996 and the
recent acceptance by Compaq of the Nordic 3-inch disk drive. See
"-- Forward-Looking Financial Information Provided by JTS." Based on such
information and further discussions, the Atari Board of Directors unanimously
affirmed its approval of the Merger.
In June 1996, JTS and Atari amended the bridge loan documents to increase
the amount lent pursuant thereto to $30.0 million.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ATARI
The Atari Board of Directors has determined that the Merger is fair to, and
in the best interests of, Atari and Atari's stockholders and unanimously
recommends that the Atari stockholders vote in favor of approval of the Merger
and the Merger Agreement.
The Atari Board held a series of meetings at which a business combination
with or an investment in JTS was discussed. Individual members of the Board were
updated from time to time on developments. In reaching its conclusion to approve
the Merger and the Merger Agreement and to recommend that the stockholders
approve the Merger and the Merger Agreement, the Atari Board considered a number
of factors, including, without limitation, the following:
- The level of working capital required to support Atari's future business
which was significantly downsized in late 1995 and early 1996 as Atari
focused on licensing and software development activities.
- The future prospects for Atari's financial performance, taking into
consideration the substantial decrease in net sales from 1994 to 1995 and
the substantial operating losses sustained in the past several years
among other things.
- The prospects of the business of JTS, based partly upon financial
forecasts, including cash flow, gross margin and unit shipment
projections, and related assumptions of JTS provided by JTS management.
- The intense competition in the video game industry.
- The significant equity position that the former stockholders of Atari
would have in the Combined Company.
- The risks associated with the businesses of Atari and JTS.
- The treatment of the Merger as a tax-free reorganization under Section
368(a) of the Code.
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- The opinion of Montgomery that the conversion ratio of Atari Common
Stock into JTS Common Stock is fair to Atari, from a financial point of
view, as of February 5, 1996.
- The anticipated ability of the Combined Company to utilize Atari's
accumulated NOLs and tax carryforwards (although the Board of Directors
did not assign material value to the NOLs and tax carryforwards due to
the inherent limitations on the survival of such carryovers and the
complexity of applicable tax laws).
- The results of the due diligence review of JTS by management of Atari,
Deloitte & Touche LLP and Wilson, Sonsini, Goodrich & Rosati, P.C.,
counsel to Atari.
The Atari Board did not attempt to prioritize the foregoing factors in any
manner.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF JTS
The JTS Board of Directors has determined that the Merger is fair to, and
in the best interests of, JTS and JTS' stockholders and unanimously recommends
that the JTS stockholders vote in favor of approval of the Merger and the Merger
Agreement.
The JTS Board of Directors held a series of formal and informal meetings in
January and February 1996 at which a business combination with Atari was
discussed. During this period, an extensive financial and legal due diligence
review of Atari was conducted by members of JTS management and accountants and
legal counsel retained by JTS. Individual members of the JTS Board of Directors
were updated regularly on developments and certain members of the Board
participated actively in negotiations and discussions with Atari and the due
diligence review of Atari. In reaching its conclusion to approve the Merger and
the Merger Agreement and to recommend that the stockholders approve the Merger
and the Merger Agreement, the JTS Board considered a number of factors,
including, without limitation, the following:
- JTS' need for working capital to maintain and expand its manufacturing
operations and research and development activities and the immediate and
significant source of capital to fund such operations and activities that
the merger with Atari would provide.
- The availability to JTS of alternative sources of capital and the time
required to obtain such capital.
- The benefits to the stockholders of JTS resulting from the expected
trading market for JTS Common Stock following the Merger, which would
provide a means of liquidity for such stockholders' stock.
- The opportunity for JTS stockholders to continue to participate in the
potential growth of JTS.
- The diminished equity position that the former stockholders of JTS will
have in the Combined Company.
- The risks associated with the businesses of Atari and JTS.
- The treatment of the Merger as a tax-free reorganization under section
368(a) of the Code.
- The anticipated ability of the Combined Company to utilize Atari's
accumulated NOLs and tax carryforwards (although the Board of Directors
did not assign material value to the NOLs and tax carryforwards due to
the inherent limitations on the survival of such carryovers and the
complexity of applicable tax laws).
- The results of the due diligence review of Atari by management of JTS
and Cooley Godward, counsel to JTS.
The JTS Board did not attempt to prioritize the foregoing factors in any
manner.
OPINION OF MONTGOMERY SECURITIES
Pursuant to an engagement letter dated January 31, 1996, Atari retained
Montgomery to render an opinion with respect to the fairness from a financial
point of view of the consideration to be paid by Atari in connection with the
acquisition of JTS. Montgomery is a nationally recognized firm and, as part of
its investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with merger transactions and other
types of acquisitions, negotiated underwritings, secondary
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distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Atari selected Montgomery to render
a fairness opinion on the basis of Montgomery's experience and expertise in
transactions similar to the Merger and its reputation in the computer
peripherals and investment communities.
On February 5, 1996, Montgomery delivered its oral and written opinion that
the conversion ratio of Atari Common Stock into JTS Common Stock was fair to
Atari, from a financial point of view, as of that date. The amount of such
consideration was determined pursuant to negotiations between Atari and JTS and
not pursuant to recommendations of Montgomery. No limitations were imposed by
Atari on Montgomery with respect to the investigations made or procedures
followed in rendering its opinion.
THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO ATARI IS ATTACHED HERETO
AS APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF
MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION. MONTGOMERY'S OPINION IS DIRECTED TO THE ATARI BOARD OF DIRECTORS
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF ATARI OR JTS AS
TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. IN FURNISHING
ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, OR THAT ITS OPINION CONSTITUTES
A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES ACT,
AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF MONTGOMERY'S WRITTEN
OPINION.
In connection with its opinion, Montgomery, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Atari, including the consolidated financial statements for recent years and
interim periods to September 30, 1995, and certain other relevant financial and
operating data relating to Atari and JTS made available to Montgomery from
published sources and from the internal records of Atari and JTS, including the
consolidated financial statements of JTS for recent years and interim periods to
November 30, 1995; (ii) reviewed the February 2, 1996 draft of the Merger
Agreement provided to Montgomery by Atari; (iii) reviewed certain historical
market prices and trading volumes of Atari Common Stock as reported on the
American Stock Exchange; (iv) compared Atari and JTS from a financial point of
view with certain other companies in the computer peripherals industry that
Montgomery deemed to be relevant; (v) considered the financial terms, to the
extent publicly available, of selected recent business combinations of companies
in the computer peripherals industry that Montgomery deemed to be comparable, in
whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of Atari and JTS certain information of a
business and financial nature regarding Atari and JTS, furnished to Montgomery
by them, including the number of shares to be issued by JTS in connection with
the acquisition of Moduler Electronics; (vii) reviewed and discussed with
representatives of the management of Atari and JTS financial forecasts,
including cash flow, gross margin and unit shipment projections, and related
assumptions of JTS, provided to Montgomery by JTS management, which forecasts
and assumptions included the estimated contribution of Moduler Electronics to
JTS' financial performance; (viii) made inquiries regarding and discussed the
Merger and the draft of the Merger Agreement and other matters related thereto
with Atari's counsel; and (ix) performed such other analyses and examinations as
Montgomery deemed appropriate.
In connection with its review, Montgomery assumed and relied upon the
accuracy and completeness of the foregoing information and did not assume any
responsibility for independent verification of such information. With respect to
the financial forecasts provided to it as described above, Montgomery assumed
for purposes of its opinion that such forecasts had been reasonably prepared on
bases reflecting the best available estimates and judgments of the management of
JTS at the time of preparation as to the future financial performance of JTS,
and, except as described below, that they provided a reasonable basis upon which
Montgomery could form its opinion. For purposes of its opinion and with the
agreement of management of Atari, Montgomery adjusted the financial forecasts
for JTS provided to Montgomery by the management of JTS to reflect more
conservative assumptions regarding future results of operations. Such forecasts
were based upon numerous variables and assumptions that are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such forecasts. Montgomery has assumed no liability for
such forecasts. Montgomery also assumed that there had been no material changes
in Atari's or JTS' assets, financial condition, results of
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<PAGE> 44
operations, business or prospects since the respective dates of their last
financial statements made available to Montgomery, and that there had occurred
no material changes in the terms of JTS' proposed acquisition of Moduler
Electronics. Montgomery relied on advice of counsel and independent accountants
to Atari as to all legal and financial reporting matters with respect to Atari,
the Merger and the draft of the Merger Agreement. In addition, Montgomery did
not assume responsibility for making an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Atari or JTS, nor
was Montgomery furnished with any such appraisals. Finally, Montgomery's opinion
is based on economic, monetary and market and other conditions as in effect on,
and the information made available to Montgomery as of, February 5, 1996.
Montgomery further assumed, with the consent of Atari's management, that
the Merger would be consummated in accordance with the terms described in the
draft of the Merger Agreement without any amendments thereto, and without waiver
by Atari or JTS of any of the conditions to their respective obligations
thereunder.
Set forth below is a brief summary of the report presented by Montgomery to
Atari's Board of Directors on February 5, 1996 in connection with its opinion.
Discounted Cash Flow Analysis. Montgomery applied a discounted cash flow
analysis to JTS financial forecasts for 1996, 1997 and 1998, prepared by JTS's
management and provided to Montgomery, and for 1999 and 2000, prepared by
Montgomery using assumptions more conservative than those underlying the JTS
management forecasts. JTS did not provide Montgomery with any financial
forecasts for periods beyond 1998. As described above, with Atari's consent
Montgomery adjusted the forecasts prepared by JTS management, and the extensions
thereof prepared by Montgomery, to reflect more conservative assumptions
regarding future results of operations. In conducting its review, Montgomery
adjusted JTS' financial projections by reducing JTS' forecasted revenues and
earnings before interest and taxes ("EBIT") by approximately 45% and 68%,
respectively. The unadjusted forecasts are referred to as the "Base Case
Forecasts," and the Base Case Forecasts as so adjusted by Montgomery are
referred to as the "Alternative Case Forecasts."
In conducting its discounted cash flow analysis, Montgomery first
calculated the estimated future streams of free cash flows that JTS would
produce through the year 2000. Montgomery then estimated JTS's aggregate value
at the end of 2000 by applying multiples ranging from 7.0x to 8.0x to JTS'
estimated EBIT in 2000. Finally, Montgomery discounted such cash flow streams
and aggregate values to present values using discount rates ranging from 25.0%
to 35.0%, chosen to reflect different assumptions regarding Atari's cost of
capital, and reduced such present values by JTS' net debt as of December 31,
1995. This analysis indicated an imputed equity value (defined as aggregate
value minus net debt) of JTS of between $449.3 million and $725.9 million based
on the Base Case Forecasts, and of between $106.1 million an $192.5 million
based on the Alternative Case Forecasts. By contrast, the consideration to be
provided by Atari in the Merger, based on the Exchange Ratio and the February 2,
1996 closing sale price of Atari Common Stock on the American Stock Exchange of
$2.00 per share, equals approximately $75.7 million.
Comparable Company Analysis. Using public and other available information,
Montgomery calculated the imputed equity value of JTS based on the multiples of
estimated 1996 revenue, EBIT and net income at which three publicly traded disk
drive companies were trading on February 2, 1996. The February 2, 1996 stock
prices of the comparable companies reflected the following median multiples:
0.3x estimated 1996 revenues; 4.8x estimated 1996 EBIT; and 8.5x estimated 1996
net income. Montgomery applied the foregoing median multiples to the analogous
forecasted 1996 statistics for JTS, made applicable adjustments to reflect JTS'
net debt (defined as debt minus cash) at December 31, 1995, narrowed the
resulting range of data to exclude valuations that Montgomery deemed to be
unrealistically high, and applied a private company illiquidity discount to the
resulting totals. This analysis indicated an imputed equity value of JTS of
between $70.0 million and $175.0 million based on the Base Case Forecasts, and
of between $49.0 million and $105.0 million based on the Alternative Case
Forecasts. By contrast, the consideration to be provided by Atari in the Merger,
based on the Exchange Ratio and the February 2, 1996 closing sale price of Atari
Common Stock on the American Stock Exchange of $2.00 per share, equals
approximately $75.7 million.
Comparable Transactions Analysis. Montgomery reviewed the consideration
paid in the following twelve acquisitions of comparable disk drive and other
computer storage companies that were announced since
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1989 (target/acquiror): Micropolis (disk drive business)/Singapore Technologies
Industrial; Maxtor/Hyundai Electronics Industries (two separate transactions);
Conner Peripherals Inc./Seagate; Digital Equipment Corporation (disk drive
business)/Quantum; Sunward Technologies Inc./Read-Rite Corporation; Archive
Corporation/Conner Peripherals Inc.; Dastek Inc./Komag Inc.; MiniScribe
Corporation (assets)/Maxtor; Cipher Data Products Inc./Archive Corporation;
Imprimis Technology Inc./Seagate; and Irwin Magnetic Systems Inc./Cipher Data
Products Inc. Montgomery analyzed the consideration paid in such transactions as
a multiple of the target companies' revenue, EBIT and net income for the latest
twelve months ("LTM"). Such analysis yielded median multiplies of 0.5x LTM
revenue, 17.6x LTM EBIT and 18.4x LTM net income. Montgomery applied the
foregoing median multiples to the analogous forecasted 1996 statistics for JTS
and made applicable adjustments to reflect JTS' net debt at December 31, 1995.
The foregoing process yielded a range of imputed equity values of JTS as of
December 31, 1996. Montgomery then discounted that range to present values using
a discount rate of 40%, a rate generally considered to reflect the standard
venture capital return hurdle, and narrowed the resulting range of data to
exclude valuations that Montgomery deemed to be unrealistically high. This
analysis indicated an imputed equity value of JTS of between $150.0 million and
$300.0 million based on the Base Case Forecasts, and of between $100.0 million
and $250.0 million based on the Alternative Case Forecasts. By contrast, the
consideration to be provided by Atari in the Merger, based on the Exchange Ratio
and the February 2, 1996 closing sale price of Atari Common Stock on the
American Stock Exchange of $2.00 per share, equals approximately $75.7 million.
No other company or transaction used in the comparable transactions
analysis as a comparison is identical to JTS or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which JTS and the
Merger are being compared.
Contribution Analysis. Montgomery compared the percentage interest in the
Combined Company that will be held by present stockholders of Atari and JTS
immediately following the Merger -- approximately 62% and 38%, respectively --
to the relative contributions of the two companies to various operating
statistics of the merged entity. Montgomery compared Atari's revenues for the
twelve months ended September 30, 1995 (the last date for which revenue
statistics for Atari were available) to JTS's revenues for the twelve months
ended January 15, 1996, which comparison indicated a relative contribution of
approximately 66% and 34%, respectively, for Atari and JTS. Montgomery also
compared Atari's estimated 1996 revenues (which Montgomery assumed would be
equal to Atari's revenues for the twelve months ended September 30, 1995) to
JTS' backlog of approximately $25.2 million as of January 15, 1996, to JTS's
1996 run rate revenues (defined as JTS' actual revenues for January 1 through
15, 1996, which equaled approximately $3.1 million, on an annualized basis) and
to JTS's forecasted 1996 revenues (based on the Base Case Forecasts). Such
comparisons indicated relative contributions of approximately 52% and 48%, 26%
and 74%, and 6% and 94%, respectively, for Atari and JTS.
The summary set forth above does not purport to be a complete description
of the presentation by Montgomery to Atari or of the analyses performed by
Montgomery. The preparation of a fairness opinion necessarily is not susceptible
to partial analysis or summary description. Montgomery believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses and of the factors considered, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to Atari. In
addition, Montgomery may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Montgomery's view
of the actual value of JTS. Although Montgomery did not consider any of the
foregoing analyses in isolation for purposes of rendering its opinion,
Montgomery does not believe that any of such analyses is inconsistent with its
opinion.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Atari and JTS. The
analyses performed by Montgomery are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
those suggested by such analyses.
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<PAGE> 46
Such analyses were prepared solely as part of Montgomery's analysis of the
fairness of the Merger to Atari and were provided to Atari in connection with
the delivery of Montgomery's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at any time in the future.
Montgomery used in its analyses various projections of future performance
prepared by the managements of Atari and JTS. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
As described above, Montgomery's opinion and presentation to Atari were
among the many factors taken into consideration by Atari in making its
determination to approve, and to recommend that its stockholders approve, the
Merger.
Pursuant to a letter agreement dated January 31, 1996 (the "Engagement
Letter"), Atari engaged Montgomery to render an opinion with respect to the
fairness from a financial point of view of the consideration to be paid by Atari
in connection with the acquisition of JTS. The Engagement Letter provides for
Atari to pay Montgomery a fee of $325,000, which was paid upon delivery of
Montgomery's opinion. The fee is not conditioned on the outcome of Montgomery's
opinion or whether or not such opinion was deemed to be favorable for any
party's purposes. The Engagement Letter also calls for Atari to reimburse
Montgomery for its reasonable out-of-pocket expenses. Pursuant to a separate
letter agreement, Atari has agreed to indemnify Montgomery, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws.
Montgomery has not performed investment banking services for JTS, except
that Montgomery was contacted in connection with a potential private placement
of JTS securities.
The Atari Board of Directors does not intend to obtain an updated fairness
opinion with respect to the Merger.
FORWARD-LOOKING FINANCIAL INFORMATION PROVIDED BY JTS*
As a matter of course, JTS does not intend to publicly disclose
forward-looking financial information. Nevertheless, in connection with the due
diligence review of JTS' business, the Atari Board of Directors and Montgomery
reviewed preliminary financial targets furnished by JTS in January 1996. Such
financial targets indicated revenues of $445 million, gross profit of $100
million and net income of $53 million for fiscal 1997. These financial targets
were based on certain assumptions including assumptions that JTS would develop
and introduce new products on a timely basis, that Indian bank funding would be
available on a timely basis for facility expansion at Moduler Electronics, that
the notebook computer systems designed to accept the Nordic disk drive would be
released within a certain time frame, that competitive conditions within the
disk drive industry would not undergo material adverse change, that the market
for computer systems, storage upgrades to computer systems and multimedia
applications, such as digital video and video on demand and hence the market for
hard disk drives, would remain strong, and that there would be no material
adverse change in JTS' operations or business. Such assumptions involve
judgments with respect to, among other things, future economic conditions,
financial market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of JTS.
In June 1996, JTS management provided to the Boards of Directors of Atari
and JTS updated preliminary financial targets for the Combined Company, based on
the assumption that the Merger would be consummated in June 1996. Such financial
targets for the Combined Company indicated revenues of $238 million, gross
profit of $31 million and a net loss of $113 million for fiscal 1997. The
decline in targeted
- ---------------
* The statements contained in this section regarding JTS' preliminary financial
targets constitute "forward- looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act and are subject
to the safe harbors created thereby.
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revenues and gross profit and the increase in net loss in the June 1996 targets
compared to the January 1996 targets resulted primarily from delays in the
scheduled releases of notebook computers which would incorporate JTS' Nordic
drives. JTS' manufacturing schedule was changed to reflect this delay in
expected shipments of its Nordic products. As a result of the delay in
production and sales of Nordic disk drives, Palladium disk drives, on which JTS
earns a lower gross margin than Nordic drives, are expected to comprise a
greater proportion of total revenues for fiscal 1997. Accordingly, JTS' targeted
gross margin decreased from January 1996 to June 1996. Additionally, expected
funding from an Indian bank, for facilities expansion and capital equipment for
Moduler Electronics was delayed three months resulting in a decrease in targeted
production capacity. The net loss in the June 1996 updated preliminary financial
targets includes expenses associated with the Merger, including a write-off of
approximately $100 million of purchased in-process research and development in
addition to goodwill amortization, Atari general and administrative expenses and
interest expense related to the Atari convertible debentures.
While JTS believes that the assumptions underlying the preliminary
financial targets are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the forward-looking financial
information will prove to be accurate. In addition, as disclosed elsewhere in
this Joint Proxy Statement/Prospectus under "Risk Factors," the business and
operations of JTS are subject to substantial risks which increase the
uncertainty inherent in such preliminary financial targets. Any of the factors
disclosed under "Risk Factors" could cause the actual revenues, operating income
and net income of JTS to differ materially from the preliminary financial
targets described above. Accordingly, for these reasons it is expected that
there will be differences between the actual and targeted results, and actual
results may be materially higher or lower than those indicated above.
In light of the significant uncertainties inherent in forward-looking
financial information of any kind, the inclusion of such information herein
should not be regarded as a representation by JTS, Atari or any other person
that the preliminary financial targets will be achieved. Investors are cautioned
that these preliminary financial targets should not be regarded as fact and
should not be relied upon as an accurate representation of future results.
Further, the preliminary financial targets furnished by JTS were not prepared
with a view to public disclosure or in compliance with the established
guidelines concerning financial projections promulgated by the American
Institute of Certified Public Accountants. In addition, such preliminary
financial targets do not purport to present operations in accordance with
generally accepted accounting principles and have not been audited, compiled or
otherwise examined by Arthur Andersen LLP, JTS' independent auditors, or by any
other independent auditor. Accordingly, neither Arthur Andersen LLP nor any
other independent auditor assumes any responsibility for the preliminary
financial targets disclosed herein. The preliminary financial targets are being
presented solely because they were furnished to the Atari Board of Directors and
Montgomery, and they should not be interpreted as suggesting that the Atari
Board or Montgomery relied solely upon such targets or placed any particular
emphasis upon such targets in evaluating any proposed transaction. JTS has
advised Atari and Montgomery that its preliminary financial targets were
prepared solely for internal use and capital budgeting and other management
decisions, and are subjective in many respects and thus susceptible to
interpretations and periodic revision based on actual experience and business
developments. None of Atari, JTS or any of their financial advisors or any of
their respective directors or officers assumes any responsibility as a result of
the inclusion of such preliminary financial targets in this Joint Proxy
Statement/Prospectus for the accuracy of such information. JTS does not intend
publicly to update or otherwise publicly to revise the preliminary financial
targets disclosed above to reflect circumstances existing after the date of
their preparation.
SUMMARY OF THE MERGER AGREEMENT
The detailed terms of, and conditions to, the Merger and certain related
transactions are contained in the Merger Agreement, a copy of which is attached
hereto as Appendix A. The statements made in this Joint Proxy
Statement/Prospectus with respect to the terms of the Merger and such related
transactions are qualified in their entirety by reference to the more complete
information set forth in the Merger Agreement.
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EFFECTIVE TIME
The Merger will become effective at such time as the Certificate of Merger
has been duly filed with the Secretary of State of the State of Nevada in
accordance with the NGCL and with the Secretary of State of the State of
Delaware in accordance with the DGCL, or at such later time as is specified in
the Certificate of Merger (the "Effective Time"). See "-- Conditions to the
Merger." It is anticipated that, if the Merger and the Merger Agreement are
approved at the respective stockholder meetings of Atari and JTS and all other
conditions to the Merger have been fulfilled or waived, the Effective Time will
occur as soon as practicable following the approval of the Merger and the Merger
Agreement by the stockholders of Atari and JTS.
MANNER AND BASIS OF CONVERTING ATARI COMMON STOCK
Conversion of Atari Stock. At the Effective Time, each outstanding share
of Atari Common Stock will be automatically converted into one share of JTS
Common Stock. Shares of Atari Common Stock held as treasury stock and shares of
Atari Common Stock held directly or indirectly by JTS shall not be converted
into JTS Common Stock.
Based on the number of shares of Atari Common Stock, JTS Common Stock and
JTS Series A Preferred Stock outstanding as of May 22, 1996, immediately after
consummation of the Merger (assuming the conversion of all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock and that none of
the holders of JTS Common Stock or JTS Series A Preferred Stock perfect
appraisal or dissenters' rights), a total of 102,687,204 shares of JTS Common
Stock would be issued and outstanding, of which 63,735,718 shares, or 62%, would
represent shares issued in the Merger upon conversion of Atari Common Stock.
Fractional Shares. No fractional shares of JTS Common Stock will be
issued as a result of the Merger. In lieu thereof, each holder of Atari Common
Stock shall receive cash (without interest) in an amount equal to the fraction
of a share of JTS Common Stock otherwise issuable to such holder multiplied by
the last sale price per share of Atari Common Stock for the trading day
preceding the date of the Effective Time as reported in The Wall Street Journal.
Exchange of Certificates. Registrar and Transfer Company, Cranford, NJ has
been designated to act as Exchange Agent for the purpose of exchanging Atari
Common Stock certificates for JTS Common Stock certificates. As promptly as
practicable after the Effective Time, instructions will be mailed to all holders
of Atari Common Stock regarding treatment of their stock certificates. After the
Effective Time, there will be no further registration of transfers of Atari
Common Stock.
Upon the surrender of a certificate representing shares of Atari Common
Stock to the Exchange Agent, together with a duly executed letter of
transmittal, the holder of such certificate will be entitled to receive in
exchange therefor the number of shares of JTS Common Stock to which the holder
of Atari Common Stock is entitled pursuant to the provisions of the Merger
Agreement. Until outstanding certificates formerly representing shares of Atari
Common Stock are properly surrendered to the Exchange Agent, no dividend or
distribution payable to holders of record of JTS Common Stock shall be paid to
any holder of such outstanding certificates, but upon surrender of such
outstanding certificates by such holder there shall be paid to such holder the
amount of any dividends or distributions (without interest) theretofore paid
with respect to such whole shares of JTS Common Stock, but not paid to such
holder, and which dividends or distributions had a record date occurring on or
subsequent to the Effective Time.
Until a certificate representing shares of Atari Common Stock has been
surrendered to the Exchange Agent, each such certificate shall be deemed at any
time after the Effective Time to represent the right to receive upon such
surrender the number of shares of JTS Common Stock to which the stockholder is
entitled under the Merger Agreement.
ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE INSTRUCTIONS TO DO SO AFTER COMPLETION OF THE MERGER.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of the parties to the effect that, subject to certain exceptions, among
other things: (a) such party is duly organized and in good standing, and has the
requisite corporate power to own its properties and carry on its business; (b)
each subsidiary of JTS and each significant subsidiary of Atari has been duly
organized and is in good standing, and all issued and outstanding capital stock
of such subsidiary is owned by its respective parent company; (c) such party has
a certain number of authorized shares, issued and outstanding shares, and shares
reserved for issuance; (d) such party has all requisite corporate power and
authority to enter into the Merger Agreement and to consummate the Merger, the
execution and delivery of the Merger Agreement has been duly authorized, and the
Merger Agreement constitutes the valid and binding obligation of such party; (e)
the execution, delivery and consummation of the Merger will not conflict with
such party's Certificate of Incorporation or Bylaws, or violate any material
agreement or law to which such party or its assets are bound; (f) the financial
statements of such party have been prepared in accordance with generally
accepted accounting principles and fairly present its financial condition,
results of operations and cash flows; (g) such party has operated its business
in the ordinary course consistent with past practice since certain dates
(January 28, 1996, in the case of JTS, and December 31, 1995, in the case of
Atari (respectively, such party's "Balance Sheet Date")), and, since such
Balance Sheet Date, there have been no actions or events that have materially
adversely affected such party; (h) such party has no material obligations or
liabilities other than those adequately provided for in such party's balance
sheet as of the Balance Sheet Date, or those incurred in the ordinary course of
business; (i) there is no litigation pending or, to the best of such party's
knowledge threatened against such party that, if determined or resolved
adversely, would have a material adverse effect on such party; (j) there is no
agreement or order binding upon such party which has or could have the effect of
prohibiting or impairing such party's business; (k) such party has obtained each
governmental license or permit required for the operation of such party's
business; (l) such party has good and marketable title to all of its properties
and assets reflected in its balance sheet or acquired after such party's Balance
Sheet Date, except for such liens as do not materially impair such party's
business or are reflected on such party's balance sheet; (m) such party owns
certain intellectual property, has no knowledge of material unauthorized use,
disclosure infringement or misappropriation of any such intellectual property,
and has not entered into any agreement to indemnify any other person against a
charge of infringement of such intellectual property; (n) to the knowledge of
such party, no hazardous material is present on such party's property and such
party has materially complied with certain laws and regulations relating to such
hazardous materials; (o) such party has timely filed all required tax returns or
statements, and such party has provided adequate accruals in its financial
statements for any taxes not yet paid; (p) such party has complied with the
provisions of the Employment Retirement Income Security Act of 1974, as amended,
with respect to each "employee benefit plan" maintained by it; (q) execution of
the Merger Agreement will not result in extraordinary payments to or the
acceleration of benefits to such party's employees; (r) such party is in
material compliance with applicable laws and regulations regarding employment,
discrimination, and other terms and conditions of employment, and such party has
no pending or, to its knowledge threatened material controversy with any of its
employees.
In addition to the foregoing mutual representations and warranties, Atari
has made certain representations and warranties to JTS to the effect that: (a)
Atari has furnished to JTS copies of each report, registration statement, proxy
statement and other document filed with the Commission by Atari since January 1,
1993, such reports as of the dates they were filed do not contain an untrue
statement or omit to state a material fact, and such reports complied in all
material respects, when filed, with the then applicable requirements of the
Commission and (b) Atari has obtained an opinion from Montgomery Securities to
the effect that the Merger is fair, from a financial point of view, to Atari.
The foregoing summary of the various representations and warranties is
qualified in its entirety by the full text of the representations and warranties
of Atari and JTS set forth in Articles III and IV of the Merger Agreement
attached to the Joint Proxy Statement/Prospectus as Appendix A.
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CONDUCT OF BUSINESS PRIOR TO THE MERGER
Under the terms of the Merger Agreement, and for the period from the date
of the Merger Agreement and continuing until the earlier of the termination of
the Merger Agreement or the Effective Time of the Merger, each of Atari and JTS
has agreed (except to the extent expressly contemplated by the Merger Agreement
or as consented to in writing by the other), to carry on its and its
subsidiaries' business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay and to cause its
subsidiaries to pay debts and taxes when due subject to good faith disputes over
such debts or taxes and to pay or perform other obligations when due. Each of
Atari and JTS has also agreed to promptly notify the other of any event or
occurrence not in the ordinary course of its or its subsidiaries' business, and
of any event which could have a material adverse effect on it and its
subsidiaries, taken as a whole. In addition, each of Atari and JTS has agreed
that it will not, among other things, do, cause or permit any of the following,
or allow, cause or permit any of its subsidiaries to do, cause or permit any of
the following, without the prior written consent of the other: (a) cause or
permit any amendments to its Certificate of Incorporation or Bylaws; (b) issue,
deliver or sell or authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or, options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than the issuance
of shares of its Common Stock pursuant to the exercise of stock options,
warrants or other rights therefor outstanding as of the date of the Merger
Agreement (provided, however, that JTS may, in the ordinary course of business
consistent with past practice, grant options to purchase up to 250,000 shares of
Common Stock under its 1995 Stock Option Plan, and that Atari may issue
securities under certain existing benefit plans); (c) declare or pay any
dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service to it or its subsidiaries; (d)
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to its and its parent's/subsidiaries' business, taken as a whole;
(e) other than in the ordinary course of business, make or change any material
election in respect of taxes, adopt or change any accounting method in respect
of taxes, file any material return or any amendment to a material return, enter
into any closing agreement, settle any claim or assessment in respect of taxes,
or consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of taxes; (f) accelerate, amend or change the
period of exercisability of options, warrants or other rights granted under its
employee stock plans or authorize cash payments in exchange for any options,
warrants or other rights granted under any of such plans; or (g) take, or agree
in writing or otherwise to take, any of the actions described in (a) through (f)
above, or any action which would make any of its representations or warranties
contained in the Merger Agreement untrue or incorrect or prevent it from
performing or cause it not to perform its covenants thereunder.
In addition, under the terms of the Merger Agreement, each of Atari and JTS
has agreed that, during the period from the date of the Merger Agreement and
continuing until the earlier of the termination of the Merger Agreement or the
Effective Time, and except as expressly contemplated by the Merger Agreement, it
will not, among other things, do, cause or permit any of the following, or allow
cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of the other party: (a) enter into
any material contract or commitment, or violate, amend or otherwise modify or
waive any of the terms of any of its material contracts, other than in the
ordinary course of business consistent with past practice; (b) transfer to any
person or entity any rights to its intellectual property other than in the
ordinary course of business consistent with past practice; (c) sell, lease,
license or otherwise dispose of or encumber any of its properties or assets
which are material, individually or in the aggregate, to its and its
subsidiaries' business, taken as a whole, except in the ordinary course of
business consistent with past practice; (d) incur any indebtedness for borrowed
money (except amounts borrowed under such party's existing revolving credit line
or drawdowns of existing credit facilities for working capital or construction
purposes only) or guarantee
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any such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others; (e) revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business and other than as
disclosed in such party's disclosure schedule; (f) pay, discharge or satisfy in
an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of business,
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in such party's financial statements; (g) terminate or waive
any right of substantial value, other than in the ordinary course of business;
(h) adopt or amend any employee benefit or stock purchase or option plan; (i)
commence a lawsuit other than (i) for the routine collection of bills, (ii) in
such cases where it in good faith determines that failure to commence suit would
result in the material impairment of a valuable aspect of its business, provided
that it consults with the other party prior to the filing of such a suit, or
(iii) for a breach of the Merger Agreement; (j) take, or agree in writing or
otherwise to take, any of the actions described in (a) through (i) above, or any
action which would make any of its representations or warranties contained in
the Merger Agreement untrue or incorrect or prevent it from performing or cause
it not to perform its covenants thereunder. In addition, Atari has agreed that,
during the period from the date of the Merger Agreement and continuing until the
earlier of the termination of the Merger Agreement or the Effective Time, it
shall not, without the prior written consent of JTS, make any capital
expenditures, capital additions or capital improvements except in the ordinary
course of business and consistent with past practice, and in any event not to
exceed $25,000 per quarter.
Each of the parties has further agreed that from and after the date of the
Merger Agreement until the earlier of the effective time of the Merger or the
termination of the Merger Agreement in accordance with its terms, it will not,
directly or indirectly (i) solicit, initiate discuss or engage in negotiations
with any person (whether such negotiations are initiated by such party or
otherwise) or take any other action intended or designed to facilitate the
efforts of any person, other than the other party, relating to the possible
acquisition of such party or any of its subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets of otherwise) or any material
portion of its or their capital stock or assets (with any such efforts by any
such person, including a firm proposal to make such an acquisition, being
referred to as an "Acquisition Proposal"), (ii) provide non-public information
with respect to such party or any of its subsidiaries to any person relating to
a possible Acquisition Proposal by any person, other than the other party, (iii)
enter into an agreement with any person, other than the other party, providing
for a possible Acquisition Proposal, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Acquisition Proposal
by any person other than the other party. If either party receives any
unsolicited offer or proposal to enter into negotiations relating to an
Acquisition Proposal, such party shall immediately notify the other party
thereof, including information as to the identity of the party making any such
offer and the specific terms of such offer. Each party agrees that the issuance
of an injunction or other equitable remedy is an appropriate remedy for any
breach of such agreements.
Notwithstanding the foregoing, nothing contained in the Merger Agreement
prevents the Board of Directors of Atari (or its agents pursuant to its
instructions) from taking any of the following actions: (i) informing any third
party of the foregoing conditions or providing a copy of the Merger Agreement
(other than the JTS Disclosure Schedule) to any third party and (ii)
considering, negotiating, approving and recommending to the stockholders of
Atari an unsolicited, bona fide, written Acquisition Proposal which the Board of
Directors of Atari determines in good faith (after consultation with its
financial advisors and after consultation with outside counsel as to whether the
Board of Directors is required to do so in order to discharge properly its
fiduciary duties to stockholders under applicable law) would result in a
transaction more favorable to Atari's stockholders from a financial point of
view than the Merger (a "Superior Atari Proposal"). However, in the event Atari
were to accept a Superior Atari Proposal, JTS would be entitled to convert the
Atari loan into shares of JTS Series A Preferred Stock.
ADDITIONAL AGREEMENTS
Each of Atari and JTS shall afford the other with reasonable access prior
to the Effective Time to (a) all of such party's properties, books, contracts,
commitments and records and (b) all other information
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concerning the business, properties and personnel of such party as the other
party may reasonably request. Each party shall promptly apply for or otherwise
seek, and use its best efforts to obtain, all consents and approvals required to
be obtained by it for the consummation of the Merger, and shall use its best
efforts to obtain all necessary consents, waivers and approvals under any of its
material contracts in connection with the Merger for the assignment thereof.
Each person or entity who holds one percent (1%) or more of the outstanding
shares of JTS capital stock and each person or entity who holds more than five
percent (5%) of the outstanding shares of Atari capital stock shall execute and
deliver a "continuity of interest certificate" (the "Continuity of Interest
Certificate") prior to the Closing. The Continuity of Interest Certificate shall
contain certain representations relating to such stockholders' intention to sell
or dispose of their respective holdings of Atari or JTS capital stock. The
Combined Company shall be entitled to place appropriate legends on the
certificates evidencing any JTS Common Stock to be received by such persons or
entities pursuant to the terms of the Merger Agreement. Such legends shall refer
to, among other things, restrictions on disposition of JTS Common Stock pursuant
to Rule 145 under the Securities Act.
Certain stockholders of Atari and JTS, prior to the execution of the Merger
Agreement, executed and delivered a Voting Agreement pursuant to which such
stockholders agreed to: (a) refrain from selling or otherwise disposing of any
shares of Atari or JTS capital stock, as applicable, prior to the Effective Time
or the date of termination of the Merger Agreement; (b) vote such shares in
favor of the Merger Agreement, the Merger and any matter that could reasonably
be expected to facilitate the Merger; and (c) deliver to Atari or JTS, as
applicable, an irrevocable proxy to vote such shares in favor of the Merger
Agreement and the Merger.
At the Effective Time, each outstanding option to purchase shares of Atari
Common Stock under the Atari Stock Option Plan, whether vested or unvested, will
be assumed by JTS. Each such option so assumed by JTS under the Merger Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the Atari Stock Option Plan.
After the Effective Time, JTS shall (to the extent not prohibited by law)
indemnify and hold harmless, and pay in advance expenses, costs, damages,
settlements and fees to each director or officer of Atari serving as such as of
the date of the Merger Agreement as provided under Nevada law or the Articles of
Incorporation or Bylaws of Atari, or any indemnification agreement to which
Atari and such officer or director is a party, in each case as in effect at the
date of the Merger Agreement, which provisions shall survive the Merger and
shall continue in full force and effect after the Effective Time.
BOARD OF DIRECTORS AND OFFICERS FOLLOWING MERGER
At the Effective Time, the directors of the Combined Company will be
Sirjang L. Tandon, David T. Mitchell, Alain L. Azan, Jean D. Deleage, Roger
Johnson, Lip-Bu Tan, Jack Tramiel and Michael Rosenberg. Messrs. Tandon,
Mitchell, Azan, Deleage, Johnson and Tan are currently directors of JTS, and
Messrs. Tramiel and Rosenberg are currently directors of Atari. The executive
officers of JTS immediately prior to the effective time will be the executive
officers of the Combined Company. The parties have also agreed that Jack Tramiel
or a person designated by Jack Tramiel shall be a member of each committee of
the Board of Directors of the Combined Company.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to,
among other things, the approval of the Merger Agreement and the Merger by the
requisite votes of the stockholders of Atari and JTS, the Commission having
declared this Joint Proxy Statement/Prospectus effective, and the satisfaction
prior to the Effective Time of the Merger of the additional following
conditions: (a) the absence of any injunction or other legal action or
regulatory restraint or prohibition preventing the consummation of the Merger or
rendering the consummation of the Merger illegal; (b) all government approvals,
waivers and consents, if any, necessary for consummation of or in connection
with the Merger and the several transactions contemplated thereby, including
such approvals, waivers and consents as may be required under the Securities
Act, under state Blue Sky laws, and under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR
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Act") having been received; (c) Atari and JTS having received substantially
identical written opinions of their respective counsel to the effect that, based
upon certain representations and assumptions and subject to certain
qualifications, the Merger will constitute a tax-free reorganization; (d) the
JTS Common Stock shall have been approved for listing on the Nasdaq National
Market or the American Stock Exchange; (e) no more than five percent (5%) of the
shareholders of JTS shall have exercised appraisal or dissenter's rights with
respect to the Merger; (f) certain significant stockholders of each party shall
have executed Continuity of Interest Certificates; and (g) JTS shall have
assumed the Atari Debentures.
The obligations of JTS to effect the Merger are subject to, among other
things, the satisfaction prior to the Effective Time of the Merger of the
following conditions, unless waived by JTS: (a) the representations and
warranties of Atari in the Merger Agreement shall be true and correct in all
respects on and as of the Effective Time as though such representations and
warranties were made on and as of such time, except to the extent that the
failure of such representations and warranties to be true and accurate in such
respects has not had and could not reasonably be expected to have a material
adverse effect on Atari and its subsidiaries; (b) Atari shall have performed and
complied in all respects with all covenants, obligations and conditions of the
Merger Agreement required to be so performed and complied with, except to the
extent that the failure to so perform and comply has not had and could not
reasonably be expected to have a material adverse effect on Atari and its
subsidiaries; (c) JTS shall have received a certificate executed on behalf of
Atari by its President and its Chief Financial Officer to the effect that, as of
the Effective Time, (i) all representations and warranties made by Atari under
the Merger Agreement are true and complete and (ii) all covenants, obligations
and conditions of the Merger Agreement to be performed by Atari have been so
performed; (d) JTS shall have been furnished with evidence satisfactory to it of
the consent or approval of third parties whose consent or approval shall be
required in connection with the merger; (e) the absence of any injunction or
other legal action or restraint limiting or restricting JTS's conduct or
operation of the business of Atari and its subsidiaries following the Merger
shall be in effect; (f) JTS shall have received a legal opinion as to certain
matters from Wilson Sonsini Goodrich & Rosati, P.C., counsel to Atari; (f) there
shall not have occurred any material adverse change in the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations, results of operations or prospects of Atari and its
subsidiaries, taken as a whole.
The obligations of Atari to effect the Merger are subject to, among other
things, the satisfaction prior to the Effective Time of the following
conditions, unless waived by Atari: (a) the representations and warranties of
JTS in the Merger Agreement shall be true and correct in all respects on and as
of the effective time of the Merger as though such representations and
warranties were made on and as of such time, except to the extent that the
failure of such representations and warranties to be true and accurate in such
respects has not had and could not reasonably be expected to have a material
adverse effect on JTS and its subsidiaries; (b) JTS shall have performed and
complied in all respects with all covenants, obligations and conditions of the
Merger Agreement required to be performed and complied with by it as of the
effective time of the Merger, except to the extent that the failure to so
perform or comply has not had and could not reasonably be expected to have a
material adverse effect on JTS and its subsidiaries; (c) Atari shall have
received a certificate executed on behalf of JTS by its Chief Executive Officer
and its Chief Financial Officer to the effect that, as of the Effective Time,
(i) all representations and warranties made by JTS under the Merger Agreement
are true and complete and (ii) all covenants, obligations and conditions of the
Merger Agreement to be performed by JTS have been so performed; (d) Atari shall
have been furnished with evidence satisfactory to it of the consent or approval
of third parties whose consent or approval shall be required in connection with
the Merger; (e) the absence of any injunction or other legal action or restraint
limiting or restricting JTS' conduct or operation of the business of Atari and
its subsidiaries following the Merger shall be in effect; (f) Atari shall have
received a legal opinion as to certain matters from Cooley Godward Castro
Huddleson & Tatum, counsel to JTS; (g) there shall not have occurred any
material adverse change in the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations, results
of operations or prospects of JTS and its subsidiaries, taken as a whole; (h)
the outstanding shares of JTS Series A Preferred Stock shall have converted into
shares of JTS Common Stock; and (i) that certain Right of First Refusal and
Co-Sale Agreement between JTS and certain stockholders of JTS shall have been
terminated.
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As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, (i) JTS will file certificates of
merger with the Secretary of State of Delaware and the Recorder of the County in
which the registered office of JTS is located and (ii) Atari will file a
certificate of merger with the Secretary of State of Nevada. The Merger will
become effective upon such filings.
TERMINATION, AMENDMENT AND WAIVER
The Merger Agreement may be terminated by mutual written agreement of Atari
and JTS, or by either Atari or JTS, if (a) as a result of a breach by the other
party of a representation, warranty, covenant or agreement set forth in the
Merger Agreement which has or can reasonably be expected to have a material
adverse effect on such other party which breach is not cured within five days
after written notice from the other (except that no cure period is provided for
a breach which by its nature cannot be cured), or (b) there shall be any final
action taken, or any statute, rule, regulation or order enacted which would
prohibit JTS' ownership or operation of all or a material portion of the
business of Atari, or which compels JTS or Atari to dispose of or otherwise
relinquish all or a material portion of either such party's assets.
The Merger Agreement may be terminated by any party if (a) the required
approvals of the stockholders of JTS and Atari are not obtained at the
respective stockholder meetings, (b) the closing of the Merger has not occurred
on or before July 31,1996, (c) there is a final, non-appealable order of a
federal or state court in effect preventing consummation of the Merger, or (d)
if the Atari Board of Directors accepts, approves or recommends a Superior Atari
Proposal to the Atari stockholders.
The Merger Agreement may be amended by Atari or JTS at any time before or
after approval by the Atari stockholders or the JTS stockholders, provided that
an amendment made subsequent to the adoption of the Merger Agreement by the
stockholders of JTS and Atari, shall not (a) alter or change the amount or kind
of consideration to be received on conversion of the Atari Common Stock, (b)
alter or change any term of the Certificate of Incorporation of JTS to be
effected by the Merger or (c) alter or change any of the terms and conditions of
the Merger Agreement if such alteration or change would adversely affect the
holders of JTS Common Stock, JTS Series A Preferred Stock or Atari Common Stock.
At any time prior to the Effective Time any party to the Merger Agreement
may (a) extend the time for performance of any obligation of the other parties,
(b) waive any inaccuracies in the representations and warranties made to such
party in the Merger Agreement or any document delivered in connection therewith
and (c) waive compliance with any of the agreements or conditions for the
benefit of such party contained in the Merger Agreement.
MERGER EXPENSES
Atari and JTS will equally bear the costs of solicitation of proxies from
their stockholders, all printing and mailing costs in connection with the
preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and
JTS stockholders, all Commission filing fees with respect to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, and all
costs of qualifying the shares of JTS Common Stock under state blue sky laws. In
addition to solicitation by mail, the directors, officers and employees of Atari
and JTS may solicit proxies from stockholders by telephone, telegram or letter
or in person, but will not be specially compensated for such activities.
Brokers, nominees, fiduciaries and other custodians have been requested to
forward solicitation material to the beneficial owners of Atari Common Stock
held of record by them. Such custodians will be reimbursed by Atari for their
reasonable expenses incurred in that connection. If the Merger is consummated,
all costs and expenses incurred in connection with the Merger not previously
paid will be paid by the Combined Company.
CERTAIN OTHER ITEMS RELATED TO THE MERGER
ACCOUNTING TREATMENT
For accounting purposes, the Merger is treated as if Atari acquired JTS. A
new basis of accounting will be established for the assets and liabilities of
JTS. The new basis reflects the allocation of the purchase price
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to the JTS assets and liabilities on the basis of their fair values at the time
the proposed transaction was announced. The aggregate purchase price to be
allocated includes the outstanding common stock of JTS, valued using $2.50 per
share which is the representative value of the Atari Common Stock at the time
the proposed transaction was announced, as well as the value of JTS options and
warrants and direct costs of the acquisition. Subsequent to the Merger, the
financial statements of the Combined Company will reflect the combined financial
position, results of operations and cash flows of Atari and JTS based on the new
basis of accounting for JTS and the historic cost basis of Atari. Pro forma
combined condensed financial statements are presented herein giving effect to
the Merger as if the transaction occurred, for purposes of the pro forma
combined financial position of the Combined Company, on March 31, 1996, and for
purposes of the pro forma combined results of operations of the Combined
Company, on the first day of each of the periods presented. The allocation of
the purchase price in the pro forma statements was based on an independent
analysis of the tangible and intangible assets of JTS, which will be revised as
updated information becomes available at the Effective Time. Under the purchase
accounting method, giving effect to the Merger, existing technology and goodwill
in the amount of approximately $22.0 million and $11.7 million, respectively,
are expected to be recognized by the Combined Company. It is anticipated that
the Combined Company will amortize the resulting existing technology and
goodwill over periods of three and seven years, respectively, which will have an
adverse effect on its results of operations. In addition, upon the consummation
of the Merger, in the third quarter of calendar year 1996, the Combined Company
expects to expense approximately $100.0 million of purchased in-process
technology. See "Unaudited Pro Forma Combined Condensed Financial Statements."
RESALE OF JTS COMMON STOCK
The shares of JTS Common Stock to be issued to holders of Atari Common
Stock in the Merger have been registered under the Securities Act by a
registration statement, of which this Joint Proxy Statement/Prospectus is a
part, thereby allowing such shares of JTS Common Stock to be traded without
restriction under the Securities Act by all such holders, except that such
holders who are "affiliates" (as such term is defined for purposes of Rule 145
promulgated under the Securities Act) of Atari will be subject to restrictions
on transferability as provided in Rule 145.
Notwithstanding the Merger, certain shares of JTS Common Stock will
continue to be subject to contractual restrictions on transfer, rights of
repurchase and other provisions (and corresponding restrictive legends on
certificates issued representing such shares), if any, to the same extent as
were applicable immediately prior to the Effective Time, all as set forth in the
restricted stock purchase agreements entered into by the holders of such shares
of JTS Common Stock upon the purchase of such shares by such holder and any
restrictive legends set forth on any certificates representing such shares. See
"Information Regarding JTS Corporation -- Management of JTS -- Executive
Compensation."
CERTIFICATE OF INCORPORATION AND BYLAWS OF COMBINED COMPANY
Upon consummation of the Merger, the Certificate of Incorporation and the
Bylaws of JTS will be amended and restated as approved by the JTS stockholders
in May 1996, and such documents will be the Certificate of Incorporation and the
Bylaws of the Combined Company. See "Comparison of Rights of Stockholders of
Atari and JTS."
ASSUMPTION OF ATARI OPTIONS
Upon consummation of the Merger, each option to purchase Atari Common Stock
then outstanding will be assumed by JTS and will be converted automatically into
an option to purchase the same number of shares of JTS Common Stock at an
exercise price per share equal to the exercise price per share of the Atari
option. The other terms of the Atari options, including vesting schedules, will
remain unchanged.
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ASSUMPTION OF ATARI DEBENTURES
Upon consummation of the Merger, all of Atari's obligations under its
outstanding 5 1/4% convertible subordinated debentures due April 29, 2002 (the
"Atari Debentures") will be assumed by JTS. The Atari Debentures are presently
convertible into Atari Common Stock at a conversion price of $16.3125 per share
and, following the Merger, will be convertible into JTS Common Stock at the same
conversion price. The other terms of the Atari Debentures will remain unchanged.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of May 22, 1996, members of the Board of Directors and executive
officers of Atari beneficially owned approximately 23,952,129 shares (37%) of
the outstanding Common Stock of Atari. As of the same date, members of the Board
of Directors and executive officers of JTS beneficially owned approximately
9,050,000 shares (97%) of the outstanding JTS Common Stock and approximately
14,120,000 shares (48%) of the outstanding JTS Series A Preferred Stock.
Following the consummation of the Merger, the executive officers and the members
of the Board of Directors of the Combined Company will beneficially own
approximately 35,660,000 shares (35%) of the outstanding Common Stock of the
Combined Company. See "-- Summary of the Merger Agreement -- Board of Directors
and Officers Following the Merger," "Information Regarding Atari Corporation --
Principal Stockholders of Atari" and "Information Regarding JTS Corporation --
Principal Stockholders of JTS."
Mr. David T. Mitchell, Chief Executive Officer, President and a director of
JTS, Mr. Kenneth D. Wing, Executive Vice President, Research and Development
Quality/Reliability of JTS, and Ms. W. Virginia Walker, Executive Vice
President, Finance and Administration and Chief Financial Officer of JTS, have
purchased 2,000,000 shares, 300,000 shares and 250,000 shares of restricted JTS
Common Stock, respectively, pursuant to restricted stock purchase agreements.
Each of the agreements provides that such shares of JTS Common Stock shall fully
vest over a four year period; provided, however, such shares of JTS Common Stock
shall immediately vest in the event that there occurs a change of control of JTS
and, within three years thereafter, the holder of such JTS Common Stock is
reassigned to a lesser position, terminated without cause or relocated. The
Merger constitutes a change of control under such restricted stock purchase
agreements.
In March 1996, Mr. Mitchell and Mr. Sirjang L. Tandon, JTS' Chairman of the
Board and Corporate Technical Strategist, each purchased 1,000,000 shares of JTS
Common Stock at a purchase price of $1.00 per share. All of such shares are
subject to a right of repurchase at cost in favor of JTS, which repurchase
option lapses as to all such shares after five years of service with JTS;
provided, however, that with respect to each individual, JTS' right of
repurchase will lapse at the rate of one-eighth of the total shares purchased in
September 1996 and as to 1/48th of the total shares purchased per month
thereafter if the Merger closes. In addition, at the discretion of JTS' Board of
Directors, the right of repurchase with respect to Mr. Mitchell's 1,000,000
shares of JTS Common Stock may be caused to lapse as to all such shares at any
time.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the provisions of the HSR Act, certain acquisitions of voting
securities may not be consummated unless certain information has been filed with
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the applicable waiting
period under the HSR Act has expired or been terminated. Neither Atari nor JTS
is required to file HSR forms under the HSR Act in connection with the Merger,
except to the extent that the acquisition of JTS Common Stock by certain Atari
stockholders in connection with the Merger may separately be subject to the
premerger notification and waiting period requirements of the HSR Act. All
necessary filings have been made and the applicable waiting period has
terminated with respect to such filings.
At any time before or after the Effective Time, and notwithstanding the
termination of the HSR Act waiting period, the Antitrust Division, the FTC or a
private person could seek under the antitrust laws, among other things, to
enjoin the Merger or to cause Atari or JTS to divest itself, in whole or in
part, of a portion of its business, or the Combined Company to divest itself, in
whole or in part, of any of the businesses of Atari or
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JTS. There can be no assurance that a challenge to the Merger will not be made
or that, if such a challenge is made, Atari and JTS will prevail.
Other than the waiting period under the HSR Act, Atari and JTS are aware of
no governmental or regulatory approvals required for consummation of the Merger,
other than compliance with the federal securities laws and applicable securities
laws of the various states.
RELATED TRANSACTIONS
ATARI LOAN TO JTS
On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a
Subordinated Secured Convertible Promissory Note (the "Note") which is secured
by substantially all of the assets of JTS. Interest accrues on the unpaid
principal amount of the Note at the rate of 8.5% per annum. The Note was amended
in June 1996 to increase the amount lent pursuant thereto to $30.0 million. The
Note provides that JTS shall repay the outstanding principal and interest under
the Note on September 30, 1996 if the Merger has not occurred prior to such
time. The Note is expressly subordinated to outstanding indebtedness in
connection with JTS' primary bank loan agreement, up to an amount of $5.0
million at any one time. In addition, Atari's security interest in JTS' assets
is junior to security interests previously obtained by a bank and certain
equipment lessors. The amount of the senior obligations was approximately $9.1
million at January 28, 1996. In addition, the Note provides that JTS may incur
(a) indebtedness to trade creditors in the ordinary course of business, (b)
contingent obligations consisting of guarantees of the obligations of vendors
and suppliers of JTS in respect to transactions entered into in the ordinary
course of business, (c) indebtedness with respect to capital lease obligations
and indebtedness secured by certain permitted liens, (d) other indebtedness, not
exceeding $1.0 million in the aggregate at any time, and (e) obligations with
respect to extensions, renewals or refinancings of any of the items in (a)-(d),
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon JTS.
Under the terms of the Note, the occurrence of any of the following shall
constitute an event of default entitling Atari to declare immediately due and
payable all outstanding obligations under the Note: (a) failure by JTS to pay
when due any principal or interest payment required under the Note; (b) failure
by JTS to observe or perform its agreements regarding prohibitions on certain
transactions and on the use of proceeds from the Note; (c) breach of any
representation or warranty made in connection with the Note or the Merger
Agreement; (d) default by JTS under certain existing loan obligations, the
effect of which is to cause indebtedness of JTS in the amount of $250,000 or
more to become due prior to its stated date of maturity; (e) involuntary or
voluntary bankruptcy proceedings with respect to JTS; (f) a final judgment or
order for the payment of money in excess of $250,000 being rendered against JTS
in which such judgment or order remains undischarged for a period of 30 days; or
(g) the uncured breach by JTS with respect to certain other obligations
specified in the Note.
In the event that the Merger Agreement is terminated, either party may,
under certain conditions, elect to convert the outstanding indebtedness under
the Note into shares of JTS Series A Preferred Stock in an amount determined by
dividing the aggregate amount of the indebtedness to be converted by the
"Conversion Price" then in effect. The initial Conversion Price is $1.00 per
share, subject to adjustments for stock splits and similar events. Atari may
effect a conversion upon (a) a mutual written consent of JTS and Atari, (b) a
breach of any representation, warranty or agreement in the Merger Agreement by
JTS, provided that Atari has not materially breached its obligations under the
Merger Agreement at such time, (c) the failure of the parties to consummate the
Merger by July 31, 1996, or (d) failure by JTS' stockholders to approve the
Merger. JTS may effect a conversion of the outstanding indebtedness under the
Note in the event that (x) Atari breaches any representation, warranty or
agreement contained in the Merger Agreement, provided that JTS has not
materially breached its obligations under the Merger Agreement at such time, (y)
Atari's stockholders do not approve the Merger, or (z) the Atari Board of
Directors shall have accepted, approved or recommended to the Atari Stockholders
a Superior Atari Proposal.
In the event that either Atari or JTS elects to convert at least $5.0
million of indebtedness outstanding under the Note into shares of JTS Series A
Preferred, JTS shall be obligated to issue to Atari warrants to
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purchase shares of JTS Series A Preferred Stock. Pursuant to the terms of the
Note, JTS shall, upon the conversion of such outstanding indebtedness, be
obligated to issue a warrant to purchase up to 9,375,000 shares of JTS Series A
Preferred. Each warrant to be issued by JTS pursuant to the Note shall have an
exercise price of $2.00 per share, subject to adjustment on certain events, and
a term of five years. The shares of JTS Series A Preferred issuable upon
exercise of any warrants issued pursuant to the Note shall be entitled to
registration rights on parity with the existing registration rights held by the
holders of JTS Series A Preferred Stock.
VOTING AGREEMENTS
In connection with the Merger, certain stockholders of Atari and JTS have
entered into Voting Agreements. The terms of such Voting Agreements provide (i)
that such stockholders will not transfer (except as may be specifically required
by court order), sell, exchange, pledge (except in connection with a bona fide
loan transaction) or otherwise dispose of or encumber their shares of Atari
Common Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may
be, beneficially owned by them, or any new shares of such stock they may
acquire, at any time prior to the effective time or earlier termination of the
Merger, and (ii) that such stockholders will vote all shares of Atari Common
Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may be,
beneficially owned by them in favor of the approval of the Merger Agreement and
the Merger. Such voting agreements are accompanied by irrevocable proxies
whereby the stockholders of Atari provide to JTS, and the stockholders of JTS
provide to Atari, the right to vote their shares on the proposals relating to
the Merger Agreement and the Merger at the Atari Special Meeting and JTS Special
Meeting, respectively. Holders of approximately 43% of the shares of Atari
Common Stock, 91% of the shares of JTS Common Stock and 70% of the shares of JTS
Series A Preferred Stock entitled to vote at the respective stockholder meetings
have entered into such Voting Agreements and irrevocable proxies.
APPRAISAL AND DISSENTERS' RIGHTS
GENERAL
Stockholders of JTS who do not vote in favor of the Merger may, under
certain circumstances and by following the procedures prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of JTS Common Stock
and JTS Series A Preferred Stock. Alternatively, although JTS is a Delaware
corporation and is therefore subject to DGCL, the CGCL provides that JTS may be
subject to California law with respect to dissenters' rights. Accordingly,
pursuant to Chapter 13 of the CGCL, stockholders of JTS who do not vote in favor
of the Merger and who comply with the requirements of the CGCL will have a right
to demand payment for, and appraisal of the "fair value" of, their shares
("Dissenting Shares"). Although a dissenting stockholder may choose to proceed
under one or both of the states' statutes, the dissenting stockholder must
specify which statute the stockholder is proceeding under and must follow the
appropriate procedures under either the DGCL or the CGCL or suffer termination
or waiver of such rights.
DELAWARE APPRAISAL RIGHTS
If the Merger is consummated, dissenting holders of JTS Common Stock and
JTS Series A Preferred Stock may be entitled to have the "fair value" (exclusive
of any element of value arising from the accomplishment or expectation of the
Merger) of their shares immediately prior to the Effective Time paid to them by
complying with the provisions of Section 262 of the DGCL.
The following is a brief summary of Section 262, which sets forth the
procedures for dissenting from the Merger and demanding statutory appraisal
rights. This summary does not purport to be a complete statement of the
provisions of the Delaware Law relating to the rights of JTS stockholders to an
appraisal of the value of their shares and is qualified in its entirety by
reference to Section 262, the full text of which is attached hereto as Appendix
D. Failure to follow these procedures exactly could result in the loss of
appraisal rights (if available). This Joint Proxy Statement/Prospectus
constitutes notice to holders of JTS Common Stock and JTS Series A Preferred
Stock concerning the availability of appraisal rights under Section 262.
Under Section 262, a stockholder of record wishing to assert appraisal
rights must hold the shares of stock on the date of making a demand for
appraisal rights with respect to such shares and must continuously hold
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<PAGE> 59
such shares through the Effective Time. Stockholders who desire to exercise
their appraisal rights (if available) must satisfy all of the conditions of
Section 262. A written demand for appraisal of shares must be filed with JTS
before the taking of the vote on the Merger. This written demand for appraisal
of shares must be in addition to and separate from any proxy vote abstaining
from or voting against the Merger. Any such abstention or vote against the
Merger will not constitute a demand for appraisal within the meaning of Section
262.
Stockholders electing to exercise their appraisal rights (if available)
under Section 262 must not vote for approval of the Merger. If a stockholder
returns a signed proxy but does not specify a vote against approval of the
merger or a direction to abstain, the proxy will be voted for approval of the
Merger, which will have the effect of waiving that stockholder's appraisal
rights (if available).
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the share
certificate. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, this demand must be executed by or for the
fiduciary. If the shares are owned by or for more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, he is acting as agent for the record owner. A person
having a beneficial interest in JTS Common Stock or JTS Series A Preferred Stock
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below and
in a timely manner to perfect whatever appraisal rights the beneficial owner may
have.
A record owner, such as a broker, who holds JTS Common Stock or JTS Series
A Preferred Stock as a nominee for others may exercise his or her right of
appraisal with respect to the shares for all or less than all of the beneficial
owners of shares as to which he or she is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly mentioned, the demand will be presumed to
cover all shares outstanding in the name of such record owner.
A JTS stockholder who elects to exercise appraisal rights (if available)
should mail or deliver his or her written demand to JTS at its address at 166
Baypointe Parkway, San Jose, California 95134, Attention: W. Virginia Walker,
Corporate Secretary. The written demand for appraisal should specify the
stockholder's name and mailing address, and that the stockholder is thereby
demanding appraisal of his or her JTS stock. If appraisal rights are available
in connection with the Merger, within ten days after the Effective Time, JTS
must provide notice of the Effective Time to all of its stockholders who have
complied with Section 262 and have not voted for approval of the Merger.
Within 120 days after the Effective Time, any stockholder who has satisfied
the requirements of Section 262 may deliver to JTS a written demand for a
statement listing the aggregate number of shares not voted in favor of the
merger and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares.
Within 120 days after the Effective Time (but not thereafter), either JTS
or any stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court of Chancery (the "Court") demanding a
determination of the fair value of the dissenting shares. If no petition for
appraisal is filed with the Court within 120 days after the Effective Time,
stockholders' rights to appraisal (if available) will cease and stockholders
will be entitled to receive shares of JTS Common Stock as provided in the Merger
Agreement. Any stockholder who desires a petition to be filed is advised to file
it on a timely basis. JTS has no present intention to file such a petition if
demand for appraisal is made.
Upon the filing of any petition by a stockholder in accordance with Section
262, service of a copy will be made upon JTS, which will, within 20 days after
service, file in the office of the Register in Chancery in which the petition
was filed, a duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom agreements
as to the value of their shares have not been reached by JTS.
If a petition for an appraisal is filed in a timely fashion, after a
hearing on the petition, the Court will determine which stockholders are
entitled to appraisal rights and will appraise the shares owned by these
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<PAGE> 60
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be fair value. In determining fair value, the Court is to take
into account all relevant factors.
JTS stockholders considering seeking appraisal of their shares should note
that the fair value of their shares determined under Section 262 could be more,
the same or less than the consideration they would receive pursuant to the
Merger Agreement if they did not seek appraisal of their shares. The costs of
the appraisal proceeding may be determined by the Court and taxed against the
parties as the Court deems equitable in the circumstances.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote for any purpose the
shares subject to demand or to receive payment of dividends or other
distributions on such shares, except for dividends or distributions payable to
stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger Agreement. After this period, a stockholder may
withdraw his or her demand for appraisal and receive payment for his or her
shares as provided in the Merger Agreement only with the consent of JTS. No
petition demanding appraisal may be dismissed without approval of the Court.
Pursuant to the Merger Agreement, JTS will give Atari prompt notice of any
demands received by JTS, and Atari will have the right to participate in all
negotiations and proceedings with respect to the demands. JTS will not, except
with the prior written consent of Atari, make any payment with respect to, or
settle or offer to settle, any such demands.
Cash received pursuant to the exercise of appraisal rights may be subject
to federal or state income tax. See "-- Certain Federal Income Tax
Considerations."
The foregoing summary of the applicable provisions of Section 262 is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to such Section, the full text of which is attached as
Appendix D-1 to this Joint Proxy Statement/Prospectus.
CALIFORNIA DISSENTERS' RIGHTS
By virtue of Section 2115 of the CGCL, if holders of JTS Common Stock and
JTS Series A Preferred Stock exercise dissenters' rights in connection with the
Merger under Chapter 13 of the CGCL ("Chapter 13"), any shares of JTS Common
Stock and JTS Series A Preferred Stock as to which such dissenters' rights are
exercised will be converted into the right to receive such consideration as may
be determined to be due with respect to such Dissenting Shares pursuant to the
laws of the State of California.
The following summary of the provisions of Chapter 13 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Chapter 13, a copy of which is attached hereto as
Appendix D-2 and is incorporated herein by reference.
If the Merger is approved by the required vote of JTS' stockholders, each
holder of shares of JTS Common Stock and JTS Series A Preferred Stock who does
not vote in favor of the Merger and who follows the procedures set forth in
Chapter 13 will be entitled to have shares of JTS Common Stock and JTS Series A
Preferred Stock purchased by JTS for cash at their fair market value. Abstention
of the stockholder from voting will not waive the stockholders' dissenter's
rights. Voting against the proposed Merger will not constitute the written
demand on the corporation for purchase of the Dissenting Shares as required
under Chapter 13. The fair market value of shares of JTS Common Stock and JTS
Series A Preferred Stock will be determined as of the day before the first
announcement of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger and therefore valuing the
shares of JTS Common Stock and Series A Preferred Stock as if the Merger had not
occurred.
Within ten days after approval of the Merger by JTS' stockholders, JTS must
mail a notice of such approval (the "Approval Notice") to all stockholders who
have not voted in favor of the Merger, together with
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<PAGE> 61
a statement of the price determined by JTS to represent the fair market value of
the applicable Dissenting Shares, a brief description of the procedures to be
followed in order for the stockholder to pursue dissenters' rights, and a copy
of Sections 1300-1304 of Chapter 13. The statement of price by JTS constitutes
an offer by JTS to purchase all Dissenting Shares at the stated amount.
A stockholder of JTS electing to exercise dissenters' rights must, within
thirty days after the date on which the Approval Notice is mailed to such
stockholder, mail or deliver the written demand to JTS stating that such holder
is demanding purchase of his or her shares of JTS Common Stock and/or JTS Series
A Preferred Stock, stating the number of shares which JTS must purchase, what
the stockholder claims to be the fair market value of such shares and enclosing
the share certificates for endorsement by JTS. The statement of fair market
value constitutes an offer by the stockholder to sell the shares at such price.
A dissenting stockholder may not withdraw a demand for payment unless JTS
consents to it.
If JTS and the stockholder agree that the shares are Dissenting Shares and
agree upon the price of the shares, JTS must pay the stockholder the agreed upon
price plus interest thereon at the legal rate from the date of the agreement on
Dissenting Shares within thirty days from the later of (i) the date of the
agreement on Dissenting Shares, or (ii) the date all contractual conditions to
the Merger are satisfied.
If JTS denies that the shares are Dissenting Shares, or if JTS and the
stockholder fail to agree upon the fair market value of shares of capital stock,
then within six months after the date the Approval Notice was mailed to
stockholders, any stockholder who has made a valid written purchase demand and
who has not voted in favor of approval and adoption of the Merger may file a
complaint in California superior court requesting a determination as to whether
the shares are Dissenting Shares or as to the fair market value of such holder's
shares of JTS Common Stock and/or JTS Series A Preferred Stock, or both.
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<PAGE> 62
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of Atari capital stock for JTS capital
stock pursuant to the Merger. This summary is based upon opinions of counsel
(the "Tax Opinions") delivered by Wilson Sonsini Goodrich & Rosati, P.C. and
Cooley Godward Castro Huddleson & Tatum (collectively "Counsel") that the Merger
will constitute a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (a "Reorganization").
Atari and JTS stockholders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular stockholders of Atari and JTS in light of their particular
circumstances, such as stockholders who are banks, insurance companies,
tax-exempt organizations, dealers in securities, foreign persons or who do not
hold their Atari or JTS capital stock as capital assets or who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the Merger under foreign, state or local tax
laws or the tax consequences of transactions effectuated prior or subsequent to
or concurrently with the Merger (whether or not such transactions are in
connection with the Merger), including, without limitation, transactions in
which Atari capital stock is acquired or JTS capital stock is disposed of.
ACCORDINGLY, ATARI AND JTS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Subject to the limitations and qualifications referred to herein, Counsel
is of the opinion that the Merger will qualify as a Reorganization which will
result in the following federal income tax consequences:
(a) No gain or loss will be recognized by holders of Atari capital stock
solely upon their receipt of JTS capital stock solely in exchange for Atari
capital stock in the Merger (except to the extent of cash received in lieu of a
fractional share of JTS capital stock).
(b) The aggregate tax basis of the JTS capital stock received by Atari
stockholders in the Merger will be the same as the aggregate tax basis of Atari
capital stock surrendered in exchange therefor less the tax basis, if any,
allocated to fractional share interests.
(c) The holding period of the JTS capital stock received in the Merger will
include the period for which the Atari capital stock surrendered in exchange
therefor was held, provided that the Atari capital stock is held as a capital
asset at the time of the Merger.
(d) Cash payments received by holders of Atari capital stock in lieu of a
fractional share will be treated as if a fractional share of JTS capital stock
had been issued in the Merger and then redeemed by JTS. A stockholder of Atari
receiving such cash will generally recognize gain or loss upon such payment,
equal to the difference (if any) between such stockholder's basis in the
fractional share and the amount of cash received.
(e) A shareholder who exercises appraisal or dissenters' rights with
respect to a share of JTS capital stock and who receives payment for such stock
in cash should generally recognize capital gain or loss (if such share was held
as a capital asset at the time of the Merger) measured by the difference between
the shareholder's basis in such share and the amount of cash received, provided
that such payment is neither essentially equivalent to a dividend nor has the
effect of a distribution of a dividend (a "Dividend Equivalent Transaction"). A
sale of capital stock of JTS pursuant to an exercise of appraisal or dissenters'
rights will generally not be a Dividend Equivalent Transaction if, as a result
of such exercise, the shareholder exercising dissenters' rights and all parties
related to such Shareholder own no shares of JTS Stock (either actually or
constructively with the meaning of Section 318 of the Code) after the Merger.
If, however, a stockholder's sale for cash of JTS capital stock pursuant to an
exercise of appraisal or dissenters' rights is a Dividend Equivalent
Transaction, then such shareholder will generally recognize income for federal
income tax purposes in an amount up to the entire amount of cash so received.
(f) Neither JTS nor Atari will recognize material amounts of gain solely as
a result of the Merger.
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<PAGE> 63
No ruling has been or will be obtained from the Internal Revenue Service
(the "IRS") in connection with the Merger. Atari and JTS stockholders should be
aware that the Tax Opinions do not bind the IRS and that the IRS is therefore
not precluded from successfully asserting a contrary opinion. The Tax Opinions
are also subject to certain limitations and qualifications, they are based upon
certain factual assumptions, and are subject to the truth and accuracy of
certain representations made by Atari and JTS. Of particular importance are
certain representations relating to the Code's "continuity of shareholder
interest" and "continuity of business enterprise" requirements.
To satisfy the continuity of shareholder interest requirement, Atari
shareholders must not, pursuant to a plan or intent existing at or prior to the
Merger, dispose of or transfer so much of either (i) their Atari capital stock
in anticipation of the Merger or (ii) the JTS capital stock to be received in
the Merger (collectively, "Planned Dispositions"), such that Atari shareholders,
as a group, would no longer have a significant equity interest in the Atari
business being conducted by JTS after the Merger. Atari shareholders will
generally be regarded as having a significant equity interest as long as the
number of shares of JTS capital stock received in the Merger less the number of
shares subject to Planned Dispositions (if any) represents, in the aggregate, a
substantial portion of the entire consideration received by the Atari
shareholders in the Merger. To satisfy the continuity of business enterprise
requirement, JTS must either (i) continue the historic business conducted by
Atari or (ii) use a significant portion of the historic business assets of Atari
in a business.
A successful IRS challenge to the Reorganization status of the Merger would
result in the Merger being treated as a taxable sale of Atari's assets.
Additionally, a successful IRS challenge to such Reorganization status would
result in Atari stockholders recognizing taxable gain or loss with respect to
each share of Atari capital stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
Effective Time, of the JTS capital stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the JTS capital stock so received
would equal its fair market value and the holding period for such stock would
begin the day after the Effective Time.
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<PAGE> 64
STOCK PRICE AND DIVIDEND INFORMATION
ATARI
Atari's Common Stock has traded on the American Stock Exchange under the
symbol "ATC" since November 7, 1986. As of the close of business on May 22,
1996, 63,735,718 shares of Atari Common Stock were outstanding and no shares of
Preferred Stock were outstanding. As of that date, there were approximately
2,600 stockholders of record of Atari Common Stock. The following table sets
forth the high and low sale prices of Atari's Common Stock for the periods
indicated as reported on the consolidated transaction system.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR 1996
Second Quarter (through July 12, 1996)......................... $ 9 $ 3 5/8
First Quarter.................................................. 4 1/8 1 5/8
FISCAL YEAR 1995
Fourth Quarter................................................. $ 3 5/16 $ 1 1/8
Third Quarter.................................................. 3 5/8 2 9/16
Second Quarter................................................. 3 1/8 2 1/2
First Quarter.................................................. 4 1/4 2 3/4
FISCAL YEAR 1994
Fourth Quarter................................................. $ 7 3/8 $ 3 9/16
Third Quarter.................................................. 7 3/4 2 7/8
Second Quarter................................................. 6 5/8 2 7/8
First Quarter.................................................. 8 1/8 5 5/8
</TABLE>
Atari has never paid cash dividends on its Common Stock and does not
anticipate a change in this practice in the foreseeable future.
JTS
JTS is a privately held company, and there is no public trading market for
its stock. As of the close of business on June 18, 1996, 9,255,116 shares of JTS
Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued
and outstanding. There are a total of 52 holders of record of JTS Series A
Preferred Stock and 16 holders of record of JTS Common Stock. After the Closing,
the JTS Common Stock is expected to be publicly traded on the American Stock
Exchange under the symbol "JTS". No cash dividend has ever been paid on any
class of JTS capital stock.
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<PAGE> 65
JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS
Moduler Electronics is located in Madras, India and was founded in 1986 by
members of the family of Sirjang L. Tandon, JTS' Chairman and Corporate
Technical Strategist, as a contract manufacturer of power supplies for computers
and hard disk drive subassemblies. In December 1994, Moduler Electronics
received Indian government approval to manufacture hard disk drives. At
approximately the same time, Moduler Electronics discontinued production of hard
disk drive subassemblies for customers other than JTS. In March 1995, JTS
entered into a verbal agreement to acquire the hard disk drive division of
Moduler Electronics for 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase 500,000 shares of JTS Common Stock at an exercise price of
$.25 per share. JTS subsequently assumed operational and management control of
certain portions of the hard disk drive business of Moduler Electronics. The
verbal agreement contemplated that prior to JTS' acquisition, Moduler
Electronics would divest itself of certain voice coil assembly and other
operations not directly involved in its hard disk drive business.
In April 1996, following Moduler Electronics' divestiture of its voice coil
business and businesses unrelated to its hard disk drive operations, JTS
purchased 90% of the outstanding capital stock of Moduler Electronics in
consideration for 1,911,673 shares of JTS Series A Preferred Stock and a warrant
to purchase 750,000 shares of JTS Common Stock at an exercise price of $0.25 per
share. The warrant is immediately exercisable as to 500,000 shares of JTS Common
Stock and becomes exercisable with respect to the remaining 250,000 shares when
certain borrowings and credit facilities in the amount of $29 million become
available to Moduler Electronics. The 250,000 share portion of the warrant
related to the credit facilities of Moduler Electronics will be valued and
recorded as additional interest expense over the term of the borrowings, if and
when such portion of the warrant becomes exercisable.
In connection with the acquisition of the hard disk drive business of
Moduler Electronics, JTS agreed not to compete in the head stack manufacturing
business within India for a period of five years, provided that JTS may
manufacture head stacks for its internal requirements. In return, the former
owners of Moduler Electronics agreed not to compete in the disk drive
manufacturing business within India for a period of five years. In addition, JTS
granted certain registration rights with respect to the shares of JTS capital
stock issued in the acquisition. JTS has a right of first refusal to purchase
the remaining 10% equity interest in Moduler Electronics at 10% of the net book
value of Moduler Electronics at the time of the purchase.
Since JTS began hard disk drive production in early 1995, JTS has conducted
substantially all of its manufacturing operations at the Moduler Electronics
facility. As of January 28, 1996, Moduler Electronics employed 1,139
individuals. The Madras facility presently occupies 85,000 square feet in a
single building, 4,000 square feet of which are designated a "clean room"
environment. At this facility, JTS is adding production lines and expanding its
clean room environment. JTS believes that locating its manufacturing operations
in India represents an important element of its manufacturing strategy due to
the local availability of a high-quality, low-cost technical labor pool. See
"Information Regarding JTS Corporation -- Business of JTS -- Manufacturing."
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JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the Merger of JTS and Moduler Electronics which was consummated
on April 4, 1996 and will be accounted for as a purchase. The accompanying pro
forma combined condensed balance sheet as of January 28, 1996 assumes that the
acquisition of Moduler Electronics by JTS took place on that date and combines
JTS' and Moduler Electronics' balance sheets as of January 28, 1996. The
accompanying pro forma combined condensed statement of operations for the year
ended January 28, 1996 assumes that the acquisition took place as of the
beginning of fiscal 1996, and combines JTS' and Moduler Electronics' statements
of operations for the year ended January 28, 1996. The pro forma combined
condensed statements of operations do not include the effect of any nonrecurring
charges directly attributable to the acquisition.
In March 1995, JTS agreed to acquire the hard disk drive division of
Moduler Electronics and subsequently assumed operational and management control
of certain portions of the hard disk drive business of Moduler Electronics. The
purchase price included 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase JTS Common Stock at an exercise price of $0.25 per share in
exchange for 90% of the outstanding capital stock of Moduler Electronics. Actual
statements of the companies will be combined after the consummation date with no
retroactive restatements. The accompanying pro forma combined condensed
financial statements should be read in conjunction with JTS' and Moduler
Electronics' historical financial statements and related notes thereto.
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<PAGE> 67
JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JANUARY 28, 1996
------------------------------------------------------
HISTORICAL
HISTORICAL MODULER PRO FORMA PRO FORMA
JTS ELECTRONICS ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash.... $ 547 $ 868 $ 1,415
Trade and other receivable.................... 2,098 -- 2,098
Receivable from Moduler Electronics........... 6,892 -- $(6,892)(a) --
Receivable from related parties............... -- -- 380(a) 380
Inventories................................... 2,093 5,983 8,076
Prepaid and other current assets.............. 240 513 753
------- ------ -------
Total current assets.................. 11,870 7,364 12,722
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET....... 7,943 5,603 1,249(b) 14,795
GOODWILL........................................ -- -- 594(b) 594
------- ------ -------
$ 19,813 $ 12,967 $ 28,111
======= ====== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit and short-term
borrowing.................................. $ 4,323 $ 6,085 $ 10,408
Note payable to stockholder................... 1,000 -- 1,000
Accounts payable --
Trade...................................... 7,226 6,268 13,494
Moduler Electronics........................ 9,546 -- (5,734)(a) --
(3,812)(b)
Related parties............................ -- 1,168 (778)(a) 390
Accrued liabilities........................... 3,501 197 3,698
Current portion of capitalized lease
obligations
and long-term debt......................... 1,520 105 1,625
------- ------ -------
Total current liabilities............. 27,116 13,823 30,615
LONG-TERM LIABILITIES........................... 3,485 2,763 6,248
------- ------ -------
Total Liabilities..................... 30,601 16,586 36,863
REDEEMABLE SERIES A PREFERRED STOCK............. 27,785 -- 1,911(b) 29,696
STOCKHOLDERS' DEFICIT:
Common stock.................................. -- -- --
Warrant for common stock...................... -- -- 125(b) 125
Additional paid-in capital.................... 6,004 -- 6,004
Deferred compensation......................... (4,320) -- (4,320)
Notes receivable from stockholders............ (623) -- (623)
Accumulated deficit........................... (39,634) (39,634)
Liabilities in excess of assets............... -- (3,619) 3,619(b) --
======
------- -------
Total stockholders' deficit........... (38,573) (38,448)
------- -------
$ 19,813 $ 28,111
======= =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
60
<PAGE> 68
JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 28, 1996
----------------------------------------------------------
HISTORICAL
HISTORICAL MODULER PRO FORMA PRO FORMA
JTS ELECTRONICS ADJUSTMENTS COMBINED
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Product sales.............................. $ 13,502 $15,580 $ (15,580)(c) $ 13,502
Technology license revenue................. 5,275 -- 5,275
------- ------ -------
18,777 15,580 18,777
COST OF PRODUCT SALES........................ 28,548 19,160 (15,580)(c) 33,626
------- ------ -------
(599)(e)
2,097(e)
GROSS MARGIN (DEFICIT)....................... (9,771) (3,580) (14,849)
OPERATING EXPENSES:
Research and development................... 13,375 -- 13,375
Selling, general and administrative........ 5,579 -- 198(d) 5,777
Manufacturing start-up costs............... 3,812 -- (3,812)(f) --
------- ------ -------
22,766 -- 19,152
------- ------ -------
OPERATING LOSS............................... (32,537) (3,580) (34,001)
OTHER INCOME (EXPENSE):
Interest income............................ 108 141 249
Interest expense........................... (589) (464) (1,053)
Other, net................................. (32) (333) (365)
------- ------ -------
NET LOSS..................................... $ (33,050) $(4,236) $ (35,170)
======= ====== =======
NET LOSS PER COMMON SHARE.................... $ (7.17) $ (7.63)
======= =======
SHARES USED IN COMPUTING NET LOSS PER
SHARE...................................... 4,611 (g) 4,611
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
61
<PAGE> 69
JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. PURCHASE PRICE ALLOCATION
The purchase price of the acquisition of Moduler Electronics is computed as
follows (in thousands):
<TABLE>
<S> <C>
Preferred stock..................................... $1,911
Warrants............................................ 125
-------
$2,036
=======
</TABLE>
The preferred stock is valued at $1.00 per share, such number of shares and
the value per share were agreed to in March 1995. The price per preferred
share was identical to the price per preferred share received by the
Company in cash sales to unrelated parties in February and September 1995.
The warrant to purchase 500,000 shares of common stock at $.25 was valued
at $125,000 and reflects the higher value of the preferred stock relative
to the common stock. Subsequent to the March 1995 agreement to purchase
Moduler Electronics, JTS assumed operational and management control of
certain portions of the Disk Drive Unit and funded certain of the start-up
losses. Accordingly, JTS expensed 90% of the Unit's loss in its historical
financial statements.
The purchase price is expected to be allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets acquired........................... $ 6,628
Property acquired................................. 6,292
Liabilities assumed............................... (11,478)
Goodwill.......................................... 594
-------
$ 2,036
=======
</TABLE>
NOTE 2. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
combined condensed balance sheet and statement of operations as described below:
(a) Eliminates intercompany receivable and payable balances.
(b) Reflects the acquisition of 90% ownership of Moduler Electronics for
1,911,673 shares of JTS Series A Preferred Stock valued at $1.00 per
share and a warrant to purchase 500,000 shares of JTS Common Stock
valued at $125,000.
(c) Eliminates intercompany sales.
(d) Reflects the amortization of goodwill on a straight-line basis over
three years.
(e) Reflects the depreciation of the step-up of fixed assets.
(f) Eliminates 90% of loss of Moduler Electronics' start-up costs.
(g) Pro forma weighted average common shares do not include common stock
equivalents as inclusion of these shares would be anti-dilutive.
62
<PAGE> 70
ATARI CORPORATION AND JTS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the proposed merger of Atari and JTS. The merger is subject to
shareholder and regulatory approval and other conditions. The unaudited pro
forma condensed combined balance sheet has been prepared as if the acquisition,
which will be accounted for as a purchase of JTS by Atari, was consummated as of
March 31, 1996. Such pro forma balance sheet combines Atari's balance sheet as
of March 31, 1996 and the balance sheet of JTS as of April 28, 1996. Although
the business combination will result in Atari merging into the JTS legal entity,
the substance of the transaction is that Atari, a public company with
substantially greater operating history and net worth, will own approximately
62% of the combined equity at the date of the acquisition.
The aggregate purchase price of $112.3 million has been allocated to the
acquired assets and liabilities of JTS. Included in the pro forma purchase price
are the approximately 40 million shares of outstanding common stock of JTS,
assuming conversion of all outstanding preferred stock of JTS, the value of the
assumed JTS options and warrants of $11.1 million and the estimated direct
transaction costs. The common stock, options and warrants were valued using
$2.50 per share which is the representative value of Atari stock at the time the
proposed transaction was announced. The allocation of the purchase price was
based on a preliminary independent appraisal of the fair value of assets
acquired and liabilities assumed. The fair value of JTS assets and liabilities
will be revised as updated information becomes available at the Effective Time.
Such preliminary appraisal allocated $119.0 million to purchased technology,
$97.0 million of which represented in-process research and development. The
$97.0 million will be expensed upon the closing of the Merger as the technology
had not yet reached technological feasibility and does not have alternative
future uses.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1995 give effect to the proposed merger as if the
acquisition was completed at the beginning of the year and combines Atari's
statement of operations as of December 31, 1995 with the pro forma combined
statement of operations for JTS and Moduler Electronics for the year ended
January 28, 1996. The unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1996 give effect to the proposed
merger as if the acquisition was completed at the beginning of the quarter and
combines Atari's statement of operations as of March 31, 1996 with the JTS pro
forma statement of operations for the quarter ended April 28, 1996. Such
statements do not include the effect of the approximately $97.0 million
nonrecurring charge for in-process research and development, as such charges
will be included in the consolidated statement of operations in the third
calendar quarter of 1996. Such statements also exclude Atari's extraordinary
gain generated from the Atari Debentures extinguished in 1995 and the $6.3
million gain on sale of marketable securities in the first quarter of 1996.
This method of combining historical financial statements for the
preparation of the pro forma condensed combined statements is for presentation
only. Actual statements of operations of the companies will be combined from the
closing date of the acquisition with no retroactive restatements. The unaudited
pro forma condensed combined financial statements are provided for illustrative
purposes only and is not necessarily indicative of the combined financial
position or combined results of operations that would have been reported had the
Merger occurred on the dates indicated, nor do they represent a forecast of the
combined financial position or results of operations for any future period. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements and accompanying notes for
Atari, JTS and Moduler Electronics.
63
<PAGE> 71
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ATARI JTS
MARCH 31, APRIL 28, PRO FORMA PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents........................ $ 23,748 $ 5,116 $ 28,864
Accounts receivable......................... 601 9,608 10,209
Other receivables........................... -- 1,182 1,182
Inventories................................. 5,526 12,983 18,509
Subordinated secured convertible note....... 25,000 -- (25,000)(k) --
Other current assets........................ 1,101 1,585 2,686
--------- -------- ---------
Total current assets..................... 55,976 30,474 61,450
GAME SOFTWARE DEVELOPMENT
COSTS....................................... 861 -- 861
EQUIPMENT AND TOOLING......................... 577 16,212 2,970(d) 19,759
REAL ESTATE HELD FOR SALE..................... 10,468 -- 10,468
INTANGIBLE & OTHER ASSETS..................... 524 -- 21,980(d) 22,504
GOODWILL...................................... -- 185 (185)(c) 11,714
11,714(d)
--------- -------- ---------
TOTAL.................................... $ 68,406 $ 46,871 $ 126,756
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings............................. $ -- $ 10,277 $ 10,277
Notes payable to stockholders............... -- 1,965 1,965
Subordinated secured convertible note....... -- 25,000 (25,000)(k) --
Accounts payable............................ 3,295 18,240 1,200(i) 22,735
Accrued liabilities......................... 5,481 4,536 10,017
Current portion of long-term obligations.... -- 1,651 1,651
--------- -------- ---------
Total current liabilities................ 8,776 61,669 46,645
LONG-TERM OBLIGATIONS......................... 42,354 6,381 48,735
REDEEMABLE PREFERRED STOCK.................... -- 29,697 (29,697)(c) --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 637 -- 400(a) 1,037
Additional paid-in capital.................. 196,272 8,088 103,105(a,c) 307,465
Deferred compensation....................... -- (3,990) 3,990(c) --
Common stock warrants....................... -- 125 1,985(b) 2,110
Notes receivable from sale of common
stock.................................... -- (2,610) (2,610)
Accumulated translation adjustments......... (730) (730)
Accumulated deficit......................... (178,903) (52,489) 52,489(c) (275,896)
(96,993)(e)
--------- -------- ---------
Total shareholders' equity (deficit)..... 17,276 (50,876) 31,376
--------- -------- ---------
TOTAL............................... $ 68,406 $ 46,871 $ 126,756
========= ======== =========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
64
<PAGE> 72
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ATARI JTS
QUARTER ENDED QUARTER ENDED PRO FORMA PRO FORMA
MARCH 31, 1996 APRIL 28, 1996 ADJUSTMENTS COMBINED
-------------- ------------------- ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES............................ $ 1,272 $ 17,581 $ 18,853
COST AND EXPENSES: 1,832(f)
Cost of revenues and inventory
write-downs........................ 6,211 19,434 248(h) 27,725
Research and development.............. 201 7,406 7,607
Sales, marketing, general and
administrative..................... 2,009 3,103 418(g) 5,530
-------- -------- --------
Total operating expenses........... 8,421 29,943 40,862
OPERATING LOSS.......................... (7,149) (12,362) (22,009)
Gain on sale of marketable
securities......................... 6,347 -- (6,347)(1) --
Other income (expense)................ 233 (56) 177
Interest income....................... 332 105 437
Interest expense...................... (569) (542) (1,111)
-------- -------- --------
Loss before income taxes........... (806) (12,855) (22,506)
Income tax credit....................... -- -- --
-------- -------- --------
NET LOSS................................ $ (806) $ (12,855) (22,506)
======== ======== ========
LOSS PER COMMON SHARE................... $ (0.01) $ (1.47) $ (0.22)
Number of shares used in computation.... 63,701 8,732 (j) 103,701
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
65
<PAGE> 73
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED JTS AND
ATARI MODULER ELECTRONICS
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
DEC. 31, 1995 JAN. 28, 1996 ADJUSTMENTS COMBINED
------------- ------------------- ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES............................. $ 14,626 $ 18,777 $ 33,403
COST AND EXPENSES: 7,327(f)
Cost of revenues....................... 44,234 33,626 990(h) 86,177
Research and development............... 5,410 13,375 18,785
Sales, marketing, general and
administrative...................... 18,647 5,777 1,673(g) 26,097
-------- -------- --------
Total operating expenses............ 68,291 52,778 131,059
OPERATING LOSS........................... (53,665) (34,001) (97,656)
Other income (expense)................. 2,683 (365) 2,318
Interest income........................ 3,133 249 3,382
Interest expense....................... (2,309) (1,053) (3,362)
-------- -------- --------
Loss before income taxes............ (50,158) (35,170) (95,318)
Income tax credit........................ -- -- --
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) (95,318)
======== ======== ========
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) $ (0.92)
Number of shares used in computation..... 63,697 4,611 (j) 103,697
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
66
<PAGE> 74
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ATARI AND JTS
NOTE 1 -- PURCHASE PRICE
The purchase price of the acquisition of JTS is computed as follows:
<TABLE>
<S> <C>
Warrants and employee stock options............................ $ 11,093,000
Common stock to be issued...................................... 100,000,000
Direct transaction costs....................................... 1,200,000
------------
TOTAL..................................................... $ 112,293,000
============
</TABLE>
The JTS common stock, options and warrants were valued using $2.50 per
share which is the representative value of Atari stock at the time the proposed
transaction was announced.
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 30,474,000
Equipment and tooling.......................................... 19,182,000
In-process technology.......................................... 96,993,000
Existing technology............................................ 21,980,000
Liabilities assumed............................................ (68,050,000)
Goodwill....................................................... 11,714,000
------------
TOTAL..................................................... $112,293,000
============
</TABLE>
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited pro
forma condensed combined financial statements:
(a) -- Reflects the value of all outstanding JTS common stock and the fair
value of JTS options.
(b) -- Reflects the fair value of JTS common stock warrants.
(c) -- Reflects elimination of JTS common and preferred stock, deferred
compensation, goodwill and shareholders' deficit.
(d) -- Reflects allocation of purchase price to acquired equipment,
existing technology and goodwill.
(e) -- Reflects a one-time charge for purchased in-process technology.
(f) -- Reflects amortization of purchased existing technology on a
straight-line basis over three years.
(g) -- Reflects amortization of goodwill on a straight-line basis over
seven years.
(h) -- Reflects depreciation of the step-up of equipment on a straight-line
basis over three years.
(i) -- Reflects accrual of direct transaction costs.
(j) -- Reflects the outstanding common stock of JTS assuming the
conversion of outstanding preferred stock of JTS excluding the
impact of stock options and warrants which are antidilutive.
(k) -- Reflects elimination of note between Atari and JTS.
(l) -- Reflects elimination of nonrecurring gain on sale of a marketable
security.
No deferred tax adjustments is made as the deferred tax assets, consisting
primarily of net operating loss carryforwards, exceed the deferred tax
liabilities and the excess of the deferred tax assets over the deferred tax
liabilities is offset by a valuation allowance due to the uncertainty
surrounding the realization.
67
<PAGE> 75
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ATARI AND JTS (CONTINUED)
NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT
The allocation of the purchase price among identifiable intangible assets
was based on a preliminary independent appraisal of the fair value of those
assets. The fair value of JTS assets and liabilities will be revised as updated
information become available at the Effective Time. Such preliminary appraisal
allocated $97.0 million to purchased in-process research and development. The
$97.0 million will be expensed in the third calendar quarter upon closing as the
technology had not yet reached technological feasibility and does not have
alternative future uses. The unaudited pro forma condensed combined statements
of operations do not include this one-time charge for purchased in-process
technology as it represents a material nonrecurring charge in accordance with
the rules for the preparation of pro forma financial statements.
NOTE 4 -- DEFERRED COMPENSATION
Upon the closing of the merger, JTS will record a one-time expense charge
of approximately $4.3 million of deferred compensation which it is currently
amortizing. Such expense has not been recorded in the accompanying pro forma
financial statements.
68
<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION
AND PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE
QUARTER ENDED MARCH 31, 1996
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Atari and JTS and the introduction to the pro forma financial statements on page
60. The pro forma combined 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
Company.
The net loss on a pro forma basis for the Combined Company was $22.5
million on net revenues of $18.9 million. The Combined Company expects sales of
Atari's Jaguar and related products to decline substantially in 1996 and
thereafter as a result of Atari's decision 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. The
Combined Company is expected to focus a substantial portion of its resources on
the disk drive portion of its business which is expected to represent a
substantial portion of the operations of the Combined Company. Sales of disk
drives in the Combined Company are expected to increase during 1996 with the
initiation of shipments of the Nordic 3-inch disk drives to Compaq late in the
second quarter and the introduction of additional disk drive products with
higher performance characteristics and increased capacities beyond JTS' current
1.6 gigabyte product.* There can be no assurance that the Combined Company will
be successful in the production and shipment of these products.
The Combined Company anticipates that it will have a five year period
during which it will not pay taxes on its operations in India. Further, the
Combined Company's operations in India are in a tax exempt facility. These tax
benefits, to the extent the Combined Company is able to generate profitable
operations to utilize them, will provide the Combined Company with a lower tax
rate than would otherwise be the case. No assurance can be given, however, that
the Combined Company will achieve profitable operations in India or be able to
utilize these tax benefits or achieve a lower tax rate.
Upon consummation of the Merger, the subordinated convertible note due from
JTS to Atari will be canceled. The unaudited pro forma Combined Balance Sheets
reflect cash and cash equivalents of $28.9 million and working capital of $14.8
million. The Combined Company will need significant additional financing
resources over the next several years for facilities expansion, capital
expenditures, working capital, research and development and vendor tooling. In
order for the Combined Company to accelerate or increase planned expenditures or
to the extent orders do not materialize as currently projected, additional
capital will be required. Furthermore, certain equipment and receivable
financing as well as existing term loans in place are contingent on compliance
with stringent financial covenants. The Combined Company will pursue equity
and/or debt financing in the near future to meet its funding requirements. The
issuance of equity or convertible debt securities would result in dilution of
the voting control of existing stockholders of the Combined Company and could
result in dilution to earnings per share. The issuance of debt securities would
provide to the holders of those securities seniority over the holders of JTS
Common Stock issued in the Merger. There can be no assurance that the Combined
Company will be able to maintain its current financing facilities or obtain
additional financing as needed on acceptable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
JTS."
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
69
<PAGE> 77
INFORMATION REGARDING ATARI CORPORATION
BUSINESS OF ATARI
Atari was incorporated under the laws of Nevada in May 1984. From 1984 to
1992, Atari designed, manufactured and marketed proprietary personal computers
and video games and related software. Over the past several years, Atari has
undergone significant change. In 1992 and 1993, Atari significantly downsized
operations, decided to exit the computer business and focused on its video game
business. As a result, revenues from computer products as a percentage of total
revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales
of entertainment systems and related software and peripheral products and the
receipt of royalties represented the balance of revenues in each such year.
These actions resulted in significant restructuring charges for closed
operations and write-downs of computer and certain video game inventories in
1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that 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 workforce, and
significant curtailment of research and development and sales and marketing
activities for 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. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices. Despite the
introduction of four additional game titles in the first quarter of 1996, sales
of Jaguar and related software have remained disappointing due to uncertainty
about Atari's commitment to the Jaguar platform, increased price competition and
pending competitive product introductions. As a result of continued
disappointing sales, management revised estimates and wrote-down inventory by an
additional $5.0 million in the first quarter of 1996. As of the end of May 1996,
Atari had approximately 90,000 units of Jaguar in inventory.
PRODUCTS
Atari's principal products are described below:
Jaguar Entertainment System. Atari introduced its 64-bit Jaguar
interactive multimedia entertainment system in late November 1993 into selected
markets. During 1994, Atari rolled out a nationwide program and commenced
initial shipments into Europe. From its launch through the end of 1994, Jaguar's
suggested retail price was $249.99. As a result of competition and cost
reductions, during the first quarter of 1995, Atari reduced the retail price of
Jaguar to $149.99. The current retail price of Jaguar is $99.99. Despite its
substantially lower retail price, sales of Jaguar continue to be disappointing.
Volume sales of Jaguar and related software in 1996 have consisted primarily of
a large order from a new European customer. Atari is also pursuing wholesale
sales channels in the U.S. as well as licensing opportunities. There can be no
assurance that Atari's substantial unsold inventory of Jaguar and related
software can be sold at current or reduced
70
<PAGE> 78
prices, if at all. In addition, any further decrease in the value of such
inventory could result in additional inventory write-downs by Atari.
The Jaguar is a 64-bit interactive multimedia system that incorporates two
proprietary chips developed by Atari which are specialized for multimedia
entertainment. The proprietary chips include four processors (graphics
processing unit, object processor, blitter and digital signal processor) and a
standard Motorola 68000 microprocessor. The computational speed of the system is
approximately 44 MIPS and the bus bandwidth is 106.4 megabytes per second. The
video features include 24-bit graphics with up to 16.8 million colors and a 3-D
engine which can render 3-D shaded or texture mapped polygons in real time. The
sound system is based on a high-speed custom digital signal processor dedicated
to audio. The audio is 16-bit compact disk ("CD") quality from cartridge-based
software, and can be processed from simultaneous sources of audio data. This
allows for very realistic sounds in the software, including human voices.
Through the use of a compression technology customized by Atari (called
"JAGPEG"), software developers can compress data to the point that a 100-megabit
game can fit into a 16-megabit ROM cartridge. This allows for more exciting
experiences both visually and in game play due to the vast amount of data
available.
Jaguar Software Titles. From 1994 through 1995, Atari developed titles for
the Jaguar primarily under contract with third party software developers. To
date, Atari has published approximately 45 software titles for the Jaguar. These
titles include an array of licensed and nonlicensed titles, some of which
utilize 3-D graphics, high speed animation, 16.8 million colors, full motion
video, motion capture techniques and 16-bit stereo sound. Atari's software
library includes titles which are cartridge based (ROM chips) and CD based.
Since 1995, the development of titles for Jaguar has been curtailed
substantially and Atari is currently developing a very limited number of titles
which it expects to publish in either cartridge or CD format. In addition to
Atari's software development efforts, in 1994 and 1995 Atari licensed
independent software vendors ("ISVs") to develop and publish titles for the
Jaguar. Atari is not aware of any current development of Jaguar titles by ISVs
and does not expect any such development in the foreseeable future.
Jaguar Peripherals. Atari offers a CD-ROM peripheral for the Jaguar that
enables software end users to have full motion video clips and more complex
games than are available on cartridges. Publishers can take advantage of lower
media cost and quicker turnaround on orders with CD-ROM software as compared to
a ROM cartridge. The CD-ROM peripheral is a double speed player that can play
Jaguar video games, regular audio CD's and CD + G (graphics). The suggested
retail price of the CD-ROM peripheral is $149.99. The success of the CD-ROM
peripheral is substantially dependent on the size of the installed base of
cartridge-based Jaguar consoles.
PC Software. As a result of Atari's investment in game design, art and
programming for its Jaguar software, Atari has ported certain of its Jaguar
titles to the IBM PC compatible platform. Atari intends to publish and/or
license these titles in 1996. In this regard, Atari commenced shipment of the PC
CD-ROM version of Tempest 2000 in Europe during the first quarter of 1996.
Library of Titles. In 1996, Atari plans to increase its efforts to license
titles from its game library to third party publishers. Atari has over 100
titles in its game library, including the following:
<TABLE>
<S> <C> <C> <C> <C>
Asteroids Combat Iron Soldier RealSport Baseball Tempest
Battlezone Crystal Castles Major Havoc RealSport Football Warbird
Bentley Bear Earthworld Millipede Space War Warlords
Breakout Food Fight Missile Command Star Raiders Yar's Revenge
Centipede Pong
</TABLE>
COMPETITION
The video game business is intensely competitive. Since its introduction in
late 1993, Jaguar has failed to achieve broad market acceptance. Atari does not
expect that Jaguar, even at its substantially reduced price, will ever become a
broadly accepted video game console, or that Jaguar technology will be broadly
adopted by software title developers. The video game industry is also
characterized by unpredictable and rapid shifts in the popularity of certain
platforms, by severe price competition, and by frequent new technology and
product
71
<PAGE> 79
introductions. In this regard, numerous companies have introduced or have
developed and are expected to introduce video game consoles that are or may
become competitive with Jaguar. In addition, an increasing number of
entertainment titles are being developed for or ported to the PC platform. Most
of Atari's competitors have greater experience and expertise in 3D graphics and
multimedia technology and have substantially greater engineering, marketing and
financial resources than Atari. Jaguar presently competes with products offered
by the following companies:
- Nintendo commenced development, in collaboration with Silicon Graphics,
Inc., of the Nintendo 64 player, expected to be released in Autumn 1996
in the United States. Nintendo also sells the 16 bit Super NES at a
retail price of $99.95.
- Sega commenced shipment of the Sega Saturn in the United States in May
1995 with a current retail price of $299.00. Sega also sells the 16 bit
Genesis at a retail price of $99.95.
- Sony released the Sony PlayStation in the United States in late 1995 with
a current retail price of $299.00.
- The 3DO Company licenses the 3DO Interactive Multiplayer System console
architecture for retail sale worldwide.
MARKETING AND DISTRIBUTION
Atari distributes its products domestically through various independent
channels. Jaguar is sold primarily through national retailers, consumer
electronic specialty stores and distributors of electronic products. European
sales are conducted from Atari's European headquarters in London, U.K. Jaguar
and Atari's PC titles are sold in European markets through substantially the
same channels of distribution as those in the United States. Net sales outside
North America for fiscal years 1995, 1994 and 1993 constituted approximately
44%, 40% and 75%, respectively, of total net revenues. No single customer
accounted for 10% or more of total net revenues for the years ended December 31,
1995, 1994 or 1993.
RESEARCH AND DEVELOPMENT
Most of Atari's products, including Jaguar, were developed by its internal
engineering and software groups as well as independent software developers under
contract with Atari. Atari's research and development expenses totaled $5.4
million, $5.8 million and $4.9 million in 1995, 1994, and 1993, respectively.
Atari has significantly downsized its research and development efforts and
currently has five employees dedicated to such efforts. As a result, Atari
expects its research and development expenses to decline substantially in 1996.*
Atari's current development efforts are dedicated to developing a limited
number of Jaguar software titles and porting certain existing Jaguar titles to
the PC platform. As part of this development process, Atari has agreements with
third parties to develop and/or license properties. Under these agreements,
Atari will make payments to these parties as either development fees and/or
advance royalties, and is obligated to make certain minimum royalty guarantees
on future sales. There can be no assurance that all payments for development
fees and/or advance royalties will be recoverable through future sales of
products.
MANUFACTURING
Atari has placed no manufacturing orders for the Jaguar console since
mid-1995. Based on current and expected sales and inventory levels, Atari does
not intend to pursue additional Jaguar manufacturing. The Jaguar console unit
was assembled in the United States by a third-party subcontractor under a
manufacturing arrangement. The agreement may be canceled by either party with 90
days' notice. Jaguar software products
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
72
<PAGE> 80
and accessories are manufactured by several suppliers and are assembled by
subcontractors. Atari believes that it could readily replace these sources of
supply and assembly, if necessary.
INTELLECTUAL PROPERTY RIGHTS
Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas
other than coin-operated arcade video game use. Atari also has a portfolio of
other intellectual properties including patents, trademarks, and copyrights
associated with its video game and computer businesses. Atari believes its
patents, trademarks and other intellectual property are important assets. As of
December 31, 1995, Atari held over 150 patents in the United States and other
jurisdictions which expire from 1996 to 2010 and had applications pending for
three additional patents. There can be no assurance that any of these patent
rights will be upheld in the future or that Atari will be able to preserve any
of its other intellectual property rights. Atari has in the past received
communications from third parties asserting rights to certain of its
intellectual property. Atari has also been involved in several major lawsuits
regarding its intellectual property, including a suit with Nintendo which was
settled in March 1994 and a suit with Sega which was settled in September 1994.
In the event any third party were to make a valid claim with respect to Atari's
intellectual property and a license were not available on commercially
reasonable terms, Atari's business, financial condition and results of
operations would be materially and adversely affected. Litigation, which has in
the past and could in the future result in substantial costs and diversion of
resources, may also be necessary to enforce Atari's patents or other
intellectual property rights or to defend against third-party infringement
claims. The occurrence of litigation relating to patent infringement or other
intellectual property matters, regardless of the outcome, could have a material
adverse effect on Atari's business, financial condition and results of
operations.
BACKLOG
Orders are usually placed by purchasers on an as-needed basis, are
sometimes cancelable before shipment, and are usually filled from inventory
shortly after receipt. Atari currently has a substantial inventory of finished
products and product components for which there are no orders. Although Atari is
taking steps to realize revenue from such inventory, Atari recognized
substantial inventory write-downs in 1995 and the first quarter of 1996 and
there can be no assurance that additional write-downs will not be required.
EMPLOYEES
Due to disappointing sales of Jaguar and related products, Atari reduced
its workforce from 101 persons at December 31, 1994 to 73 persons at December
31, 1995 and 31 persons at March 31, 1996. Atari had 22 employees at June 19,
1996, including 15 in the United States and seven outside the United States.
None of the employees are represented by a labor union. Atari considers its
employee relations to be good.
PROPERTIES
Atari leases its 7,200 square feet headquarters facility in Sunnyvale,
California under a lease which expires in 2001. Atari also leases a 20,200
square feet warehouse facility in Santa Clara, California, a 33,600 square feet
international sales facility in Slough, England and a 19,400 square feet vacant
facility in Viannen, Holland. Atari also holds certain properties in Southern
California and Texas for sale. Some of these properties are currently being
leased by Atari. These properties are reported as real estate held for sale in
the Atari Consolidated Financial Statements. See Note 7 of Notes to Atari
Consolidated Financial Statements.
LEGAL PROCEEDINGS
Atari is a defendant in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara by Citizen America
Corporation, a former supplier, in February 1994 seeking damages of
approximately $900,000 for alleged breach of contract and related claims. Atari
believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is a defendant and counter claimant in a civil action for alleged
breach of contract brought in U.S. District Court for the Northern District of
New York, case number 95 Civ. 1945, by Tradewell, Inc., a New
73
<PAGE> 81
York corporation, seeking specific performance for release of goods having a
value of $1.6 million. Atari has counterclaimed seeking specific performance for
the purchase of media or, alternatively, damages in the amount of $3.3 million.
As a result of a partial settlement, Atari now seeks damages of approximately
$1.5 million. Atari believes this action will have no material adverse effect on
its business, financial condition or results of operations.*
Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara brought against Philips
Laser Magnetic Storage ("Philips") for breach of contract and breach of implied
covenant of good faith and fair dealing arising out of Philips' failure to
deliver goods to Atari. Philips has filed a counterclaim seeking damages in
excess of $3.0 million. Atari believes this action will have no material adverse
effect on its business, financial condition or results of operations.*
Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara and removed to the
United States District Court, Northern District of California brought against
Probe Entertainment Limited for breach of contract and related claims.
Counterclaims have been filed against Atari for alleged breach of contract.
Atari believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is not aware of any other pending legal proceedings against Atari and
its consolidated subsidiaries other than routine litigation incidental to their
normal business.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
74
<PAGE> 82
SELECTED CONSOLIDATED FINANCIAL DATA OF ATARI
The following selected consolidated financial data of Atari have been
derived from the historical consolidated financial statements of Atari, included
elsewhere herein, with the exception of the Atari Consolidated Statement of
Operations Data prior to fiscal 1993 and the Atari Consolidated Balance Sheet
Data prior to December 31, 1994 which were derived from historical consolidated
financial statements not included herein. The information set forth below should
be read in conjunction with Atari's Consolidated Financial Statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations of Atari. The unaudited quarterly financial data 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.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............ $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Operating loss............ (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683)
Income (loss) from
continuing
operations(1).......... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659
Income (loss) before
extraordinary credit... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659
Net income (loss)......... (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619
Per common share data:
Income (loss) from
continuing
operations............. $ (0.01) $ (0.07) $ (0.79) $ 0.16 $ (0.85) $ (1.44) $ 0.41
Income (loss) before
extraordinary credit... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)......... (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets..................... $ 55,976 $65,126 $113,188 $51,388 $109,551 $239,296
Working capital.................... 47,200 55,084 92,670 33,896 75,563 159,831
Total assets....................... 68,406 77,569 131,042 74,833 138,508 253,486
Current liabilities................ 8,776 10,042 20,518 17,492 33,988 79,465
Long-term obligations.............. 42,354 42,354 43,454 52,987 53,937 48,492
Shareholder's equity............... 17,276 25,173 67,070 4,354 50,583 125,529
</TABLE>
- ---------------
(1) Includes a gain from the sale of marketable securities of $6.3 million in
1996, a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
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<PAGE> 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATARI
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and 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 certain
factors, including those set forth under "Risk Factors -- Risk Factors Related
to the Business of Atari" and elsewhere in this Joint Proxy
Statement/Prospectus.
Over the past several years, Atari has undergone significant change. In
1992 and 1993, Atari significantly downsized operations, decided to exit the
computer business and focused on its video game business. As a result, revenues
from computer products as a percentage of total revenues declined from 67% in
1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and
related software and peripheral products and the receipt of royalties
represented the balance of revenues in each such year. These actions resulted in
significant restructuring charges for closed operations and write-downs of
computer and certain video game inventories in 1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that 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 workforce, and
significant curtailment of research and development and sales and marketing
activities for 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. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices. Despite the
introduction of four additional game titles in the first quarter of 1996, sales
of Jaguar and related software have remained disappointing due to uncertainty
about Atari's commitment to the Jaguar platform, increased price competition and
pending competitive product introductions. As a result of continued
disappointing sales, management revised estimates and wrote-down inventory by an
additional $5.0 million in the first quarter of 1996. As of the end of May 1996,
Atari had approximately 90,000 units of Jaguar in inventory.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 were $14.6 million compared to $38.7 million for
1994. Sales of Jaguar and related products represented 68% and 76% of total
revenues for 1995 and 1994, 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.
In the first quarter of 1995, Atari reduced the suggested retail price of Jaguar
from its original price of $249.99 to $149.99. The current suggested retail
price of Jaguar is $99.99. As a result of the Jaguar price reductions, the
substantial curtailment of sales and marketing activities for Jaguar and the
substantial curtailment of efforts by Atari and independent software developers
to develop additional software
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<PAGE> 84
titles for Jaguar, Atari expects sales of Jaguar and related products to decline
substantially in 1996 and thereafter.*
Cost of revenues for 1995 was $44.2 million compared to $35.2 million for
1994. Included in cost of revenues for 1995 were accelerated amortization and
write-offs of capitalized game software development costs of $16.6 million and
inventory write-downs of $12.6 million primarily relating to Jaguar products. As
a result of these charges and lower selling prices for Jaguar products and
provisions for returns and allowances and price protection, gross margin for the
year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or
9.2% of revenues. Included in cost of revenues for 1994 were write-downs of
inventory of $3.6 million and amortization and the write-off of capitalized game
software development costs of $1.5 million. As of December 31, 1995, Atari had
approximately 100,000 units of the Jaguar console in inventory and there can be
no assurance that substantial additional write-downs will not be necessary.
Research and development expenses for 1995 were $5.4 million compared to
$5.8 million for 1994. During 1995 and 1994, a significant number of Atari
employees and consultants were devoted to developing hardware and software for
the Jaguar, and Atari contracted with third-party software developers to develop
Jaguar software titles. As a result of Jaguar's poor sales performance, in the
third and fourth quarters of 1995, Atari accelerated its amortization of
contracted software development which resulted in charges in those quarters of
$6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994,
Atari had capitalized software development costs of $758,000 and $5.1 million,
respectively. In the fourth quarter of 1995, Atari eliminated its internal
Jaguar development teams and other development staff as titles for Jaguar were
completed. As a result, Atari expects research and development expenses will be
substantially lower for the foreseeable future.*
Marketing and distribution expenses for 1995 were $12.7 million compared to
$14.7 million for 1994. Such costs included television and print media,
promotions and other activities to promote Jaguar. Due to the substantial
curtailment of the Jaguar marketing program, Atari expects these expenses will
be substantially lower for the foreseeable future.*
General and administrative expenses for 1995 were $5.9 million compared to
$7.2 million for 1994. The decrease in such expenses was primarily a result of
staff reductions, reduced legal fees and other operating costs. Due to the
substantial reduction in general and administrative personnel in 1995 and the
first quarter of 1996, Atari expects these expenses will be substantially lower
for the foreseeable future.*
Atari experienced a gain on foreign currency exchange of $13,000 for 1995
compared to a gain of $1.2 million for 1994. These changes were a result of
lower foreign asset exposure and a greater percentage of sales made in U.S.
dollars which further reduced exposure to foreign currency transaction
fluctuations.
In 1994, Atari received $2.2 million in connection with the settlement of
litigation between Atari, Atari Games Corporation and Nintendo. In 1994, Atari
also reached an agreement with Sega, which resulted in a gain of $29.8 million,
after contingent legal fees, and the sale of 4,705,883 shares of Atari Common
Stock to Sega at $8.50 per share for an aggregate of $40.0 million.
During 1995, Atari sold a portion of its holdings in Dixon PLC, a retailer
in England, and realized a gain of $2.4 million, of which $1.8 million was
realized in the fourth quarter of 1995. In the first quarter of 1996, Atari sold
the remaining portion of its holdings and realized a gain of $6.1 million. The
1995 gain of $2.4 million together with other income items resulted in a total
other income of $2.7 million compared to $484,000 for 1994.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
77
<PAGE> 85
For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Debentures. In 1995, Atari repurchased a portion of the Atari
Debentures and realized a gain of $582,000. As of December 31, 1995, the
outstanding balance of these debentures was $42.4 million.
Interest income for 1995 and 1994 was $3.1 million and $2.0 million,
respectively. The increase in interest income was primarily attributable to
higher average cash balances in 1995.
As a result of Atari's operating losses, there was no provision for income
taxes in 1995. See Note 11 to the Atari Consolidated Financial Statements.
As a result of the factors discussed above, Atari reported a net loss for
1995 of $49.6 million compared to net income of $9.4 million in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues for 1994 were $38.7 million compared to $29.1 million for
1993. The increased revenues were primarily a result of Atari's national rollout
of the Jaguar and related products. Sales of Jaguar products represented 76% of
revenues in 1994 compared to 13% of revenues in 1993. Jaguar was introduced in
selected markets in late 1993, and approximately 100,000 units were sold by the
end of 1994 at a suggested retail price of $249.99. Sales of Atari's proprietary
personal computers and certain discontinued video game products represented 24%
of revenues for 1994 compared to 87% of revenues for 1993.
Gross margin for 1994 was $3.5 million, or 9.2% of revenues, compared to a
gross loss of $13.7 million for 1993. Included in cost of revenues are inventory
write-downs of $3.6 million and $18.1 million for 1994 and 1993, respectively,
and a write-off of capitalized game software development costs of $804,000 in
1994. These write-downs of proprietary personal computers and video game
products to estimated realizable values were made concurrently with the
introduction and change in marketing focus to Jaguar products.
Research and development expenses for 1994 were $5.8 million compared to
$4.9 million for 1993. The increase resulted from increased expenditures for the
Jaguar product line.
Marketing and distribution expenses for 1994 were $14.7 million compared to
$9.0 million for 1993. The increase in expenditures was primarily the result of
the national rollout in 1994 of the Jaguar. Such costs included television and
print media promotions and other activities.
General and administrative expenses for 1994 were $7.2 million compared to
$7.6 million for 1993. The marginally lower general and administrative expenses
were primarily due to Atari's restructuring program in 1993. During 1993, Atari
made provisions for restructuring totaling $12.4 million, which included closing
many of Atari's operations in Europe, Asia and Australia, including, but not
limited to, severance payments, rental commitments and other closure costs.
For 1994, Atari experienced a gain on foreign currency exchange of $1.2
million compared to a loss on exchange of $2.2 million in 1993. This change was
a result of fluctuation in exchange rates, a lower foreign asset exposure and a
greater percentage of sales made in U.S. dollars, thereby further reducing
exposure to foreign currency transaction fluctuations.
For each of 1994 and 1993, interest expense was approximately $2.3 million
on the Atari Debentures.
Atari utilized net operating loss carryforwards and, as a result, there was
no provision for income taxes in 1994.
As a result of the factors discussed above, Atari reported net income for
1994 of $9.4 million compared to a net loss of $48.9 million in 1993.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
Total revenues for the first quarter of 1996 were $1.3 million compared to
$4.9 million for the first quarter 1995, a reduction of $3.6 million. Sales of
Jaguar and related products represented 41% and 72% of total revenues for the
first quarter of 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
78
<PAGE> 86
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 revenues for the first quarter of 1996 was $1.2 million compared to
$3.8 million for the first quarter of 1995. The reduction in cost of revenues is
consistent with the reduction in revenues.
In the first quarter of 1996, the Company wrote-down inventory by $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. Despite the introduction of four additional game titles in the
first quarter of 1996, sales of Jaguar and related products have remained
disappointing due to uncertainty about Atari's commitment to the Jaguar
platform, increased price competition and pending competitive product
introductions. Atari is pursuing alternative sales channels and licensing
opportunities. Atari expects the market to remain highly competitive throughout
the year.
Research and development expenses were $200,000 for the first quarter of
1996 compared to $1.8 million for the first 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 of 1995. As of March 31,
1996, Atari had capitalized $900,000 of development cost associated with certain
CD titles.
Marketing and distribution expenses were $800,000 for the first quarter of
1996 compared to $2.6 million for the first quarter of 1995. The reduction was
due to the curtailment of marketing activities for the Jaguar.
General and administrative expenses for the first quarter of 1996, were
$1.3 million compared to $1.8 million for the first quarter of 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 first quarter of 1996 was $290,000
compared to $200,000 for the first quarter of 1995. Gains on sales of marketable
securities were $6.3 million for the first quarter of 1996 compared to $107,000
for the first quarter of 1995. The 1996 gain represented the sale of the
remaining portion of Atari's holdings in Dixon PLC, a retailer in England.
During the 1995 quarter Atari repurchased a portion of its 5 1/4% Convertible
Subordinated Debentures and recorded an extraordinary credit of $47,250.
Interest income for the first quarter of 1996 was $300,000 compared to $1.0
million for the first quarter of 1995, reflecting Atari's significantly lower
cash balances during the first quarter of 1996. Interest expenses for the 1996
and 1995 quarters were $600,000 which represents interest due on Atari's 5 1/4%
Convertible Subordinated Debentures. In April 1996, Atari made an annual payment
of interest on its bonds that totaled $2.2 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Atari held cash and marketable securities of $50.6
million compared to $81.0 million at December 31, 1994. The decrease in cash and
marketable securities was primarily the result of operating losses incurred
during 1995.
During 1995, Atari sold a portion of its holding in Dixon PLC., a U.K.
retailer, and realized a gain on the sale of these securities in the amount of
$2.4 million. In the first quarter of 1996, Atari sold its remaining interest in
Dixon PLC. and realized a gain of $6.3 million. As of December 31, 1995, Atari's
balance sheet reflected an unrealized gain on marketable securities of $7.1
million.
As of March 31, 1996 , Atari held cash and marketable securities of $23.7
million compared to $50.6 million as of December 31, 1995 for a reduction of
$26.9 million.
In connection with the Merger, on February 13, 1996, Atari extended a
bridge loan to JTS in the amount of $25.0 million. In event the Merger is not
consummated, the bridge loan can be converted into shares of JTS Series A
Preferred Stock at the option of Atari or JTS, subject to certain conditions.
See "The Proposed Merger and Related Transactions -- Related
Transactions -- Atari Loan to JTS."
79
<PAGE> 87
As of March 31, 1996, Atari had $42.4 million of its 5 1/4% convertible
subordinated debentures due April 29, 2002 outstanding. The market value of the
Atari Debentures was approximately $31.0 million at May 29, 1996. The Atari
Debentures may be redeemed at Atari's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into Atari Common
Stock at $16.3125 per share. A default with respect to other indebtedness of
Atari in an aggregate amount exceeding $5 million would result in an event of
default whereby the Atari Debentures would be due and payable immediately.
Atari believes its existing cash balances are sufficient to meet its
requirements at least for the next 12 months.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE> 88
MANAGEMENT OF ATARI
EXECUTIVE OFFICERS AND DIRECTORS
Following the Merger, Atari and JTS have agreed that Jack Tramiel, Chairman
of the Board of Directors of Atari, and Michael Rosenberg, a member of Atari's
Board of Directors, will serve as members of the Board of Directors of the
Combined Company. In addition, Atari and JTS have agreed that Jack Tramiel or a
person designated by him shall serve as a member of each committee of the Board
of Directors of the Combined Company. None of the executive officers of Atari
prior to the Merger will serve as executive officers of the Combined Company.
The following table lists the names, ages and positions held by all
directors and executive officers of Atari as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH ATARI
------------------------------- ----------------------------------------------
<S> <C> <C>
Jack Tramiel 67 Chairman of the Board
Sam Tramiel 45 Director, President, Chief Executive Officer
and Chief Financial Officer
Leonard I. Schreiber 81 Director
Michael Rosenberg 68 Director
August J. Liguori 44 Director
Laurence M. Scott, Jr. 50 Vice President, Manufacturing and Operations
Leonard Tramiel 41 Vice President, Advanced Software Development
</TABLE>
JACK TRAMIEL and a group of associates purchased the assets and liabilities
of Atari from Warner Communications in May 1984 and Mr. Tramiel has served as
Chairman of Atari's Board of Directors since such time. Mr. Tramiel served as
Atari's Chief Executive Officer from May 1984 through May 1988.
SAM TRAMIEL has served as President and as a member of the Board of
Directors of Atari since June 1984, as Chief Executive Officer of Atari since
May 1988 and as Chief Financial Officer of Atari since March 1996.
LEONARD I. SCHREIBER has served as a member of the Board of Directors of
Atari since May 1984. Mr. Schreiber was a partner of Schreiber & McBride, a
private law firm, from 1980 to 1995.
MICHAEL ROSENBERG has served as a member of the Board of Directors of Atari
since May 1987. Mr. Rosenberg has served as Chief Executive Officer of Ross &
Roberts, Inc., a plastics company, since September 1987. Mr. Rosenberg is a
Certified Public Accountant.
AUGUST J. LIGUORI has served as a member of the Board of Directors of Atari
since 1992. Since March 1996, Mr. Liguori has served as Vice President, Finance
of Marvel Entertainment Group, Inc. From October 1986 to February 1996, Mr.
Liguori served in several positions with Atari, including Vice President and
General Manager of Atari U.S. Corp., an Atari subsidiary, from October 1986 to
October 1989, Vice President of Atari Corporation from October 1989 to October
1990, and Vice President, Finance, Treasurer and Chief Financial Officer from
October 1990 to February 1996.
LAURENCE M. SCOTT, JR. has served as Vice President, Manufacturing and
Operations of Atari since 1992. Prior to joining Atari, Mr. Scott served as
President of Radofin Electronics (FE) Ltd., a contract manufacturing firm, from
1978 to 1991.
LEONARD TRAMIEL has served Vice President, Advanced Software Development of
Atari since March 1991. Mr. Tramiel served as Vice President, Software
Development of Atari from July 1984 to March 1991.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Executive officers
of Atari are appointed by and serve at the discretion of the Atari Board of
Directors. Jack Tramiel is the father of Sam Tramiel and Leonard Tramiel.
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<PAGE> 89
COMPENSATION OF DIRECTORS
Each of the non-employee directors of Atari, including Mr. Rosenberg,
receives $500 for each meeting of the Atari Board of Directors which such
individual attends. In 1995, each non-employee director received an option to
purchase 20,000 shares of Atari Common Stock pursuant to Atari's 1986 Stock
Option Plan, as amended. Such options have an exercise price of $2.69 and vest
over a period of five years.
PRINCIPAL STOCKHOLDERS OF ATARI
The following table sets forth information, as of May 22, 1996, with
respect to beneficial ownership of Atari Common Stock owned by (a) each person
(or group of affiliated persons) known by Atari to be the beneficial owners of
more than 5% of Atari's Common Stock, (b) each of Atari's directors, (c) each of
Atari's executive officers and (d) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES PERCENT NUMBER OF SHARES OF PERCENT OF SHARES OF
BENEFICIALLY BENEFICIALLY THE COMBINED THE COMBINED
NAME OF BENEFICIAL OWNER OWNED OWNED(1) COMPANY COMPANY(2)
- -------------------------------------- ------------ ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
Jack Tramiel(3)....................... 12,494,616 19.6% 12,494,616 12.2%
455 South Mathilda Avenue
Sunnyvale, California 94086
Time Warner, Inc.(4).................. 8,600,000 13.5 8,600,000 8.4
75 Rockefeller Plaza
New York, New York 10019
Sam Tramiel(5)........................ 5,662,567 8.9 5,662,567 5.5
455 South Mathilda Avenue
Sunnyvale, California 94086
Leonard Tramiel(6).................... 5,263,946 8.2 5,263,946 5.1
455 South Mathilda Avenue
Sunnyvale, California 94086
Sega Holdings USA Inc ................ 4,705,883 7.4 4,705,883 4.6
303 Twin Dolphin Drive, Suite 200
Redwood City, California 94065
Garry Tramiel(7)...................... 4,055,000 6.4 4,055,000 3.9
455 South Mathilda Avenue
Sunnyvale, California 94086
August J. Liguori(8).................. 262,000 * 262,000 *
Michael Rosenberg(9).................. 45,000 * 45,000 *
Leonard I. Schreiber(10).............. 214,000 * 214,000 *
Laurence M. Scott, Jr.(11)............ 10,000 * 10,000 *
All directors and executive officers 23,952,129 37.3 23,952,129 23.3
as a group (seven persons)(12)......
</TABLE>
- ---------------
* Less than 1%
(1) Based on 63,735,718 shares of Atari Common Stock outstanding as of May 22,
1996.
(2) Based on (i) 63,735,718 shares of Atari Common Stock outstanding as of May
22, 1996 (assuming no exercise of outstanding options after such date) and
(ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,255,116 shares
of JTS Common Stock outstanding as of May 15, 1996 (assuming no exercise of
outstanding options and warrants after such date).
(3) Includes 11,597,315 shares held by Jack Tramiel's wife. Also includes
155,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
benefit of Mr. Tramiel's minor grandchildren. Also includes 4,000 shares
subject to options which are vested or become vested within 60 days
following May 22, 1996.
(4) Includes 7,100,000 shares held by Warner Communications Investors, Inc.,
1,500,000 shares held by Warner Communications, Inc.
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<PAGE> 90
(5) Includes 352,062 shares held by Sam Tramiel as custodian on behalf of his
children, 8,100 shares held by Mr. Tramiel's wife and an aggregate of
97,416 shares held by Mr. Tramiel's minor children. Also includes 225,000
shares subject to options which are vested or become vested within 60 days
following May 22, 1996.
(6) Includes 40,000 shares held by Leonard Tramiel's wife and 10,000 shares
held by Mr. Tramiel's minor children. Also includes 55,000 shares subject
to options which are vested or become vested within 60 days following May
22, 1996.
(7) Includes 55,000 shares subject to options which are vested or become vested
within 60 days following May 22, 1996.
(8) Includes 165,000 shares subject to options which are vested or become
vested within 60 days following May 22, 1996.
(9) Includes 20,000 shares subject to options which are vested or become vested
within 60 days following May 22, 1996.
(10) Includes 20,000 shares subject to options which are vested or become vested
within 60 days following May 22, 1996.
(11) Represents shares subject to options which are vested or become vested
within 60 days following May 22, 1996.
(12) Includes 499,000 shares subject to options which are vested or become
vested within 60 days following May 22, 1996.
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INFORMATION REGARDING JTS CORPORATION
BUSINESS OF JTS
JTS was founded as a Delaware corporation in February 1994 to design,
manufacture and market hard disk drives for use in notebook computers and
desktop personal computers. JTS has developed two product families of hard disk
drives: the Nordic product family for notebook computers, which includes disk
drives with 3-inch form factors and two or three recording disks; and the
Palladium product family for desktop personal computers, which includes disk
drives with 3.5-inch form factors and two or three recording disks. JTS is also
developing a family of 5.25-inch form factor disk drives for the desktop
personal computer market. JTS markets and sells its products to original
equipment manufacturers ("OEMs") for incorporation into their notebook and
desktop computer systems and subsystems. JTS acquired several technical
personnel and rights to certain key technology utilized in JTS' disk drives in
connection with bankruptcy proceedings involving Kalok Corporation in February
1994. All JTS disk drives are currently manufactured at JTS' subsidiary, Moduler
Electronics, located in Madras, India.
INDUSTRY BACKGROUND
The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Hewlett-Packard,
Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations
that produce disk drives for incorporation into their own computers as well as
for sale to other OEMs. In 1995, the top six disk drive vendors accounted for
approximately 88% of the unit market share.
In 1995, approximately 89 million hard disk drives were shipped,
representing a 30% increase over the prior year. Approximately 70 million, or
77%, of the hard disk drives shipped in 1995 were sold as part of desktop
personal computers, and approximately 11 million, or 12%, were sold as part of
notebook computers. In 1995, Seagate, Quantum and Western Digital controlled
approximately 61% of the desktop hard disk drive market share, and IBM and
Toshiba controlled approximately 70% of the notebook hard disk drive market
share.
All hard disk drives used in notebook and desktop personal computers
incorporate the same basic technology. One or more rigid disks are attached to a
spin motor assembly which rotates the disks at a constant speed within a sealed,
contamination-free enclosure. Typically, both surfaces of each disk are coated
with a thin layer of magnetic material. Magnetic heads record and retrieve data
from discrete magnetic domains located on pre-formatted concentric tracks in the
magnetic layers of the rotating disks. An actuator positions the head over the
proper track upon instructions from the drive's electronic circuitry. Most disk
drives are "intelligent" disk drives which incorporate an embedded ASIC
controller to manage communications with the computer.
The size of a hard disk drive is referred to as the drive's "form factor"
or "footprint." At present, the vast majority of personal desktop and notebook
computers incorporate disk drives with either 3.5-inch or 2.5-inch form factors.
The size of the form factor determines the size of the recording disk and,
hence, dictates the recording capacity of the disk drive. Disk drives with
smaller form factors must incorporate more disks and, as a result, more heads to
offer the same recording capacity as larger form factor drives. Therefore,
because heads and disks are the most expensive components in the hard disk
drive, larger form factor disk drives are relatively less expensive to
manufacture than smaller form factor drives with comparable recording
capacities. As a result, 3.5-inch drives are better suited for desktop personal
computers, which are not subject to the size constraints of notebook computers.
In contrast, 2.5 inch drives, because of their reduced size as well as power
conservation features and lightweight design, presently dominate the notebook
computer market.
In recent years, the computer industry has witnessed the emergence of
several trends that JTS believes will continue to drive demand for innovative
disk drive products. First, new data- and image-intensive applications are
generating increased demand for greater storage capacity and performance at a
lower cost for both business and home computer users. JTS believes that this
trend will continue as more applications are developed that enable individuals
to easily access, store and manipulate digital information and as computers
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<PAGE> 92
become a more common home appliance. At the same time, a significant percentage
of personal computing is occurring on mobile devices, such as notebook
computers, which represented approximately 15% of all personal computers sold in
1995. Third, the personal computer industry is migrating towards lower profile
computing devices, both in the desktop and notebook arenas. The pressure to
shrink the dimensions, increase the capacities and lower the costs of personal
computers has presented manufacturers, especially notebook designers, with a
substantial and ongoing technical challenge.
JTS STRATEGY
JTS' objective is to become a leading supplier of hard disk drives to the
notebook and desktop computer markets. JTS' strategy to achieve this objective
includes the following key elements:
- Establish 3-inch form factor technology for notebook computers. JTS
has developed a family of 3-inch form factor disk drives, the Nordic
product family, for use in notebook computers as an alternative to 2.5-inch
drives, the current industry standard. JTS Nordic disk drives are similar
to 2.5-inch drives in terms of weight and power consumption but have a
modestly larger footprint, although the low-profile design of the 3-inch
drive results in its total volume being the same as the 2.5-inch drive. The
disks used in JTS' 3-inch drives have 82% greater recording surface area
per drive than disks used in 2.5-inch drives, and, therefore, greater
storage capacities can be achieved at the same areal densities (megabytes
per square inch) as 2.5-inch drives. JTS began shipment of Nordic drives in
the second calendar quarter of 1996. Nordic drives are expected to be
offered at prices that are competitive with the prices of 2.5-inch drives.*
- Develop innovative disk drives for desktop personal computers. JTS
has developed a 3.5-inch family of disk drives, the Palladium family, for
desktop personal computers. Like the Nordic family of disk drives, the
Palladium family is characterized by a low-profile, fully-encapsulated
design and a simplified, highly-integrated platform approach. JTS began
volume production and shipment of Palladium drives in September 1995 and is
presently shipping Palladium drives with capacities of 1.0 and 1.6
gigabytes. JTS is also developing a family of 5.25-inch form factor disk
drives for the desktop market with many of the same design features as JTS'
Nordic and Palladium drives, but with significantly greater recording
capacities.
- Achieve low product cost structure. All of JTS' manufacturing
operations and some of its design operations take place in Madras, India,
which offers a low-cost and well-trained labor force. In order to
capitalize upon the low-cost labor base in India, JTS has adopted a
manufacturing strategy of selective vertical integration. For example, JTS
is presently vertically integrated in the manufacture of particularly
labor-intensive components such as head stacks. JTS' disk drive products
also share a significant amount of common componentry, thereby reducing
manufacturing and development costs.
- Form strategic alliances with key participants in the computer
industry. JTS has entered into a Development Agreement and Purchase
Agreement with Compaq pursuant to which Compaq has agreed to design at
least one of JTS' disk drives into Compaq's products and to purchase a
minimum number of disk drives subject to certain conditions. JTS intends to
establish similar arrangements with other major computer OEMs and notebook
computer manufacturers. In addition, JTS has entered into a Technology
Transfer and License Agreement with Western Digital, which provides for the
cross-licensing of JTS' and Western Digital's 3-inch disk drive technology
and licenses Western Digital to act as a second source of 3-inch drives to
Compaq.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 93
PRODUCTS
JTS' disk drives are characterized by the following design features:
- Low Profile Design. JTS' hard disk drives have a lower profile than
competing hard disk drives with comparable form factors and recording
capacities. The low profile design is accomplished by a high level of
electronic integration that allows for the printed circuit board assembly
("PCBA") to be placed in a small corner of the drive in the same plane as
the recording disks (this design is known as "board in the plane of the
media" packaging). Most competing drives place the PCBA under the drive
mechanics which significantly increases the height of the drive.
- Simplified and Highly-Integrated Platform Approach. JTS' product
families share a simplified, highly-integrated platform approach
characterized by a reduced number of components. JTS believes that its
PCBAs have the fewest components in the industry because of a
highly-integrated ASIC controller. JTS believes this simplified platform
approach combined with common technology among its product families
facilitates the introduction of new technology and utilizes research
personnel in a more efficient manner, thereby reducing development costs.
- Fully-Encapsulated Design. JTS disk drives are fully-encapsulated
with no exposed PCBA and contain either a standard fixed drive connector or
optional multi-insertion connector. The encapsulated design eliminates the
possibility of damage to the PCBA due to electrostatic discharge and
improves the electromagnetic interference immunity of the drive.
- Common Componentry. The Nordic and Palladium product families share
a substantial percentage of common electronic componentry which facilitates
the simultaneous development of products for the notebook and desktop
computer markets and reduces time to market for JTS products. For example,
JTS' product families share spindle motors, certain head stack components
and controller ASICs.
Nordic Product Family
JTS' Nordic product family is designed for notebook computers. Nordic
drives measure 90mm wide, the same width as a floppy diskette, and are
classified as 3-inch drives. The Nordic drives incorporate low-profile
architecture, measuring 10.5mm high for the two disk version and 12.5mm for the
three disk version. Nordic drive capacities presently range from 640 to 810
megabytes for the two disk version and 1.2 gigabytes for the three disk version.
The 10.5mm and 12.5mm Nordic drives are significantly thinner than the 17mm or
19mm high 2.5-inch drives, while the surface area of the recording disk in a
Nordic drive is 82% greater than a 2.5-inch disk. The greater surface area of
the disk media used in the Nordic drives allows for greater recording capacity
using the same areal densities. At the same time, the Nordic drives consume
approximately the same amount of power as 2.5-inch drives, making them well
suited for battery operated applications.
The Nordic product family is being developed in conjunction with Western
Digital, which has entered into a Technology Transfer and License Agreement with
JTS obligating Western Digital to make milestone payments and to share
advancements in 3-inch technology and licensing Western Digital to serve as a
second source of Nordic products to Compaq. In addition, JTS has entered into a
Development Agreement with Compaq which committed Compaq to partially fund
Nordic development costs and obligated Compaq to purchase a minimum number of
disk drives over a two year period. Shipments to Compaq of Nordic disk drives
commenced in the second calendar quarter of 1996. Volume shipments of Nordic
drives to Compaq are expected to commence in the third quarter of fiscal 1997.*
See "-- Relationship with Compaq" and "-- Western Digital Arrangement."
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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Palladium Product Family
Palladium disk drives are 3.5-inch form factor drives designed for desktop
personal computers. The Palladium product family includes two and three disk
versions with capacities presently ranging from 540 megabytes to 1.6 gigabytes.
The Palladium drives incorporate low-profile architecture similar to Nordic
drives, measuring 1/2-inch in height compared to competing drives that typically
measure 1-inch in height. The low profile design allows two disk drives to be
configured into the same space required for one competing 3.5-inch drive. JTS
began volume production and shipments of Palladium drives in September 1995.
5.25-inch Family of Hard Disk Drives
JTS is developing a family of 5.25-inch form factor hard disk drives for
desktop personal computers. The 5.25-inch drives will initially include three
disks and have a capacity of 3.5 gigabytes. The 5.25-inch drives are being
designed to meet the increased data storage demands of advanced multimedia
applications. Like the Nordic and Palladium drives, the 5.25-inch drives will
have a low-profile, fully-encapsulated design and a simplified,
highly-integrated platform approach. JTS expects to begin volume production and
shipment of 5.25-inch drives in the fourth quarter of fiscal 1997.*
RELATIONSHIP WITH COMPAQ
In June 1994, JTS entered into a Development Agreement with Compaq pursuant
to which the two companies established a plan for the development of JTS' Nordic
family of disk drives. Pursuant to the terms of the Development Agreement,
Compaq has paid $500,000 to JTS for product development expenses. In addition,
JTS has granted to Compaq certain pricing preferences and agreed to pay
royalties to Compaq on sales of Nordic disk drives to third parties during the
term of the agreement. Compaq has been granted a license to use the Nordic
designs to manufacture Nordic drives on a royalty-free basis in the event JTS
fails to meet the agreed upon production schedule. The Development Agreement
also restricts JTS' ability to sublicense Nordic technology. The Development
Agreement has a five year term, which will automatically be renewed under
certain circumstances and may be terminated by either party only with cause. JTS
and Compaq have also entered into a Purchase Agreement related to future
purchases by Compaq of Nordic drives. See "-- Patents and Licenses."
WESTERN DIGITAL ARRANGEMENT
In February 1995, JTS entered into a Technology Transfer and License
Agreement with Western Digital. Under the terms of the agreement, Western
Digital obtained manufacturing and marketing rights to JTS' 3-inch hard disk
drive products. In return, Western Digital is obligated to make payments to JTS
totalling $6.0 million upon the achievement of certain development milestones
and is licensed to act as a second source of Nordic drives to Compaq. As of
January 28, 1996, Western Digital had made milestone payments to JTS in an
aggregate amount of $5.3 million. In February 1995, Western Digital also made a
$4.1 million equity investment in JTS as part of the transaction. The parties
have reciprocal, royalty-free, cross-license agreements for future 3-inch drive
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch disk drive technology. Under certain circumstances,
the Technology Transfer and License Agreement restricts JTS from sublicensing
Nordic technology until 1998. See "-- Patents and Licenses."
MANUFACTURING
JTS' manufacturing strategy is to be a low-cost producer of hard disk
drives for the notebook and desktop personal computer markets. All of JTS'
manufacturing operations are currently conducted at its subsidiary,
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 95
Moduler Electronics, located in Madras, India, which JTS acquired in April 1996.
See "JTS' Acquisition of the Disk Drive Division of Moduler Electronics." As of
April 26, 1996, 1,760 individuals were employed at Moduler Electronics. The
Madras facility presently occupies 85,000 square feet in a single building,
4,000 square feet of which are designated a "clean room" environment. At this
facility, JTS is adding production lines and expanding its clean room
environment. JTS believes that locating its manufacturing operations in India is
an important element of its low-cost manufacturing strategy due to the
availability of a high-quality, low-cost technical labor pool. In 1995, JTS was
granted a five year "tax holiday" with respect to sales of JTS' products in and
outside of India. In addition, Moduler Electronics is located in the Madras
export processing zone and, therefore, enjoys a tax exemption with respect to
profits generated from sales outside of India. Such exemption may be terminated
at any time, in which event JTS would become subject to significantly greater
taxes on sales of disk drives outside of India. Other benefits associated with
conducting business in India, which historically has experienced considerable
political instability, are subject to the vagaries of the Indian government, and
may be withdrawn at any time.
The manufacture of high-capacity hard disk drives is a complex process,
requiring a "clean room" environment, the assembly of precision components
within narrow tolerances and extensive testing to ensure reliability. JTS'
manufacturing process is performed in three stages: subassembly, final assembly
and final test. The subassembly group builds mechanical subassemblies and flex
cables and modifies PCBAs. Printed circuit board assembly is performed by
outside vendors. The final assembly group assembles all subassemblies and
components into the mechanical head/disk assembly ("HDA"), writes servo
information, and performs preliminary testing. To avoid contamination by dust
and other particles which may impair the functioning of the disk drive, most
assembly takes place under controlled "clean room" conditions. The final test
group connects PCBAs to HDAs, burns-in completed drives and performs final
tests.
The principal components used in JTS' manufacturing process are disks,
heads and PCBAs. JTS has two qualified sources for PCBAs and is in the process
of qualifying second sources for disks and heads. JTS' Indian subsidiary imports
approximately 85% of the componentry used in the manufacture of its disk drives
from outside of India. In the past, JTS has experienced delays in obtaining
certain integrated circuits required in the assembly of PCBAs, and there can be
no assurance that such delays, or difficulties in obtaining those or other
components, will not occur in the future. JTS' inability to obtain essential
components or to qualify additional sources as necessary, if prolonged, could
have a material adverse effect on JTS' business, operating results and financial
condition. In the second quarter of 1996, JTS was advised that its sole supplier
of certain head stack components intends to decrease production and ultimately
discontinue manufacturing of such components, and, therefore, JTS will be
required to secure a new supply arrangement with another manufacturer of such
components.
JTS has developed a comprehensive quality assurance program. All
significant electrical and mechanical parts received from outside sources are
inspected or tested, normally on a sample basis, and testing and burn-in of
certain components and subassemblies occurs during assembly. In addition, JTS
performs several in-process quality checks and inspections, both in the PCBA and
HDA processes, and a final drive-level quality check prior to packaging.
Additional performance and reliability testing is done on a sample basis from
each week's production units in order to monitor quality levels and provide
corrective action to the factory processes. JTS generally warrants its products
against defects in design, materials and workmanship for three years. JTS
maintains in-house service facilities for refurbishment or repair of its
products in Madras, India.
Due to the common componentry of the Nordic and Palladium disk drives, JTS
believes that it enjoys considerable flexibility in managing inventory levels
and meeting its customers' production requirements. In addition, JTS believes
that common componentry reduces the amount of scrap materials generated in the
manufacturing process and facilitates the training of operators in producing new
products, thus reducing production costs.
JTS' longer-term manufacturing strategy calls for selective vertical
integration to reduce JTS' manufacturing costs. At present, JTS is vertically
integrated in certain labor intensive components, such as head stacks, thereby
capitalizing on the low-cost labor base in India. JTS also believes that its
proprietary controller ASIC is less expensive and more easily upgradeable than
commercially available integrated circuits.
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RESEARCH AND DEVELOPMENT
JTS operates in an industry characterized by rapid technological change and
short product life cycles. As a result, JTS' success will depend upon its
ability to develop new products, successfully introduce these products to the
market and ramp up production to meet customer demand. Accordingly, JTS is
committed to timely development of new products and the continuing evaluation of
new technologies. JTS' research and development efforts are presently
concentrated on broadening its existing 3.5- and 3-inch product lines and
introducing new generations of products with increased capacity and improved
performance at a lower cost. In this regard, JTS is presently designing various
high performance features, such as MR heads, new ASIC/channel technology and
advanced head lifters, into each of its hard disk drive product families. In
June 1996, JTS entered into a Heads of Agreement with Headway Corporation
("Headway"), a joint venture between Hewlett-Packard and Komag Corporation,
pursuant to which Headway has agreed to act as the exclusive supplier of MR
heads for JTS' future products.
JTS expects to begin shipment of Palladium drives with recording capacities
of up to 2.5 gigabytes and Nordic drives with recording capacities of up to 2.0
gigabytes in the fourth quarter of fiscal 1997.* In addition, JTS is developing
a family of 5.25-inch disk drives for the desktop personal computer market. JTS
expects to begin shipment of 5.25-inch drives in the fourth quarter of fiscal
1997.* For the fiscal years ended January 31, 1995 and 1996, JTS' research and
development expenses totalled approximately $3.7 million and $13.4 million,
respectively. As of January 28, 1996, JTS employed 137 individuals in
engineering support and research and development.
SALES AND MARKETING
JTS sells its products through its direct sales force operating in the
United States, Europe and Asia. In addition, JTS' hard disk drives are sold into
the Latin American markets by FutureTech International, Inc. ("Futuretech"), a
products distributor. JTS presently has a sales office in Taiwan that employs
three individuals. The Taiwan sales office markets the JTS Nordic disk drives to
local notebook computer manufacturers and works closely with the manufacturers
to design JTS' disk drives into their products. In addition, JTS has independent
sales representatives located in Japan, Germany and South Africa who market JTS'
Nordic disk drives to notebook computer manufacturers. JTS employs two sales
representatives in the United States who market JTS' 3.5-inch disk drives to
OEMs. International sales accounted for 81% of revenues in fiscal 1996. See
"Notes to JTS Financial Statements."
A limited number of customers account for a significant percentage of JTS'
total revenue. In fiscal 1996, Olidata S.p.A., Connexe Peripherals, Ltd., Liuski
International, Inc. and Aashima Technology, B.V. accounted for 34%, 12%, 11% and
10%, respectively, of JTS' total revenue. In the quarter ended April 28, 1996,
Peacock Systems GmbH, Markvision International S.A. and FutureTech accounted for
43%, 18% and 14%, respectively, of JTS' total revenue. JTS expects that sales to
a relatively small number of OEMs will account for a substantial portion of its
net revenues for the foreseeable future, although the companies that comprise
JTS' largest customers may change from period to period. In particular, based on
existing contracts with FutureTech and Compaq, JTS expects that revenues from
these companies will account for a substantial percentage of JTS' revenues in
the foreseeable future. The loss of, or decline in orders from, one or more of
JTS' key customers would have a material adverse effect on JTS' business,
operating results and financial condition.
PATENTS AND LICENSES
JTS holds no patents and has licensed in a substantial portion of the
technology used in its hard disk drives pursuant to license agreements with Pont
Peripherals Corporation, formerly DZU Corporation ("Pont"), TEAC Corporation
("TEAC") and Western Digital. If such license agreements were prematurely
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 97
terminated or if JTS were enjoined from relying upon such licenses due to JTS'
alleged or actual breach of such agreements, JTS would be prevented from
manufacturing disk drives incorporating technology subject to such licenses. As
a result, JTS' business, operating results and financial condition would be
materially adversely affected. JTS has filed three United States patents
applications. Although JTS believes that patent protection could offer
significant value, the rapidly changing technology of the computer industry
makes JTS' future success dependent primarily upon the technical competence and
creative skills of its personnel rather than on patent protection.
A license with respect to certain key technology employed in JTS' Nordic
disk drives was granted to JTS by TEAC pursuant to a license agreement dated
February 4, 1994 (the "TEAC Agreement"). The TEAC Agreement also includes a
cross-license with respect to Nordic technology developed jointly by TEAC and
JTS, which will be owned jointly by the two companies, and granted certain
rights to TEAC with respect to Nordic technology developed independently by JTS,
which will be owned solely by JTS. Under the TEAC Agreement, JTS is obligated
under certain circumstances to make royalty payments to TEAC in connection with
the sale of future generation disk drives incorporating Nordic technology that
is jointly developed by JTS and TEAC or independently developed by TEAC. JTS is
not obligated to make royalty payments with respect to developments to Nordic
technology made independently by JTS, but JTS is obligated to license such
developments to TEAC on a royalty-free basis. The TEAC Agreement restricts JTS'
ability to sublicense certain technology licensed to JTS. TEAC originally
acquired its rights in certain Nordic disk drive technology pursuant to the
Agreed Order Compromising Controversies dated February 4, 1994 (the "Order")
governing the distribution of the assets of Kalok Corporation. The Order imposes
certain restrictions on JTS' right to sublicense, manufacture and sell certain
disk drive technology of Kalok Corporation that was transferred to both TEAC and
Pont pursuant to the Order.
In June 1994, JTS entered into a Development Agreement with Compaq which
imposes certain restrictions on JTS' ability to sublicense Nordic technology to
third parties. In addition, the Development Agreement imposes a royalty
obligation upon JTS with respect to the sale of Nordic disk drives to third
parties during the term of the agreement. Moreover, Compaq has a right of first
refusal with respect to all production of Nordic drives until June 1997 and a
right of first refusal to license and/or acquire future JTS technologies and
products during the term of the agreement. JTS has also granted certain
non-exclusive manufacturing and marketing rights with respect to certain Nordic
technology and developments thereto within the term of the Development
Agreement. See "-- Relationship with Compaq."
In January 1995, JTS and Pont entered into a cross-licensing agreement (the
"Pont Agreement") pursuant to which JTS granted to Pont a royalty-free,
nonexclusive, perpetual license to use certain JTS and jointly-developed hard
disk drive technology, to make developments to such technology and to
manufacture and sell in certain territories hard disk drives incorporating such
technology. In return, Pont granted to JTS a royalty-free, nonexclusive,
perpetual license to use certain Pont and jointly-developed hard disk drive
technology, to make developments to such technology and to manufacture and sell
in certain territories hard disk drives incorporating such technology. In
addition, Pont was obligated to make certain royalty payments to JTS for a
limited period of time with respect to the sale of hard disk drives
incorporating certain JTS technology.
In February 1995, the TEAC Agreement, the Order, the Pont Agreement and the
Compaq Development Agreement were each amended to permit the license and
sublicense by JTS to Western Digital of certain rights in Nordic disk drive
technology. In addition, the amendment to the TEAC Agreement provides that JTS
will pay certain royalties to TEAC, under certain circumstances, upon the sale
of Nordic drives for a limited period of time. The Pont Agreement was also
amended to expand the territories in which JTS may manufacture and sell hard
disk drives incorporating technology subject to the agreement. JTS and Western
Digital concurrently entered into a Technology Transfer and License Agreement
pursuant to which Western Digital obtained certain manufacturing and marketing
rights to Nordic disk drive technology. The parties have reciprocal,
royalty-free, cross-license agreements for future Nordic technology
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch hard disk drive technology. See "-- Western Digital
Arrangement."
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COMPETITION
The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Hewlett-Packard,
Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations
that produce disk drives for incorporation into their own computers as well as
for sale to other OEMs. JTS believes that competition in the disk drive industry
is based primarily upon time to market, product availability, performance,
product capacity and price. JTS believes that it competes favorably with respect
to each of these factors. Many of JTS' competitors have broader product lines
than JTS, and all have significantly greater financial, technical and marketing
resources. There can be no assurance that JTS will be able to develop and
manufacture products on a timely basis with the quality and features necessary
in order to be competitive. High volume disk drive users typically utilize from
two to four suppliers but desire to limit the number of sources. As a result, it
may be necessary for JTS to displace competitors in many circumstances in order
to increase its net sales. In addition, JTS faces competition from the
manufacturing operations of its current and potential OEM customers, which could
initiate or increase internal production and reduce or cease purchasing from
independent disk drive suppliers such as JTS. Moreover, the hard disk drive
industry is characterized by intense price competition. If other disk
manufacturers add significant capacity or demand for disk drives decreases, the
resulting pricing pressures could adversely affect JTS' business, operating
results and financial condition. JTS has experienced pricing pressures in the
past, and there can be no assurance that JTS will not experience increased price
competition in the future. Any increase in price competition could have a
material adverse effect on JTS' business, operating results and financial
condition. If JTS' current and prospective customers and end users were to adopt
alternative data storage products, including optical storage, flash memory and
holographic storage, JTS' business, operating results and financial condition
could be adversely affected.
BACKLOG
JTS' sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, quantity reductions or rescheduling without
significant penalties. Changes in forecasts, cancellations, rescheduling and
quantity reductions may result in excess inventory costs, inventory losses and
under-utilization of production capacity and may have a material adverse effect
on JTS' business, operating results and financial condition. As a result of the
foregoing, JTS' backlog as of any particular date may not be representative of
actual sales for any succeeding period.
EMPLOYEES
As of April 26, 1996, JTS had 1,936 full-time employees, of whom 158 were
located in San Jose, California, 1,760 were located in Madras, India, 13 were
located in Singapore and five were located in Taipei, Taiwan. Of the full-time
employees, 1,490 are engaged in manufacturing, 12 in marketing, sales and
service, 108 in product development and 18 in administration and finance.
The market for well-trained employees with disk drive industry experience
is intensely competitive. JTS believes that its future success will depend on
its ability to continue to attract and retain a team of highly motivated and
skilled individuals. None of JTS' employees is represented by a labor
organization. JTS believes that its employee relations are good.
PROPERTIES
JTS presently leases facilities in San Jose, California, Madras, India,
Singapore and Taipei, Taiwan. JTS' executive and administrative headquarters are
located in a 52,000 square foot building in San Jose. The lease on this facility
expires in July 2000, and has an option to renew for four years, subject to
certain restrictions.
The Madras facility comprises approximately 85,000 square feet and is used
for all of JTS' manufacturing operations. JTS does not presently lease the
Madras facility, but rather occupies the facility pursuant to allotment letters
from the Development Commissioner of the Madras Export Processing Zone. Such
allotment letters authorize JTS to occupy the premises indefinitely so long as
the space is used in the
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reasonable conduct of JTS' business and rents are paid in a timely fashion. JTS
currently intends to increase the size of the Madras facility by 65,000 square
feet by the end of fiscal 1997.*
The Singapore office comprises approximately 1,500 square feet and is used
for JTS' purchasing operations in Southeast Asia. The lease for this facility
expires in October 1997.
The Taiwan sales office has approximately 1,144 square feet and is used for
JTS' marketing and sales operations in Taiwan. The lease for this facility
expires in July 1997.
LEGAL PROCEEDINGS
JTS has been served with a complaint filed in the Superior Court of the
State of California in and for the County of Santa Clara by Venture Lending &
Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA
The following unaudited selected pro forma combined financial data of JTS
and Moduler Electronics presents the pro forma combined financial position and
results of operations of JTS and Moduler Electronics as of and for the year
ended January 28, 1996 and for the three months ended April 28, 1996 and April
30, 1995. This unaudited selected pro forma financial data combine JTS and
Moduler Electronics and give effect to the JTS and Moduler Electronics
combination, which was accounted for as a purchase. The April 28, 1996 balance
sheet reflects the acquisition of Moduler Electronics which took place on April
4, 1996. Intercompany balances and transactions have been eliminated in the
presentation. This data should be read in conjunction with the Unaudited Pro
Forma Financial Statements and related notes, and the historical financial
statements and related notes of JTS and Moduler Electronics which are included
elsewhere herein. All amounts are stated in thousands, except per share amounts.
<TABLE>
<S> <C> <C>
Statement of Operations Data:
Year Ended January 28, 1996 (Pro forma)
Net revenues................................................ $ 18,777
Gross margin (deficit)...................................... (14,849)
Research and development.................................... 13,375
Selling, general and administrative expenses................ 5,777
Operating loss.............................................. (34,001)
Net loss.................................................... (35,170)
Loss per common share(1).................................... (7.63)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 28, 1996 APRIL 30, 1995
---------------- --------------
<S> <C> <C>
Quarter ended April 28, 1996 and April 30, 1995 (Pro forma)
Total revenues.............................................. $ 17,581 $ 2,077
Operating loss.............................................. (12,098) (1,203)
Net loss.................................................... (12,820) (1,143)
Net loss per share(1)....................................... (1.47) (.26)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28,
1996
APRIL 28, 1996 --------------
---------------- (PRO FORMA)
(ACTUAL)
<S> <C> <C>
Balance Sheet Data:
Current assets.............................................. $ 30,474 $ 12,722
Equipment and leasehold improvements, net................... 16,212 14,795
Total assets................................................ 46,871 28,111
Current liabilities......................................... 61,669 30,615
Long-term debt.............................................. 6,381 6,248
Redeemable Series A Preferred Stock......................... 29,697 29,696
Stockholders' deficit....................................... (50,876) (38,448)
</TABLE>
- ---------------
(1) Excludes JTS Series A Preferred Stock, warrants and options as their effect
would be antidilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JTS
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping hard disk drives. From October 1995
through January 1996, JTS shipped 98,000 Palladium disk drives in 540 megabyte,
850 megabyte and 1 gigabyte configurations primarily to customers in the United
States and Europe. During the second quarter of calendar year 1996, JTS expects
to begin shipment of Nordic disk drives to Compaq under a volume purchase
agreement.* There can be no assurance that JTS will be successful in the
production and shipment of these products.
Since its inception, JTS has incurred significant losses which have
resulted from the substantial costs associated with the design, development and
marketing of new products, the establishment of manufacturing operations and the
development of a supplier base. JTS' ability to achieve successful operations
will depend upon a number of factors, including market acceptance of JTS'
products, the introduction of new products in a timely and cost-effective
manner, and the volume production of disk drives at acceptable manufacturing
yields. In addition, JTS will need significant additional financing resources
over the next several years for facilities expansion, capital expenditures,
working capital, research and development and vendor tooling. There can be no
assurance that JTS will achieve successful operations.
All of JTS' products are manufactured in Madras, India by its Moduler
Electronics subsidiary. In March 1995, JTS entered into a verbal agreement to
acquire Moduler Electronics and subsequently assumed operational and management
control of certain aspects of Moduler Electronics' disk drive business. In April
1996, JTS acquired 90% of Moduler Electronics and, accordingly, the Pro Forma
Combined Condensed Financial Statements of JTS and Moduler Electronics are the
bases for the following discussion and analysis.
PRO FORMA YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
For the fiscal year ended January 28, 1996, JTS' pro forma results reflect
a net loss of $35.2 million, compared to a net loss of $4.8 million for JTS in
fiscal 1995.
Total pro forma revenues for fiscal 1996 were $18.8 million and consisted
of product sales and license revenues. Net product sales for fiscal 1996 were
$13.5 million as JTS initiated product shipments to customers in October 1995.
License revenues for fiscal 1996 were $5.3 million as JTS achieved certain
development milestones under its Technology Transfer and License Agreement with
Western Digital which was executed in February 1995. Of total revenues, 81% were
derived from European customers and 19% were derived from customers in the
United States. During fiscal 1996, JTS' product sales were concentrated among
several key customers with Olidata Spa, Connexe Peripherals, Ltd., Liuski
International, Inc. and Aashima Technology B.V. accounting for 34%, 12%, 11% and
10% of total product sales, respectively. JTS had no revenues in fiscal 1995.
Pro forma gross margin for fiscal 1996 was a deficit of $14.8 million. The
deficit resulted principally from costs and expenses due to low manufacturing
yields and high per unit costs associated with the start-up of manufacturing
operations. Cost of product sales for fiscal 1996 also included a $4.3 million
provision for inventory allowances. The principal reasons for these allowances
include approximately $3.6 million for obsolete and unsaleable inventory,
approximately $345,000 for the costs of repairing defective products and a
reserve of approximately $500,000 for various other allowances. JTS anticipates
incurring future inventory allowances, the level of which will depend upon a
number of factors including manufacturing yields, new product introductions,
maturity or obsolescence of product designs, inventory levels and competitive
pressures.*
The hard disk drive industry has been characterized by ongoing rapid price
erosion and resulting pressure on gross margins. JTS expects that hard disk
drive prices will continue to decline in the future and that
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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competitors will offer products which meet or exceed the performance
capabilities of JTS products. Due to such pricing pressures, JTS' future gross
margin will be substantially dependent upon its ability to control manufacturing
costs, improve manufacturing yields and introduce new products on a timely
basis.*
Research and development expenses for fiscal 1996 were $13.4 million
compared to $3.7 million for fiscal 1995. The increase is primarily attributable
to salaries and benefits resulting from the significant increase in staffing
required for product design and the development of manufacturing processes.
Specifically, during fiscal 1996, the number of employees in research and
development increased by 112 to a total of 137 employees at the end of fiscal
1996. In addition, expenses for supplies, materials and other costs associated
with design and pilot production of new products were approximately $5.0 million
in fiscal 1996 compared to approximately $1.5 million in fiscal 1995. JTS
expects that research and development expenses will continue to increase
throughout fiscal 1997 in absolute dollars but that such expenses will decline
as a percent of sales.*
Selling, general and administrative expenses for fiscal 1996 were $5.8
million compared to $1.5 million for fiscal 1995. The major components of these
expenses are salaries and benefits of administrative and marketing and sales
employees, facility costs and professional fees. The growth in these expenses in
fiscal 1996 was required to support the expansion of JTS' operations and the
commencement of marketing and sales efforts. Included in 1996 is a non-cash
charge of $930,000 of amortization of deferred compensation related to the
issuance of common stock to certain officers (see Note 7 to JTS Financial
Statements). JTS expects that selling, general and administrative expenses will
increase throughout fiscal 1997 in absolute dollars but that such expenses will
decline as a percentage of sales.*
QUARTER ENDED APRIL 28, 1996 COMPARED TO QUARTER ENDED APRIL 30, 1995
Revenue for the first quarter of fiscal 1997 was $17.6 million compared to
$2.0 million for the first quarter of fiscal 1996. Revenue for the current
quarter was comprised primarily of sales of the Company's 850 megabyte and 1
gigabyte Palladium 3 1/2-inch disk drives. Minimal product revenues were
recorded in the first quarter of fiscal 1996, as the Company initiated volume
shipments of disk drives in October 1995. However, JTS earned $2.0 million of
technology license revenue during the first quarter of fiscal 1997 as a result
of achieving certain development milestones under the Technology Transfer and
License Agreement with Western Digital. JTS' management expects revenues from
its 850 megabyte drives to be nominal for the rest of the fiscal year and sales
from its 1 gigabyte products to decline in the near future.* JTS recently began
shipment of its 1.6 gigabyte drives, the sales of which are expected to increase
in the near future.* During the second fiscal quarter, the Company will begin
shipment of Nordic 3-inch disk drives to Compaq Computer Corporation under a
volume purchase agreement.* There can be no assurance that product sales will
materialize as expected.
The gross margin for the first quarter of fiscal 1997 was a deficit of $1.8
million compared to a margin of $2.0 million for the first quarter in fiscal
1996. The $3.8 million increase in the gross margin deficit is attributable to
high unit costs associated with the ramp-up of volume production of disk drives.
In order for JTS to realize positive gross margins in the future, the Company
will have to control manufacturing costs, further improve manufacturing yields
and successfully introduce new products on a timely basis.
Research and development expenses were $7.4 million for the first quarter
of fiscal year 1997 compared to $1.7 million for the first quarter of fiscal
year 1996 as a result of a significant increase in the number of employees in
research and development required to meet demand for timely product design. JTS
expects that research and development expenses will continue to increase
throughout fiscal 1997 in absolute dollars but that such expenses will decline
as a percentage of sales.
Selling, general and administrative expenses for the first quarter of
fiscal 1997 were $3.1 million compared to $700,000 for the first quarter of
fiscal 1996. The increase resulted from the expansion of JTS' operations and the
commencement of marketing and sales efforts. Also included is a non-cash charge
of
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 103
$330,000 related to the amortization of deferred compensation. JTS expects that
selling, general and administrative expenses will increase throughout fiscal
1997 in absolute dollars but that such expenses will decline as a percentage of
sales.
LIQUIDITY AND CAPITAL RESOURCES
As of January 28, 1996, JTS had cash and cash equivalents of $1.4 million.
Of this amount, $380,000 on deposit in India was restricted for use by JTS for a
90 day period beginning on January 28, 1996. On a pro-forma basis, at January
28, 1996, JTS had a working capital deficit of $17.9 million, which included
short term borrowings of $10.4 million. The short term borrowings were used to
finance working capital requirements, and included $4.3 million outstanding
under a bank line of credit and $6.1 million outstanding under bank lines of
credit in India.
Since inception, JTS has acquired approximately $11.0 million in capital
equipment, furniture and fixtures and leasehold improvements. Long term debt
associated with capital acquisitions amounted to approximately $7.9 million at
January 28, 1996. JTS currently expects that approximately $22 million will be
required during calendar year 1996 for capital equipment, tooling and leasehold
improvements, primarily in India.* As of January 28, 1996, JTS had no material
commitments related to such expenditures.
On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a
Subordinated Secured Convertible Promissory Note (the "Note") which is secured
by substantially all of the assets of JTS. Interest accrues on the unpaid
principal amount of the Note at the rate of 8.5% per annum. The Note provides
that JTS shall repay the outstanding principal and interest under the Note on
September 30, 1996 if the Merger has not occurred prior to such time. In the
event that the Merger Agreement is terminated, either party may, under certain
conditions, elect to convert the outstanding indebtedness under the Note into
shares of JTS Series A Preferred Stock. The Note is expressly subordinated to
outstanding indebtedness in connection with JTS' primary bank loan agreement, up
to an amount of $5.0 million at any one time. In addition, at January 28, 1996,
JTS had approximately $400,000 of unused lines of credit and approximately
$600,000 of letter of credit facilities available from three banks in India. In
March 1996, Moduler Electronics received approval from another Indian bank for a
$10 million term loan to finance capital equipment purchases. See "The Proposed
Merger and Related Transactions -- Related Transactions -- Atari Loan to JTS."
Since its inception, JTS has incurred significant losses which have
resulted from the substantial costs associated with the design, development and
marketing of new products, the establishment of manufacturing operations and the
development of a supplier base. At January 28, 1996, JTS had a working capital
deficit of $17.9 million and a negative net worth of $38.4 million. JTS has yet
to generate significant revenues and cannot assure that any level of future
revenues will be attained or that JTS will achieve or maintain successful
operations in the future. Such factors have raised substantial doubt about the
ability of JTS to continue its operations without achieving successful future
operations or obtaining financing to meet its working capital needs, neither of
which can be assured. The report of independent public accountants on JTS'
financial statements includes an explanatory paragraph describing uncertainties
concerning the ability of JTS to continue as a going concern. See "Notes to JTS
Financial Statements." JTS believes that it will be able to fund operations for
the next 12 months from a combination of funds made available as a result of the
Merger, funds available under its credit facilities, cash flow from operations
and existing cash balances.*
At April 28, 1996, JTS' consolidated balance sheets reflected cash and cash
equivalents of $5.1 million compared to $1.4 million at January 28, 1996. Of the
$5.1 million, approximately $400,000 on deposit in Indian banks was restricted
for use by JTS until certain obligations related to letters of credit are
settled. JTS had a working capital deficit of $31.2 million at quarter end,
which included short term borrowings from Atari of $25 million and $10.3 million
outstanding under bank lines of credit.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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The hard disk drive business is extremely capital intensive, and JTS
anticipates that it will need significant additional financing resources in the
near term for facilities expansion, capital expenditures, working capital,
research and development and vendor tooling. In this regard, JTS has held
discussions with investment banking firms regarding the possibility of raising
additional capital through the issuance of debt or equity securities. In June
1996, JTS retained an investment banking firm to advise JTS with respect to the
private issuance of between $50-100 million of 10-year debt securities
convertible into JTS Common Stock, although the terms of such financing have not
been established and the marketing effort for such financing has not yet
commenced. Recent comparable transactions were priced to yield between 5.5-6.5%
annually and included conversion premiums over the market prices of the Common
Stock of between 20-25%. JTS intends for such financing to close as soon as
practicable after the closing of the Merger and the terms of the debt securities
and the amount of the securities offered will not be determined until the
closing of the financing, if any. There can be no assurance that JTS will be
able to consummate such financing on terms acceptable to JTS or at all. As a
result, the pro forma financial statements included in this Joint Proxy
Statement/ Prospectus do not reflect such transactions. The issuance of equity
or convertible debt securities, upon conversion, would result in dilution of the
voting control of existing stockholders, could result in dilution to earnings
per share and would provide to the holders of convertible debt securities
seniority over the holders of JTS Common Stock issued in the Merger. There can
be no assurance that additional funding will be available on terms acceptable to
JTS or at all. The failure to fund its capital requirements with additional
financing would have a material adverse effect on JTS' business, operating
results and financial condition. Furthermore, certain equipment and receivables
financing as well as term loans made to JTS and Moduler Electronics are
contingent on JTS' ability to comply with stringent financial covenants. In this
regard, Moduler Electronics did not obtain certain debt and equity capital
required under one of its loan agreements. JTS has informed the lender that it
intends to provide such capital by August 1996. In addition, certain of Moduler
Electronics' loan agreements require the lender's consent to mergers and similar
transactions, which could be interpreted to require the consent of the lending
institution to the acquisition of 90% of the capital stock of Moduler
Electronics by JTS. Such consents were not obtained, but the lending institution
has continued to transact business with Moduler Electronics and JTS since JTS'
share acquisition in Moduler Electronics. JTS believes that such matters
regarding the Moduler Electronics loan agreements will not have a material
adverse effect on JTS' business, operating results or financial condition. There
can be no assurance that JTS will be able to maintain its current financing
facilities or obtain additional financing as needed on acceptable terms or at
all. If JTS is unable to obtain sufficient capital, it would be required to
curtail its facilities expansion, capital expenditures, working capital,
research and development and vendor tooling expenditures, which would materially
adversely affect JTS' business, operating results and financial condition.
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MANAGEMENT OF JTS
The following individuals are expected to serve as directors, executive
officers or significant employees of the Combined Company following the Merger.
Their positions at JTS and their ages as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------- ---- ---------------------------------------------
<S> <C> <C>
David T. Mitchell 54 Chief Executive Officer, President and
Director
Sirjang L. Tandon 54 Chairman of the Board of Directors and
Corporate Technical Strategist
Kenneth D. Wing 48 Executive Vice President, Research &
Development Quality/Reliability
W. Virginia Walker 51 Executive Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
Amit Chokshi 41 Executive Vice President, Worldwide
Operations and Managing Director of India
Operations
Steven L. Kaczeus 61 Chief Technical Officer
Alain L. Azan 47 Director
Jean D. Deleage 55 Director
Roger W. Johnson 61 Director
Lip-Bu Tan 36 Director
</TABLE>
MR. DAVID T. MITCHELL joined JTS in May 1995 as Chief Executive Officer and
President and is a member of the Board of Directors of JTS. Prior to joining
JTS, he served as President, Chief Operating Officer and a director of Conner
Peripherals, Inc. commencing in October 1992. Prior to that time, Mr. Mitchell
co-founded Seagate, where he served as President, Chief Operating Officer and
director.
MR. SIRJANG L. TANDON founded JTS in February 1994 and served as its
Chairman of the Board of Directors, Chief Executive Officer and President from
inception until May 1995. Since such time, he has served as Chairman of the
Board of Directors and Corporate Technical Strategist. Prior to founding JTS,
Mr. Tandon founded and was Chief Executive Officer of Tandon Corporation, a
personal computer manufacturing firm. Tandon Corporation filed a petition under
the Federal bankruptcy laws in 1993.
MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President,
Research & Development Quality/Reliability. Prior to joining JTS, Mr. Wing
worked for 14 years at Seagate. During his tenure at Seagate, Mr. Wing served in
several capacities, including Vice President of Process Engineering, Vice
President of Quality, Vice President of Manufacturing Operations and Vice
President of Worldwide Automation. He holds a Bachelor of Science degree in
Science and Engineering and a Master of Science in Mechanical Engineering from
the University of Michigan.
MS. W. VIRGINIA WALKER joined JTS in November 1995 as Executive Vice
President, Finance and Administration, Chief Financial Officer and Secretary.
Prior to joining JTS, Ms. Walker served as Vice President of Finance and Chief
Financial Officer of Scios Inc. from 1985 to 1992 and as Vice President, Finance
and Administration and Chief Financial Officer of Scios Inc. and Scios Nova Inc.
Prior to 1985, Ms. Walker served as Controller for Intersil Inc., a manufacturer
of integrated circuits and at that time a subsidiary of General Electric
Company.
MR. AMIT CHOKSHI joined JTS in June 1995 as Executive Vice President,
Worldwide Operations and Managing Director of India Operations. Prior to joining
JTS, Mr. Chokshi co-founded Dastek Corporation, a hard disk drive manufacturing
company, where he served as Vice President of Marketing/Sales and Operations
until December 1994. Mr. Chokshi has a Bachelor of Science degree in Statistical
Mathematics from Gujarat University, India.
MR. STEVEN L. KACZEUS joined JTS in February 1994 as Chief Technical
Officer. Prior to joining JTS, he founded Kalok Corporation in 1987 and served
in various technical and management positions, most recently as Chairman of the
Board of Directors and Chief Technical Officer. Kalok Corporation filed a
petition under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master
of Science and Bachelor of Science
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in Mechanical Engineering from the University of Bridgeport and University of
Budapest, Hungary, respectively.
MR. ALAIN L. AZAN became a director of JTS in 1995. In 1985, he joined the
Sofinnova group in France as a charged d'affaires. In 1987, Mr. Azan was
assigned to Sofinnova's United States subsidiary, Sofinnova Inc. Currently, Mr.
Azan serves as Managing General Partner for Sofinnova Ventures Funds I, II and
III. Mr. Azan holds degrees in Sciences Humaines et Economiques from Marseille,
International Trade from C.E.C.E. and Management from INSEAD.
MR. JEAN D. DELEAGE became a director of JTS in 1995. He has served as a
Managing General Partner of Burr, Egan, Deleage & Co., a venture capital firm,
since its formation in 1979. In 1976, he formed Sofinnova, Inc. (the U.S.
subsidiary of Sofinnova). Mr. Deleage holds a Master of Science in Electrical
Engineering from Ecole Superieure d'Electricite and a Ph.D. in Economics from
the Sorbonne. In 1993, he was awarded the Legion of Honor from the French
government in recognition of his career accomplishments. Mr. Deleage is also a
director of DepoTech Corporation and OraVex, Inc.
MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as
Administrator of the United States General Services Administration ("GSA") from
July 1993 to March 1996. From 1984 to 1993, Mr. Johnson served as Chairman of
the Board and Chief Executive Officer of Western Digital. Mr. Johnson received a
Bachelor of Business Administration from Clarkson University and a Master of
Business Administration in Industrial Management from the University of
Massachusetts.
MR. LIP-BU TAN became a director of JTS in 1995. He has served as General
Partner of the Walden Group, a venture capital firm, since 1985. He is also the
founder and Chairman of Walden International Investment Group in Asia. Mr. Tan
received a Bachelor of Science degree from Nanyang University, Singapore, a
Master of Science in Nuclear Engineering from the Massachusetts Institute of
Technology and a Master of Business Administration from the University of San
Francisco, where he served on the Advisory Council and the Board of Trustees.
Mr. Tan is also a director of Creative Technology Ltd. and Premisys
Communications, Inc.
All directors hold office until the next annual meeting of stockholders at
which their term expires and until their successors have been duly elected and
qualified. Executive officers of JTS are appointed by and serve at the
discretion of the Board of Directors of JTS. There are no family relationships
among any of the directors, officers or key employees of JTS.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMBINED COMPANY
JTS does not presently have an Audit Committee. Effective upon the closing
of the Merger, the Audit Committee of the Combined Company's Board of Directors
will consist of Messrs. Jack Tramiel, Michael Rosenberg and Alain L. Azan. The
Audit Committee will make recommendations to the Board regarding the selection
of independent auditors, review the results and scope of audits and other
services provided by JTS' independent auditors, and review and evaluate JTS'
internal audit and control functions.
JTS does not presently have a Compensation Committee. Effective upon the
closing of the Merger, the Compensation Committee of the Combined Company's
Board of Directors will consist of Messrs. Jack Tramiel, Lip-Bu Tan and Jean D.
Deleage. The Compensation Committee will make recommendations concerning
salaries and incentive compensation, award stock options to employees and
consultants under the Combined Company's stock option plans and otherwise
determine compensation levels and perform such other functions regarding
compensation as the Board may delegate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, JTS had no Compensation Committee. Each of the members
of the JTS Board of Directors during fiscal 1996 participated in deliberations
concerning executive officer compensation. David T. Mitchell, a member of JTS'
Board of Directors, has served as Chief Executive Officer and President of JTS
since May 1995. Mr. Sirjang L. Tandon, Chairman of JTS' Board of Directors,
served as Chief Executive Officer and President of JTS from February 1994 to May
1995.
99
<PAGE> 107
DIRECTOR COMPENSATION
The members of JTS' Board of Directors do not currently receive any cash
compensation from JTS for their services as members of the Board of Directors or
any committee thereof. Roger W. Johnson, a director of JTS, provides consulting
services to JTS pursuant to a two-year agreement which compensates Mr. Johnson
in the amount of $2,000 per month. Mr. Johnson's consulting agreement expires in
April 1998.
In March 1996, the JTS Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of JTS Common Stock to non-employee directors of JTS
("Non-Employee Directors"). The maximum number of shares of JTS Common Stock
that may be issued pursuant to options granted under the Directors' Plan is
500,000. Pursuant to the terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Board and any former Atari
director appointed to the JTS Board of Directors in connection with the Merger)
who is elected to the JTS Board for the first time after adoption of the
Directors' Plan and each other Non-Employee Director (other than a compensated
Chairman of the Board) who is reelected to the JTS Board at or after the 1998
stockholders' meeting will automatically be granted an option to purchase 50,000
shares of Common Stock on the date of his or her election or reelection to the
Board. Thereafter, each Non-Employee Director (other than a compensated Chairman
of the Board) will automatically be granted an option to purchase an additional
50,000 shares of Common Stock under the Directors' Plan on the date any and all
previous options or stock purchases by such person either under the Directors'
Plan or otherwise become fully vested, as discussed below. Neither directors of
JTS serving on the date the Directors' Plan was adopted nor former directors of
Atari appointed to the JTS Board in connection with the Merger have received
option grants under the Directors' Plan or will receive any such grants in
connection with the Merger, and such individuals are not eligible to receive
such grants until the 1998 stockholders' meeting.
Outstanding options under the Directors' Plan will vest in two equal annual
installments measured from the date of grant. The exercise price of options
granted under the Directors' Plan shall equal the fair market value of the
Common Stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date of grant.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate in March 2006, unless earlier terminated by the
Board.
In the event of the dissolution, liquidation or sale of substantially all
of the assets of JTS, a specified form of merger, consolidation or
reorganization involving JTS or an acquisition transaction resulting in the
change of control of the voting power of JTS' voting securities, options
outstanding under the Plan will automatically become fully vested and will
terminate if not exercised prior to such event.
100
<PAGE> 108
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to or earned by JTS'
Chief Executive Officer and JTS' four other most highly compensated executive
officers (together, the "JTS Named Executive Officers") for services rendered to
JTS during the fiscal year ended January 28, 1996 ("fiscal 1996"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS($) (1) OPTIONS(#)
---------------------------------- -------- -------- ---------------- -----------
<S> <C> <C> <C> <C>
David T. Mitchell (2)............. $168,427 -- -- --
President and Chief Executive
Officer
Sirjang L. Tandon (3)............. 184,615 -- -- --
Chairman of the Board of
Directors
and Corporate Technical
Strategist
Kenneth D. Wing (4)............... 126,752 $82,625 -- 100,000
Executive Vice President,
Research & Development
Quality/Reliability
Amit Chokshi (5).................. 104,327 -- -- --
Executive Vice President,
Worldwide
Operations and Managing
Director of India Operations
Steven L. Kaczeus................. 192,308 -- -- 242,500
Chief Technical Officer
David B. Pearce (6)............... 206,192 -- -- 8,750
Former executive officer
</TABLE>
- ---------------
(1) Mr. Mitchell, Mr. Wing and Mr. Pearce purchased 2,000,000, 300,000 and
450,000 shares of restricted Common Stock of JTS, respectively, during
fiscal 1996 at a per share price of $0.25. The dollar value to the
purchasers of each such purchase, net of the consideration paid by the
purchasers, was zero on the date of each such purchase. No dividends have
been paid or are expected to be paid with respect to the JTS Common Stock
purchased by such individuals.
(2) Mr. Mitchell became Chief Executive Officer of JTS in May 1995. Mr. Mitchell
purchased 2,000,000 shares of restricted JTS Common Stock in fiscal 1996 at
a price of $0.25 per share, 250,000 shares of which were immediately vested.
The remaining 1,750,000 shares are subject to a right of repurchase by JTS
which began lapsing as to 1/48th of such shares monthly commencing on
January 5, 1996.
(3) Mr. Tandon served as Chief Executive Officer of JTS from February 1994 to
May 1995.
(4) Mr. Wing became Executive Vice President, Research & Development
Quality/Reliability of JTS in July 1995. Mr. Wing purchased 300,000 shares
of JTS Common Stock in fiscal 1996 at a price of $0.25 per share. Such
shares are subject to a right of repurchase by JTS which began lapsing as to
one-eighth of such shares in January 1996 and as to 1/48th of such shares
monthly thereafter. Includes forgiveness of $80,000 of loan principal and
accrued interest as specified in Mr. Wing's employment agreement. See
"Employment Agreement."
(5) Mr. Chokshi became Executive Vice President, World of JTS in June 1995.
(6) Mr. Pearce purchased 450,000 shares of restricted JTS Common Stock in fiscal
1996 at a price of $0.25 per share, 253,125 shares of which were immediately
vested. The remaining 196,875 shares were subject to a right of repurchase
by JTS which began lapsing as to 1/42nd of such shares monthly commencing on
January 15, 1996. Mr. Pearce's employment with JTS terminated in March 1996,
at which time an aggregate of 257,873 shares of his JTS Common Stock had
vested.
101
<PAGE> 109
EMPLOYMENT AGREEMENT
In June 1995, Kenneth D. Wing, Executive Vice President, Research &
Development Quality/Reliability of JTS, entered into an employment agreement
with JTS which provides for an annual base salary of $225,000, eligibility for
annual bonuses and a severance package that, under certain circumstances,
provides that Mr. Wing will continue to receive his base salary until June 1997
in the event he is terminated prior to such time. In addition, the employment
agreement provides for a $160,000 loan which was forgiven as to 50% of principal
and interest accrued thereon in January 1996 and shall be forgiven as to the
remainder in January 1997, provided Mr. Wing's employment with JTS continues
through such time.
STOCK OPTION PLAN
In April 1996, JTS amended and restated its 1995 Stock Option Plan (the
"1995 Plan"), which was adopted in March 1995. Under the 1995 Plan, as amended
and restated (the "Restated Plan"), an aggregate of 9,000,000 shares of JTS
Common Stock have been reserved for issuance upon exercise of options granted to
employees, officers and directors of and consultants to JTS. As of May 15, 1996,
options to purchase 3,680,358 shares of JTS Common Stock had been granted under
the Restated Plan. The Restated Plan will terminate in February 2006, unless
sooner terminated by the Board of Directors of JTS.
The Restated Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Code and nonstatutory stock
options. The Board of Directors has determined that, following the Merger, the
Compensation Committee will administer the Restated Plan. The Board of Directors
has also established a Non-Officer Stock Option Committee, consisting of David
T. Mitchell, JTS' President, Chief Executive Officer and a director, with
authority to grant stock options to persons who are not at the time of the grant
of the options subject to Section 16 of the Exchange Act. As used herein with
respect to the Restated Plan, the JTS Board refers to the Compensation
Committee, the Non-Officer Stock Option Committee as well as to the Board of
Directors of JTS. The JTS Board has the authority to select the persons to whom
grants are to be made, to designate the number of shares to be covered by each
option, to establish vesting schedules, to specify the type of consideration to
be paid upon exercise and, subject to certain restrictions, to specify other
terms of the options. The maximum term of options granted under the Restated
Plan is ten years. Options granted under the Restated Plan generally are
nontransferable and generally expire three months after the termination of an
optionee's employment, directorship or consulting relationship with JTS. In
general, if an optionee becomes permanently disabled or dies while employed or
retained by JTS, such person's options generally may be exercised up to 12
months after his or her disability and generally up to 18 months after his or
her death.
The exercise price of incentive stock options granted under the Restated
Plan must equal at least the fair market value of JTS' Common Stock on the date
of grant. The exercise price of nonstatutory stock options granted under the
Restated Plan must equal at least 85% of the fair market value of JTS' Common
Stock on the date of grant. The exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant and the terms
of these options cannot exceed five years. Options under the Restated Plan
typically become exercisable over four years, as to one-eighth of the shares
subject to such options six months after the date of grant and as to 1/48th of
such shares each month thereafter.
The Restated Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to the
Restated Plan and the class, number of shares and price per share of stock
subject to such outstanding options in the event of stock splits, stock
dividends, recapitalizations and similar events. Under the Restated Plan, the
JTS Board of Directors has discretion in connection with a merger, consolidation
or liquidation involving JTS to provide that outstanding options shall be
terminated or shall be assumed or otherwise continued or to provide for the
accelerated vesting of outstanding options.
102
<PAGE> 110
401(K) PLAN
In January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving
Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively
bargained employees and employees who are nonresident aliens with no United
States source income. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) plan permits, but does not require,
matching contributions and profit sharing contributions to the Plan by JTS on
behalf of all participants. JTS has not made any such contributions to date. The
401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by JTS to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn, and
contributions by JTS, if any, are deductible by JTS.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under the 1995 Plan to each JTS Named Executive Officer during fiscal
1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIALLY
PERCENTAGE REALIZABLE VALUE AT
OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(3)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) YEAR(%)(2) ($/SH) DATE 5%($) 10%($)
- --------------------------------------- ------------ ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David T. Mitchell -- -- -- -- -- --
Sirjang L. Tandon -- -- -- -- -- --
Kenneth D. Wing 100,000 2.5% $ 0.25 11/29/2005 $15,750 $39,750
Amit Chokshi -- -- -- -- -- --
Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 38,194 96,394
David B. Pearce 8,750 0.02 0.25 6/7/2005 1,378 3,478
</TABLE>
- ---------------
(1) Under the 1995 Plan, options granted to employees vest at the rate of
one-eighth at the end of six months and an additional 1/48 per month until
all options have become vested at the end of four years' service. In the
event an option was granted to an existing employee of JTS (rather than a
newly-hired employee), such option shall vest at the rate described above
based on the grant date of such option.
(2) Based on total grants of options to purchase 3,996,674 shares of JTS Common
Stock.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.
103
<PAGE> 111
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
January 28, 1996 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of January 28, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL FISCAL
ACQUIRED YEAR-END(#)(1) YEAR-END($)(1)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ----------- ----------------- --------------
<S> <C> <C> <C> <C>
David T. Mitchell -- -- -- --
Sirjang L. Tandon -- -- -- --
Kenneth D. Wing -- -- 0/100,000 0/0
Amit Chokshi -- -- -- --
Steven L. Kaczeus -- -- 125,313/117,187 0/0
David B. Pearce -- -- 8,750/0 0/0
</TABLE>
- ---------------
(1) Fair market value of JTS' Common Stock at January 28, 1996 ($0.25), minus
the exercise price of the options ($0.25), multiplied by the number of
shares underlying the options.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the DGCL, JTS' Certificate of Incorporation provides that
no director of JTS will be personally liable to JTS or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to JTS or to its
stockholders, (ii) for acts or omissions not made in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit. In addition, JTS' Bylaws
provide that any director or executive officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to JTS will be indemnified to the fullest extent permitted by the
DGCL.
JTS has entered into indemnification agreements with each of its directors
and executive officers under which JTS has agreed to indemnify each of them
against expenses and losses incurred for claims brought against them by reason
of their being a director or officer of JTS, and JTS maintains directors' and
officers' liability insurance.
There is no pending litigation or proceeding involving a director or
officer of JTS as to which indemnification is being sought, nor is JTS aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
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<PAGE> 112
CERTAIN TRANSACTIONS
Since JTS' inception in February 1994, JTS has maintained significant
business relationships with Moduler Electronics, Tantec Magnetics, Inc., a
California corporation ("Tantec"), and Maazda Travel, Inc. ("Maazda"). Mr.
Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, or members
of his immediate family, directly or indirectly own controlling equity interests
in each of Moduler Electronics, Tantec and Maazda. In fiscal 1996, Moduler
Electronics provided subassembly and final assembly manufacturing services to
JTS for which JTS had made aggregate payments to Moduler Electronics of
approximately $13.0 million, and JTS has provided certain equipment on
consignment to Moduler Electronics with an aggregate value of approximately $4.4
million. Tantec has provided certain hard disk drive component parts, test
equipment and services to JTS for which JTS had made aggregate payments to
Tantec of approximately $366,000 and $295,000 in fiscal 1995 and 1996,
respectively, and JTS sold certain hard disk drives to Tantec with an aggregate
value of approximately $653,000 in fiscal 1996. During fiscal 1996, JTS made
aggregate payments to Maazda, JTS' principal travel agent, of approximately
$100,000.
From February 1994 to February 1995, JTS received bridge loans aggregating
approximately $2.9 million from certain significant JTS stockholders evidenced
by secured convertible notes (the "First Financing Notes"). The First Financing
Notes accrued interest at a rate of 8.5% per annum. All of the First Financing
Notes were canceled and the principal outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with the JTS Series A
Preferred Stock financing in February 1995 (the "First Series A Financing"). JTS
sold an aggregate of 16,200,000 shares of JTS Series A Preferred Stock in the
First Series A Financing for a purchase price of $1.00 per share in exchange for
cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred in
the First Series A Financing included the following:
<TABLE>
<CAPTION>
SHARES OF JTS AMOUNT OF
SERIES A PREFERRED CASH INDEBTEDNESS
PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($)
-------------------------------- ------------------ ---------------- ------------
<S> <C> <C> <C>
Entities affiliated with Burr,
Egan, Deleage & Co.(1)........ 2,500,000 $1,673,374 $826,626
Entities affiliated with
Sofinnova Management,
L.P.(2) ...................... 1,000,000 709,349 290,651
Advanced Technology Ventures
III(3)........................ 1,000,000 709,350 290,650
Brentwood Associates VI,
L.P.(4)....................... 1,650,000 1,170,427 479,573
Western Digital(5).............. 4,100,000 3,300,000 800,000
Steven L. Kaczeus(6)............ 223,511 -- 223,511
</TABLE>
- ---------------
(1) Jean D. Deleage, a director of JTS, is Managing General Partner of Burr,
Egan, Deleage & Co. ("Burr Egan").
(2) Alain L. Azan, a director of JTS, is a Managing General Partner of three
funds affiliated with Sofinova Management, L.P. ("Sofinnova").
(3) Entities affiliated with Advanced Technology Ventures III own more than 5%
of the outstanding shares of JTS Series A Preferred Stock.
(4) Brentwood Associates VI, L.P. owns more than 5% of the outstanding shares of
JTS Series A Preferred Stock.
(5) Western Digital, a second source manufacturer for JTS, owns more than 5% of
the outstanding shares of JTS Series A Preferred Stock.
(6) Steven L. Kaczeus is the Chief Technical Officer of JTS.
In connection with the First Series A Financing and pursuant to that
certain Debt Cancellation Agreement, dated as of February 3, 1995, by and among
JTS, Tantec and Mr. Tandon, JTS issued 2,202,227 shares of JTS Series A
Preferred Stock to Tantec in exchange for the cancellation of $2,202,227 of
indebtedness owed by JTS to Tantec.
105
<PAGE> 113
In June 1995, JTS received bridge loans aggregating approximately $2.75
million from certain significant JTS stockholders, evidenced by secured
convertible notes (the "Second Financing Notes"). The Second Financing Notes
accrued interest at a rate of 8% per annum. All of the Second Financing Notes
were canceled and the principal amount outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with a JTS Series A
Preferred Stock financing in August 1995 (the "Second Series A Financing"). JTS
sold an aggregate of 12,496,370 shares of JTS Series A Preferred Stock in the
Second Series A Financing for a purchase price of $1.00 per share in exchange
for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred
in the Second Series A Financing included the following:
<TABLE>
<CAPTION>
SHARES OF JTS AMOUNT OF
SERIES A PREFERRED CASH INDEBTEDNESS
PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($)
-------------------------------- ------------------ ---------------- ------------
<S> <C> <C> <C>
Entities affiliated with the
Walden Group of Venture
Capital Funds(1).............. 3,000,000 $3,000,000 --
Entities affiliated with
Advanced Technology
Ventures...................... 2,826,424 2,576,424 $ 250,000
Entities affiliated with Burr
Egan.......................... 1,437,500 437,500 1,000,000
David T. Mitchell(2)............ 1,010,196 -- 1,010,196
Brentwood Associates VI, L.P.... 952,083 448,750 503,333
Entities affiliated with
Sofinnova..................... 500,000 500,000 --
Steven L. Kaczeus............... 37,000 37,000 --
</TABLE>
- ---------------
(1) Lip-Bu Tan, a director of JTS, is a General Partner of the Walden Group.
(2) David T. Mitchell is the President, Chief Executive Officer and a member of
the Board of Directors of JTS.
In July 1995, JTS loaned $160,000 to Kenneth D. Wing, Executive Vice
President, Research & Development Quality/Reliability, pursuant to the terms of
Mr. Wing's employment agreement. Of such loan amount, $80,000 of principal (and
interest accrued thereon) were forgiven on January 1, 1996, and, subject to Mr.
Wing's continued employment with JTS, any remaining amounts owed under such loan
will be forgiven on January 1, 1997. See "Management of JTS -- Employment
Agreement."
During fiscal 1996, in connection with the Technology Transfer and
Licensing Agreement between JTS and Western Digital, JTS provided certain hard
disk drive components to Western Digital, a principal stockholder of JTS, with
an aggregate value of approximately $358,000. In addition, JTS received
aggregate milestone payments of approximately $5.3 million from Western Digital
in fiscal 1996. See "Business of JTS -- Western Digital Arrangement."
In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D.
Wing, Virginia Walker, JTS' Executive Vice President, Finance and Administration
and Chief Financial Officer, and David B. Pearce in connection with the purchase
by such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and
450,000 shares of JTS Common Stock, respectively, at a purchase price of $0.25
per share. Each purchaser executed a restricted stock purchase agreement (each,
a "Restricted Stock Purchase Agreement") granting JTS a right of repurchase as
to such shares in the event the purchasers' employment with JTS terminates. With
respect to Mr. Mitchell, 250,000 shares of the JTS Common Stock purchased were
immediately vested, and JTS' repurchase right lapses monthly with respect to the
remainder of such shares at the rate of 1/48th per month. With respect to the
shares purchased by Mr. Wing, JTS' repurchase right lapsed as to one-eighth of
such shares in January 1996 and as to 1/48th of such shares monthly thereafter.
With respect to the shares purchased by Ms. Walker, JTS' repurchase right lapsed
as to one-eighth of such shares in May 1996 and as to 1/48th of such shares
monthly thereafter. With respect to the shares purchased by Mr. Pearce, 253,125
shares of the JTS Common Stock purchased were immediately vested and 14,063
additional shares had vested at the time Mr. Pearce's employment with JTS
terminated. In March 1996, JTS repurchased 182,812 shares of JTS Common Stock
from Mr. Pearce. In addition, the Restricted Stock Purchase Agreements provide
that JTS' repurchase right shall lapse entirely upon certain events following a
change in control of JTS. See "The
106
<PAGE> 114
Proposed Merger and Related Transactions -- Certain Other Items Related to the
Merger -- Interests of Certain Persons in the Merger."
From January 1996 to April 1996, JTS received an aggregate of approximately
$2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"),
from certain significant stockholders of JTS. The Bridge Notes are due and
payable on July 15, 1996 and accrue interest at a rate of 10% per annum.
Individuals and entities to whom Bridge Notes were issued include the following:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
STOCKHOLDER(S) OF BRIDGE NOTE($)
------------------------------------------------------------ ------------------
<S> <C>
Tantec...................................................... $1,000,000
Entities affiliated with Burr Egan.......................... 260,000
Entities affiliated with Advanced Technology Ventures....... 260,000
Entities affiliated with the Walden Group of Venture Capital 200,000
Funds.....................................................
Brentwood Associates VI, L.P. .............................. 185,000
Entities affiliated with Sofinnova.......................... 99,900
</TABLE>
In April 1996, JTS acquired a 90% interest in Moduler Electronics in
exchange for issuing 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase 750,000 shares of JTS Common Stock at an exercise price of
$0.25 per share to Lunenburg S.A., an affiliate of Sirjang L. Tandon. Such
warrant is immediately exercisable as to 500,000 shares and becomes exercisable
as to 250,000 shares when certain credit facilities in India are made available
to Moduler Electronics in the amount of at least $29 million. See "JTS
Acquisition of Disk Drive Division of Moduler Electronics."
A family member of Sirjang Lal Tandon, JTS' Chairman and Corporate
Technical Strategist, has guaranteed the secured short term borrowings and
secured long term loans of Modular Electronics furnished by certain Indian
banks. See Notes 4 and 5 to the Financial Statements to the Hard Disk Drive
Division of Modular Electronics (India) Private Ltd.
JTS believes that all of the transactions set forth above were made on
terms no less favorable to JTS than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between JTS and its
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the JTS Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of Directors,
and have been and will be on terms no less favorable to JTS than could be
obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS OF JTS
The following table sets forth certain information regarding beneficial
ownership of JTS Common Stock and JTS Series A Preferred Stock as of May 15,
1996 by (a) each person (or group of affiliated persons) known to JTS to
beneficially own more than 5% of the outstanding shares of JTS Common Stock or
more than 5% of the outstanding shares of JTS Series A Preferred Stock, (b) each
of the directors and executive officers of JTS who will be a director or
executive officer of the Combined Company, and (c) all of JTS directors and
executive officers who will be directors and executive officers of the Combined
Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ALL SHARES
COMMON STOCK(2) PREFERRED STOCK(2) PERCENT SHARES OF OF THE
----------------------- ------------------------ OF ALL THE COMBINED
NUMBER PERCENT OF NUMBER PERCENT OF JTS CAPITAL COMBINED COMPANY
BENEFICIAL OWNER(1) OF SHARES CLASS(%)(3) OF SHARES CLASS(%)(3) STOCK(%) COMPANY (%)(3)
- --------------------------------- --------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Tantec Magnetics, Lunenburg
S.A. and the Tandon Family
Partnership(4)................. 5,350,000 57.6% 4,613,900 15.5% 25.6% 9,963,900 9.7%
Sirjang L. Tandon
c/o JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Western Digital Corporation...... -- -- 4,100,000 13.8 10.5 4,100,000 4.0
8105 Irving Center Drive
Irvine, CA 92718
David T. Mitchell................ 3,000,000 32.3 1,010,196 3.4 10.3 4,010,196 3.9
c/o JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Entities affiliated with
Burr, Egan, Deleage & Co.(5)... -- -- 3,937,500 13.3 10.1 3,937,500 3.8
Jean D. Deleage
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Entities affiliated with
Advanced Technology
Ventures(6).................... -- -- 3,826,424 12.9 9.8 3,826,424 3.7
485 Ramona Street, Suite 200
Palo Alto, CA 94301
Entities Affiliated with
the Walden Group of Venture
Capital Funds(7)............... -- -- 3,000,000 10.1 7.7 3,000,000 2.9
Lip-Bu Tan
750 Battery Street, Suite 700
San Francisco, CA 94111
Brentwood Associates VI, L.P..... -- -- 2,602,083 8.8 6.7 2,602,083 2.5
11150 Santa Monica Blvd.
#1200
Los Angeles, CA 90025
Entities Affiliated with
Sofinnova Management,
L.P.(8)........................ -- -- 1,500,000 5.1 3.9 1,500,000 1.5
Alain L. Azan
One Market Plaza
Stewart Tower, Suite 2630
San Francisco, CA 94105
Steven L. Kaczeus(9)............. 153,437 1.6 260,511 * 1.1 409,261 *
Kenneth D. Wing.................. 314,583 3.4 -- -- * 300,000 *
David B. Pearce.................. 275,937 3.0 -- -- * 275,937 *
Amit Chokshi..................... -- -- -- -- -- -- --
Roger W. Johnson................. -- -- -- -- -- -- --
All current directors and
executive 9,068,020 97.0 14,122,107 47.6 59.3 23,190,857 22.6
officers as a group (10
persons)(10)
</TABLE>
- ---------------
* Less than 1%
(1) Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of JTS Common Stock and JTS
Series A Preferred Stock shown as beneficially owned by them.
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<PAGE> 116
(2) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding, including for purposes of computing the percentage of the
person holding such option, but not for purposes of computing the
percentage of any other holder.
(3) Based on (i) 63,735,718 shares of Atari Common Stock outstanding as of May
22, 1996 (assuming no exercise of outstanding options after such date) and
(ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,263,866 shares
of JTS Common Stock outstanding as of May 15, 1996 (assuming no exercise of
outstanding options and warrants after such date).
(4) Preferred Stock includes 2,702,227 shares and 1,911,673 shares of JTS
Series A Preferred Stock held by Tantec Magnetics, Inc. and Lunenburg S.A.,
respectively. Sirjang L. Tandon, a director of JTS, is an executive officer
of Tantec Magnetics, Inc. and may have shared voting power over the shares
held by Lunenburg S.A. Common Stock includes 4,350,000 shares of JTS Common
Stock held by the Tandon Family Partnership. Mr. Tandon is a general
partner of the Tandon Family Partnership. Includes 1,000,000 shares of JTS
Common Stock over which Mr. Tandon has voting power, but which are subject
to a right of repurchase by JTS until fully vested. Mr. Tandon disclaims
beneficial ownership of the shares held by Tantec Magnetics, Lunenburg S.A.
and the Tandon Family Partnership except to the extent of his proportionate
partnership and shareholder interests therein.
(5) Preferred Stock includes 3,896,550 shares and 40,950 shares of JTS Series A
Preferred Stock held by Alta V Limited Partnership and Customs House
Partners, respectively. Jean Deleage, a director of JTS, is Vice President
of Burr, Egan, Deleage & Co. which is a general partner of Alta V
Management Partners, L.P., a general partner of Alta V Limited Partnership,
and Customs House Partners. He has voting and investment power with respect
to such shares. Mr. Deleage disclaims beneficial ownership of such shares
except to the extent of his proportionate partnership interests therein.
(6) Preferred Stock includes 2,250,000 shares and 1,576,424 shares of JTS
Series A Preferred Stock held by Advanced Technology Ventures IV and
Advanced Technology Ventures III, respectively.
(7) Preferred Stock includes 700,000; 600,000; 500,000; 300,000; 200,000;
200,000; 200,000; 200,000 and 100,000 shares of JTS Series A Preferred
Stock held by Walden Capital Partners II, L.P.; International Venture
Capital Investment Corporation; Walden Investors; BI Walden Ventures Kedua
Sdn Bhd; Seed Ventures II Limited; OWW Pacrim Investments Ltd.; OCBC,
Wearnes & Walden Investments (Singapore) Ltd.; Walden Ventures and Walden
Technology Ventures II, L.P., respectively. Lip-Bu Tan, a director of JTS,
has voting power and investment power with respect to the shares held by
each of the foregoing investment funds, except Walden Ventures. Mr. Tan
disclaims beneficial ownership of such shares except to the extent of his
proportionate interests in such entities.
(8) Preferred Stock includes 800,000 shares and 700,000 shares of JTS Series A
Preferred Stock held by C.V. Sofinnova Ventures Partners III and C.V.
Sofinnova Ventures Partners II, respectively. Alain Azan, a director of
JTS, is a general partner of Sofinnova Management, L.P., the general
partner of C.V. Sofinnova Ventures Partners II and C.V. Sofinnova Ventures
Partners III and has voting and investment power with respect to such
shares. Mr. Azan disclaims beneficial ownership of such shares except to
the extent of his proportionate partnership interest therein.
(9) Includes options to purchase 168,020 shares of JTS Common Stock that are
exercisable within 60 days of May 15, 1996.
(10) Includes 8,900,000 shares of JTS Common Stock and 14,122,107 shares of JTS
Preferred Stock held by executive officers and entities affiliated with
certain directors and includes options to purchase 168,020 shares of JTS
Common Stock by executive officers that are exercisable within 60 days of
May 15, 1996. See footnotes (4)-(9).
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<PAGE> 117
DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS
The following descriptions of the capital stock of Atari and JTS are
qualified by reference to Atari's Articles of Incorporation and JTS' Certificate
of Incorporation and any amendments thereto. Copies of these are included as
exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part.
ATARI CAPITAL STOCK
General. The authorized capital stock of Atari consists of 100,000,000
shares of Common Stock, $.01 par value per share, and 10,000,000 of undesignated
Preferred Stock, $.01 par value per share. As of close of business on May 22,
1996, 63,735,718 shares of Atari Common Stock were issued and outstanding and no
shares of Preferred Stock were issued and outstanding.
At the Effective Time of the Merger, each share of Atari Common Stock
issued and outstanding immediately prior to the Effective Time will be canceled
and extinguished and be converted automatically into the right to receive one
share of JTS Common Stock.
Common Stock. Holders of Atari Common Stock are entitled to one vote per
share on matters to be voted upon by the stockholders and are not entitled to
cumulative voting in the election of directors. Subject to any preferences
granted to holders of Atari Preferred Stock or of any other senior equity,
holders of Atari Common Stock are entitled to receive dividends when, as and if
declared by the Atari Board of Directors, and to share ratably in the assets of
Atari legally available for distribution to its stockholders in the event of
liquidation, dissolution and winding up of Atari. Holders of Atari Common Stock
have no preemptive, subscription, redemption or conversion rights with respect
to Atari Common Stock. All outstanding shares of Atari Common Stock are validly
issued, fully paid and nonassessable.
Preferred Stock. Atari has 10,000,000 shares of undesignated preferred
stock authorized, none of which are issued and outstanding. The Atari Board of
Directors has the authority to issue the undesignated preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of undesignated preferred
stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders.
Convertible Subordinated Debentures. As of March 31, 1996, Atari had $42.4
million of 5 1/4% convertible subordinated debentures due April 29, 2002
outstanding. The market value of these debentures was approximately $29.3
million at June 18, 1996. The debentures may be redeemed at Atari's option, upon
payment of a premium. The debentures, at the option of the holders, are
convertible into common stock at $16.3125 per share. At March 31, 1996,
2,596,414 shares of Atari Common Stock were reserved for issuance upon
conversion of the outstanding debentures. A default with respect to other
indebtedness of Atari in an aggregate amount exceeding $5 million would result
in an event of default whereby the outstanding debentures would be due and
payable immediately.
Registrar and Transfer Agent. The registrar and transfer agent for Atari
Common Stock is the Registrar and Transfer Company.
JTS CAPITAL STOCK
Prior to the Merger, the authorized capital stock of JTS consists of
90,000,000 shares of JTS Common Stock, $.000001 par value per share, and
70,000,000 shares of Preferred Stock, $.000001 par value per share, all of which
is designated Series A Preferred Stock.
JTS is a privately held company; there is no public trading market for its
stock. As of the close of business on May 15, 1996, 9,255,116 shares of JTS
Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued
and outstanding. There are a total of 52 holders of record of JTS Series A
Preferred Stock and 16 holders of record of JTS Common Stock.
Preferred Stock Rights. The principal rights, privileges and preferences
of the issued and outstanding shares of JTS Series A Preferred Stock are as set
forth below.
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Dividends. Holders of JTS Series A Preferred Stock are entitled to
dividend preferences when, as and if declared by the JTS Board, at an annual
rate of $.09 per share. All dividends are cumulative. JTS may not pay cash
dividends on JTS Common Stock while there are any declared but unpaid cash
dividends on any shares of JTS Series A Preferred Stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
JTS (which, upon the election of the holders of a majority of the Series A
Preferred Stock, would include the Merger), holders of the JTS Series A
Preferred Stock are entitled to receive, prior and in preference to any
distribution of any assets of JTS to the holders of JTS Common Stock, $1.00 per
share plus all accrued and unpaid dividends. After the holders of JTS Series A
Preferred Stock have received the full amount of their liquidation preference,
the holders of JTS Common Stock and JTS Series A Preferred Stock (on an
as-converted basis) are entitled to receive all remaining assets of JTS
available for distribution pro rata based on the number of shares of JTS Common
Stock held or, after conversion of JTS Series A Preferred Stock, that would be
held by each such holder; provided, however, if the holders of JTS Series A
Preferred Stock, exclusive of any unpaid cumulative dividends, would receive at
least an aggregate of $5.00 per share of Series A Preferred Stock, then the
holders of Series A Preferred Stock shall not be entitled to the $1.00 per share
preference over the holders of JTS Common Stock.
Redemption. Holders of JTS Series A Preferred Stock are entitled to
certain mandatory redemption rights. Upon the election of a majority of the
holders of JTS Series A Preferred Stock and provided JTS has funds legally
available to do so, JTS shall redeem one-third, one-half and the remainder of
all of the outstanding shares of Series A Preferred Stock on February 7, 2000,
February 7, 2001 and February 7, 2002, respectively.
Voting Rights. Subject to the protective provisions described above and
except as otherwise required by law, the holders of JTS Common Stock and JTS
Series A Preferred Stock are entitled to notice of any stockholders' meeting and
to vote together as a single class upon any matter submitted to the stockholders
for a vote on the following basis:
(a) Common Vote. Each share of Common Stock issued and outstanding has one
vote.
(b) Preferred Vote. Each holder of JTS Series A Preferred Stock has a
number of votes equal to the number of full shares of JTS Common Stock into
which such JTS Preferred Stock is then convertible. Each share of JTS Series A
Preferred Stock is presently convertible into one share of JTS Common Stock.
Protective Provisions. JTS must obtain the approval of at least two-thirds
of the outstanding shares of JTS Series A Preferred Stock to (i) create a new
class of stock with rights equal to or superior to the rights of Series A
Preferred Stock; (ii) sell, lease or convey all or substantially all of JTS'
property or business; (iii) amend JTS' Certificate of Incorporation if such
alters the rights of the Series A Preferred Stock; (iv) increase the authorized
number of shares of JTS Preferred or Common Stock; (v) undertake a
reorganization, merger, or consolidation in which the holders of JTS voting
stock will hold less than 50% of the voting stock of the successor entity; (vi)
pay or declare a dividend other than in Common Stock to the holders of Common
Stock; or (vii) repurchase JTS securities other than from employees or
consultants of JTS when their employment ends.
All of the outstanding shares of JTS Common Stock and JTS Series A
Preferred Stock are validly issued, fully paid and nonassessable.
Upon consummation of the Merger, the holders of JTS Series A Preferred
Stock will become holders of JTS Common Stock and, consequently, will no longer
be entitled to certain rights and privileges described above. In addition,
certain other rights and privileges of JTS stockholders will change as a result
of the Merger. Upon completion of the Merger, the percentage ownership of the
Combined Company by each former JTS stockholder will be significantly less than
his, her or its current percentage ownership of JTS. Accordingly, former JTS
stockholders will have a significantly smaller voting influence over the affairs
of the Combined Company than they currently enjoy over the affairs of JTS. "See
Risk Factors -- Risk Factors Related to the Business of JTS -- Reduction in
Voting Control." Moreover, certain contractual rights presently possessed by
holders of JTS Series A Preferred Stock will cease to exist after the Merger.
Finally,
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the statutory protections available to JTS stockholders under Section 2115 of
the CGCL will no longer exist. See "Comparison of Rights of Stockholders of
Atari and JTS -- Application of the General Corporation Law of California to
Delaware Corporations."
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE COMBINED COMPANY
The authorized capital stock of the Combined Company shall consist of
150,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated, "blank check" preferred stock, $.001 par value per
share. The Board of Directors of the Combined Company will have the authority to
issue the undesignated preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued shares of undesignated preferred stock and to fix the number of
shares constituting any series and the designations of such series, without any
further vote or action by the stockholders.
The Combined Company's Certificate of Incorporation will provide that all
stockholder actions must be effected at a duly called meeting and may not be
effected by written consent. In addition, the Combined Company's Certificate of
Incorporation and Bylaws will provide that only the Chairman of the Board of
Directors, the Chief Executive Officer or the Board of Directors pursuant to a
resolution adopted by at least two directors will be permitted to call a special
meeting of stockholders. These and other provisions, including the creation of
"blank check" preferred stock, could discourage potential acquisition proposals
and could delay or prevent a change in control of the Combined Company. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Combined Company. These
provisions are designed to reduce the vulnerability of the Combined Company to
an unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Combined Company's shares and, as a consequence, they also may
inhibit fluctuations in the market price of the Combined Company's shares that
could result from actual or rumored takeover attempts. Such provisions also may
have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Other Risk Factors Related to the Merger -- Control by
Affiliates; Anti-takeover Effects."
DELAWARE TAKEOVER STATUTE
The Combined Company will be subject to Section 203 of the Delaware General
Corporation Law ("DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the time that such
stockholder became an interested stockholder, unless: (i) prior to such time,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation by
the interested stockholder; or
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(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation. In general, Section 203 defines an interested stockholder as
any entity or person owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF ATARI AND JTS AND THE COMBINED COMPANY
The rights of Atari stockholders are governed by its Articles of
Incorporation and any amendments thereto (the "Atari Articles"), Atari's Bylaws
and any amendments thereto (the "Atari Bylaws") and the laws of the State of
Nevada. The rights of JTS stockholders are governed by its Certificate of
Incorporation and any amendments thereto (the "JTS Certificate"), JTS' Bylaws
and any amendments thereto (the "JTS Bylaws") and the DGCL. After the Effective
Time, the rights of Atari and JTS stockholders who become stockholders of the
Combined Company will be governed by the Certificate and Bylaws of the Combined
Company and the DGCL.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
The discussion below primarily addresses the differences between the DGCL
and general corporation law of Nevada. However, Section 2115 of the CGCL makes
substantial portions of the CGCL applicable, with limited exceptions, to a
foreign corporation with ("Section 2115") more than half of its outstanding
stock held of record by persons having addresses in California and more than
half of its business conducted in the state (as measured by factors based on a
corporation's levels of property, payroll and sales determined for California
franchise tax purposes), irrespective of the corporation's state of
incorporation. Although JTS is incorporated in Delaware, it is subject to
Section 2115. The statutory provisions of the CGCL to which JTS is subject
include but are not limited to provisions governing a director's standard of
care in performing the duties of a director, a stockholder's right to vote
cumulatively in any election of directors, a director's or stockholder's right
to inspect corporate records, indemnification requirements concerning directors,
officers and others and the corporate requirements to effectuate corporate
reorganizations (including mergers and acquisitions). Section 2115 also invokes
the application of Chapter 13 of the CGCL to the Merger with respect to JTS
stockholders who elect to exercise dissenters' rights. Upon completion of the
Merger, the statutory protections available to JTS stockholders pursuant to
Section 2115 will no longer apply.
COMPARISON OF THE RIGHTS OF ATARI AND JTS STOCKHOLDERS AND STOCKHOLDERS OF THE
COMBINED COMPANY
The following is a summary of material differences between the rights of
Atari and JTS stockholders under their respective charter documents, the
Combined Company's charter documents and applicable state laws.
Cumulative Voting. Under Delaware and Nevada law, cumulative voting in the
election of directors is not mandatory. Elimination of cumulative voting limits
the ability of minority stockholders to obtain representation on the board of
directors. The JTS Certificate provides for cumulative voting in elections of
Directors. The Atari Articles and Bylaws do not provide for cumulative voting in
elections of Directors. The Certificate and Bylaws of the Combined Company do
not provide for cumulative voting in elections of Directors. To the extent that
Section 2115 would render California law applicable to JTS, cumulative voting in
the election of directors would be required.
Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder
Business and Nominees. The Atari Bylaws provide that special meetings of
stockholders may be called by the Board of Directors, the Chairman of the Board
or the President. The JTS Bylaws provide that special meetings of stockholders
may be called by the Board of Directors or a committee of the Board. The Bylaws
of the Combined Company provide that special meetings of stockholders may be
called by the Chairman of the Board of Directors, the Chief Executive Officer or
the Board of Directors pursuant to a resolution adopted by at least two
directors.
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Under Delaware and Nevada law, a special meeting of stockholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the bylaws.
Any limitation on the ability to call special stockholder meetings could
make it more difficult for stockholders to initiate action that is opposed by
the board of directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the board of directors
with respect to unsolicited takeover bids.
Size of the Board of Directors. Delaware and Nevada law each permit the
board of directors alone to change the authorized number, or the range, of
directors by amendment to the bylaws, unless the directors are not authorized to
amend the bylaws or the number of directors is fixed in the certificate of
incorporation (in which case a change in the number of directors may be made
only by amendment to the certificate of incorporation following approval of such
change by the stockholders). The Atari Bylaws provide for a range of directors
between five and seven, until changed by an amendment to the Atari Articles or
by stockholder vote. However, the number of directors cannot be less than five
if the votes against the action or the votes not consenting to the action are
equal or are greater than 16 2/3% of the outstanding shares. The exact number of
directors shall be fixed by the Board or by stockholder resolution. The current
number of directors on the Atari Board is six. The JTS Certificate and Bylaws
authorize the JTS Board of Directors to determine the number of directors on the
JTS Board of Directors. The current number of directors on the JTS Board is six.
The Certificate of the Combined Company provides that number of directors on the
Board of Directors of the Combined Company shall be determined exclusively by
resolutions of the Board of the Combined Company.
Classified Board of Directors. A classified board is one to which a certain
number, but not all, of the directors are elected on a rotating basis each year.
Delaware and Nevada law permit, but do not require, a classified board of
directors, with staggered terms under which one-half or one-third of the
directors are elected for terms of two or three years, respectively. This method
of electing directors may make changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a lengthier
and more difficult process. The charter documents of Atari, JTS and the Combined
Company do not provide for a classified board of directors. The establishment of
a classified board following the Merger would require the approval of the
stockholders of the Combined Company. To the extent that Section 2115 would
render California law applicable to JTS, directors must be elected annually,
unless the corporation is listed on the Nasdaq National Market and has at least
800 stockholders or is listed on certain public exchanges.
Removal of Directors. Under Nevada law, unless the articles of
incorporation provide for cumulative voting or a larger percentage of voting
stock required to do so, any director may be removed from office by the vote of
stockholders representing not less than two-thirds of the voting power of the
class or series of stock of the corporation entitled to elect such director. The
Atari Bylaws do not provide for cumulative voting. The Atari Bylaws allow the
Board to remove any director declared of unsound mind by court order or
convicted of a felony. Otherwise, a two-thirds vote of outstanding shares is
needed to remove a director.
Under Delaware law, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote. In the case of a Delaware corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause if the number of votes cast against such removal would be sufficient to
elect the director under cumulative voting. A director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. To the extent that Section 2115
would render California law applicable to JTS, any directors or the entire board
of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; provided, however, no
director may be removed (unless the entire board is removed) if the number of
shares voted against removal would be sufficient to elect the director under
applicable cumulative voting rules. The JTS Certificate provides for cumulative
voting. The Certificate of the Combined Company does not provide for cumulative
voting. The Certificate and Bylaws of the Combined Company allow removal of a
director, subject to the rights of preferred stock holders, (i) with cause by a
majority of the outstanding shares or (ii) without cause by two-thirds of the
outstanding shares.
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Filling Vacancies on the Board of Directors. Under Nevada law, unless a
Corporation's articles of incorporation provide otherwise, any vacancy on the
board of directors, including one created by removal of a director or an
increase in the number of authorized directors, may be filled by the majority of
the remaining directors, even if such number constitutes less than a quorum. The
Atari Articles so provide. The Atari Bylaws also provide for vacancies filled by
directors. Stockholders may fill the vacancy if the directors fail to do so.
Under Delaware law, vacancies and newly created directorships may be filled by a
majority of the directors then in office (even though less than a quorum) unless
otherwise provided in the certificate of incorporation or bylaws (and unless the
certificate of incorporation directs that a particular class is to elect such
director, in which case any other directors elected by such class, or a sole
remaining director, shall fill such vacancy). In addition Delaware law permits a
ten percent (10%) stockholder to order an election to fill a director vacancy.
The JTS Bylaws allow a vacancy to be filled by a majority of the remaining
members of the Board of Directors, although the majority is less than a quorum
or by a plurality of stockholder votes. The Bylaws of the Combined Company
provide that a director vacancy shall only be filled by a majority of the
remaining directors, even though less than a quorum.
Interested Director Transactions. Under both Nevada and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under Nevada and Delaware law.
Under Nevada and Delaware law, either the stockholders or the disinterested
members of the board of directors must approve any such contract or transaction
after full disclosure of the material facts, and in the case of board approval
the contract or transaction must also be fair to the corporation, or the
contract or transaction must have been just and reasonable or fair as to the
corporation at the time it was authorized or approved. If board approval is
sought, the contract or transaction must be approved by a majority vote of a
quorum of the directors, without counting the vote of any interested directors
(except that interested directors may be counted for purposes of establishing a
quorum). The JTS Bylaws reiterate Delaware corporate law regarding interested
director transactions. The Articles and Bylaws of Atari and the Certificate and
Bylaws of the Combined Company contain no special provision regarding such
transactions.
Loans to Officers and Employees. Under Nevada law, any transaction
(including any loan or guaranty) to or for the benefit of a director or officer
of the corporation or its parent is permitted (unless otherwise provided for in
the corporation's articles of incorporation) provided a disinterested majority
of the board of directors or stockholders, after full and fair disclosure of the
material terms of such transaction, approve such transaction, or if such
transaction is fair to the corporation at the time it is authorized or approved.
Under Delaware law, a corporation may make loans to, guarantee the obligations
of or otherwise assist its officers or other employees and those of its
subsidiaries (including directors who are also officers or employees) when such
action, in the judgment of the directors, may reasonably be expected to benefit
the corporation. Pursuant to the Bylaws of the Combined Company and in
accordance with Delaware law, the Combined Company may make loans to, guarantee
the obligations of or otherwise assist its officers or other employees and those
of its subsidiaries (including directors who are also officers or employees)
when such action, in the judgment of the Board of the Combined Company, may
reasonably be expected to benefit the corporation. The Articles and Bylaws of
Atari and the Certificate and Bylaws of JTS contain no special provision
regarding such transactions.
Indemnification and Limitation of Liability. Nevada and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit
corporations to adopt a provision in their charters eliminating the liability of
a director to the corporation or its stockholders for monetary damages for
breach of the director's fiduciary duty of care. There are nonetheless certain
differences between the laws of the two states with respect to indemnification
and limitation of liability.
Atari's Articles indemnify directors to the fullest extent permissible
under Nevada law. Atari's Bylaws further provide for indemnification for Atari's
agents and authorize the Board of Directors to purchase and maintain insurance.
Similar to Delaware law, Nevada law does not permit the elimination of monetary
liability
115
<PAGE> 123
where such liability is based on intentional misconduct, fraud, knowing
violation of law or payments or distributions in violation of law. In addition,
Nevada law departs from Delaware law insofar as Nevada law (i) permits a broader
array of insurance or other financial arrangements between a company and its
directors, and (ii) allows a provision in the corporation's bylaws or articles
of incorporation which mandates indemnification rather than leaving that
decision to the board of directors.
The Certificates of JTS and the Combined Company eliminate the liability of
directors and officers to the fullest extent permissible under Delaware law, as
such law exists currently or as it may be amended in the future. Under Delaware
law, such provision may not eliminate or limit director monetary liability for
(a) breaches of the director's duty of loyalty to the corporation or its
stockholders; (b) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law; (c) the payment of unlawful dividends
or unlawful stock repurchases or redemptions under DGCL Section 174; or (d)
transactions in which the director received an improper personal benefit. Such
limitation of liability provisions also may not limit a director's liability for
violation of, or otherwise relieve JTS, the Combined Company or the directors of
either of them from the necessity of complying with, federal or state securities
laws, or affect the availability of non-monetary remedies such as injunctive
relief or rescission.
The Bylaws of JTS and the Combined Company state that indemnification for
JTS' or the Combined Company's agents will be as set forth in the DGCL. However,
JTS may modify the extent of such indemnification by individual contracts with
its directors and executive officers. In addition, the DGCL provides that the
indemnification provided by statute shall not be deemed exclusive of any other
rights under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. The Bylaws of JTS and the Combined Company track this
provision of Delaware law.
JTS has entered into indemnification agreements with its officers and
directors. Upon consummation of the Merger, such agreements will become binding
on the Combined Company. It is expected that the Combined Company will enter in
similar agreements with Jack Tramiel and Michael Rosenberg.
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to Nevada law) not opposed to the best interests of the
corporation (or in the case of a criminal proceeding, if the accused had no
reasonable cause to believe the conduct was unlawful). Without court approval,
however, no indemnification may be made in respect of any derivative action in
which such person is adjudged liable for negligence or misconduct in the
performance of his duty to the corporation.
The Certificate of the Combined Company limits director liability to the
Combined Company or its stockholders for monetary damages arising out of a
director's breach of his duty of care. The duty of care refers to the fiduciary
duty of a director to exercise sufficient diligence and care in considering a
transaction or causing the corporation to take or refuse to take corporate
action. The Certificate of the Combined Company, however, does not eliminate the
duty of care; it only eliminates monetary damage awards occasioned by a breach
of such duty. Thus, after the Merger, a breach of the duty of care would remain
a valid basis for a suit seeking to prevent a proposed transaction from
occurring. After the transaction has occurred, however, the stockholders would
not have a claim against directors for monetary damages based on the breach of
the duty of care, even if that breach involved gross negligence on the part of
the directors.
Reorganizations, Asset Sales and Mergers. Both Nevada and Delaware law
generally require that a majority of the stockholders of the acquiring and
target corporations approve statutory mergers. Delaware law does not require a
stockholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if (a) the
merger agreement does not amend the existing certificate of incorporation, (b)
each share of the surviving corporation outstanding before the merger is an
identical out standing or treasury share after the merger, and (c) the number of
shares to be issued by the surviving corporation in the merger does not exceed
20% of the shares outstanding immediately prior to the merger. Nevada law
contains a substantially similar exception to its voting requirements for the
surviving corporation in a reorganization. To the extent Section 2115 would
render California law applicable to JTS,
116
<PAGE> 124
stockholder approval of each constituent corporation in a statutory merger and
any parent corporation is required, except (i) corporations which will own (or
where stockholders will own), equity securities (other than warrants) possessing
more than 5/6 of the voting power of the surviving corporation or (ii) parent
corporations, not subject to Section 2115, incorporated under the laws of other
states not requiring such approval.
Both Nevada and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by the board of
directors and a majority of the voting shares of the corporation transferring
such assets.
If required by the articles of incorporation, Nevada law requires that
mergers, reorganizations, certain sales of assets and similar transactions be
approved by a majority vote of each class of shares outstanding and/or a larger
percentage vote than a simple majority of the voting shares. The Atari Articles
do not require such approval. By contrast, Delaware law generally does not
require class voting, except in certain transactions involving an amendment to
the certificate of incorporation which adversely affects a specific class of
shares. To the extent Section 2115 would render California law applicable to
JTS, a majority vote of each class of shares outstanding and/or a larger
percentage vote than a simple majority would be required to approve certain
mergers, reorganizations, sales of assets or similar transactions. JTS'
Certificate provides for special voting rights of JTS' Series A Preferred Stock.
The following actions must be approved by at least 2/3 of holders of outstanding
JTS Series A Preferred Stock: (1) creation of a new class of stock on par or
superior in rights to the Series A Preferred Stock; (2) selling, leasing or
otherwise disposing of all or most of JTS's property; (3) an amendment of the
JTS Certificate if such amendment would alter the rights of the JTS Series A
Preferred Stock; (4) increasing the authorized number of shares of JTS Series A
Preferred or JTS Common Stock; (5) a transaction involving a reorganization,
consolidation or merger in which the holders of JTS voting stock hold less than
50% of the voting stock of the successor entity; (6) payment or declaration by
any dividend other than in Common Stock to the holders of Common Stock; or (7)
repurchase of securities other than from employees or consultants terminating
their employment or consulting relationship with JTS.
Should JTS authorize and issue shares of a new class of capital stock, the
holders thereof would vote with the holders of the previously outstanding
capital stock on proposals not adversely affecting a particular class. In such
event the holders of the previously outstanding capital stock, if in the
minority, would be unable to control the outcome of a vote, and, if in the
majority, would be able to control the outcome of such a vote.
Elimination of Actions by Written Consent of Stockholders. Under Nevada and
Delaware law, stockholders may execute an action by written consent in lieu of a
stockholder meeting. Nevada and Delaware law permit a corporation to eliminate
such actions by written consent in its charter or bylaws. The Bylaws of Atari
and JTS provide for action of the stockholders without a meeting including
written consent. The Certificate of the Combined Company does not permit action
by written consent of stockholders.
Dividends and Repurchases of Shares. Nevada law dispenses with the concepts
of par value of shares as well as statutory definitions of capital, surplus and
the like. The concepts of par value, capital and surplus are retained under
Delaware law.
Nevada law prohibits a distribution (including dividends, purchases,
redemptions or other acquisition of shares, distributions of indebtedness or
otherwise) if, after giving effect to the distribution, (1) the corporation
would not be able to pay its debts as they become due in the usual course of
business or (2) except as provided in the articles of incorporation, the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation. To the extent that
Section 2115 would render California law applicable to JTS,
117
<PAGE> 125
distributions (including dividends and redemptions of shares) are permitted if
the corporation's assets-to-liabilities ratios are sufficient under CGCL Section
500.
Appraisal or Dissenters' Rights. Under both Nevada and Delaware law, a
stockholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to appraisal or
dissenters' rights pursuant to which such stockholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under
Delaware law, such dissenters' rights are not available (a) with respect to the
sale, lease or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation
whose shares are either listed on a national securities exchange or are held of
record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or held of record by more than 2,000
holders, plus cash in lieu of fractional shares, or (c) to stockholders of a
corporation surviving a merger if no vote of the stockholders of the surviving
corporation is required to approve the merger because the merger agreement does
not amend the existing certificate of incorporation, each share of the surviving
corporation outstanding prior to the merger is an identical outstanding or
treasury share after the merger, and the number of shares to be issued in the
merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the merger and if certain other conditions are
met. See "The Proposed Merger and Related Transactions -- Appraisal and
Dissenters' Rights -- Delaware Appraisal Rights."
Under Nevada law, dissenters' rights are not available in a merger or share
exchange if the shares held by the stockholders prior to the share exchange or
merger were either listed on a national securities exchange or held by at least
2,000 stockholders of record unless the articles of incorporation of the
corporation provide otherwise or the stockholders are required to accept under
the plan of merger share exchange anything other than cash or shares of the
surviving corporation or shares that are listed on a national securities
exchange, or a combination of these. Because Atari Common Stock is listed on a
national securities exchange and because the Atari Articles do not provide
otherwise, Atari stockholders may not exercise dissenters' rights with respect
to the Merger.
To the extent that Section 2115 would render California law applicable to
JTS, stockholders who dissent from a merger may also be entitled to dissenters'
rights under the CGCL. See "The Proposed Merger and Related
Transactions -- Appraisal and Dissenters' Rights -- California Dissenters'
Rights."
The foregoing discussion of material differences between the rights of
Atari and JTS stockholders under their respective charter documents and
applicable state laws is only a summary of certain provisions and does not
purport to be a complete description of such differences. The discussion is
qualified in its entirety by reference to the Nevada, Delaware and California
General Corporation Laws, the respective common law in Nevada, Delaware and
California and the full text of the Certificate of Incorporation and any
amendments thereto and the Bylaws and any amendment thereto of Atari and JTS.
LEGAL MATTERS
The validity of the JTS Common Stock issuable in the Merger, the federal
income tax consequences in connection with the Merger and certain other matters
relating to the Merger will be passed upon for JTS by Cooley Godward Castro
Huddleson & Tatum. The federal income tax consequences in connection with the
Merger and certain other matters relating to the Merger will be passed upon for
Atari by Wilson Sonsini Goodrich & Rosati, P.C. As of May 22, 1996, one member
of Wilson Sonsini Goodrich & Rosati, P.C., investment partnerships of which such
individual is a partner and a trust for which such individual serves as trustee,
beneficially owned 84,000 shares of JTS Series A Preferred Stock.
EXPERTS
The consolidated financial statements of Atari Corporation as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Joint Proxy Statement/Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
118
<PAGE> 126
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of JT Storage, Inc and The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited included in this Joint
Proxy Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, to the extent and for the periods indicated in their
reports, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to said reports which include
an explanatory paragraph describing uncertainties concerning the ability of the
Company to continue as a going concern discussed in Note 1 to the financial
statements.
STOCKHOLDER PROPOSALS
In the event the Merger is not consummated for any reason, Atari expects to
hold an annual meeting in 1997. To be eligible for inclusion in Atari's proxy
solicitation materials for its annual stockholder meeting to be held in 1997,
any stockholder proposal to be considered at such meeting must have been
received at Atari's principal executive offices, 455 South Mathilda Avenue,
Sunnyvale, California 94086, no later than February , 1997. Any such proposal
is subject to the requirements of the proxy rules adopted under the Exchange
Act.
119
<PAGE> 127
ATARI CORPORATION, JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ATARI CORPORATION
Report of Deloitte & Touche LLP....................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and
1993................................................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1994, and 1993...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Unaudited Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995...... F-15
Unaudited Consolidated Statements of Operations for the Quarters Ended March 31, 1996
and March 31, 1995.................................................................. F-16
Unaudited Consolidated Statements of Cash Flows for the Quarters Ended March 31, 1996
and March 31, 1995.................................................................. F-17
Unaudited Notes to Consolidated Financial Statements.................................. F-18
JTS CORPORATION
Report of Arthur Andersen LLP......................................................... F-19
Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-20
Statements of Operations for the 52 weeks ended January 28, 1996 and for the period
from inception (February 3, 1994) to January 29, 1995............................... F-21
Statements of Stockholders' Deficit from inception (February 3, 1994) to
January 28, 1995.................................................................... F-22
Statements of Cash Flows for the 52 weeks ended January 28, 1996 and for the period
from inception (February 3, 1994) to January 29, 1995............................... F-23
Notes to Financial Statements......................................................... F-24
Unaudited Condensed Consolidated Balance Sheets as of April 28, 1996 and January 28,
1996................................................................................ F-33
Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended April
28, 1996 and April 30, 1995......................................................... F-34
Unaudited Consolidated Statements of Cash Flows for the Quarters Ended April 28, 1996
and April 30, 1995.................................................................. F-35
Unaudited Notes to Consolidated Financial Statements.................................. F-36
THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
Report of Arthur Andersen LLP......................................................... F-37
Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-38
Statement of Revenues and Expenses for the period from February 1, 1995 to January 28,
1996................................................................................ F-39
Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-40
Notes to Financial Statements......................................................... F-41
</TABLE>
F-1
<PAGE> 128
REPORT OF DELOITTE & TOUCHE LLP
To the Shareholders and Board of Directors
of Atari Corporation:
We have audited the accompanying consolidated balance sheets of Atari
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Atari Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 1996
(April 8, 1996 as to Note 16)
F-2
<PAGE> 129
ATARI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $700 and $4,450 held as restricted
balances in 1995 and 1994)...................................... $ 28,941 $ 22,592
Marketable securities.............................................. 21,649 58,432
Accounts receivable (less allowances for returns and doubtful
accounts:
1995, $4,221; 1994, $1,957)..................................... 2,468 9,262
Inventories........................................................ 10,934 18,185
Other current assets............................................... 1,134 4,717
--------- ---------
Total current assets....................................... 65,126 113,188
GAME SOFTWARE DEVELOPMENT COSTS -- Net............................... 758 5,145
EQUIPMENT AND TOOLING -- Net......................................... 671 1,315
REAL ESTATE HELD FOR SALE............................................ 10,468 10,741
OTHER ASSETS......................................................... 546 653
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $ 4,954 $ 15,341
Accrued liabilities................................................ 5,088 5,177
--------- ---------
Total current liabilities.................................. 10,042 20,518
--------- ---------
LONG-TERM OBLIGATIONS................................................ 42,354 43,454
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
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: 1995, 63,687,118 shares; 1994, 63,648,535 shares... 637 636
Additional paid-in capital......................................... 196,209 196,138
Unrealized net gain on marketable securities....................... 7,088 542
Accumulated translation adjustments................................ (663) (1,724)
Accumulated deficit................................................ (178,098) (128,522)
--------- ---------
Total shareholders' equity...................................... 25,173 67,070
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 130
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $ 14,626 $ 38,748 $ 29,108
COST AND EXPENSES:
Cost of revenues......................................... 44,234 35,200 42,768
Research and development................................. 5,410 5,775 4,876
Marketing and distribution............................... 12,726 14,651 8,980
General and administrative............................... 5,921 7,169 7,558
Restructuring charges.................................... -- -- 12,425
-------- -------- --------
Total operating expenses......................... 68,291 62,795 76,607
-------- -------- --------
OPERATING LOSS............................................. (53,665) (24,047) (47,499)
Settlements of patent litigation........................... -- 32,062 --
Exchange gain (loss)....................................... 13 1,184 (2,234)
Other income............................................... 2,670 484 854
Interest income............................................ 3,133 2,015 2,039
Interest expense........................................... (2,309) (2,304) (2,290)
-------- -------- --------
Income (loss) before income taxes................ (50,158) 9,394 (49,130)
Income tax credit.......................................... -- -- 264
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT.................. (50,158) 9,394 (48,866)
Extraordinary credit -- gain on extinguishment of 5 1/4%
convertible subordinated debentures...................... 582 -- --
-------- -------- --------
NET INCOME (LOSS).......................................... $(49,576) $ 9,394 $(48,866)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary credit................ $ (0.79) $ 0.16 $ (0.85)
Net income (loss)........................................ $ (0.78) $ 0.16 $ (0.85)
Number of shares used in computations.................... 63,697 58,962 57,148
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 131
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE UNREALIZED
FROM NET GAIN
COMMON STOCK ADDITIONAL SALE OF ACCUMULATED ON
----------------- PAID-IN COMMON TRANSLATION MARKETABLE ACCUMULATED
SHARES AMOUNT CAPITAL STOCK ADJUSTMENTS SECURITIES DEFICIT TOTAL
------ ------ ---------- ---------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY
1, 1993.......... 57,137 $571 $142,315 $(19) $(3,234) $ -- $ (89,050) $ 50,583
Stock options
exercised........ 89 1 191 192
Common stock
repurchased...... (11) (9) 9 --
Collection of notes
receivable....... 7 7
Translation
adjustments...... 2,438 2,438
Net loss........... (48,866) (48,866)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1993......... 57,215 572 142,497 (3) (796) -- (137,916) 4,354
Sale of common
stock............ 6,277 63 53,270 53,333
Stock options
exercised........ 157 1 371 372
Collection of notes
receivable....... 3 3
Translation
adjustments...... (928) (928)
Unrealized net gain
on marketable
securities....... 542 542
Net income......... 9,394 9,394
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1994......... 63,649 636 196,138 -- (1,724) 542 (128,522) 67,070
Stock options
exercised........ 82 1 109 110
Stock
repurchased...... (44) (38) (38)
Translation
adjustments...... 1,061 1,061
Unrealized net gain
on marketable
securities....... 6,546 6,546
Net loss........... (49,576) (49,576)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1995......... 63,687 $637 $196,209 $ -- $ (663) $7,088 $(178,098) $ 25,173
====== ==== ======== ==== ======= ====== ====== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 132
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................................................... $(49,576) $ 9,394 $(48,866)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Gain from extinguishment of 5 1/4% convertible subordinated debentures..................... (582) -- --
Depreciation and amortization.............................................................. 1,970 2,619 361
Provision for production tooling........................................................... 300 -- --
Provision for doubtful accounts............................................................ 50 194 232
Provision for sales returns and allowances................................................. 5,028 1,563 457
Provision for restructuring................................................................ -- -- 12,425
Gain on sale of marketable securities...................................................... (2,377) -- (324)
Provision for inventory valuation.......................................................... 12,640 5,362 18,100
Utilization of advertising barter credits.................................................. 3,179 -- --
Write-off of game software development costs............................................... 16,578 804 --
Changes in operating assets and liabilities:
Accounts receivable...................................................................... 1,637 (5,383) 16,863
Inventories.............................................................................. (5,389) (14,177) 951
Other assets............................................................................. 395 (336) 3,178
Accounts payable......................................................................... (10,372) 3,763 (4,925)
Accrued liabilities...................................................................... (42) (660) (15,881)
-------- -------- --------
Net cash provided (used) by operations..................................................... (26,561) 3,143 (17,429)
-------- -------- --------
INVESTING ACTIVITIES:
Sales and maturities of marketable securities.............................................. 55,703 -- 2,525
Purchase of marketable securities.......................................................... (9,997) (50,000) --
Purchases of property, equipment and tooling............................................... (782) (1,207) (663)
Sale of property........................................................................... 29 7,543 --
Game software development costs............................................................ (12,791) (5,810) (789)
Other assets............................................................................... 107 482 541
-------- -------- --------
Net cash provided (used) by investing activities........................................... 32,269 (48,992) 1,614
-------- -------- --------
FINANCING ACTIVITIES:
5 1/4% convertible subordinated debentures extinguished.................................... (518) -- --
Repayments of borrowings................................................................... -- (7,642) (259)
Issuance of common stock, net.............................................................. 72 53,708 199
-------- -------- --------
Net cash provided (used) by financing activities........................................... (446) 46,066 (60)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS...................................... 1,087 (684) (356)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. 6,349 (467) (16,231)
CASH AND EQUIVALENTS:
Beginning of year.......................................................................... 22,592 23,059 39,290
-------- -------- --------
End of year................................................................................ $ 28,941 $ 22,592 $ 23,059
======== ======== ========
OTHER CASH FLOW INFORMATION:
Interest paid.............................................................................. $ 2,309 $ 2,303 $ 3,023
======== ======== ========
Income taxes refunded...................................................................... $ -- $ (426) $ (225)
======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Exchange of inventory for advertising services............................................. $ -- $ 3,179 $ --
======== ======== ========
Exchange of property for retirement of debt................................................ $ -- $ 1,891 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 133
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY
Nature of Operations -- The Company designs and markets interactive
multimedia entertainment systems and related software and peripheral products.
Manufacture of these products is performed by third parties. The principal
methods of distribution are through mass market retailers, consumer electronic
specialty stores and distributors of electronic products.
Product Focus -- Since 1992, the Company has focused its research and
development effort on its 64-bit Jaguar interactive multimedia entertainment
system. This product was introduced in 1993 and, in 1995 and 1994, 68% and 76%
of revenues, respectively, were associated with this product. Sales of the
Jaguar in 1995 were disappointing and the Company is currently test marketing
different price points and software bundles for the Jaguar in an attempt to sell
its substantial inventory of such products.
In December 1994, the Company planned price reductions beginning in early
1995 and recognized the impact of this decision on finished and in-process
inventory through a write-down of inventory of $3.6 million, which is included
in cost of sales in the fourth quarter of 1994. In December 1995, the Company
planned further price reductions beginning in early 1996 and recognized the
impact of this decision through a $10.9 million write-down of inventory, which
is included in cost of sales in the fourth quarter of 1995.
The Company continues to carry limited quantities of its older 8-bit and
16-bit video games and computer product lines. As a result of rapid
technological change and intense competition, the Company wrote down inventories
of these products by $18.1 million in 1993 which was included in cost of sales.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect recorded amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. In connection with
the change of the Company's focus, measurement of assets and liabilities is
dependent upon management's ability to accurately predict future operating
results. Actual results could differ from these estimates.
Restructuring -- The Company has active operations in the United States and
the United Kingdom. During 1993 and 1992, the Company significantly restructured
its operations around the world, closing operations in Australia and the Far
East, in several European countries and in Canada and Mexico. These operational
closures resulted in the bankruptcy of subsidiaries in Australia and Germany and
may result in the voluntary or involuntary liquidation or bankruptcy of other
subsidiary companies. Charges for restructuring have been separately reported in
the consolidated statements of operations for 1993. The remaining accruals of
$351,000 at December 31, 1995 relate to employee benefits in Italy and lease
obligations in the Netherlands.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the Company and its subsidiaries. All transactions and balances between
the companies are eliminated.
Cash and Equivalents -- Cash equivalents are stated at cost, which
approximates market value, have maturities not exceeding ninety days upon
acquisition and generally consist of certificates of deposit, time deposits,
treasury notes and commercial paper.
Marketable Securities -- Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Marketable securities are
carried as available-for-sale securities and reported at the fair market value.
The cumulative effect of adoption of SFAS 115 as of January 1, 1994 was not
material. Unrealized gains and losses are reported as a separate component of
shareholders' equity. Realized gains and losses are recorded in the statements
of operations and realized gains were $2.4 million in 1995. The cost of
securities sold is based on average cost.
F-7
<PAGE> 134
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Inventories are stated at the lower of cost or market. Cost
is computed using standard costs which approximate actual cost on a first-in,
first-out basis. Market for each of the Company's product lines is determined by
reference to expected sales prices less direct selling expenses.
Prepaid Advertising -- Included in other current assets at December 31,
1994 is $3.2 million of prepaid advertising resulting from a barter transaction.
The amount recorded as prepaid advertising equals the carrying value of certain
inventory exchanged for advertising credits. The Company expensed the prepaid
advertising as utilized during 1995.
Equipment and Tooling -- Equipment and tooling are stated at cost.
Depreciation on equipment is computed using the straight-line method based on
estimated useful lives of the assets of two to five years. Tooling is
depreciated on a units of production basis. Leasehold improvements are amortized
over the estimated useful life or lease term, as appropriate. Fully depreciated
assets, and related depreciation, are excluded from the consolidated financial
statements.
Real Estate Held for Sale -- Real property associated with closed
operations in the U.S. is stated at estimated market value as determined by
recent valuations, appraisals or pending sales offers.
Revenue Recognition -- Sale of consoles, software game cartridges and
related products are recorded as revenue at the time of shipment to customers.
Concurrently, the Company establishes reserves for estimated returns, which are
recorded as a reduction of sales, and for cooperative advertising allowances,
which are recorded as marketing and distribution expense. Royalty revenues are
recognized when earned and collection is probable.
Income Taxes -- The Company adopted SFAS No. 109 "Accounting for Income
Taxes" in the first quarter of 1993 which requires an asset and liability method
for financial accounting and reporting of income taxes. The impact of the
adoption of SFAS 109 was not material.
Foreign Currency Translation -- Assets and liabilities of operations
outside the United States are translated into United States dollars using
current exchange rates, and the effects of foreign currency translation
adjustments are deferred and included as a component of shareholders' equity.
Income (Loss) per Common Share -- Per share amounts are computed based on
the weighted average number of common and dilutive common equivalent shares
(stock options) outstanding during each period. The effect of the assumed
conversion of the 5 1/4% convertible subordinated debentures was antidilutive
for all periods presented and excluded from the computation.
Fiscal Year -- The Company uses a 52/53 week fiscal year which ends on the
Saturday closest to December 31. All fiscal years presented contain 52 weeks.
For simplicity of presentation, the date December 31 is used to represent the
fiscal year end.
Reclassifications -- Certain items have been reclassified in the 1994 and
1993 financial statements to conform to the 1995 presentation and had no effect
on operating results or shareholders' equity.
Recently Issued Pronouncements -- In October 1995, the Financial Accounting
Standards Board issued FASB No. 123, "Accounting for Stock-Based Compensation."
The new standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period. This standard will be effective for the Company
beginning in 1996, and requires measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the Company had applied the new method of accounting.
The Company intends to follow these
F-8
<PAGE> 135
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
3. FINANCIAL INSTRUMENTS
Marketable Securities -- Marketable securities available for sale consist
of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ----------------------------------
GROSS GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
ISSUE COST VALUE GAINS COST VALUE GAINS
- ---------------------------------------- --------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity securities --
Dixon common stock.................... $ 4,565 $11,606 $7,041 $ 7,890 $ 8,432 $ 542
Government securities --
Federal Home Loan Bank................ 4,993 5,026 33 -- -- --
Federal Home Loan Mortgage Corp....... 5,003 5,017 14 -- -- --
Foreign government debt securities --
Eurodollar notes...................... -- -- -- 50,000 50,000 --
----- ------- ------- ------
Total marketable securities......... $14,561 $21,649 $7,088 $57,890 $58,432 $ 542
===== ======= ======= ======
</TABLE>
The contractual maturities of the government securities range from two to
four years. The Eurodollar notes matured during 1995.
Concentration of Credit Risk -- The Company sells to mass market retailers,
consumer electronic specialty stores and to distributors of electronic products
throughout the United States and Europe. The Company makes ongoing credit
evaluations of customers and, at times, requires letters of credit from some
foreign customers. Sales to foreign customers are generally stated in the
currency of the customer. To date, the Company has not entered into hedges of
these foreign currency exposures.
Fair Value of Financial Instruments -- In accordance with the provisions of
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on and off balance
sheet financial instruments where it is practicable to estimate the value, the
Company has estimated the fair value of its financial instruments. The estimated
fair value of the 5 1/4% convertible subordinated debentures at December 31,
1995 was approximately $20 million based primarily on quoted market prices. The
carrying amounts of the remainder of the Company's financial instruments,
including cash and equivalents, marketable securities, accounts receivable and
accounts payable, approximate fair values due to their short maturities.
4. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Finished goods................................................... $ 9,927 $15,799
Raw materials and work-in-process................................ 1,007 2,386
------- -------
Total....................................................... $10,934 $18,185
======= =======
</TABLE>
5. GAME SOFTWARE DEVELOPMENT COSTS
Internal game software development costs are expensed as incurred as these
costs relate primarily to development tools. External development costs are
capitalized once technological feasibility has been determined. During 1995 and
1994, the Company capitalized $12.8 million and $5.8 million, respectively, of
F-9
<PAGE> 136
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts paid to third parties, primarily as prepaid licenses, in connection with
game development for the Jaguar. The Company amortizes such costs over the
shorter of 12 months from game introduction or the estimated unit sales of the
game title. The Company assesses the recoverability of capitalized games
software development costs in light of many factors, including, but not limited
to, anticipated future revenues, estimated economic useful lives and changes in
software and hardware technologies. Amortization expense and adjustments for
management's assessment of recoverability were $17.1 million (including a
write-off of $16.6 million) and $1.5 million (including a write-off of $804,000)
for the years ended December 31, 1995 and 1994, respectively.
6. EQUIPMENT AND TOOLING
Equipment and tooling at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Equipment and tooling............................................. $1,526 $ 1,874
Furniture and fixtures............................................ 198 708
Leasehold improvements............................................ -- 43
------ -------
Total............................................................. 1,724 2,625
Accumulated depreciation and amortization......................... (753) (1,310)
Reserve for production tooling.................................... (300) --
------ -------
Equipment and tooling -- net...................................... $ 671 $ 1,315
====== =======
</TABLE>
7. REAL ESTATE HELD FOR SALE
Property held for sale at December 31, 1995 consists of nine properties in
California and Texas, from the discontinued consumer electronics and home
entertainment products operation. Certain of the properties have rental tenants,
although all properties are available for sale. Rental income, net of rental
expense and depreciation, is included in other income (expense) and was not
material. Disposals in 1994 represented the Company's building in Germany and
land and building in France, which were disposed of with no significant gain or
loss.
8. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accrued interest........................................... $1,483 $1,513
Accrued game software development costs.................... 1,525 --
Accrued restructuring charge............................... 351 719
Accrued royalties.......................................... 28 320
Other...................................................... 1,701 2,625
------ ------
Total...................................................... $5,088 $5,177
====== ======
</TABLE>
9. LETTERS OF CREDIT AND RESTRICTED CASH
At December 31, 1995, cash balances of $700,000 were collateral for
outstanding commercial letters of credit associated with inventory components
and software development. At December 31, 1994, cash balances of $4.5 million
were collateral for outstanding letters of credit.
F-10
<PAGE> 137
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT OBLIGATIONS
Convertible Subordinated Debentures -- The Company has $42.4 million of
5 1/4% convertible subordinated debentures due April 29, 2002. The debentures
may be redeemed at the Company's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into common stock at
$16.3125 per share. At December 31, 1995, 2,596,414 shares of common stock were
reserved for issuance upon conversion. Default with respect to other
indebtedness of Atari Corporation in an aggregate amount exceeding $5 million
would result in an event of default whereby the outstanding debentures would be
due and payable immediately.
In 1995, the Company reacquired in the open market and extinguished $1.1
million face value of these debentures for $500,000, resulting in an
extraordinary credit of $582,000.
Term Loans on Real Estate in Europe -- At December 31, 1993, the Company
had two secured term loans outstanding totaling $7.5 million for its building in
Germany and a term loan of $2.0 million for its land and building in France.
These loans were repaid or exchanged in 1994 from the sale or transfer of the
properties.
11. SETTLEMENTS OF PATENT LITIGATION
During the first quarter of 1994, the Company received $2.2 million with
respect to the settlement of litigation between the Company, Atari Games
Corporation and Nintendo. Although not part of the litigation, the Company sold
1,500,000 shares of its common stock to Time Warner (parent company of Atari
Games Corporation), Inc. for $12.8 million.
During the fourth quarter of 1994, the Company completed a comprehensive
agreement ("Agreement") with Sega Enterprises, Ltd. ("Sega") concerning
resolution of disputes, equity investment and patent and product licensing
agreements. The results of the Agreement were as follows: (i) Sega acquired
4,705,883 shares of the Company's common stock for $40.0 million; (ii) the
Company received a payment of $29.8 million ($50.0 million from Sega, net of
$20.2 million of legal fees and associated costs) in exchange for a license from
Atari covering the use of a library of Atari patents issued between 1977 through
1984 (excluding patents which exclusively claim elements of the Company's JAGUAR
and LYNX products) through the year 2001; and (iii) the Company and Sega agreed
to cross-license up to five software game titles each year through the year
2001.
12. INCOME TAXES
The credit for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Current:
Federal............................................. $-- $-- $ --
Foreign............................................. -- -- (264)
State............................................... -- -- --
-- --
-----
Income tax credit..................................... $-- $-- $(264)
== == =====
</TABLE>
At December 31, 1995, the Company has a U.S. income tax operating loss
carryforward of $165 million which expires in 2006 through 2010, a research and
development tax credit carryforward of $1.8 million which expires in 2002
through 2010, and a California income tax operating loss carryforward of $60
million which expires as follows: $16.4 million in 1997, $16.7 million in 1998,
$1.6 million in 1999 and $21.8 million in 2000.
F-11
<PAGE> 138
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rates for 1995, 1994 and 1993 were 0%, 0%, and
(1)%, respectively, and differ from the federal statutory rate of 35% as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Computed at federal statutory rates................. $(17,402) $ 3,288 $(17,103)
Valuation allowance................................. 18,604 (3,288) 16,821
Effect of foreign tax rates different than statutory
rates and utilization of foreign loss
carrybacks........................................ -- -- 16
Other............................................... (1,202) -- 2
-------- ------- --------
Income tax credit................................... $ -- $ -- $ (264)
======== ======= ========
</TABLE>
The components of the net deferred tax asset at December 31 consist of (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. operating loss carryforwards...................... $ 57,706 $ 42,149
State operating loss carryforwards..................... 3,820 2,321
Capital loss carryforwards............................. 1,035 1,804
Research and development tax credit carryforwards...... 1,813 1,370
Inventory reserves..................................... 3,237 2,781
Restructuring charges.................................. 50 239
Capitalized game software development costs............ 3,022 --
Other items............................................ 4,411 5,826
-------- --------
Subtotal............................................... 75,094 56,490
Valuation allowance.................................... (75,094) (56,490)
-------- --------
Net deferred tax asset................................. $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing and realization of the
benefits of its favorable tax attributes in future years, the Company has
established a valuation allowance to offset its net deferred tax assets.
Current federal and state tax law includes certain provisions limiting the
use of net operating loss carryforwards in the event of certain defined changes
in stock ownership. The annual use of the Company's net operating loss
carryforwards could be limited according to these provisions, and there can be
no assurance that such limitations will not result in the loss of carryforward
benefits during the carryforward period.
13. STOCK OPTIONS
The Company's stock option plan and restricted stock plan provide for the
issuance of up to 3,000,000 shares of common stock through the issuance of
incentive stock options to employees and nonqualified stock options and
restricted stock to employees, directors and consultants. Under the plans, stock
options or restricted stock may be granted at not less than fair market value as
determined by the Board of Directors. Stock options become exercisable as
established by the Board (generally ratably over five years) and expire up to
ten years from date of grant. The Company's right to repurchase restricted stock
lapses over a maximum period of five years. At December 31, 1995, options for
551,925 shares were exercisable and options for 602,310 shares were available
for future grant. At December 31, 1995, no restricted stock under the restricted
stock plan had been issued.
F-12
<PAGE> 139
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to the stock option plan is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
RANGE PER SHARE
NUMBER OF ------------------
OPTIONS LOW HIGH TOTAL
--------- ------ ----- -----------
<S> <C> <C> <C> <C> <C>
Outstanding, January 1, 1993............... 970,400 $1.500 - $7.50 $ 3,131,450
Granted.................................... 535,583 0.875 - 4.75 1,045,093
Exercised.................................. (89,300) 0.875 - 3.00 (195,463)
Cancelled.................................. (222,500) 0.875 - 6.00 (831,625)
---------
Outstanding, December 31, 1993............. 1,194,183 0.875 - 7.50 3,149,455
Granted.................................... 289,500 2.250 - 7.00 1,467,750
Exercised.................................. (157,065) 0.875 - 6.25 (372,403)
Cancelled.................................. (18,160) 1.675 - 7.50 (93,980)
---------
Outstanding, December 31, 1994............. 1,308,458 0.875 - 7.00 4,150,822
Granted.................................... 1,487,000 1.438 - 3.81 3,970,814
Exercised.................................. (82,333) 0.875 - 2.00 (110,250)
Cancelled.................................. (615,600) 0.875 - 7.00 (2,135,175)
---------
Outstanding, December 31, 1995............. 2,097,525 $0.875 - $5.25 $ 5,876,211
=========
</TABLE>
14. SEGMENT INFORMATION
The Company operates in one industry segment -- the design and sale of
consumer electronic products.
The Company's foreign operations at December 31, 1995 consist of sales and
distribution facilities in Europe. Transfers between geographic areas are
accounted for at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Corporate assets
are primarily cash and equivalents, marketable securities and real estate held
for sale.
The following tables present a summary of operations by geographic region
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
North America.............................. $ 8,163 $ 23,158 $ 7,390
Export sales from North America............ 1,868 8,538 --
Europe..................................... 4,595 7,052 18,548
Other...................................... -- -- 3,170
------- ------- -------
Total............................ $ 14,626 $ 38,748 $ 29,108
======= ======= =======
Transfer between geographic areas
(eliminated in consolidation):
North America.............................. $ 4,041 $ 1,046 $ 17,781
Europe..................................... 68 1,895 25,284
Other...................................... -- -- 102
------- ------- -------
Total............................ $ 4,109 $ 2,941 $ 43,167
======= ======= =======
</TABLE>
F-13
<PAGE> 140
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Operating loss:
North America.............................. $(51,036) $(21,600) $(14,025)
Europe..................................... (2,629) (2,447) (19,741)
Other...................................... -- -- (13,733)
------- ------- -------
Total............................ $(53,665) $(24,047) $(47,499)
======= ======= =======
Identifiable assets at December 31:
North America.............................. $ 14,588 $ 37,627 $ 17,369
Europe..................................... 1,856 1,650 5,801
Corporate assets........................... 61,125 91,765 51,663
------- ------- -------
Total............................ $ 77,569 $131,042 $ 74,833
======= ======= =======
</TABLE>
No single customer accounted for more than 10% of total revenues for the
years ended December 31, 1995, 1994 or 1993.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases various facilities and equipment under noncancellable
operating lease arrangements. These leases generally provide renewal options of
five additional years. Minimum future lease payments under noncancellable
operating leases as of December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $ 670
1997................................................ 460
1998................................................ 183
1999................................................ 85
2000................................................ 74
------
Total minimum lease payments.............. $1,472
======
</TABLE>
Rent expense for operating leases was $1,193,000, $1,218,000 and $1,251,000
for the years 1995, 1994 and 1993, respectively.
Certain claims and suits arising in the ordinary course of business have
been filed or are pending against the Company. The number of such claims has
increased as the Company significantly downsized its development operations. In
the opinion of management, all such matters have been adequately provided for,
are without merit, or are such that if settled unfavorably would not have a
material adverse effect on the Company's consolidated financial position and
results of operations.
16. SUBSEQUENT EVENT
On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
F-14
<PAGE> 141
ATARI CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $441 and $700 held as restricted
balances at March 31, 1996 and December 31, 1995)................ $ 23,748 $ 28,941
Marketable securities............................................... -- 21,649
Accounts receivable (less allowances for returns and doubtful
accounts:
March 31, 1996 $4,006; December 31, 1995 $4,221)................. 601 2,468
Inventories (See Note 2)............................................ 5,526 10,934
Subordinated secured convertible note with JT Storage, Inc.
(see Note 4)..................................................... 25,000 --
Other current assets................................................ 1,101 1,134
--------- ---------
Total current assets........................................ 55,976 65,126
GAME SOFTWARE DEVELOPMENT COSTS -- Net................................ 861 758
EQUIPMENT AND TOOLING -- Net.......................................... 577 671
REAL ESTATE HELD FOR SALE............................................. 10,468 10,468
OTHER ASSETS.......................................................... 524 546
--------- ---------
TOTAL................................................................. $ 68,406 $ 77,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 3,295 $ 4,954
Accrued Liabilities................................................. 5,481 5,088
--------- ---------
TOTAL CURRENT LIABILITIES............................................. 8,776 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: March 1996, 63,710,318;
December 1995, 63,687,118)....................................... 637 637
Additional paid-in capital.......................................... 196,272 196,209
Unrealized gain on marketable securities............................ -- 7,088
Accumulated translation adjustments................................. (730) (663)
Accumulated deficit................................................. (178,903) (178,098)
--------- ---------
Total shareholders' equity....................................... 17,276 25,173
--------- ---------
TOTAL....................................................... $ 68,406 $ 77,569
========= =========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 142
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 1996 AND MARCH 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
NET REVENUE............................................................ $ 1,272 $ 4,874
COST AND EXPENSES:
Cost of revenues..................................................... 1,211 3,846
Write-down of inventory.............................................. 5,000 --
Research and development............................................. 201 1,815
Marketing and distribution........................................... 758 2,576
General and administrative........................................... 1,251 1,795
------- -------
Total operating expenses..................................... 8,421 10,032
------- -------
OPERATING LOSS......................................................... (7,149) (5,158)
Gain on sale of marketable securities.................................. 6,347 107
Exchange (loss) gain................................................... (60) 5
Other income(expense), net............................................. 293 201
Interest income........................................................ 332 953
Interest expense....................................................... (569) (581)
------- -------
Loss before income taxes and extraordinary credit...................... (806) (4,473)
------- -------
Provision for income taxes............................................. -- --
------- -------
Loss before extraordinary credit....................................... (806) (4,473)
------- -------
Extraordinary credit -- gain on extinguishment of 5 1/4% convertible
subordinated debentures (see Note 3)................................. -- 47
------- -------
NET LOSS............................................................... $ (806) $(4,426)
======= =======
LOSS PER COMMON SHARE:................................................. $ (0.01) $ (0.07)
======= =======
Number of shares used in computations................................ 63,701 63,701
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 143
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss)............................................................... $ (805) $ (4,426)
Adjustments to reconcile net (loss) to net cash provided (used) by
operating activities:
Gain from extinguishment of 5 1/4% convertible subordinated debentures... -- (47)
Depreciation and amortization............................................ 136 672
Gain on sale of marketable securities.................................... (6,347) (107)
Provision for inventory valuation........................................ 5,000 --
Changes in operating assets and liabilities:
Accounts receivable.................................................... 1,895 5,035
Inventories............................................................ 408 (4,051)
Other assets........................................................... 44 243
Accounts payable....................................................... (1,664) (8,983)
Accrued liabilities.................................................... 386 851
-------- --------
Net cash (used) by operations............................................ (947) (10,813)
INVESTING ACTIVITIES:
Sale of marketable securities............................................ 20,908 492
Proceeds from property sales............................................. 33 --
Property purchases....................................................... -- (51)
Borrowing by JTS......................................................... (25,000) --
Stock dividend received on investment.................................... -- 82
Decrease in other assets................................................. 22 99
Increase in software development costs................................... (103) (2,864)
-------- --------
Net cash (used) by investing activities.................................. (4,140) (2,242)
FINANCING ACTIVITIES:
Repayments of borrowings................................................. -- (100)
Extinguishment of debt................................................... (75) (46)
Issuance of common stock................................................. 63 84
-------- --------
Net cash (used) by financing activities.................................. (12) (62)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH & EQUIVALENTS..................................................... (94) 47
-------- --------
NET DECREASE IN CASH & EQUIVALENTS....................................... (5,193) (13,070)
CASH & EQUIVALENTS:
Beginning of period...................................................... 28,941 22,592
-------- --------
End of period............................................................ $ 23,748 $ 9,522
======== ========
NON CASH INVESTING ACTIVITIES:
Unrealized gain on marketable securities................................. $ -- $ 1,836
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 144
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The 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
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 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 dates for the first quarter of 1996 and 1995 were March 30, and April 1,
respectively.
NOTE 2. INVENTORIES
In the first quarter of 1996, the Company wrote-down inventory by $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.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Finished goods....................................... $ 5,049 $ 9,927
Raw materials and work-in-process.................... 477 1,007
------ -------
Total...................................... $ 5,526 $ 10,934
====== =======
</TABLE>
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.
NOTE 4. MERGER WITH JT STORAGE, INC.
On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
F-18
<PAGE> 145
REPORT OF ARTHUR ANDERSEN LLP
To the Board of Directors of
JTS Corporation:
We have audited the accompanying balance sheets of JTS Corporation (a
Delaware corporation), formerly JT Storage, Inc., as of January 28, 1996 and
January 29, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year ended January 28, 1996 and the period from
inception (February 3, 1994) to January 29, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JTS Corporation as of
January 28, 1996 and January 29, 1995, and the results of its operations and its
cash flows for the year ended January 28, 1996 and the period from inception
(February 3, 1994) to January 29, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN, LLP
San Jose, California
April 4, 1996
F-19
<PAGE> 146
JTS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 547 $ --
Trade accounts receivable, less allowance for doubtful accounts of
$730 and $4, respectively........................................ 1,286 13
Receivable from Moduler Electronics................................. 6,892 1,033
Other receivables................................................... 812 28
Inventories......................................................... 2,093 358
Prepaid and other current assets.................................... 240 154
------- ------
Total current assets........................................ 11,870 1,586
------- ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost:
Machinery and equipment............................................. 9,231 2,254
Leasehold improvements.............................................. 398 --
Furniture and fixtures.............................................. 1,145 92
Less -- Accumulated depreciation and amortization................... (2,831) (335)
------- ------
7,943 2,011
------- ------
$ 19,813 $ 3,597
======= ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................. $ 4,323 $ 743
Note payable to stockholder......................................... 1,000 --
Accounts payable --
Trade............................................................ 7,226 1,780
Moduler Electronics.............................................. 9,546 366
Accrued payroll and bonus........................................... 978 249
Other accrued liabilities........................................... 2,523 540
Current portion of capitalized lease obligations and long-term
debt............................................................. 1,520 146
------- ------
Total current liabilities................................... 27,116 3,824
LONG-TERM LIABILITIES:
Capitalized lease obligations and long-term debt, net of current
portion.......................................................... 3,485 61
Convertible notes payable to related parties........................ -- 1,902
Convertible notes payable........................................... -- 3,219
------- ------
Total liabilities........................................... 30,601 9,006
------- ------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value; 31,200 shares authorized (increased to 70,000
shares in February 1996); 27,785 shares issued and outstanding in
1996, liquidation value of $29,716............................... 27,785 --
------- ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value; 60,000 shares authorized
(increased to 90,000 shares in February 1996); 7,367 and 4,833
shares issued and outstanding in 1996 and 1995, respectively..... -- --
Additional paid-in capital.......................................... 6,004 --
Deferred compensation............................................... (4,320) --
Notes receivable from stockholders.................................. (623) --
Accumulated deficit................................................. (39,634) (5,409)
------- ------
Total stockholders' deficit................................. (38,573) (5,409)
------- ------
$ 19,813 $ 3,597
======= ======
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
F-20
<PAGE> 147
JTS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
52 WEEKS ENDED FROM INCEPTION TO
JANUARY 28, 1996 JANUARY 29, 1995
---------------- -----------------
<S> <C> <C>
REVENUES:
Product sales............................................... $ 13,502 $ --
Technology license revenue.................................. 5,275 --
-------- -------
18,777 --
COST OF PRODUCT SALES......................................... 28,548 --
-------- -------
GROSS MARGIN (DEFICIT)........................................ (9,771) --
-------- -------
OPERATING EXPENSES:
Research and development.................................... 13,375 3,740
Selling, general and administrative......................... 5,579 1,495
Manufacturing start-up costs................................ 3,812 --
-------- -------
Total operating expenses............................ 22,766 5,235
-------- -------
OPERATING LOSS................................................ (32,537) (5,235)
OTHER INCOME (EXPENSE):
Interest income............................................. 108 --
Interest expense............................................ (589) (144)
Other, net.................................................. (32) (30)
-------- -------
NET LOSS...................................................... $(33,050) $(5,409)
======== =======
NET LOSS PER COMMON SHARE..................................... $ (7.17) $ (1.12)
======== =======
SHARES USED IN COMPUTING NET LOSS PER SHARE................... 4,611 4,833
======== =======
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-21
<PAGE> 148
JTS CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------- PAID-IN DEFERRED FROM ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL
------ ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION,
FEBRUARY 3, 1994........ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders at
$.000001 per share... 4,350 -- -- -- -- -- --
Issuance of common stock
at $.000001 in
exchange for
technology license... 483 -- -- -- -- -- --
Net loss for the
period............... -- -- -- -- -- (5,409) (5,409)
----- --- ------ ------- ----- -------- --------
BALANCE, JANUARY 29,
1995.................... 4,833 -- -- -- -- (5,409) (5,409)
Exchange of common stock
for Redeemable Series
A preferred stock.... (483 ) -- -- -- -- (1,000) (1,000)
Issuance costs of
Redeemable Series A
preferred stock...... -- -- -- -- -- (175) (175)
Shares issued under the
stock option plan.... 17 -- 4 -- -- -- 4
Shares issued under
restricted stock
purchase
agreements........... 3,000 -- 6,000 (5,250) (623) -- 127
Amortization of deferred
compensation......... -- -- -- 930 -- -- 930
Net loss................ -- -- -- -- -- (33,050) (33,050)
----- --- ------ ------- ----- -------- --------
BALANCE, JANUARY 28,
1996.................... 7,367 $ -- $6,004 $ (4,320) $ (623) $ (39,634) $(38,573)
===== === ====== ======= ===== ======== ========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-22
<PAGE> 149
JTS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
52 WEEKS ENDED FROM INCEPTION TO
JANUARY 28, 1996 JANUARY 29, 1995
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(33,050) $(5,409)
Adjustments to reconcile net loss to net cash used in
operating activities --
Receivable from Moduler Electronics........................ (5,859) (1,033)
Payable to Moduler Electronics for finished goods
inventory................................................ 9,180 366
Depreciation and amortization expense...................... 2,496 551
Reserve for bad debts...................................... 726 4
Issuance of preferred stock for services rendered.......... 30 --
Payables converted to note payable and subsequently to
preferred stock.......................................... 300 1,902
Amortization of deferred compensation...................... 930 --
Changes in assets and liabilities:
Trade receivables........................................ (1,999) (17)
Other receivables........................................ (757) (28)
Inventories.............................................. (1,735) (312)
Prepaid and other current assets......................... (86) (154)
Accounts payable......................................... 5,446 1,780
Accrued liabilities...................................... 2,712 686
-------- -------
Net cash used in operating activities................. (21,666) (1,664)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................ (3,132) (1,984)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit............................. 3,580 743
Proceeds from issuance of common stock........................ 104 --
Proceeds from issuance of preferred stock..................... 18,556 --
Preferred stock issuance costs................................ (175) --
Payments on capital lease obligations......................... (408) (10)
Payments on long-term debt.................................... (90) (90)
Proceeds from notes payable................................... 3,778 3,005
-------- -------
Net cash provided by financing activities............. 25,345 3,648
-------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS......................... 547 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............ -- --
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................. $ 547 $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest........................................ $ 449 $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Sale of common stock for notes................................ $ 750 $ --
Equipment purchased under capital leases...................... 5,296 82
Conversion of notes payable to preferred stock................ 9,199 --
Issuance of convertible debt upon Kalok acquisition........... -- 214
Equipment ($280) and inventory ($49) acquired net of related
accrued liabilities of $104 from Kalok..................... -- 225
Issuance of debt upon acquisition of Kalok.................... -- 225
Exchange of TEAC common stock to preferred stock.............. 1,000 --
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-23
<PAGE> 150
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
JTS Corporation (the "Company"), a Delaware corporation, formerly JT
Storage, Inc. (Note 12), was incorporated on February 3, 1994 to develop, market
and manufacture hard disk drives. The Company was a development stage company
prior to the commencement of production shipments in October 1995. Accordingly,
the Company ceased to be in the development stage at that time. Moduler
Electronics (India) Private Limited ("Moduler Electronics"), a company owned by
the family of a major stockholder manufactured, on a contract basis, all of the
Company's products. In April 1996, the Company acquired 90% of Moduler
Electronics (Note 10).
On February 4, 1994, as part of a settlement in United States Bankruptcy
Court, the Company acquired certain assets and assumed certain liabilities of
Kalok Corporation ("Kalok") in exchange for a note payable to the Kalok
Bankruptcy estate (Note 5) and a warrant to Kalok's unsecured creditors (Note
7). Liabilities assumed of $543,172 exceeded the fair market value of assets
acquired by approximately $215,000 which, due to uncertainties regarding its
realization, was expensed in the accompanying 1995 statement of operations. In
connection with the settlement agreement, the Company acquired certain
proprietary disk drive technology from TEAC Corporation ("TEAC") in exchange for
482,850 shares of common stock, which represented 10% of the outstanding Common
Stock of the Company. No value was assigned to the acquired technology as it had
no cost basis to TEAC and the common stock was deemed to have nominal value. On
February 3, 1995, the Company agreed to issue 1,000,000 shares of Redeemable
Series A preferred stock to TEAC in exchange for the return of the 482,850
shares of common stock and the cancellation of a shareholder agreement with TEAC
(Note 8).
The Company has continued to develop its technology and manufacturing
capabilities during fiscal 1996. This development has resulted in substantial
increases in accounts receivable, accounts payable, bank borrowings, and a net
working capital deficit of $15,246,000 as of January 28, 1996. Operations
subsequent to year end indicate the Company has continued to suffer losses and
its working capital deficit has continued to increase. These factors raise a
substantial doubt about the ability of the Company to continue as a going
concern. The Company's management is pursuing plans to merge with Atari
Corporation ("Atari"). In the opinion of management, the merger, if successful,
would raise cash adequate to fund operations for at least the next 12 months.
Thereafter, the Company will require additional funding. Subsequent to year end,
Atari extended a $25 million loan to the Company of which $19.7 million had been
used as of April 4, 1996. In the event the merger (Note 10) is not consummated,
the loan will, at Atari's option, either be due September 30, 1996 or converted
into the Company's preferred stock. In addition, Moduler Electronics received
approval of additional financing from another Indian bank resulting in total
unused credit facilities of approximately $12 million, subject to certain
conditions.
2. ACCOUNTING POLICIES:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition and Product Warranty
Revenue from product sales is generally recognized upon shipment to
customers. The Company warrants its products against defects in design,
materials and workmanship generally for three years. A provision for estimated
future costs relating to warranty expense is recorded when products are shipped.
F-24
<PAGE> 151
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories include direct materials at third party component manufacturers
(other than Moduler Electronics) and are recorded at the lower of cost
(first-in, first-out) or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Raw materials................................. $2,093 $309
Finished goods................................ -- 49
-----
--
-------
$2,093 $358
======= =======
</TABLE>
Equipment and Leasehold Improvements
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of three years. Repairs and
maintenance costs are expensed as incurred. Major renewals and betterments which
substantially extend the useful life of the asset are capitalized.
The Company had equipment with an historical cost of approximately
$4,400,000 and $530,000 located at Moduler Electronics at January 28, 1996 and
January 29, 1995, respectively.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of salaries, materials and supplies.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of less than three
months to be cash equivalents.
Fiscal year
The fiscal year of the Company is a 52- or 53-week period ending on the
Sunday closest to January 31. The fiscal year for the year ended January 28,
1996 was a 52-week period.
Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform to the current presentation.
Income from Technology License
In February 1995, the Company entered into a technology transfer and
perpetual license agreement. Under this agreement, the Company granted
non-exclusive, perpetual rights to manufacture and sell certain of its products.
In connection with the agreement, the Company was obligated to achieve certain
milestones
F-25
<PAGE> 152
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
regarding the successful completion of engineering tests, the delivery of
working models and the commencement of volume production. As of January 28, 1995
the Company had delivered a working prototype and accordingly, recognized income
of $5,275,000 in connection with achieving specified milestones in fiscal 1996.
The remaining income of $1,125,000 will be recognized as future milestones are
achieved. Funds received under this agreement are not reimbursable to the
licensee.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of shares
of common stock outstanding during the periods. The outstanding shares and
earnings per share have been restated for all periods presented to reflect the
impact of the stock split described in Note 7.
3. INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves............................ $ 292 $ --
Inventory reserves...................................... 1,731 --
Items not currently deductible principally manufacturing
start-up costs related to Moduler Electronics........ 2,327 181
Net operating loss carryforwards........................ 9,930 1,819
Tax credit carryforwards................................ 600 135
--------- --------
Total deferred tax assets................................. 14,880 2,135
Valuation allowance....................................... (14,828) (2,135)
--------- --------
Deferred tax assets, net of valuation allowance........... 52 --
Deferred tax liabilities -- accelerated depreciation...... (52) --
--------- --------
Net deferred tax assets................................... $ -- $ --
========= ========
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the net deferred tax assets such that a valuation allowance has been recorded to
completely offset the net deferred tax assets. Such factors include recurring
operating losses from inception, recent increases in expense levels to support
the Company's growth, and the fact that the market in which the Company competes
is intensely competitive and is characterized by rapidly changing technology.
For income tax reporting purposes, the Company has Federal and State net
operating loss carryforwards of approximately $27,000,000 and $13,500,000,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $350,000 and $250,000, respectively, all of which
will expire on various dates through 2011.
The Internal Revenue Code contains provisions which may limit the amount of
tax carryforwards available to be used in any given year upon the occurrence of
certain events, including changes in ownership interests.
F-26
<PAGE> 153
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS:
Moduler Electronics Transactions
As discussed in Note 1, the Company uses Moduler Electronics to manufacture
all of the Company's products. The Company purchased finished goods from Moduler
Electronics amounting to approximately $14 million in fiscal 1996 and the
majority of the accounts payable balance to Moduler Electronics at January 28,
1996 is a result of these purchases.
The Company made cash advances totalling approximately $2.5 million and
also sold fixed assets and inventory totalling approximately $8.3 million to
Moduler Electronics in fiscal 1996.
The advances were made to fund the manufacturing start-up of disk drives
for the Company. Because the Company intended to (and subsequently did) acquire
90% of Moduler Electronics (Note 10) and the ultimate realizability of these
advances is subject to the achievement by Moduler Electronics of successful
operations, the Company has expensed 90% of Moduler's Electronics' fiscal 1996
net loss in order to reflect its investment in Moduler Electronics' start-up
operations.
The Company entered into an agreement with Moduler Electronics whereby the
Company has undertaken to bear all inventory loss and the cost of any future
warranty claims, product return and rework charges. In fiscal 1996, the Company
assumed approximately $3,448,000 and $171,000 of inventory reserve and warranty
costs, respectively.
Notes Receivable From Stockholders
In January 1996, the Company loaned certain executive officers $750,000
which was used by the officers to purchase 3,000,000 shares of common stock
under restricted stock purchase agreements. The notes bear interest at an annual
rate of 5.91% and the principal and interest is payable in four annual
installments. The notes are with full recourse and are collateralized by the
stock purchased. As of February 28, 1996, $127,500 had been collected on these
notes. The remaining balance of $622,500 is included in stockholders' deficit in
the 1996 accompanying balance sheet.
Note Payable to Stockholders
In January and February 1996, the Company entered into unsecured loan
agreements totalling $1,965,000 with certain stockholders. The notes bear
interest at 10% per annum and the principal and interest are due on July 15,
1996.
Convertible Notes Payable
As of January 29, 1995, the Company had $5,121,186 outstanding under
certain convertible notes payable. These notes were converted into 5,121,186
shares of redeemable preferred stock in February 1995. The Company also had
$2,764,953 outstanding under certain convertible notes payable in June 1995
which were converted into 2,764,953 shares of redeemable preferred stock in
August 1995.
5. NOTES PAYABLE:
Bank Line of Credit
In December 1995, the Company established a line of credit for $5 million.
As of April 4, 1996, $4,323,000 was outstanding under the line. The line of
credit is collateralized by certain assets, bears interest at 9.5%, is due
monthly and the principal is due on June 30, 1996. The line of credit contains
certain financial covenants, among others, relating to minimum financial ratios
and minimum tangible net worth. The Company was not in compliance with these
covenants at January 28, 1996. The bank has waived compliance
F-27
<PAGE> 154
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with these covenants until such time as the merger with Atari occurs (Note 10);
however, the Company may not draw further on the line.
Capitalized Lease Obligations and Long-Term Debt
In conjunction with the purchase of certain assets of Kalok (see Note 1),
the Company issued a non-interest bearing note payable to the Kalok bankruptcy
estate for $225,000. The note is payable in 10 equal quarterly installments of
$22,500, with the final payment due July 1, 1996.
In fiscal 1995, the Company entered into equipment lease agreements under
which it can lease up to $6.5 million of equipment through July 1996. Payments
are due in equal monthly installments over a 36 to 48 month period. As of
January 28, 1996, the cost of the leased assets was $5,377,588 and the related
accumulated depreciation was $1,087,644. The leases bear interest between 11.5%
and 18.2%.
The following is a schedule of future payments under the note payable to
Kalok and equipment leases together with the present value of the net minimum
lease payments at January 28, 1996:
<TABLE>
<CAPTION>
YEARS ENDING
----------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 2,077
1998........................................... 2,021
1999........................................... 2,198
2000........................................... 285
--------
Total net minimum lease payments............... 6,581
Less -- Amount representing interest........... (1,576)
--------
Present value of net minimum lease payment..... 5,005
Less -- Current portion........................ (1,520)
--------
Long term portion.............................. $ 3,485
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its facilities and certain equipment under
non-cancelable operating leases. The future payments under these leases at
January 28, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
----------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 583
1998........................................... 578
1999........................................... 553
2000........................................... 571
2001........................................... 243
------
$2,528
======
</TABLE>
Total rent expense for the periods ended January 29, 1995 and January 28,
1996 was approximately $180,000 and $425,000, respectively.
Royalty Obligation
As discussed in note 1 the Company licenses certain technology from TEAC.
In the event the Company commences selling certain products incorporating
certain TEAC Technology it will incur a royalty obligation of up to 2% of sales
for a certain period. The Company was not marketing any products incorporating
TEAC developed technology and accordingly, no royalties were due as of January
28, 1996.
F-28
<PAGE> 155
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK:
Stock Split and Capitalization
In February 1995, the Board of Directors approved a 4,350-for-1 common
stock split. All share and per share amounts in the accompanying financial
statements have been restated to reflect this split. In February 1996 the
Company amended its certificate of incorporation and authorized 90,000,000 and
70,000,000 shares of common and Redeemable Series A Preferred Stock,
respectively.
Warrants
The Company has issued warrants to purchase 100,000 shares of common stock
to the unsecured creditors of Kalok Corporation in conjunction with the
Company's acquisition of Kalok's assets. The warrants may be exercised for a
one-year period commencing on the earlier of the closing of an initial public
offering or the public registration of the Company's stock. The exercise price
of the warrant is 25% of the initial public offering price or the fair market
value of the Company's stock if the Company becomes a public registrant absent
an initial public offering. Such warrants were deemed to have nominal value at
the issuance date and, accordingly, are carried at no value in the accompanying
financial statements.
The Company has also issued warrants to purchase 500,000 shares of common
stock at $1.00 and $3.00 to the equipment lease company and the bank with which
it has a line of credit, respectively. The warrants may be exercised at any time
before various dates through 2001. In the event of any acquisition, the warrant
to purchase 450,000 shares issued to the equipment lease company will terminate.
Restricted Stock Purchase Agreement
The Company issued 3,000,000 shares of its common stock to certain officers
in exchange for a $750,000 note receivable (Note 4). The Company has the right
to repurchase such shares at the original purchase price. However, the Company's
right to repurchase 1/48 of such shares lapses monthly. As of January 28, 1996,
2,469,271 shares were subject to repurchase. Upon issuance of the common stock
the Company recorded deferred compensation of $5,250,000 for the difference
between the per share sales price of $.25 and $2.00 (the per share fair market
value at the date of grant for financial reporting purposes). The Company is
recognizing the deferred compensation ratably over the period that the
repurchase agreement lapses. 2,000,000 of such shares, however, will no longer
be subject to repurchase in the event there are certain changes of control of
the Company. The merger (Note 10) constitutes a change of control and
accordingly, any remaining unamortized deferred compensation will be expensed at
that time.
Stock Option Plan
The Company has reserved 4,300,000 shares of common stock for issuance
under its 1995 Stock Option Plan. Under the plan, either incentive or
nonstatutory stock options may be granted to purchase shares of common stock.
Nonstatutory stock options may be granted to employees, nonemployee members of
the Board of Directors and consultants at prices not less than 85% of the fair
value of the stock at the date of the grant, as determined by the Board.
Incentive stock options may be granted only to employees at prices not lower
than the fair value of the stock at the date of grant, as determined by the
Board. Options granted under the plan are generally exercisable at any time, and
expire no later than ten years from the date of grant. Options granted vest at a
rate of 25% per annum.
The following table presents the option activity under the Option Plan for
the period from inception to January 28,1996.
F-29
<PAGE> 156
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTION
NUMBER OF PRICE
OPTIONS PER SHARE
--------- ---------
<S> <C> <C>
Options outstanding at January 29, 1995..................... -- --
Granted..................................................... 3,996,675 $ .25
Exercised................................................... (16,729 ) $ .25
Forfeited................................................... (219,199 ) $ .25
--------- ----
Options outstanding at January 28, 1996..................... 3,760,747 $ .25
--------- ----
Exercisable at January 28, 1996............................. 627,193 $ .25
========= ====
</TABLE>
In February and March 1996, the Company issued options to purchase 486,000
shares of common stock to various employees. Such options are ratably
exercisable ranging from $.25 to $2.95 per share and vest ratably over a four
year period.
In March 1996, two officers purchased 1,000,000 shares of the Company's
Common Stock each at a purchase price of $1.00 per share. All of such shares are
subject to a right of repurchase which lapses after five years of service with
the Company provided, however, that the right of repurchase will lapse at the
rate of one-eighth in September 1996 and 1/48(th) per month thereafter if the
merger with Atari closes (Note 10).
Common Stock Reserved for Future Issuance
As of January 28, 1996, the Company has reserved the following shares of
common stock for issuance in connection with:
<TABLE>
<S> <C>
Conversion of redeemable preferred stock................. 27,785,370
Conversion of redeemable preferred stock expected to be
issued in connection with the Moduler Electronics
acquisition............................................ 1,911,000
Stock option plan........................................ 4,283,271
Warrants to purchase common stock........................ 600,000
----------
34,579,641
==========
</TABLE>
8. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:
In fiscal 1996, the Company issued 27.8 million shares of Series A
preferred stock at $1.00 per share for cash and conversion of certain notes
payable. The Company also issued 30,000 shares of Series A preferred stock to a
consultant for services. The Company also issued 1,000,000 shares of preferred
stock to TEAC in exchange for 482,850 shares of the Company's common stock and
the termination of the TEAC stockholder agreement. The exchange with TEAC was
accounted for as an equity transaction and the value of the preferred stock
issued was charged to accumulated deficit in the accompanying 1996 statement of
operations.
The rights, restrictions and preferences of the preferred stock are as
follows:
- Annual dividends of $.09 per share per annum, when and if declared by the
Board of Directors. Dividends are cumulative and are payable, at the
option of the Company, in cash or shares of common stock.
- In the event of any liquidation, dissolution or winding up of the
Company, the holders of preferred stock shall be entitled to receive
proceeds equal to $1.00 per share plus the greater of (i) all cumulative
unpaid dividends or (ii) any declared and unpaid dividends for preferred
stock then held by them. This distribution will occur prior to any
distribution to the common shareholders. At January 28, 1996, the
liquidation preference was $29,715,761.
F-30
<PAGE> 157
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- Upon the election of the holders of a majority of the outstanding shares
of preferred stock, 33%, 33% and 34% of the stock will be redeemed in
cash by the Company on February 4, 2000, February 4, 2001, and February
4, 2002, respectively. The redemption price shall be equal to $1.00 plus
all accrued but unpaid dividends.
- The following table represents the redemption amounts required under the
agreement:
<TABLE>
<CAPTION>
YEAR
--------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
2000......................................... $ 9,905
2001......................................... 9,905
2002......................................... 9,906
-------
$ 29,716
=======
</TABLE>
- At the option of the holder, each preferred share is convertible into one
share of common stock. The conversion rate is subject to change upon the
occurrence of certain events. The preferred stockholders have agreed to
convert each share of preferred stock into one share of common stock
prior to the closing of the merger with Atari (Note 10).
- The preferred stock converts automatically into common stock at the
earlier of (i) the closing of an underwritten public offering of the
Company's common stock at a price of not less than $5.00 per share and an
aggregate offering price of greater than $10,000,000, or (ii) upon the
affirmative election of the holders of at least 66.7% of the then
outstanding preferred stock.
- The holders of preferred stock are entitled to one vote for each share of
common stock into which such share may be converted.
9. EXPORT SALES AND SIGNIFICANT CUSTOMERS:
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives and original equipment
manufacturers. The Company's geographic sales as a percent of 1996 net revenues
are as follows:
<TABLE>
<S> <C>
United States.......................................... 19%
Europe................................................. 81%
---
100%
===
</TABLE>
Sales to major customers as a percentage of 1996 product sales are as
follows:
<TABLE>
<S> <C>
Olidata................................................. 34%
Connexe................................................. 12%
Liuski.................................................. 11%
Aashima................................................. 10%
</TABLE>
10. PROPOSED MERGER AND ACQUISITION:
Atari Corporation
On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. The merger requires
shareholder approval and is expected to be consummated in the second quarter of
calendar year 1996. In connection with the merger, Atari extended a bridge loan
to the Company in the amount of $25.0 million maturing on September 30, 1996
with a stated interest rate of 8 1/2% per annum. If the merger is not
consummated, the bridge loan is convertible at the option of Atari or the
F-31
<PAGE> 158
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company into shares of the Company's Series A preferred stock and warrants to
acquire the Company's Series A preferred stock, subject to certain conditions.
Moduler Electronics
In March 1995, the Company agreed to acquire the hard disk drive division
of Moduler Electronics for 1,911,673 shares of the Company's Series A preferred
stock and a warrant to purchase 500,000 shares of the Company's common stock at
an exercise price of $.25 per share. The Company subsequently assumed
operational and management control of certain portions of the hard disk drive
business of Moduler Electronics. The verbal agreement contemplated that prior to
the Company's acquisition, Moduler Electronics would divest itself of certain
voice coil assembly and other operations not directly involved in its hard disk
drive business.
In April 1996, following Moduler Electronics' divestiture of its voice coil
business and businesses unrelated to its hard disk drive operations, the Company
acquired 90% of the outstanding capital stock of Moduler Electronics. Upon the
closing of the transaction, the Company acquired the stock in consideration for
1,911,673 shares of the Company's Series A preferred stock and a warrant to
purchase 750,000 shares of the Company's common stock at an exercise price of
$0.25 per share. The warrant is immediately exercisable as to 500,000 shares of
the Company's common stock and becomes exercisable with respect to the remaining
250,000 shares when there becomes available to Moduler Electronics certain
borrowings and credit facilities in the amount of $29,000,000. Subject to the
foregoing, the warrant may be exercised at any time until February 25, 2001.
11. RETIREMENT SAVING PLAN
In January 1996, the Company adopted the Employee 401(K) Saving Plan ("the
plan"). The plan covers substantially all of employees and allows participants
to defer a portion of their annual compensation on a pre-tax basis. The plan
permits, but does not require, additional matching contributions and profit
sharing contributions to the plan by the Company on behalf of all participants.
In fiscal 1996, the Company did not make any such contributions.
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
Change in Name
On June 18, 1996, the Company changed its name to JTS Corporation from JT
Storage, Inc.
Litigation
The Company has been served with a complaint filed in the Superior Court of
the State of California in and for the County of Santa Clara by Venture Lending
& Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million. Such amount includes
the lease liability of $3.4 million which is recorded in the accompanying
balance sheet. The Company is currently evaluating its alternatives and the
parties have commenced preliminary settlement discussions.
F-32
<PAGE> 159
JTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28,
1996
APRIL 28, -----------
1996
---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalent and restricted cash............................. $ 5,116 $ 547
Trade accounts receivable, less allowance for doubtful accounts of
$1,086 and $730, respectively....................................... 9,608 1,286
Receivable from Moduler Electronics................................... -- 6,892
Other receivables..................................................... 1,182 812
Inventories........................................................... 12,983 2,093
Prepaid and other current assets...................................... 1,585 240
------ ------
30,474 11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,212 7,943
GOODWILL.............................................................. 185 --
------ ------
TOTAL....................................................... $ 46,871 $ 19,813
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................... $ 10,277 $ 4,323
Notes payable to stockholders......................................... 1,965 1,000
Note payable to Atari Corporation..................................... 25,000 --
Accounts payable --
Trade............................................................... 18,240 7,226
Moduler Electronics................................................. -- 9,546
Accrued liabilities................................................... 4,536 3,501
Current portion of capitalized lease obligation and long-term debt.... 1,651 1,520
------ ------
61,669 27,116
------ ------
LONG-TERM OBLIGATIONS................................................. 6,381 3,485
------ ------
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,687
and 27,785 shares, respectively..................................... 29,697 27,785
------ ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
outstanding: 9,421 and 7,367 shares, respectively................... -- --
Additional paid-in capital............................................ 8,213 6,004
Deferred compensation................................................. (3,990) (4,320)
Notes receivable from stockholders.................................... (2,610) (623)
Accumulated deficit................................................... (52,489) (39,634)
------ ------
(50,876) (38,573)
------ ------
TOTAL....................................................... $ 46,871 $ 19,813
====== ======
</TABLE>
See accompanying notes.
F-33
<PAGE> 160
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 28, 1996 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
REVENUE:
Product sales................................................... $ 17,481 $ 48
Technology license revenue...................................... 100 2,029
-------------- -------
17,581 2,077
-------------- -------
COST AND EXPENSES:
Cost of sales................................................... 19,434 43
Research and development........................................ 7,406 1,758
Selling, general and administrative............................. 3,103 718
-------------- -------
29,943 2,519
-------------- -------
OPERATING LOSS (12,362) (442)
Interest income................................................... 105 --
Interest expense.................................................. (542) --
Other expense, net................................................ (56) (2)
-------------- -------
NET LOSS $(12,855) $ (444)
========== ==========
NET LOSS PER COMMON SHARE......................................... $ (1.47) $(0.10)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 8,732 4,360
========== ==========
See accompanying notes.
</TABLE>
F-34
<PAGE> 161
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------
APRIL 28, 1996 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations....................................... $(21,216) $ (3,228)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases................................................ (1,763) (1,654)
Cash acquired from the Moduler acquisition........................ 1,634 --
-------- --------
Net cash used in investing activities............................. (129) (1,654)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock......................... -- 8,855
Proceeds from note payable -- Atari Corporation................... 25,000 --
Other............................................................. 914 (841)
-------- --------
Net cash provided by financing activities......................... 25,914 8,014
NET INCREASE IN CASH AND EQUIVALENTS.............................. 4,569 3,132
CASH AND EQUIVALENTS:
Beginning of period............................................... 547 --
-------- --------
End of period..................................................... $ 5,116 $ 3,132
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred stock in connection with the Moduler
acquisition..................................................... $ 1,912 $ --
Assets of $17,296 acquired net of related liabilities of $15,449
assumed from Moduler............................................ 1,847 --
======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE> 162
JTS CORPORATION
NOTES TO CONDENSED 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, in the opinion of management, the accompanying
financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto for the full year included elsewhere in this
document.
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 first quarter of 1996 and 1995 was April 28 and April 30,
respectively.
NOTE 2. ACQUISITION OF MODULER ELECTRONICS
In April 1996, the Company acquired 90% of the outstanding shares of
Moduler Electronics, a disk drive manufacturer. The Company acquired the stock
in consideration for 1,911,673 shares of the Company's Series A preferred stock
and a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The acquisition was accounted for as a
purchase.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Inventories and other current assets.............................. $ 9,542
Equipment and leasehold improvements.............................. 7,754
Current liabilities assumed....................................... (12,681)
Long-term liabilities assumed..................................... (2,768)
--------
Net assets acquired..................................... $ 1,847
========
</TABLE>
The table below reflects condensed pro forma operating results of the
combined companies for the three months then ended as if the acquisition took
place at the beginning of each period.
<TABLE>
<CAPTION>
APRIL 28, APRIL 30,
1996 1995
--------- ---------
<S> <C> <C>
Revenues................................................ $ 17,581 $ 2,077
Net loss................................................ $ (12,820) $ (1,143)
</TABLE>
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 28, JANUARY 28,
1996 1996
--------- -----------
<S> <C> <C>
Raw materials.......................................... $ 9,355 $ 2,093
Work in process........................................ 3,353 --
Finished goods......................................... 275 --
------- ------
$ 12,983 $ 2,093
======= ======
</TABLE>
NOTE 4. MERGER WITH ATARI CORPORATION
On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. On April 8, 1996, the
merger agreement was amended and restated. The merger required shareholder
approval and is expected to be consummated in the second quarter of 1996. In
connection with the merger, Atari extended a bridge loan to the Company in the
amount of $25.0 million maturing on September 30, 1996 with a stated interest
rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is
convertible at the option of Atari or the Company into shares of the Company's
Series A preferred stock, subject to certain conditions.
F-36
<PAGE> 163
REPORT OF ARTHUR ANDERSEN LLP
To Moduler Electronics (India) Private Limited:
We have audited the accompanying statements of assets and liabilities of
The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as
of January 28, 1996 and January 31, 1995, and the related statements of revenues
and expenses and cash flows for the year ended January 28, 1996. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The financial statements referred to above have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the joint proxy statement of Atari
Corporation and JTS Corporation, formerly JT Storage, Inc.) as described in Note
1, and are not intended to be a complete presentation of the assets,
liabilities, revenues, expenses and cash flows of Moduler Electronics (India)
Private Limited.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited as of January 28, 1996
and January 31, 1995, and the related revenues, expenses and cash flows for the
year ended January 28, 1996 in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 1 to the
financial statements, the Division has suffered a loss from operations and has
an excess of liabilities over assets that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
San Jose, California
April 4, 1996
F-37
<PAGE> 164
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENTS OF ASSETS AND LIABILITIES
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 488 $ 65
Restricted cash balances............................................ 380 197
Due from other business units, net.................................. -- 776
Advances to suppliers............................................... 249 12
Inventories......................................................... 5,983 1,296
Prepaid expenses and other current assets........................... 264 61
------- ------
Total current assets........................................ 7,364 2,407
PLANT AND EQUIPMENT, at cost, net of accumulated depreciation......... 5,603 1,645
------- ------
Total assets................................................ $12,967 $ 4,052
------- ------
LIABILITIES
CURRENT LIABILITIES:
Secured short term borrowings....................................... $ 6,085 $ 367
Current portion of long term loans and capital lease obligations.... 105 67
Due to related parties, net......................................... 1,168 1,261
Accounts payable.................................................... 6,268 1,494
Accrued liabilities................................................. 197 46
------- ------
Total current liabilities................................... 13,823 3,235
CAPITAL LEASE OBLIGATIONS, net of current portion..................... 21 --
SECURED LONG TERM LOANS, net of current portion....................... 2,742 200
------- ------
Total liabilities........................................... 16,586 3,435
------- ------
NET (LIABILITIES) ASSETS.............................................. $(3,619) $ 617
======= ======
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-38
<PAGE> 165
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENT OF REVENUES AND EXPENSES
FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<S> <C>
NET REVENUES...................................................................... $ 15,580
COST OF GOODS SOLD................................................................ (19,160)
--------
Gross margin (deficit)....................................................... (3,580)
OTHER INCOME/(EXPENSE):
Interest and other income....................................................... 141
Foreign currency loss........................................................... (333)
Interest expense................................................................ (464)
--------
Net loss........................................................................ $ (4,236)
========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
F-39
<PAGE> 166
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $(4,236)
Adjustments to reconcile net loss to net cash used in operating activities --
Depreciation expense.......................................................... 667
Write-off of plant and equipment.............................................. 558
Decrease/(increase) in current assets --
Due from other business units, net.......................................... 776
Advances to suppliers....................................................... (237)
Inventories................................................................. (4,687)
Prepaid expenses and other current assets................................... (203)
Increase (decrease) in current liabilities --
Due to related parties, net................................................. (93)
Accounts payable............................................................ 4,774
Accrued liabilities......................................................... 151
--------
Net cash used in operating activities.................................... (2,530)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment................................................. (2,491)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net secured short term borrowings................................................ 5,718
Principal payments under secured long term loan.................................. (91)
--------
Net cash provided by financing activities................................ 5,627
--------
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH......................... 606
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period.................... 262
--------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period.......................... $ 868
========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
F-40
<PAGE> 167
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION:
BASIS OF STATEMENTS
The accompanying statements of assets and liabilities of the Hard Disk
Drive Division ("the Division") of Moduler Electronics (India) Private Limited
("the Company") as of January 31, 1995 and January 28, 1996 and the related
statements of revenues and expenses and of cash flows for the period from
February 1, 1995 to January 28, 1996 ("the statements") have been prepared in
conformity with generally accepted accounting principles in the United States of
America, from the accounting books and records maintained by the Company at
Madras, India. The statements have been prepared for the purpose of inclusion in
the registration statement on Form S-4 to be filed by JTS Corporation ("JTS",
formerly JT Storage, Inc.) in compliance with the rules and regulations of the
Securities and Exchange Commission. The Form S-4 filing of JTS is pursuant to
its proposed acquisition of Atari Corporation ("Atari"). In April 1996, JTS
acquired 90% of the outstanding equity shares of the Company. The Division is
likely to be the only remaining business of the Company after the transfer of
the Voice Coil Magnetic Assembly ("VCMA") business to an entity owned by the
Chairman of the Company and his family members. As of April 4, 1996, this
transfer had been made, subject to completion of legal documentation.
Although the Company began business in fiscal 1986, the Division first
began significant operations in fiscal 1996. Division operations prior to fiscal
1996 were insignificant; accordingly, the accompanying financial statements
include the Statements of Assets and Liabilities of the Division as of January
28, 1996 and January 31, 1995 and the related Statement of Revenues and Expenses
for the period from February 1, 1995 to January 28, 1996. These statements were
prepared from the Balance Sheet and the Income Statement, respectively, of the
total businesses of the Company, from which balances and transactions relating
to the businesses that are being divested were excluded.
The Division developed its disk drive manufacturing capabilities during
fiscal 1996 which has resulted in an operating loss and a working capital
deficit of $6,459,000. In addition, the Company will require additional capital
in order to achieve volume production. The Division's disk drive production is
dedicated exclusively to JTS and JTS has recently completed its acquisition of
90% of the Division. The auditors' report on the JTS financial statements dated
April 4, 1996 contains a paragraph regarding a substantial doubt regarding the
ability of JTS to continue as a going concern. These factors raise a substantial
doubt about the Division's ability to continue as a going concern. As discussed
above, JTS plans to merge with Atari. In the opinion of management, the Atari
merger, if successful, would raise capital adequate to fund operations for the
next 12 months.
Since the Company did not maintain separate accounting records for the
Division, certain estimates, which management believed to be reasonable, were
required in order to segregate the Division's account balances as of January 31,
1995 as well as to reflect the proposed divestiture of other businesses as of
January 28, 1996. The segregation of account balances relating to the Division
was made on the following bases:
- Identification basis -- Account balances relating to assets, liabilities,
revenues and expenses ("account balances") pertaining to the Division
were specifically identified and segregated.
- Agreed basis -- Account balances which have been specifically agreed to
be assumed by the Division were identified and segregated.
- Transfer basis -- Account balances pertaining to other businesses which
were being divested, were identified and excluded.
F-41
<PAGE> 168
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- Allocation basis -- Account balances related to expenses incurred by the
Company for the Division have been included in total as the Division was
the significant portion of the Company's operations for fiscal 1996.
INCORPORATION
The Company was incorporated on March 24, 1986 as a private company under
the Indian Companies Act, 1956 in the state of Maharashtra. The Company is owned
principally by Asperal Holdings, Inc. and Dexar Holdings, Inc., companies
registered in Panama, which have a 45% equity stake each. The remaining 10% of
the Company's outstanding equity shares are owned by the Chairman of the
Company, Mr. Manohar Lal Tandon, and his relatives ("the Tandon Family").
The Company was established to operate a 100 percent Export Oriented Unit
("EOU") in the Madras Export Processing Zone ("MEPZ"), a free trade zone
established by the Government of India at Madras, Tamil Nadu, India. The
Company's industrial unit is located in a government provided low cost standard
design factory within the MEPZ. The Company initially undertook the manufacture
of computer hard disk drive components such as Head Gimble Assemblies ("HGA")
and Head Stack Assemblies ("HSA"). During the first five years of operations,
the Company diversified its product line to include two other products, namely,
VCMA and Switch Mode Power Supplies ("SMPS").
During fiscal 1994, the Company closed its SMPS division and established
another EOU for the assembly of hard disk drives. Under the approval obtained
from the Government of India in September 1994, the Company was originally
licensed to manufacture, on an average, 286,000 hard disk drives annually. In
November 1995, the Company obtained a revised approval to manufacture, on an
average, 807,000 hard disk drives and 418,000 subassemblies (i.e., HGAs and
HSAs) annually. In December 1994, the Company discontinued production of HGAs
and HSAs for customers other than JTS, with which it began collaborations to
manufacture hard disk drives.
Though the Division started shipping nominal quantities in January 1995,
commercial production of hard disk drives commenced only in October 1995. The
Company continued to produce VCMAs until January 18, 1996 when the VCMA business
was transferred to a related party. Prior to its divestiture, a portion of the
voice coil assemblies produced by the VCMA business was used in the manufacture
of hard disk drives, while the rest were sold to a related party. Except for the
VCMA business, the Company operated as a captive manufacturer for JTS during
fiscal 1996. With its association, JTS has assumed operational and management
control of certain portions of the Division and has provided financing for the
hard disk drive business and corporate support in areas such as process
engineering, tooling, vendor selection and financial management. Since assuming
operational control, JTS has employed several expatriates consisting of disk
drive industry professionals who have filled senior positions in engineering,
manufacturing, quality control and materials management functions of the
Division.
Export Oriented Unit
In order to encourage export oriented businesses and foreign currency
inflows, the Government of India offers special incentives to EOUs established
in export processing zones such as state grants and subsidies, exemptions
relating to import licenses, exemptions from payment of customs duty on imported
inputs and excise duty on local material procurements, and allotment of low cost
factory space. Such EOUs are also exempted from payment of corporate income
taxes for a block of five years during the first eight years of operations,
subject to fulfillment of certain conditions. Currently, export earnings
received in convertible foreign currency continue to be exempt from tax, even
after the tax holiday period.
F-42
<PAGE> 169
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Current Operations
The Division currently manufactures hard disk drives with different
capacity points, based on technical know-how and designs provided by JTS. The
Division's products are marketed through JTS under the trade names Palladium and
Nordic, and are sold to original equipment manufacturers and system integrators
who incorporate the products into desktop and notebook computers. The Division
remained in development stage until October 1995 when it first started shipping
commercial quantities.
Sources of Supply
Many components incorporated in, or used in the manufacture of, the
Division's products are currently sourced from a single supplier. JTS procures
components for the Division, which it purchases from third party manufacturers
and in turn sells or consigns to the Division. JTS' customers have placed
certain restrictions on vendor and design changes.
The Division purchases all of its components and equipment pursuant to
purchase orders placed from time to time and has no guaranteed supply
arrangements. In the past, there have been certain instances of supply shortages
which had caused delays in manufacturing and loss of sales. Supply shortages
resulting from a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which would have a material adverse impact on the
Division's operating results. Further, the Division produces in-house a number
of critical subassemblies incorporated in the final hard disk drive product.
Failure to produce these subassemblies in adequate quantity or quality could
also adversely impact the operating results of the Division.
Manufacturing Relationships
In the past, the Company has sold subassemblies and other components to
Xyratex in Havant, United Kingdom for the manufacture of hard disk drives under
a subcontract manufacturing agreement between Xyratex and JTS. With the
commencement of commercial production of hard disk drive products by the Company
in October 1995, the Division stopped supplying Xyratex.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Foreign Currency Translation
The Division has determined the United States ("US") dollar to be its
functional currency, in accordance with the Statement of Financial Accounting
Standards No 52, "Foreign Currency Translation", based on indicators such as
cash flows, sales market, sales price, expense, financing and inter-company
transactions and arrangements. Since the Division's books are maintained in
Indian rupees which is not its functional currency, account balances were first
remeasured in US dollar. Since the Division's functional and reporting
currencies are the same, the remeasurement process is intended to produce the
same result as if the Division's books had been maintained in the functional
currency, and obviates separate translation.
Nonmonetary assets and liabilities such as inventories, plant and equipment
and accumulated depreciation thereon have been remeasured using historical
currency exchange rates prevailing at the dates transactions relating to such
elements were recognized in the statements. Expenses related to such nonmonetary
assets and liabilities such as manufacturing overhead costs included in cost of
goods sold have been remeasured using average exchange rates for the period to
approximate remeasurement at the historical exchange rates prevailing at the
dates those elements were recognized in the statements.
All other monetary assets and liabilities that are not denominated in the
Division's functional currency have been translated at the current exchange
rates prevailing on the dates of the statements. Exchange gains
F-43
<PAGE> 170
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and losses from such translation of monetary assets and liabilities have been
recognized in determining net loss for the current period.
Certain expenses and cash flows have been translated at average exchange
rates for the period to approximate translation at the exchange rates prevailing
at the dates those elements were recognized in the statements.
Gains and losses on foreign currency transactions have been included in
determining net loss for the current period in the Statement of Revenues and
Expenses.
Pervasiveness of Estimates
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the statements and the
related amounts of revenues and expenses during the reporting period. The
Company has maintained its books of accounts in accordance with Indian
accounting standards and in the local currency, the Indian rupee. As discussed
above, the Division's statements have been remeasured into US dollar in
accordance with the Statement of Financial Accounting Standards No 52. As
discussed in Note 1, certain assumptions and estimates which, management
believed to be reasonable, were required to segregate the Division's account
balances from those relating to the rest of the Company's businesses as of
January 31, 1995 and to reflect the divestiture of other businesses as of
January 28, 1996. Actual results could have been different from these estimates
and remeasurements.
Revenue Recognition
Revenues on product sales are recognized at the time of shipment and
include incentives provided by the Government of India on export sales.
Substantially, all shipments are sent directly to JTS' end customers, but are
invoiced by the Division to JTS, which in turn bills and collects from the end
customers.
The Division's accounts receivables as of the dates of the statements
comprised of receivables outstanding from JTS arising from sale of hard disk
drives and receivables from a related party arising from sale of VCMAs. The
Company has not experienced bad debts associated with either of these customers
in the past, and accordingly, has not recorded an allowance for doubtful
accounts.
Due from Other Business Units, Net
As of January 31, 1995, due from other business units represent the excess
of assets over liabilities of the Company's businesses excluding the Division.
Such receivables are expected to be collected within the next twelve months.
Inventories
Inventories include direct materials, freight thereon, direct labor and
related manufacturing overhead costs. The Division values its inventories at
cost, determined on first in, first out ("FIFO") basis, or market value,
whichever is lower.
F-44
<PAGE> 171
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
Raw materials......................................... $ 2,520 $ 1,225
Work-in-process....................................... 1,660 71
Finished goods........................................ 1,803 --
------ ------
$ 5,983 $ 1,296
====== ======
</TABLE>
JTS and the Division have an agreement whereby JTS has undertaken to bear
all inventory losses the Division might incur by repurchasing such inventories
from the Division at their carrying value. As of January 28, 1996, JTS assumed
inventory valued at $2,747,802, which is netted against the inventory balance
shown above.
Plant and Equipment
Plant and equipment is recorded at cost and depreciation is computed using
the straight line method over the estimated useful lives of the assets.
Plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE JANUARY 28, JANUARY 31,
(YEARS) 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment............................ 2 - 7 $ 6,703 $ 2,237
Furniture, fixtures and miscellaneous assets....... 2 - 6 288 129
----- ------- ------
6,991 2,366
Less -- Accumulated depreciation................... (1,388) (721)
------- ------
$ 5,603 $ 1,645
======= ======
</TABLE>
Costs of normal repairs and maintenance are expensed as incurred. Major
replacements or betterments of plant and equipment are capitalized. When items
are sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in
determining net loss. The amount expensed for repairs and maintenance for the
period from February 1, 1995 to January 28, 1996 was $494,104.
The Division has certain specialized manufacturing equipment used in its
operations.
Income Tax
Under the Indian Income Tax Act, 1961, the Division, being an EOU located
in an export processing zone, is exempted from payment of corporate income taxes
for a block of five years during the first eight years of operations, subject to
fulfillment of certain conditions.
The Division continues to be exempt from income tax to the extent of income
attributable to the export sales of the Division. As the Division did not have
any taxable income for the period from February 1, 1995 to January 28, 1996, no
provision for income tax has been made.
F-45
<PAGE> 172
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Warranty Costs
The Division manufactures disk drive products to customer specifications
and components for such disk drives are sourced from vendors specified by JTS.
JTS generally provides a three year limited warranty on the Palladium and Nordic
drives manufactured by the Division and has agreed to bear the costs of all
warranty claims, product returns and rework charges. Accordingly, no warranty
cost has been recorded in the Division's statements as of January 28, 1996 and
January 31, 1995.
Prior to the divestiture of the Company's VCMA business, voice coil
products were manufactured and sold principally to a related party which
provided product specifications and mandated specific component sources. No
provision has been provided for any warranty costs on the voice coils sold prior
to the divestiture since the related party, to which the VCMA business is being
sold, has agreed to assume any claims related to such products.
Supplemental Disclosure of Cash Flow Information
For the purposes of the Statement of Cash Flows, the Division considers all
highly liquid investments purchased with original maturities of 90 days or less
to be cash equivalents. The carrying amounts reported in the statements of
assets and liabilities for cash and cash equivalents approximate their fair
values. Cash paid for interest for the period from February 1, 1995 to January
28, 1996 was $404,522. During fiscal 1996, the Company entered into capital
lease obligations amounting to $36,170. The Company also financed the purchase
of equipment amounting to $2,657,145 with secured long-term loans (Note 5).
During the period from February 1, 1995 to January 28, 1996, the Division
received equipment and inventories amounting to $2,569,471 and $6,748,512,
respectively, from related parties. These were recorded as due to related
parties in the Statement of Cash Flows since they are non-cash transactions.
3. RESTRICTED CASH BALANCES:
Restricted cash balances comprise margin money deposits with banks
amounting to $380,013 and $197,578 as of January 28, 1996 and January 31, 1995
respectively. These deposits are maintained as security against letters of
credit issued by banks on behalf of the Division (see Note 4 below). During the
period from February 1, 1995 to January 28, 1996, rates of interest on these
deposits ranged from 9 to 12% per annum.
4. SECURED SHORT TERM BORROWINGS:
The Company has entered into an agreement with a consortium of three Indian
Government owned commercial banks to obtain working capital credit facilities.
The consortium was established in February 1995. While the three banks have
agreed to a total extension of credit and an allocation of participation, each
bank independently sanctions its portion of the participation. The lead bank in
the consortium, Indian Bank, has fully sanctioned its limit, while the other two
banks have only partially sanctioned their participation as of January 28, 1996.
The credit agreement with the consortium has four separate facilities,
namely, export sales accounts receivable bill discounting ("bill discounting"),
exports sales order based inventory packing credit ("packing credit"), foreign
letters of credit ("letters of credit" or "LC"), and letters of guarantee
("guarantee").
Bill discounting is a post-shipment credit facility used to finance export
receivables. Under the Company's bill discounting lines, export invoices are
presented to the bank, upon which the bank advances funds for the full value of
the invoice. Bills are typically discounted for ninety days. This facility is
self-
F-46
<PAGE> 173
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
liquidating in nature whereby advances made by the bank to the Company against
bills discounted are settled through direct retirement of bills by the foreign
customers.
Under the packing credit advance which is a pre-shipment facility, the bank
finances procurement of inventories and other costs incurred for fulfillment of
the Division's export orders. The advances under this facility are liquidated
using the proceeds of bills discounted by the Division. The Division has been
fully utilizing its sanctioned credit limits on its bill discounting and packing
credit facilities, and therefore the total credit availed by the Division
facilitates a continuous rotation of its inventory and invoice financing
requirements.
Under the letter of credit facility, the bank guarantees timely payments to
the Division's foreign suppliers. Letter of credit is a non-funded limit which,
when issued, results in a contingent liability to the Division. The Division is
obligated to pay the bank at the time the bank remits money against documents
presented by the foreign supplier. Contingent liabilities arising from the use
of letters of credit have not been included in the Division's statements but
have been disclosed in Note 7 below.
Letters of guarantee are provided by the bank on behalf of the Division to
third parties with which it has business dealings, to guarantee due performance
of contracts as well as fulfillment of monetary obligations by the Division.
F-47
<PAGE> 174
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following table summarizes details relating to the credit facilities
described above (in thousands):
<TABLE>
<CAPTION>
STATE BANK OF STATE BANK OF
INDIAN BANK TRAVANCORE HYDERABAD
--------------- ------------- -------------
PARTICULARS 1996 1995 1996 1995 1996 1995
- --------------------------------------------------- ------ ------ ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1. Available lines of credit
(a) Bill Discounting............................. $3,925 $ 972 $1,389 $ -- $ 139 $ 222
(b) Packing Credit............................... 834 556 -- -- 83 --
(c) Letters of Credit............................ 2,431 1,111 1,216 -- 361 361
(d) Letters of Guarantee......................... 28 28 -- -- -- --
2. Amount outstanding
(a) Bill Discounting............................. 3,878 165 1,277 -- 143 --
(b) Packing Credit............................... 503 202 -- -- 80 --
(c) Advances for overdue letters of credit....... 204 -- -- -- -- --
(d) Letters of Credit............................ 2,268 -- 784 -- 279 --
(e) Letters of Guarantee......................... -- -- -- -- -- --
3. Amount by which sanctioned limits have been
exceeded
(a) Bill Discounting............................. -- -- -- -- 4 --
(b) Packing Credit............................... -- -- -- -- -- --
(c) Letters of Credit............................ -- -- -- -- -- --
(d) Letters of Guarantee......................... -- -- -- -- -- --
4. Interest rates
(a) Bill Discounting
--if availed in US Dollars................... 7.5% 6.5% 7.5% -- 7.5% 6.5%
--if availed in Indian Rupees................ 13-15% 13-15% 13-15% -- 13-15% 13-15%
(b) Packing Credit
--if availed in US Dollars................... 7.5% 6.5% -- -- 6.5% --
--if availed in Indian Rupees................ 13-15% 13-15% -- -- 13-15% --
5. Margin
(a) Packing Credit............................... 25% 10% -- -- 25% --
(b) Letters of Credit............................ 10% 10% 10% -- 10% 10%
(c) Letters of Guarantee......................... 10-50% 10-50% -- -- -- --
</TABLE>
Bill discounting agreements are secured by export receivables. Packing
credit agreements are secured by a first charge on the Company's stocks of raw
materials, work in process and finished goods inventories.
Outstanding letters of credit are secured by a charge on goods covered
under the letter of credit and a lien on deposits made by the Company with the
banks.
Letters of guarantee are secured by counter guarantees issued by the
Company and a lien on deposits made by the Company with the banks.
All the above agreements and facilities are fully covered by the personal
guarantee of the Chairman of the Company. The banks have sought for a second
collateral on the Company's plant and equipment, present and future, which have
already been used as collateral for the Company's secured long term loans (see
Note 5 below). As of the date of the statements, the Company was in the process
of fulfilling this requirement.
F-48
<PAGE> 175
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
According to the terms stipulated in the credit facility sanction letter of
Indian Bank, the Company's owners were required to contribute unsecured loans of
approximately $1.8 million and increase the paid-in capital of the Company to
$611,281 (from $69,463) before September 30, 1995. The Company has not fulfilled
this requirement as of the date of the statements. However, the Company has
obtained an undertaking from JTS, that advances made to the Division by JTS to
the extent of $2,558,650, will not be withdrawn or adjusted, either in part or
full, against the bills drawn by the Division, and, in due course, will be
converted into equity capital/unsecured loan.
5. SECURED LONG TERM LOANS:
The Company has entered into term loan agreements with the Industrial
Credit and Investment Corporation of India Limited ("ICICI"), a term lending
institution in India. In September 1992, the Company was sanctioned a rupee loan
of approximately $571,429 for the purpose of augmenting its existing
manufacturing facilities. Approximately $304,713 was available to the Company to
borrow as of January 31, 1995, subsequent to which the Company decided not to
fully avail of this loan before the last date of withdrawal, February 15, 1995.
The loan is repayable in Indian rupees in 12 equal quarterly installments of
approximately $19,450 each commencing from May 1995. Interest on outstanding
amounts are payable quarterly at the rate of 20% per annum.
In October 1994, the Company was sanctioned an additional loan by the
ICICI, for approximately $2,550,000, denominated in four foreign currencies, for
the import of capital equipment. The Division had not borrowed against the loan
as of January 31, 1995, and had utilized the loan for a US dollar equivalent
amount of $2,625,758 as of January 28, 1996. As of January 28, 1996 there were
immaterial unutilized balances in three of the four foreign currencies under the
loan, which were cancelled by ICICI on February 22, 1996 based on a written
request by the Company. The loan is repayable in US dollar in 13 equal quarterly
installments of $201,981 each commencing from April 1997. Interest on
outstanding amounts is payable quarterly at the rate of US dollar LIBOR plus
2.75% per annum. For the period from February 1, 1995 to January 28, 1996, the
interest rates on this loan ranged from 8.7 to 9.5% per annum.
Both loans are secured by all of the Company's property and equipment and
are fully covered by the personal guarantee of the Chairman of the Company.
According to the terms of the agreement for the foreign currency loan, the
Company's promoters were required to contribute unsecured loans of approximately
$1.8 million and increase the paid-in capital of the Company to $611,281 (from
$69,463). Though this amount has not been contributed by the owners as of the
date of the statements, the Company has obtained an undertaking from JTS, that
advances made to the Division by JTS to the extent of $2,558,650, will not be
withdrawn or adjusted, either in part or full, against the bills drawn by the
Division, and, in due course, will be converted into equity capital/unsecured
loan.
In addition to the ICICI term loans, the Company has entered into a term
loan agreement with Corporation Bank, a Government owned commercial bank in
India, for the purchase of automobiles. As of January 28, 1996, the Division had
utilized approximately $31,386 of the total sanctioned amount of $41,678. The
loan is secured by the automobiles and is repayable in thirty equal monthly
installments of $1,047 each.
F-49
<PAGE> 176
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future repayments under the Division's long-term loans are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING LOAN REPAYMENTS
--------------------------------------------- ---------------
<S> <C>
1997 (current portion of long term loans).... $ 90
1998......................................... 898
1999......................................... 834
2000......................................... 808
2001......................................... 202
------
$ 2,832
======
</TABLE>
6. DUE TO RELATED PARTIES, NET:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Due from related parties
Ultra Tek Devices Limited.................................. $ 62 $ 80
Tantec Magnetics........................................... 318 --
Eastern Peripherals Limited................................ -- 65
Memory Electronics......................................... -- 18
Golden Computers Limited................................... -- 120
Advance Technology Devices................................. -- 92
------ ------
Total............................................ 380 375
------ ------
Due to related parties
JTS........................................................ 1,158 667
Nidec Corporation.......................................... 367 --
Tandon Family.............................................. 14 16
Tantec Magnetics........................................... -- 271
Tandon Associates, Inc..................................... -- 603
Reliable Consultancy Services Private Limited.............. -- 1
Tancom Electronics......................................... 9 78
------ ------
Total............................................ 1,548 1,636
------ ------
Net due to related parties................................. $1,168 $1,261
====== ======
</TABLE>
See Note 8 for a description of the relationships and the nature of
transactions between the Division and the above related parties.
F-50
<PAGE> 177
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Capital Leases
The Company has purchased automobiles through certain capital lease
agreements. The gross amount of assets acquired under capital leases and
capitalized was $38,673 as of January 28, 1996. Following is a schedule of
aggregate future minimum lease payments under these capital leases together with
the present value of net minimum lease payments as of January 28, 1996 (in
thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING LEASE PAYMENTS
--------------------------------------------------------------- --------------
<S> <C>
1997........................................................... $ 19
1998........................................................... 15
1999........................................................... 14
---
Total net minimum lease payments............................... 48
Less -- Amount representing interest........................... 12
---
Present value of net minimum lease payments.................... 36
Less -- Current portion........................................ 15
---
$ 21
===
</TABLE>
Purchases
Open letters of credit for import of raw materials in the normal course of
business amounted to $3,594,360 as of January 28, 1996 (see Note 4 above).
Obligations to Employees
The Company has made certain statutory minimum contributions towards
employee obligations as required by labor laws enacted by the Government of
India. These include, inter alia, minimum wages, provident fund, employee state
insurance, bonus, gratuity, earned leave and labor welfare fund.
8. RELATED PARTY TRANSACTIONS:
As discussed in Note 1 above, the Division has functioned as a
manufacturing arm of JTS since its association with JTS. Apart from JTS, the
Division's related parties include Xyratex (former subcontractor of JTS), Nidec
Corporation (supplier to the Company and an equity investee in JTS), and
entities which are owned and/or controlled by the Chairman of the Company or his
relatives.
JTS loaned manufacturing equipment with an historical cost of approximately
$4,400,000 and $530,000 located at the Division at January 28, 1996 and January
31, 1995.
The Division's related party transactions during the period from February
1, 1995 to January 28, 1996 primarily consist of transactions with JTS and
Xyratex. These transactions include, inter alia, purchase of fixed assets and
raw materials from JTS, receipt of certain fixed assets on loan basis from JTS,
receipt of certain raw material free of cost from JTS, sale of disk drives to
JTS, advances received from JTS, remittances made to JTS, assumption of obsolete
inventories and warranty costs by JTS, sale of subassemblies and raw material to
Xyratex, and purchase of tools from Xyratex. Since the VCMA business was part of
the Company until January 28, 1996, transactions between the Division and the
VCMA business have not been considered as related party transactions.
F-51
<PAGE> 178
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net balances due from or to each related party as of January 28, 1996
and January 31, 1995 for sales, purchases, advances, transfers and sharing of
expenses are disclosed in Note 6 above. Summarized information relating to such
transactions for the period from February 1, 1995 to January 28, 1996 are
presented below (in thousands):
<TABLE>
<CAPTION>
NAME OF THE RELATED PARTY NATURE OF TRANSACTION AMOUNT
------------------------------------- -------------------------------------- -------
<S> <C> <C>
Nidec Corporation.................... Purchase of raw material $ 701
Payment for purchase of raw material 522
Tandon Associates, Inc............... Payment for purchases 957
Tancom Electronics................... Purchase of plant and equipment 42
Sale of raw material 41
Proceeds from sale of raw material 55
Charges for common expenses received 3
Advance to Tancom 10
JTS.................................. Purchase of plant and equipment 2,569
Purchase of raw material 6,621
Payment for purchase of raw material 1,052
Advance against export 2,559
Product sales 14,892
Receipt from product sales 8,495
Assumption of obsolete inventories and 2,919
warranty costs by JTS
Tantec Magnetics..................... Purchase of raw material 110
Product sales 465
</TABLE>
The Company has been capitalized since inception with 200,000 shares of
equity stock at a par value of Indian rupees 10 each and 5,000 shares of
preferred stock at a par value of Indian rupees 100 each. The Company's lone
preferred stock shareholder is the son of the Chairman of the Company. As part
of the transfer of the Company's VCMA business to a related party and the
proposed acquisition of the Division by JTS, it was decided in March 1995 to
retire the preferred stock of the Company. Effective January 28, 1996, all
preferred shares were retired for a consideration of Indian rupees 500,000
($13,893). As of January 28, 1996, this amount has been included in "Due to
related parties, net" (see Note 6 above).
F-52
<PAGE> 179
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. OTHER MATTERS:
Technical Know-how and Collaboration Agreement
Foreign currency transactions with parties outside India are subject to
controls imposed by the Reserve Bank of India ("RBI"), India's central bank.
Funds can only be remitted for payments against specific invoices for receipt of
materials or equipment and certain additional limited uses. Except for payments
below $5,000, cash in advance or deposit payments are not freely permitted to
parties outside the country. As part of the Company's disk drive EOU project
approval, the Government has allowed the Company to pay $2 million to JTS for
technical know-how fees. The Company is yet to finalize its agreement with JTS
for the payment of technical know-how fees as of the date of the statements. The
Division has not recorded any liability for possible future payment of technical
know-how fees due to the anticipated acquisition of the Company by JTS. The
Company's term loan agreements with ICICI contains certain restrictions on the
timing and period of payment of technical know-how fees.
Divestiture of Voice Coil Business
The Company transferred the VCMA business, after write-offs of
approximately $350,000 of related party balances, to Tancom Electronics
("Tancom") as of January 28, 1996. Such transfer included plant and equipment
and inventories of the VCMA business, along with certain other assets and
liabilities.
Tancom is owned and controlled by the Chairman of the Company and his
family members and is therefore considered a related party. Retained earnings
attributable to the VCMA business since April 1, 1994 less advances made to
certain related parties were also transferred to Tancom. The Division expects to
continue to purchase voice coil assemblies from Tancom, provided their prices
remain competitive. The Division has not entered into any agreement mandating
the purchase of voice coil assemblies from Tancom.
As of January 28, 1996, the total value of assets transferred to Tancom was
$558,146 and the total value of liabilities transferred totalled $28,148.
Retained earnings of the VCMA business transferred to Tancom totalled $418,493.
Accounts receivable of $428,080 and accounts payable of $236,163 relating to the
voice coil business, outstanding as of January 28, 1996 has been included in the
Statement of Assets and Liabilities of the Division due to regulatory
constraints on transfer of foreign currency receivables and payables. All of the
accounts receivables of the VCMA business are owing from Tantec Magnetics, a
related party to the Company.
10. SUBSEQUENT EVENTS:
New Long Term Loan
On February 20, 1996, the Company was sanctioned an additional foreign
currency loan of $10 million, to be reduced to the extent of participation by
other institutions, by the ICICI for the proposed expansion of its disk drive
business. The Company had received a letter of intent ("letter") from the ICICI
the terms and conditions of which have to be agreed upon by the Company within
30 days before a formal foreign currency loan agreement ("loan agreement") could
be executed by both parties. Interest on this proposed loan shall be payable at
the lending rates of the ICICI prevailing on the date of execution of the loan
agreement. Lending rates of the ICICI are US dollar LIBOR, plus a fixed percent,
if the funds are provided out of the floating rate US dollar funds, and a fixed
rate per annum, if the funds are provided out of fixed rate US dollar funds.
According to the letter, this loan will be secured by a first charge on all of
the Company's equipment, both present and future, subject to any prior charge on
specified equipment in favor of the Company's banks. The Company is also
required to provide an irrevocable and unconditional guarantee from the Chairman
in favor of ICICI for due repayment of the loan along with all interest and any
other moneys. Further, for the loan to
F-53
<PAGE> 180
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
become effective, the Company would have to raise $5,584,885 by issue of equity
shares to promoters, obtain an unsecured loan of $3,601,000 and state subsidies
of $236,177 to meet a part of the cost of the project.
On March 18, 1996, the Company entered into a loan agreement with the ICICI
for $7 million towards their participation in the total sanctioned amount of $10
million. The loan is repayable in US dollar in 12 equal quarterly installments
of $583,333 each commencing form May 20, 1998. The Company has procured an
irrevocable and unconditional guarantee from the Chairman of the Company as
required by the letter of intent. The funding of this loan by ICICI is dependent
upon the Company's compliance with the pre-disbursement conditions relating to
raising of additional equity capital and obtaining of unsecured loans and state
subsidies, mentioned above. If the Company does not comply with these
pre-disbursement conditions, the previously obtained loans from ICICI (see Note
5) could be held in default and ICICI may have the right to recall the earlier
loans, besides not funding the current loan.
F-54
<PAGE> 181
APPENDIX C
MONTGOMERY SECURITIES FAIRNESS OPINION
<PAGE> 182
MONTGOMERY LETTERHEAD
February 5, 1996
Board of Directors
Atari Corporation
1196 Borregas Avenue
Sunnyvale, California 94089
Gentlemen:
We understand that Atari Corporation, a Nevada corporation (the
"Company"), JT Storage, Inc., a Delaware corporation ("JTS") and JTS
Acquisition Corporation, a Delaware corporation ("Newco"), propose to enter
into an Agreement and Plan of Reorganization, dated as of February 12, 1996
(the "Reorganization Agreement"), pursuant to which the Company and JTS will be
merged with and into Newco, which will be the surviving entity (the "Merger").
Pursuant to the Merger, as more fully described in the February 2, 1996 draft
of the Reorganization Agreement provided to us by the Company, we understand
that each outstanding share of (a) the common stock of the Company, $.01 par
value per share (the "Company Common Stock"), (b) the common stock of JTS, par
value $.000001 per share, and (c) the Series A preferred stock of JTS, par
value $.000001 per share, in each case not owned directly or indirectly by
Newco, will be converted into 1.00 shares (the "Exchange Ratio") of the common
stock, par value $.01 per share, of Newco ("Newco Common Stock"). We understand
that, immediately following the Merger, the former securityholders of the
Company and JTS will own approximately 61% and 39% respectively, of the Newco
Common Stock on a fully diluted basis. We also understand that Newco is a newly
formed corporation with no material assets and no liabilities.
You have asked for our opinion as investment bankers as to whether the
Exchange Ratio to be paid by Newco pursuant to the Merger is fair to the
Company from a financial point of view, as of the date hereof.
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
the Company, including the consolidated financial statements for recent years
and interim periods to September 30, 1995, and certain other relevant financial
and operating data relating to the Company and JTS made available to us from
published sources and from the internal records of the Company and JTS,
including the consolidated financial statements of JTS for recent years and
interim periods to November 30, 1995; (ii) reviewed the February 2, 1996 draft
of the Reorganization Agreement provided to us by the Company; (iii) reviewed
certain historical market prices and trading volumes of the Company Common
Stock as reported in the American Stock Exchange; (iv) compared the Company and
JTS from a financial point of view with certain other companies in the computer
peripherals industry that we deemed to be relevant; (v) considered the
financial terms, to the extent publicly available, of selected recent business
combinations of companies in the computer peripherals industry that we deemed
to be comparable, in whole or in part, to the Merger; (vi) reviewed and
discussed with representatives of the management of the Company and JTS certain
information of a business and financial nature regarding the Company and JTS,
furnished to us by them; (vii) reviewed and discussed with representatives of
the management of the Company and JTS financial forecasts and related
assumptions of JTS, provided to us by JTS management; (viii) made inquiries
regarding and discussed the Merger and the draft of the Reorganization
Agreement and other matters related thereto with the Company's counsel; and
(ix) performed such other analyses and examinations as we have deemed
appropriate.
In connection with our review, we have assumed and relied upon the
accuracy and completeness of the foregoing information and we have not assumed
any responsibility for independent verification of such information. With
respect to the financial forecasts provided to us as described above, we have
assumed for purposes of our opinion that such forecasts have been reasonably
prepared on bases reflecting the best
<PAGE> 183
available estimates and judgments of the management of JTS at the time of
preparation as to the future financial performance of JTS, and, except as
described below, that they provide a reasonable basis upon which we can form
our opinion. For purposes of our opinion and with the agreement of management
of the Company, we have adjusted the financial forecasts for JTS provided to us
by its management to reflect more conservative assumptions regarding future
results of operations. We have also assumed that there have been no material
changes in the Company's or JTS' assets, financial condition, results of
operations, business or prospects since the respective dates of their last
financial statements made available to us. We have relied on advice of counsel
and independent accountants to the Company as to all legal and financial
reporting matters with respect to the Company, the Merger and the draft of the
Reorganization Agreement. In addition, we have not assumed responsibility
for making an independent evaluation, appraisal or physical inspection of the
assets or individual properties of the Company or JTS, nor have we been
furnished with any such appraisals. Finally, our opinion is based on economic,
monetary and market and other conditions as in effect on, and the information
made available to us as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms described in the draft if the
Reorganization Agreement without any amendments thereto, and without waiver by
the Company or JTS of any of the conditions to their respective obligations
thereunder.
We have, in the ordinary course of our business, previously performed
various investment banking services for JTS.
Based upon the foregoing and in reliance thereon, it is out opinion as
investment bankers that the Exchange Ratio to be paid by Newco pursuant to the
Merger is fair to the Company from a financial point of view, as of the date
hereof.
This opinion is directed to the Board of Directors of the Company and
is not a recommendation to any shareholder as to how such shareholder should
vote with respect to the Merger. This opinion may not be used or referred to by
the Company, or quoted or disclosed to any person in any manner, without our
prior written consent, which consent is hereby given to its inclusion in any
proxy statement or prospectus filed with the Securities and Exchange
Commission in connection with the Merger. In furnishing this opinion, we do not
admit that we are experts within the meaning of the term "experts" as used in
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "Securities Act"), nor do we admit that this
opinion constitutes a report or valuation within the meaning of Section 11 of
the Securities Act.
Very truly yours,
Montgomery Securities
MONTGOMERY SECURITIES
<PAGE> 184
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
will have broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws will provide that the Registrant will indemnify its directors and
executive officers and may indemnify other officers to the fullest extent
permitted by law. Under its Bylaws, indemnified parties will be entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also will require the Registrant to advance
litigation expenses in the case of stockholder derivative actions or other
actions, against an undertaking by the indemnified party to repay such advances
if it is ultimately determined that the indemnified party is not entitled to
indemnification.
In addition, the Registrant's Certificate of Incorporation will provide
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. This provision in the Certificate of Incorporation will
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant for acts or omissions not in good faith or involving intentional
misconduct, for knowing violation of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also will not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. Such indemnity agreements contain provisions
that are in some respects broader than the specific indemnification provisions
contained in Delaware law.
II-1
<PAGE> 185
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated April 8, 1996,
between JTS and Atari
2.2 -- Form of Agreement of Merger of JTS Corporation and Atari Corporation
3.1 -- Restated Certificate of Incorporation, as amended, JTS Corporation
3.2 -- Form of Amended and Restated Certificate of Incorporation to be filed immediately
prior to the consummation of the Merger of JTS Corporation
3.3 -- Bylaws of JTS Corporation
3.4 -- Form of Amended and Restated Bylaws of JTS Corporation
4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation
4.2 -- Form of Amended and Restated Registration Rights Agreement
4.3 -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987
4.4 -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985
4.5 -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated
September 24, 1987
4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated March 25, 1994,
issued to Venture Lending & Leasing, Inc.
4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995,
issued to Silicon Valley Bank
4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996,
issued to Lunenburg S.A.
5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to legality of securities
being registered
8.1 -- Form of Opinion of Cooley Godward Castro Huddleson & Tatum as to certain tax
matters
8.2 -- Form of Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters
9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares
between JTS and certain stockholders of Atari
9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares
between Atari and certain stockholders of JTS
10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock option agreements
10.2 -- 1996 Non-Employee Directors' Plan and form of stock option agreement
10.3 -- 401(k) Plan, adopted March 15, 1996
10.4 -- Form of Indemnity Agreement
10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995
10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996
10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David
T. Mitchell and related Promissory Note
10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T.
Mitchell and related Promissory Note
10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang
Lal Tandon and related Promissory Note
10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and
Kenneth D. Wing and related Promissory Note
10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W.
Virginia Walker and related Promissory Note
</TABLE>
II-2
<PAGE> 186
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David
Pearce and related Promissory Note
10.13 -- Form of convertible promissory note between JTS and certain principal stockholders
of JTS
10.14 -- Form of promissory note between JTS and certain principal stockholders of JTS
10.15 -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and
related Security Agreement dated February 13, 1996, between JTS and Atari
10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A.
10.17 -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler
10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust
10.19+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
September 15, 1992
10.20+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
October 11, 1994
10.21+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
March 18, 1996
10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended
January 26, 1995
10.23 -- TEAC Master Agreement, dated February 4, 1994
10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995
10.25+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on
February 3, 1995 and December 5, 1995
10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq
10.27+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and
Western Digital
10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995,
between JTS and Pont
10.29+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent
Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon
Valley Bank
10.30 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as Borrower and the
State Bank of Hyderabad as Lender, dated February 1994.
21.1 -- List of Subsidiaries
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and 8.2
23.4 -- Consent of Montgomery Securities. Reference is made to Appendix C.
24.1 -- Powers of Attorney. Reference is made to page II-6.
27.1 -- Financial Data Schedule
99.1 -- Form of JTS Proxy
99.2 -- Form of Atari Proxy
</TABLE>
- ---------------
+ Exhibits for which confidential treatment has been requested
II-3
<PAGE> 187
(b) Financial Statement Schedules
JTS Corporation:
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
No financial statement schedules are required of Atari Corporation.
(c) Item 4(b) Reports
See Appendix C to the Joint Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filled as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Joint Proxy Statement/Prospectus
pursuant to Items 4,10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the Certificate of
Incorporation and the Bylaws of the Registrant and the Delaware General
Corporation Law, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the question has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 188
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, JTS
Corporation has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, County of Santa Clara, State of California, on the 10th day of
July, 1996.
JTS Corporation
By /s/ W. Virginia Walker
--------------------------------
W. Virginia Walker
Executive Vice President, Finance
and
Administration and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------------- --------------
<C> <S> <C>
/s/ DAVID T. MITCHELL* President, Chief Executive July 10, 1996
------------------------------------ Officer and Director
David T. Mitchell (Principal Executive Officer)
/s/ W. VIRGINIA WALKER Executive Vice President, Finance July 10, 1996
----------------------------------- and Administration, Chief
W. Virginia Walker Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
/s/ SIRJANG LAL TANDON* Chairman of the Board and July 10, 1996
----------------------------------- Corporate Technical Strategist
Sirjang Lal Tandon
/s/ JEAN D. DELEAGE* Director July 10, 1996
-----------------------------------
Jean D. Deleage
/s/ LIP-BU TAN* Director July 10, 1996
-----------------------------------
Lip-Bu Tan
/s/ ALAIN L. AZAN* Director July 10, 1996
-----------------------------------
Alain L. Azan
/s/ ROGER W. JOHNSON* Director July 10, 1996
- ------------------------------------
Roger W. Johnson
*By /s/ W. VIRGINIA WALKER
--------------------------------
W. Virginia Walker
</TABLE>
II-5
<PAGE> 189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the financial statements of JTS Corporation included in this registration
statement, and have issued our report thereon dated April 4, 1996. Our audit was
made for the purpose forming an opinion on those statements taken as a whole.
The schedule listed in the index above is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 4, 1996
S-1
<PAGE> 190
SCHEDULE II
JTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 28, 1996 AND
THE PERIOD FROM INCEPTION (FEBRUARY 3, 1994) TO JANUARY 29, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Period ended:
January 29, 1995.............................. $ -- $ 4 $ -- $ 4
January 28, 1996.............................. $ 4 $ 726 $ -- $ 730
SALES RETURN RESERVE:
Period ended:
January 29, 1995.............................. $ -- $ -- $ -- $ --
January 28, 1996.............................. $ -- $1,088 $ -- $1,088
ACCRUED WARRANTY:
Period ended:
January 29, 1995.............................. $ -- $ 328 $ -- $ 328
January 28, 1996.............................. $328 $ 306 $ -- $ 634
</TABLE>
S-2
<PAGE> 191
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated
April 8, 1996, between JTS and Atari
2.2 -- Form of Agreement of Merger of JTS Corporation and Atari
Corporation
3.1 -- Restated Certificate of Incorporation, as amended, JTS
Corporation
3.2 -- Form of Amended and Restated Certificate of Incorporation to be
filed immediately prior to the consummation of the Merger of JTS
Corporation
3.3 -- Bylaws of JTS Corporation
3.4 -- Form of Amended and Restated Bylaws of JTS Corporation
4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation
4.2 -- Form of Amended and Restated Registration Rights Agreement
4.3 -- Atari and Security Pacific National Bank Indenture, dated April
29, 1987
4.4 -- Federated Group/Security Pacific National Bank Indenture, dated
April 15, 1985
4.5 -- First Supplemental Federated Group/Security Pacific National
Bank Indenture, dated September 24, 1987
4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated
March 25, 1994, issued to Venture Lending & Leasing, Inc.
4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated
December 18, 1995, issued to Silicon Valley Bank
4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock,
dated April 4, 1996, issued to Lunenburg S.A.
5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to
legality of securities being registered
8.1 -- Form of Opinion of Cooley Godward Castro Huddleson & Tatum as to
certain tax matters
8.2 -- Form of Opinion of Wilson Sonsini Goodrich & Rosati as to
certain tax matters
9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the
voting of shares between JTS and certain stockholders of Atari
9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the
voting of shares between Atari and certain stockholders of JTS
10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock
option agreements
10.2 -- 1996 Non-Employee Directors' Plan and form of stock option
agreement
10.3 -- 401(k) Plan, adopted March 15, 1996
10.4 -- Form of Indemnity Agreement
10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995
10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996
10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996,
between JTS and David T. Mitchell and related Promissory Note
10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996,
between JTS and David T. Mitchell and related Promissory Note
10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996,
between JTS and Sirjang Lal Tandon and related Promissory Note
10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996,
between JTS and Kenneth D. Wing and related Promissory Note
10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996,
between JTS and W. Virginia Walker and related Promissory Note
10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996,
between JTS and David Pearce and related Promissory Note
10.13 -- Form of convertible promissory note between JTS and certain
principal stockholders of JTS
</TABLE>
<PAGE> 192
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.14 -- Form of promissory note between JTS and certain principal
stockholders of JTS
10.15 -- Subordinated Secured Convertible Promissory Note, dated February
13, 1996, and related Security Agreement dated February 13,
1996, between JTS and Atari
10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and
Lunenburg S.A.
10.17 -- Technical Know-How License Agreement, dated June 14, 1996,
between JTS and Moduler
10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable
Trust
10.19+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated September 15, 1992
10.20+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated October 11, 1994
10.21+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated March 18, 1996
10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994,
as amended January 26, 1995
10.23 -- TEAC Master Agreement, dated February 4, 1994
10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on
February 3, 1995
10.25+ -- Development Agreement, dated June 16, 1994, between JTS and
Compaq, as amended on February 3, 1995 and December 5, 1995
10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between
JTS and Compaq
10.27+ -- Technology Transfer and License Agreement, dated February 3,
1995, between JTS and Western Digital
10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated
January 31, 1995, between JTS and Pont
10.29+ -- Business Loan Agreement, Promissory Note and Collateral,
Assignment, Patent Mortgage and Security Agreement, dated
December 18, 1995, between JTS and Silicon Valley Bank
10.30 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as
Borrower and the State Bank of Hyderabad as Lender, dated
February 1994.
21.1 -- List of Subsidiaries
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and
8.2
23.4 -- Consent of Montgomery Securities. Reference is made to Appendix
C.
24.1 -- Powers of Attorney. Reference is made to page II-6.
27.1 -- Financial Data Schedule
99.1 -- Form of JTS Proxy
99.2 -- Form of Atari Proxy
</TABLE>
- ---------------
+ Exhibits for which confidential treatment has been requested
<PAGE> 1
EXHIBIT 3.4
BYLAWS
OF
JTS CORPORATION
(A DELAWARE CORPORATION)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II CORPORATE SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . 5
Section 10. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 11. Joint Owners of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 15. Number and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 17. Election of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 18. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 19. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 20. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(a) Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(b) Regular Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(c) Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(d) Telephone Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(e) Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(f) Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 22. Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 24. Fees and Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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----
<S> <C> <C>
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(a) Executive Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(b) Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(c) Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(d) Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 27. Officers Designated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 28. Tenure and Duties of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(b) Duties of Chairman of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . 12
(c) Duties of President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(d) Duties of Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(e) Duties of Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(f) Duties of Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 29. Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 31. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 32. Execution of Corporate Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 33. Voting of Securities Owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 34. Form and Execution of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 35. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 36. Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 37. Fixing Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 38. Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 39. Execution of Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
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<TABLE>
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<S> <C> <C>
ARTICLE IX DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE X FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 42. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE XI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents 18
(a) Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(b) Other Officers, Employees and Other Agents . . . . . . . . . . . . . . . . . . . . . . . . 18
(c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(d) Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(e) Non-Exclusivity of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(f) Survival of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(g) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(h) Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(i) Saving Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(j) Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE XII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 44. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(a) Notice to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(b) Notice to directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(c) Affidavit of Mailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) Time Notices Deemed Given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(e) Methods of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(f) Failure to Receive Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
(g) Notice to Person with Whom Communication Is Unlawful . . . . . . . . . . . . . . . . . . . 22
(h) Notice to Person with Undeliverable Address . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XIII AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
042996 iii.
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<TABLE>
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<S> <C>
ARTICLE XIV LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 46. Loans to Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE XV MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 47. Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
iv.
<PAGE> 6
BYLAWS
OF
JTS CORPORATION
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the
corporation in the State of Delaware shall be in the City of Wilmington, County
of New Castle.
SECTION 2. OTHER OFFICES. The corporation shall also have and
maintain an office or principal place of business at such place as may be fixed
by the Board of Directors, and may also have offices at such other places, both
within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of
a die bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of
the corporation shall be held at such place, either within or without the State
of Delaware, as may be designated from time to time by the Board of Directors,
or, if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
1.
<PAGE> 7
SECTION 5. ANNUAL MEETING.
(A) The annual meeting of the stockholders of the
corporation, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors.
(B) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be:
(A) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (B) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (C)
otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary
of the corporation. To be timely, a stockholder's notice must be delivered to
or mailed and received at the principal executive offices of the corporation
not later than the close of business on the sixtieth (60th) day nor earlier
than the close of business on the ninetieth (90th) day prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that no annual meeting was held in the previous year or the date of
the annual meeting has been changed by more than thirty (30) days from the date
contemplated at the time of the previous year's proxy statement, notice by the
stockholder to be timely must be so received not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to
such annual meeting or, in the event public announcement of the date of such
annual meeting is first made by the corporation fewer than seventy (70) days
prior to the date of such annual meeting, the close of business on the tenth
(10th) day following the day on which public announcement of the date of such
meeting is first made by the corporation. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on
the corporation's books, of the stockholder proposing such business, (iii) the
class and number of shares of the corporation which are beneficially owned by
the stockholder, (iv) any material interest of the stockholder in such business
and (v) any other information that is required to be provided by the
stockholder pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "1934 Act"), in his capacity as a proponent to a
stockholder proposal. Notwithstanding the foregoing, in order to include
information with respect to a stockholder proposal in the proxy statement and
form of proxy for a stockholder's meeting, stockholders must provide notice as
required by the regulations promulgated under the 1934 Act. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
paragraph (b). The chairman of the annual meeting shall, if the facts warrant,
determine and declare at the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this paragraph (b),
and, if he
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should so determine, he shall so declare at the meeting that any such business
not properly brought before the meeting shall not be transacted.
(C) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of
the corporation may be made at a meeting of stockholders by or at the direction
of the Board of Directors or by any stockholder of the corporation entitled to
vote in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant
to timely notice in writing to the Secretary of the corporation in accordance
with the provisions of paragraph (b) of this Section 5. Such stockholder's
notice shall set forth (i) as to each person, if any, whom the stockholder
proposes to nominate for election or re-election as a director: (A) the name,
age, business address and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number of shares of
the corporation which are beneficially owned by such person, (D) a description
of all arrangements or understandings between the stockholder and each nominee
and any other person or persons (naming such person or persons) pursuant to
which the nominations are to be made by the stockholder, and (E) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected); and (ii) as to
such stockholder giving notice, the information required to be provided
pursuant to paragraph (b) of this Section 5. At the request of the Board of
Directors, any person nominated by a stockholder for election as a director
shall furnish to the Secretary of the corporation that information required to
be set forth in the stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
this paragraph (c). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare at the meeting, and the defective nomination
shall be disregarded.
(D) For purposes of this Section 5, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
SECTION 6. SPECIAL MEETINGS.
(A) Special meetings of the stockholders of the
corporation may be called, for any purpose or purposes, by (i) the Chairman of
the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of
Directors pursuant to a resolution adopted by two (2)
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directors, and shall be held at such place, on such date, and at such time as
the Board of Directors, shall fix.
(B) If a special meeting is called by any person or
persons other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the Chairman of the Board of Directors, the
Chief Executive Officer, or the Secretary of the corporation. No business may
be transacted at such special meeting otherwise than specified in such notice.
The Board of Directors shall determine the time and place of such special
meeting, which shall be held not less than thirty-five (35) nor more than one
hundred twenty (120) days after the date of the receipt of the request. Upon
determination of the time and place of the meeting, the officer receiving the
request shall cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice is
not given within sixty (60) days after the receipt of the request, the person
or persons requesting the meeting may set the time and place of the meeting and
give the notice. Nothing contained in this paragraph (b) shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called
by action of the Board of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by
law or the Certificate of Incorporation, written notice of each meeting of
stockholders shall be given not less than ten (10) nor more than sixty (60)
days before the date of the meeting to each stockholder entitled to vote at
such meeting, such notice to specify the place, date and hour and purpose or
purposes of the meeting. Notice of the time, place and purpose of any meeting
of stockholders may be waived in writing, signed by the person entitled to
notice thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Any stockholder so waiving notice
of such meeting shall be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except
where otherwise provided by statute or by the Certificate of Incorporation, or
by these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all action taken by the holders of a majority of the vote
cast, excluding abstentions, at any meeting at which a quorum is present shall
be valid and binding upon the corporation; provided, however, that directors
shall be elected by
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a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where
a separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by the statute or by the Certificate of Incorporation
or these Bylaws, the affirmative vote of the majority (plurality, in the case
of the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the act of such
class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any
meeting of stockholders, whether annual or special, may be adjourned from time
to time either by the chairman of the meeting or by the vote of a majority of
the shares casting votes, excluding abstentions. When a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the corporation may transact
any business which might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the
stock records of the corporation on the record date, as provided in Section 12
of these Bylaws, shall be entitled to vote at any meeting of stockholders.
Every person entitled to vote shall have the right to do so either in person or
by an agent or agents authorized by a proxy granted in accordance with Delaware
law. An agent so appointed need not be a stockholder. No proxy shall be voted
after three (3) years from its date of creation unless the proxy provides for a
longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety, or otherwise, or if two (2) or more persons
have the same fiduciary relationship respecting the same shares, unless the
Secretary is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1)
votes, the act of the majority so voting binds all; (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally, or may apply to the Delaware
Court of Chancery for relief as provided in the General Corporation Law of
Delaware, Section 217(b). If the instrument filed with the Secretary shows
that any such tenancy is held in unequal interests, a majority or even-split
for the purpose of subsection (c) shall be a majority or even-split in
interest.
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SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time
thereof and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by
the stockholders except at an annual or special meeting of stockholders called
in accordance with these Bylaws, and no action shall be taken by the
stockholders by written consent.
SECTION 14. ORGANIZATION.
(A) At every meeting of stockholders, the Chairman of the
Board of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by
a majority in interest of the stockholders entitled to vote, present in person
or by proxy, shall act as chairman. The Secretary, or, in his absence, an
Assistant Secretary directed to do so by the President, shall act as secretary
of the meeting.
(B) The Board of Directors of the corporation shall be
entitled to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject to
such rules and regulations of the Board of Directors, if any, the chairman of
the meeting shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are necessary, appropriate or convenient for the proper conduct of
the meeting, including, without limitation, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the
meeting and the safety of those present, limitations on participation in such
meeting to stockholders of record of the corporation and their duly authorized
and constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
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ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be
exercised, its business conducted and its property controlled by the Board of
Directors, except as may be otherwise provided by statute or by the Certificate
of Incorporation.
SECTION 17. ELECTION OF DIRECTORS. Subject to the rights of the
holders of any series of Preferred Stock to elect additional directors under
specified circumstances, directors shall be elected at each annual meeting of
stockholders for a term of one year. Each director shall serve until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
SECTION 18. VACANCIES. Unless otherwise provided in the
Certificate of Incorporation, any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other causes and any
newly created directorships resulting from any increase in the number of
directors, shall unless the Board of Directors determines by resolution that
any such vacancies or newly created directorships shall be filled by
stockholders, be filled only by the affirmative vote of a majority of the
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such director's successor shall
have been elected and qualified. A vacancy in the Board of Directors shall be
deemed to exist under this Bylaw in the case of the death, removal or
resignation of any director.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the
Board of Directors. When one or more directors shall resign from the Board of
Directors, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each Director so chosen shall hold
office for the unexpired portion of the term of the Director whose place shall
be vacated and until his successor shall have been duly elected and qualified.
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SECTION 20. REMOVAL. Subject to the rights of the holders of any
series of Preferred Stock, the Board of Directors or any individual director
may be removed from office at any time (i) with cause by the affirmative vote
of the holders of a majority of the voting power of all the then-outstanding
shares of voting stock of the corporation, entitled to vote at an election of
directors (the "Voting Stock") or (ii) without cause by the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all the then-outstanding shares of the Voting Stock.
SECTION 21. MEETINGS.
(A) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such meeting
shall be held for the purpose of electing officers and transacting such other
business as may lawfully come before it.
(B) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place within
or without the State of Delaware which has been designated by resolution of the
Board of Directors or the written consent of all directors.
(C) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(D) TELEPHONE MEETINGS. Any member of the Board of
Directors, or of any committee thereof, may participate in a meeting by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting by such means shall constitute presence in person at such meeting.
(E) NOTICE OF MEETINGS. Notice of the time and place of
all special meetings of the Board of Directors shall be orally or in writing,
by telephone, facsimile, telegraph or telex, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent
in writing to each director by first class mail, charges prepaid, at least
three (3) days before the date of the meeting. Notice of any meeting may be
waived in writing at any time before or after the meeting and will be waived by
any director by attendance thereat, except when the director attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called
or convened.
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(F) WAIVER OF NOTICE. The transaction of all business at
any meeting of the Board of Directors, or any committee thereof, however called
or noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either
before or after the meeting, each of the directors not present shall sign a
written waiver of notice. All such waivers shall be filed with the corporate
records or made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(A) Unless the Certificate of Incorporation requires a
greater number and except with respect to indemnification questions arising
under Section 43 hereof, for which a quorum shall be one-third of the exact
number of directors fixed from time to time in accordance with the Certificate
of Incorporation, a quorum of the Board of Directors shall consist of a
majority of the exact number of directors fixed from time to time by the Board
of Directors in accordance with the Certificate of Incorporation; provided,
however, at any meeting whether a quorum be present or otherwise, a majority of
the directors present may adjourn from time to time until the time fixed for
the next regular meeting of the Board of Directors, without notice other than
by announcement at the meeting.
(B) At each meeting of the Board of Directors at which a
quorum is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different
vote be required by law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board
of Directors or committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled
to such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors,
a fixed sum and expenses of attendance, if any, for attendance at each regular
or special meeting of the Board of Directors and at any meeting of a committee
of the Board of Directors. Nothing herein contained shall be construed to
preclude any director from serving the corporation in any other capacity as an
officer, agent, employee, or otherwise and receiving compensation therefor.
SECTION 25. COMMITTEES.
(A) EXECUTIVE COMMITTEE. The Board of Directors may by
resolution passed by a majority of the whole Board of Directors appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to
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the extent permitted by law and provided in the resolution of the Board of
Directors shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation,
including without limitation the power or authority to declare a dividend, to
authorize the issuance of stock and to adopt a certificate of ownership and
merger, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
fix the designations and any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series), adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending
the bylaws of the corporation.
(B) OTHER COMMITTEES. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, from time to
time appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or more
members of the Board of Directors and shall have such powers and perform such
duties as may be prescribed by the resolution or resolutions creating such
committees, but in no event shall such committee have the powers denied to the
Executive Committee in these Bylaws.
(C) TERM. Each member of a committee of the Board of
Directors shall serve a term on the committee coexistent with such member's
term on the Board of Directors. The Board of Directors, subject to the
provisions of subsections (a) or (b) of this Bylaw may at any time increase or
decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his death or voluntary resignation from the committee or from the Board of
Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
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(D) MEETINGS. Unless the Board of Directors shall
otherwise provide, regular meetings of the Executive Committee or any other
committee appointed pursuant to this Section 25 shall be held at such times and
places as are determined by the Board of Directors, or by any such committee,
and when notice thereof has been given to each member of such committee, no
further notice of such regular meetings need be given thereafter. Special
meetings of any such committee may be held at any place which has been
determined from time to time by such committee, and may be called by any
director who is a member of such committee, upon written notice to the members
of such committee of the time and place of such special meeting given in the
manner provided for the giving of written notice to members of the Board of
Directors of the time and place of special meetings of the Board of Directors.
Notice of any special meeting of any committee may be waived in writing at any
time before or after the meeting and will be waived by any director by
attendance thereat, except when the director attends such special meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. A majority of the authorized number of members of any such committee
shall constitute a quorum for the transaction of business, and the act of a
majority of those present at any meeting at which a quorum is present shall be
the act of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation
shall include, if and when designated by the Board of Directors, the Chairman
of the Board of Directors, the Chief Executive Officer, the President, one or
more Vice Presidents, the Secretary, the Chief Financial Officer, the
Treasurer, the Controller, all of whom shall be elected at the annual
organizational meeting of the Board of Directors. The Board of Directors may
also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant
Controllers and such other officers and agents with such powers and duties as
it shall deem necessary. The Board of Directors may assign such additional
titles to one or more of the officers as it shall deem appropriate. Any one
person may hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation
of the officers of the corporation shall be fixed by or in the manner
designated by the Board of Directors.
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SECTION 28. TENURE AND DUTIES OF OFFICERS.
(A) GENERAL. All officers shall hold office at the
pleasure of the Board of Directors and until their successors shall have been
duly elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board of
Directors. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
(B) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors, when present, shall preside at all meetings
of the stockholders and the Board of Directors. The Chairman of the Board of
Directors shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors shall designate from time to time. If there is no President, then
the Chairman of the Board of Directors shall also serve as the Chief Executive
Officer of the corporation and shall have the powers and duties prescribed in
paragraph (c) of this Section 28.
(C) DUTIES OF PRESIDENT. The President shall preside at
all meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is
present. Unless some other officer has been elected Chief Executive Officer of
the corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(D) DUTIES OF VICE PRESIDENTS. The Vice Presidents may
assume and perform the duties of the President in the absence or disability of
the President or whenever the office of President is vacant. The Vice
Presidents shall perform other duties commonly incident to their office and
shall also perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.
(E) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record all
acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings of
the stockholders and of all meetings of the Board of Directors and any
committee thereof requiring notice. The Secretary shall perform all other
duties given him in these Bylaws and other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time. The President may
direct any Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to his office and shall
also perform such other duties and have such other powers as the Board of
Directors or the President shall designate from time to time.
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(F) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief
Financial Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of the
financial affairs of the corporation in such form and as often as required by
the Board of Directors or the President. The Chief Financial Officer, subject
to the order of the Board of Directors, shall have the custody of all funds and
securities of the corporation. The Chief Financial Officer shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time. The President may direct the Treasurer or any
Assistant Treasurer, or the Controller or any Assistant Controller to assume
and perform the duties of the Chief Financial Officer in the absence or
disability of the Chief Financial Officer, and each Treasurer and Assistant
Treasurer and each Controller and Assistant Controller shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may
from time to time delegate the powers or duties of any officer to any other
officer or agent, notwithstanding any provision hereof.
SECTION 30. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at
any time, either with or without cause, by the affirmative vote of a majority
of the directors in office at the time, or by the unanimous written consent of
the directors in office at the time, or by any committee or superior officers
upon whom such power of removal may have been conferred by the Board of
Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of
Directors may, in its discretion, determine the method and designate the
signatory officer or officers, or other person or persons, to execute on behalf
of the corporation any corporate instrument or document, or to sign on behalf
of the corporation the corporate name without limitation, or
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to enter into contracts on behalf of the corporation, except where otherwise
provided by law or these Bylaws, and such execution or signature shall be
binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and
other evidences of indebtedness of the corporation, and other corporate
instruments or documents requiring the corporate seal, and certificates of
shares of stock owned by the corporation, shall be executed, signed or endorsed
by the Chairman of the Board of Directors, or the President or any Vice
President, and by the Secretary or Treasurer or any Assistant Secretary or
Assistant Treasurer. All other instruments and documents requiring the
corporate signature, but not requiring the corporate seal, may be executed as
aforesaid or in such other manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall
be signed by such person or persons as the Board of Directors shall authorize
so to do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All
stock and other securities of other corporations owned or held by the
corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors, or, in the absence
of such authorization, by the Chairman of the Board of Directors, the Chief
Executive Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for
the shares of stock of the corporation shall be in such form as is consistent
with the Certificate of Incorporation and applicable law. Every holder of
stock in the corporation shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairman of the Board of Directors, or
the President or any Vice President and by the Treasurer or Assistant Treasurer
or the Secretary or Assistant Secretary, certifying the number of shares owned
by him in the corporation. Any or all of the signatures on the certificate may
be facsimiles. In case any officer, transfer agent, or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued with the same effect as if he were such
officer, transfer agent, or registrar at the date of issue. Each certificate
shall state upon the
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face or back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set
forth on the face or back a statement that the corporation will furnish without
charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen, or destroyed. The corporation may require, as a
condition precedent to the issuance of a new certificate or certificates, the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
or to give the corporation a surety bond in such form and amount as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen, or
destroyed.
SECTION 36. TRANSFERS.
(A) Transfers of record of shares of stock of the
corporation shall be made only upon its books by the holders thereof, in person
or by attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(B) The corporation shall have power to enter into and
perform any agreement with any number of stockholders of any one or more
classes of stock of the corporation to restrict the transfer of shares of stock
of the corporation of any one or more classes owned by such stockholders in any
manner not prohibited by the General Corporation Law of Delaware.
SECTION 37. FIXING RECORD DATES.
(A) In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix, in advance, a record
date, which record date shall not precede the date
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upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting. If no record date is fixed
by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given,
or if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of Directors
may fix a new record date for the adjourned meeting.
(B) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose
of any other lawful action, the Board of Directors may fix, in advance, a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto.
SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures
and other corporate securities of the corporation, other than stock
certificates (covered in Section 34), may be signed by the Chairman of the
Board of Directors, the President or any Vice President, or such other person
as may be authorized by the Board of Directors, and the corporate seal
impressed thereon or a facsimile of such seal imprinted thereon and attested by
the signature of the Secretary or an Assistant Secretary, or the Chief
Financial Officer or Treasurer or an Assistant Treasurer; provided, however,
that where any such bond, debenture or other corporate security shall be
authenticated by the manual signature, or where permissible facsimile
signature, of a trustee under an indenture pursuant to which such bond,
debenture or other corporate security shall be issued, the signatures of the
persons signing and attesting the corporate seal on such bond, debenture or
other corporate security may be the imprinted facsimile of the signatures of
such persons. Interest coupons appertaining to any such bond, debenture or
other corporate security, authenticated by a trustee as aforesaid,
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shall be signed by the Treasurer or an Assistant Treasurer of the corporation
or such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond,
debenture or other corporate security so signed or attested shall have been
delivered, such bond, debenture or other corporate security nevertheless may be
adopted by the corporation and issued and delivered as though the person who
signed the same or whose facsimile signature shall have been used thereon had
not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital
stock of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to
law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend,
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the Board of Directors from time to time, in
their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the Board of
Directors shall think conducive to the interests of the corporation, and the
Board of Directors may modify or abolish any such reserve in the manner in
which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.
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ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS,
OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS.
(A) DIRECTORS AND EXECUTIVE OFFICERS. The corporation
shall indemnify its directors and executive officers (for the purposes of this
Article XI, "executive officers shall have the meaning defined in Rule 3b-7
promulgated under the 1934 Act) to the fullest extent not prohibited by the
Delaware General Corporation Law; provided, however, that the corporation may
modify the extent of such indemnification by individual contracts with its
directors and executive officers; and, provided, further, that the corporation
shall not be required to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such person
unless (i) such indemnification is expressly required to be made by law, (ii)
the proceeding was authorized by the Board of Directors of the corporation,
(iii) such indemnification is provided by the corporation, in its sole
discretion, pursuant to the powers vested in the corporation under the Delaware
General Corporation Law or (iv) such indemnification is required to be made
under subsection (d).
(B) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law.
(C) EXPENSES. The corporation shall advance to any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director or executive officer, of the corporation, or is or was serving
at the request of the corporation as a director or executive officer of another
corporation, partnership, joint venture, trust or other enterprise, prior to
the final disposition of the proceeding, promptly following request therefor,
all expenses incurred by any director or executive officer in connection with
such proceeding upon receipt of an undertaking by or on behalf of such person
to repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such
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person acted in bad faith or in a manner that such person did not believe to be
in or not opposed to the best interests of the corporation.
(D) ENFORCEMENT. Without the necessity of entering into
an express contract, all rights to indemnification and advances to directors
and executive officers under this Bylaw shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the director or executive officer. Any right to
indemnification or advances granted by this Bylaw to a director or executive
officer shall be enforceable by or on behalf of the person holding such right
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim
is made within ninety (90) days of request therefor. The claimant in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. In connection with any claim
for indemnification, the corporation shall be entitled to raise as a defense to
any such action that the claimant has not met the standards of conduct that
make it permissible under the Delaware General Corporation Law for the
corporation to indemnify the claimant for the amount claimed. In connection
with any claim by an executive officer of the corporation (except in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such executive officer is or was a
director of the corporation) for advances, the corporation shall be entitled to
raise a defense as to any such action clear and convincing evidence that such
person acted in bad faith or in a manner that such person did not believe to be
in or not opposed to the best interests of the corporation, or with respect to
any criminal action or proceeding that such person acted without reasonable
cause to believe that his conduct was lawful. Neither the failure of the
corporation (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the Delaware
General Corporation Law, nor an actual determination by the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct. In any suit brought by a
director or executive officer to enforce a right to indemnification or to an
advancement of expenses hereunder, the burden of proving that the director or
executive officer is not entitled to be indemnified, or to such advancement of
expenses, under this Article XI or otherwise shall be on the corporation.
(E) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on
any person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.
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(f) SURVIVAL OF RIGHTS. The rights conferred on any
person by this Bylaw shall continue as to a person who has ceased to be a
director, officer, employee or other agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw
shall only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director and executive
officer to the full extent not prohibited by any applicable portion of this
Bylaw that shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw,
the following definitions shall apply:
(i) The term "proceeding" shall be broadly
construed and shall include, without limitation, the investigation,
preparation, prosecution, defense, settlement, arbitration and appeal
of, and the giving of testimony in, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
(ii) The term "expenses" shall be broadly
construed and shall include, without limitation, court costs,
attorneys' fees, witness fees, fines, amounts paid in settlement or
judgment and any other costs and expenses of any nature or kind
incurred in connection with any proceeding.
(iii) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Bylaw
with respect to the resulting or
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surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(iv) References to a "director," "executive
officer," "officer," "employee," or "agent" of the corporation shall
include, without limitation, situations where such person is serving
at the request of the corporation as, respectively, a director,
executive officer, officer, employee, trustee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
(v) References to "other enterprises" shall
include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the
corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with
respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any
provisions of these Bylaws, notice is required to be given to any stockholder,
it shall be given in writing, timely and duly deposited in the United States
mail, postage prepaid, and addressed to his last known post office address as
shown by the stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given
to any director may be given by the method stated in subsection (a), or by
facsimile, telex or telegram, except that such notice other than one which is
delivered personally shall be sent to such address as such director shall have
filed in writing with the Secretary, or, in the absence of such filing, to the
last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing,
executed by a duly authorized and competent employee of the corporation or its
transfer agent appointed with respect to the class of stock affected,
specifying the name and address or the names and addresses of the stockholder
or stockholders, or director or directors, to whom any such notice or notices
was or were given, and the time and method of giving the same, shall in the
absence of fraud, be prima facie evidence of the facts therein contained.
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(d) TIME NOTICES DEEMED GIVEN. All notices given by
mail, as above provided, shall be deemed to have been given as at the time of
mailing, and all notices given by facsimile, telex or telegram shall be deemed
to have been given as of the sending time recorded at time of transmission.
(e) METHODS OF NOTICE. It shall not be necessary that
the same method of giving notice be employed in respect of all directors, but
one permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other or
others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation
of time within which any stockholder may exercise any option or right, or enjoy
any privilege or benefit, or be required to act, or within which any director
may exercise any power or right, or enjoy any privilege, pursuant to any notice
sent him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS.
Whenever notice is required to be given, under any provision of law or the
Certificate of Incorporation or Bylaws of the corporation, to any stockholder
to whom (i) notice of two consecutive annual meetings, and all notices of
meetings or of the taking of action by written consent without a meeting to
such person during the period between such two consecutive annual meetings, or
(ii) all, and at least two, payments (if sent by first class mail) of dividends
or interest on securities during a twelve-month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as
if such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General
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Corporation Law, the certificate need not state that notice was not given to
persons to whom notice was not required to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43
of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by
the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of
the voting power of all of the then-outstanding shares of the Voting Stock.
The Board of Directors shall also have the power to adopt, amend, or repeal
Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. LOANS TO OFFICERS. The corporation may lend money
to, or guarantee any obligation of, or otherwise assist any officer or other
employee of the corporation or of its subsidiaries, including any officer or
employee who is a Director of the corporation or its subsidiaries, whenever, in
the judgment of the Board of Directors, such loan, guarantee or assistance may
reasonably be expected to benefit the corporation. The loan, guarantee or
other assistance may be with or without interest and may be unsecured, or
secured in such manner as the Board of Directors shall approve, including,
without limitation, a pledge of shares of stock of the corporation. Nothing in
these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty
or warranty of the corporation at common law or under any statute.
ARTICLE XV
Miscellaneous
Section 47. Annual Report.
(a) Subject to the provisions of paragraph (b) of this Bylaw, the Board
of Directors shall cause an annual report to be sent to each stockholder of the
corporation not later than one hundred twenty (120) days after the close of the
corporation's fiscal year. Such report shall include a balance sheet as of the
end of such fiscal year and an income statement and statement of changes in
financial position for such fiscal year, accompanied by any report thereon of
independent accounts or, if there is no such report, the certificate of an
authorized officer of the corporation that such statements were prepared
without audit from the books and records of the corporation. When there are
more than 100 stockholders of record of the corporation's shares, as determined
by Section 605 of the California Corporations Code, additional information as
required by Section 1501(b) of the California Corporations Code shall also be
contained in such report, provided that if the corporation has a class of
securities registered under Section 12 of the 1934 Act, that Act shall take
precedence. Such report shall be sent to stockholders at least fifteen (15)
days prior to the next annual meeting of stockholders after the end of the
fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of record of the
corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.
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EXHIBIT 10.30
Place: Madras
Date:
The State Bank of Hyderabad
MADRAS - 600001
WHEREAS, the undersigned us/are Director/s of Moduler Electronics
_______Limited Co. carrying on business as manufacturers and exporters of
Electronic Components of Computer hardware hereinafter called the "THE
BORROWER".
AND WHEREAS the State Bank of Hyderabad has at my/our request agreed to
grant/has granted/renewed/renew/continue/continued loans facility/facilities to
such as amount/s from time to time under different loan account/s as the said
Bank in its discretion shall think proper in respect of each such facility, in
the aggregate not to exceed Rs. 210,00,000 besides interest and costs, charges
etc. On such conditions as to security, interest rate, charges etc. as it may
stipulate from time to time.
1. In consideration of such grant/renewal/continuation of the said
facility/ies I/we, the undersigned, in my/our individual and personal capacity
besides my/our liability as Director/s of the Borrower), hereby agree to pay and
satisfy to your Bank on demand, up to the amount herein above mentioned, all
monies and liabilities of the Borrower under the aforesaid facilities already
advanced, paid or renewed on such accounts and/or which you may at any time
advance/pay or incur by way of sanction/renewal/continuance of the said
facility/ies to the borrower together with all interest, discount, commission or
charges costs and expenses etc., which may be or may become payable in
connection therewith.
2. AND I/We further agree that my/our guarantee shall be considered
continuing/not-with-standing it may in the meantime at any time or from time to
time be brought to credit in respect of one or more or all of the said
facilities, until notice in writing that the same is closed is given by your
Bank.
3. I/We further agree that the said Bank shall be at liberty to take other
securities for the said account/s or any part thereof and to release or for-bear
to enforce all or any of its remedies upon or under such securities and my
collateral security or securities now held/come to be held by the Bank and that
no such release or forbearance as aforesaid shall have the effect of releasing
me/us from my/our liability or of prejudicing the said Bank's rights and
remedies against me/us under this guarantee and that I/We shall have no right to
the benefit of any other security that may be held by the said Bank until the
said account/s covering the different facilities against the borrower or any
other account what-so-ever shall have been fully satisfied and then in so for
only as such security shall have not been exhausted for the purpose of releasing
the amount of the said Bank's claims and noteably only with other guarantors or
other persons (if any) entitled to the benefit of such securities respectively.
1
<PAGE> 2
4. I/We further agree that if the Borrower shall become insolvent
bankrupt, enter into liquidation (compulsory or voluntary) or make any
arrangement or composition with creditors the said Bank may (notwithstanding
payment to the said Bank by me/us or any other person/s of the whole or any part
of the amount hereby secured) Bank creditor and prove against the State of the
Borrower for the full amount of all the said Bank's claims against the Borrower
or agree to and accept any composition in respect of thereof and the said Bank
may receive retain the whole of the dividends composition or other payments
thereon to the exclusion of composition or other payments thereon to the
exclusion of all/my/our rights as guarantor/s for the Borrower in competition
with the said Bank until all the said Bank's claims are fully satisfied and I/We
will not by paying off the amount payable by me/us of any part thereof or
otherwise prove or claim against the state of the Borrower until the whole of
the said Bank may enforce and recover payment from me/us of the full amount
payable by me/us not with-standing any such proof or composition as aforesaid.
5. I/We further agree that the Borrower being a private limited company
my/our guarantee and obligations hereunder shall not be affected by any change
in the constitution of the Board of Directors of style of such company at any
time.
6. I/We further agree that if all or any of the facilities is/are intended
to be secured by the hypothecation and/or pledge of goods and/or documents of
title to goods under separate agreement to be taken from time to time and
entered into by the borrower with the said Bank which agreement contains
stipulations as to the insurance assignment and delivery of insurance policies
to the said Bank and as to the margin of value of goods under security to be
maintained and the periodical furnishing of different statements to the said
Bank and other matters We/I agree that no failure in requiring or enforcing the
observance or performance of any of the said stipulations or terms shall have
the effect of releasing us/me from our/my liability incurred in our/my
individual capacity or of prejudicing the said Bank's right or remedies against
us/me under the guarantee.
7. I/We further agree that notwithstanding anything herein before
contained I/We shall be severally liable to the Bank or the full amount of the
said facilities and that the Bank shall be at liberty to sue either or any of us
in respect of such or any one or more of them without joining the other or
others of us and not-with-standing any degree in any such suit subsequently to
sue the other or others of us to proceed to judgment and execution at the option
of the Bank until its claim is fully satisfied.
Signed sealed and delivered by the said
[ ]
2
<PAGE> 3
H.O. 1362
FORM C.5
LETTER REGARDING THE GRANT OF
INDIVIDUAL LIMITS WITHIN THE OVERALL LIMIT
Date: 02-08-94
To, (To be stamped as an agreement)
Modular Electronics (Particulars of charge to be registered with
________________Ltd. the Register of Companies in the case of
406, Dalamai Towers borrower companies)
__________________
Nzaimar Point
Bombay - 400 027
Dear Sirs,
In pursuance of Clauses 5 and 6 of the Agreement of Loan dated the
____________ day of ___________________ 19____________________________ and
Clause 3 of the Agreement of Hypothecation dated the __________ day of
____________________ 19____ and clause 3 of the Agreement of pledge dated the
______ day of _______________ 19_____ executed for the overall limit of Rs.
210,00,000 (Rupees only) we are pleased to advise you that within the overall or
aggregate limit we have decided to grant to you the following individual limits
at the rates of interest mentioned there against:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Serial No. Nature of Facility Limit Rate of Interest
Rs._____
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Foreign Bills Purchase Discount 80.00 As per RBI directives
2. Letters of ____ (_________) 130.00 As per ________
3.
4.
Etc.,
</TABLE>
3
<PAGE> 4
and on the terms and conditions contained in the said Agreements.
2. You shall maintain and provide the following margin(s) in respect of
the aforesaid limit(s):
- --------------------------------------------------------------------------------
Serial No. Particulars of the item Limit Margin
- --------------------------------------------------------------------------------
(i) Raw materials
(ii) Stocks-in-process
(iii) Finished goods
(iv) Any others (specify)
(v) Book debts/receivables
(vi) Land and buildings/plant
4.***This letter modifies/supercedes the individual limits granted to you
earlier in terms of Form C.5 dated the _____________________________ day of
19___
***Delete if not applicable
5. We are forwarding this letter in duplicate and shall be glad if you
will return to us the original letter dully signed by you below the
words "We Accept" appearing at the bottom of this letter and retain the
duplicate thereof for your record.
Your's faithfully,
For State Bank of HYDERABAD
/S/__________________
Asst. General Manager
Overseas Branch, Madras
We accept
Borrower
4
<PAGE> 5
Note: In case the Borrower is a limited company, the acceptance should be
under the Common Seal of the Company affixed as per its articles of
Association.
The Common Seal of the ______ Modular _____ P. LTD was _____ unto
affixed pursuant to a Resolution passed in this behalf by the Board of
Directors at their meeting held on 4-8-1994 in the presence of Mr. [ ]
Director AND Mr. B.V. Shah _______ who have set their _____ in token
thereof.
FORM C.1 HO. 1354
(To be stamped as an agreement, as a
General Power of Attorney and also
as Declaration of Trust)
(AGREEMENT OF LOAN FOR OVERALL LIMIT)
MEMORANDUM OF AGREEMENT made the
_______________________ day of _________________
One thousand nine hundred and between
Shri/Smt/Kum*
* Please insert the name of
the Borrower
**Please insert the full
address of the place of
business.
***Please insert the name
of the firs
NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES as follows:
Statements and particulars 1. The Borrower's application dated
proposals are correct. 28-04-94 and subsequent correspondence
with the bank (hereinafter collectively
referred to as "the Borrower's proposal")
shall be deemed to constitute the basis of
this Agreement and the credit facilities
to be granted by the bank hereinafter and
the Borrower hereby warrants the
correctness of each and every statement
and particulars therein contained and
undertakes to carry out the proposal
therein set forth.
Facilities to be governed 2. The Borrower declares and confirms that
arrangement letter. the aforesaid credit facilities agreed to
be granted to the Borrower shall be
governed by the terms and conditions as
set out in the sanction/arrangement letter
No. Adv/OSM/ dated 27-07-94 also herein
contained, as well as those embodied in
the relative security documents.
- --------
* (hereinafter referred to as "the borrower" which expression shall unless
repugnant to the context or meaning thereof be deemed to include them and
survivors or survivor of the partners or partner for the time being thereof and
his/her/their respective heirs, executors, administrators, legal representatives
successors and permitted assigns) of the One Part.
5
<PAGE> 6
Change in particulars to be 3. The borrower under takes to notify in
notified. writing to the Bank of any circumstances
affecting the correctness of any of the
particulars set forth in the Borrower's
proposal immediately on the happening or
occurrence of any such circumstance.
Covenants and declaration by 4. The Borrower declare affirms, confirms
Borrower regarding executors of and covenants that:
security documents etc.
(a) the execution on behalf of the
Borrower of this Agreement has been and
the execution on behalf of the Borrower
of the security* documents will be
validly authorised and the obligations
expressed as being assumed by the
Borrower hereunder and under the
security documents by the Borrower
constitute and will constitute valid
legal and binding obligations of the
borrower enforceable against the
Borrower in accordance with their terms;
(b) neither the execution and delivery
hereof and of the security
documents by the borrower nor the
performance or observance of any
of obligations of the Borrower
hereunder or thereunder shall:
(i) conflict with or result in
any breach of law, statute,
rule, order, trust, agreement
or other instrument,
arrangement, obligation or
duty by which the Borrower is
bound; or
(ii) cause any limitation on any
of the powers whatsoever of
the Borrower however imposed,
or on the right or ability of
the directors of the borrower
where the Borrower is a
company to exercise such
powers to be exceeded;
(c) the Borrower is not in default
under any law, rule, regulation,
order, mortgage, thrust,
instrument, agreement or other
instrument arrangement, obligation
or duty by which the Borrower
______und;
To be deleted in case non corporate (d) the copies certified by the
borrower. Borrower's Secretary, of the
certificate of Incorporation and
the Memorandum and Articles of
________tion of the Borrower are
true and effective and the
Borrower shall not during the
currency of this Agreement cause
any alteration to be made in any
of them without
6
<PAGE> 7
prior notification to and written
consent of the Bank;
*To be deleted in case of *(e) the resolution passed by the
non-corporate borrower. Borrower in general meeting on
_______________ 19 ____ consenting
under Section 293 (i d) of the
Companies Act, 1956 to the Board
of Directors borrowing moneys in
excess of the aggregate of the
paid up capital of the Borrower
and its free reserves, a certified
copy of the minutes of which has
been delivered by the Borrower to
the Bank, is and, during the
currency of this Agreement, shall
remain adequate and effective to
enable the Bank to grant and the
Borrower to receive the credit
facilities aforesaid;
(f) the audited profit and loss
account of the Borrower for the
year ended 3-31-1993 and the
audited balance sheet of the
Borrower as of that date give a
true and fair view of the results
of the operations of the Borrower
for that period and the financial
position of the Borrower as of
that date and that there has been
no material change adverse to the
business, assets, conditions or
operations of the Borrower since
that date;
(g) no litigation or administrative or
arbitration proceedings of or
before any court governmental
authority or arbitrator is
presently taking place pending or
threatened against the Borrower or
against any of the assets of the
Borrower;
(h) all necessary resolutions,
consents, licenses, approvals and
authorisations of the Government
of India and any political
subdivision thereof and of any
government ministry, authority,
bureau or agency and of any other
person or entity required in
connection with the execution,
delivery, performance, validity
and enforceability of this
Agreement and/or the establishment
and continuance of the business
activity of the Borrower and the
transactions relating thereto have
been duly obtained and are in full
force and effect and in respect of
all payments
7
<PAGE> 8
to be made by the Borrower to the
Bank hereunder in foreign
currencies are exempt and
exonerated from Indian withholding
tax and other taxes assessed or
imposed by any Government or
taxing authority thereof;
(i) the approval of the Reserve Bank
of India in respect of credit
facilities granted/to be granted
by the Bank in foreign currencies
has been duly obtained and a
certified copy thereof has been
delivered to the Bank;
(j) to take or cause to be taken in
respect of credit facilities and
repayments thereof in foreign
currencies all action which may be or
become necessary or appropriate in
order to ensure the immediate
availability of such foreign
currencies for all repayment and
discharge of the obligations of the
Borrower hereunder;
(k) in the event of default by the
Borrower the Bank may;
(i) apply and/or appropriate and/or
set off any credit balance standing
upon any account of the Borrower with
an branch of the Bank in India
______________ and in whatever
currency first in or towards
satisfaction of any sum (whether of
principal, interest or otherwise) due
to the Bank from the Borrower
hereunder and;
(ii) in the name of the Borrower as
the attorney of the Borrower to do all
such acts and execute all such
documents as the Bank may consider
necessary or expedient in this regard;
To be deleted if there are no prior (l) there exists no mortgage, charge,
mortgages or changes hypothecation, pledge lien,
encumbrance or other security interest
whatsoever the whole or any port of
the undertaking or assets, present or
future, including uncalled capital of
the Borrower *except the following;
Facilities to be granted at the (LIST OF EXCEPTIONS)
sole discretion of Bank.
5. The Bank may at its sole and
absolute discretion grant to the
Borrower all or some or any of the
aforesaid credit facilities either in
Indian or foreign currencies by way of
overdrafts, demand loans, loans, cash
credits (by way of pledge lock and key
type, factory type or mundy type or by
way of hypothecation or in any other
form including working capital term
loan), term loans (including funding
of interest or in any other form
granted as part of rehabilitation
packages), pre-shipment and
post-shipment credit, opening of
letters of credit, issuing of
guarantees including deferred payment
guarantees and indemnities,
negotiation and discounting of demand
and/or usance bills and cheques inland
as well as foreign and such other
facilities as may be agreed upon, from
time to time to sums not exceeding at
any one time in the aggregate the sum
of Rs. 210,00,000/ (Rupees Two _____
8
<PAGE> 9
and ten _____ only) to be made
available at* overseas branch, Madras
or at any one or more branches
of the Bank or at any one or more
branches of any one or more associate
Banks and/or State Bank of India of
the Bank in India and/or abroad.
Facilities to be extended or 6. The Bank shall not be required to
contented at the sole discretion of extend or continue any of the
Bank. aforesaid credit facilities granted or
to be granted to the Borrower
otherwise than at the Bank's sole and
absolute discretion and in no
circumstance to an amount at any one
time exceeding in the aggregate with
the interest thereon and other costs,
if any such limit as the Bank may,
from time to time, decide in respect
of each facility or in the aggregate.
Borrower's properties to be secured. 7. As security for payment and
discharge by the Borrower to the Bank
of said sum Rs. 210,00,000/s and
interest and costs charges expenses
and other monies due and payable by
the Borrower to the bank under or in
respect of the aforesaid credit
facilities or any of them the Borrower
shall, as may be required, create in
favour of the Bank:
(a) a mortgage in a form
satisfactory to the Bank of all
the Borrower's immovable
properties both present and
future; and
(b) a first charge by way of
hypothecation and/or pledge of the
Borrower's entire goods, movables and
other assets present and future
including documents of title to the
goods and assets, such as book-debts
outstanding moneys, receivables
including receivables by way of cash
assistance and/or cash incentives
under the Cash Incentive Scheme or any
other Scheme, claims, including claims
by way of refund of customs/excise
duties under the Duty Drawback Credit
Scheme or any other Scheme, bills,
invoices, documents, contracts,
insurance policies, guarantees,
engagements, securities, investments
and rights uncalled capital and all
machinery present and future of such
form satisfactory to the Bank.
Borrower to procure personally 8. The Borrower shall if required,
guarantees. procure irrevocable and unconditional
guarantees from its Directors and/or
others for the payment and discharge
by the Borrower to the Bank of the sum
Rs. 210,00,000/s and interest all cost
charges and expenses and other monies
due and payable by the Borrower to the
Bank under in respect of the aforesaid
credit facilities the form prescribed
by the Bank.
To sell with prior approval
of Bank
9
<PAGE> 10
12. Subject always to the Bank's
rights, powers and discretion under
this Agreement, any security documents
or otherwise the Borrower may with the
prior written approval of the Bank and
in due course of business sell from
time to time the goods movables and
other assets and receive the
book-debts which may be/have been
hypothecated, pledged mortgaged or
charged to the Bank provided the
To maintained required margin of margin(s) of security required by the
security Bank are always fully maintained and
on the terms of payment and delivery
to the bank of the proceeds thereof
and on the express understanding that
the security created thereunder and
all realisation recoveries and
insurance proceeds therefor shall
always be kept distinguishable and
held as the Bank's exclusive property
specifically appropriated to the
security created thereunder to be
dealt with only in accordance with
To keep charged machinery in good the directions of the Bank. It is
condition further agreed that the Borrower
shall-keep the machinery charged to
the Bank by way of hypothecation,
pledge or otherwise in good condition
and shall do or cause to be done all
acts and things necessary to keep the
said machinery in good condition,
provided that the Bank may in absolute
discretion, without being bound to do
so, spend such money as may be
necessary to maintain its undisturbed
possession of the said machinery and
to preserve the security and the
moneys so spent shall on demand be
paid by the Borrower to the bank and
until payment shall be debited to the
accounts opened by the Bank in respect
of the aforesaid credit facilities and
carry interest accordingly. It is,
however, understood that the Borrower
shall not without the written consent
of the bank first had and obtained
remove the plant and machinery
attached to the premises, if any,
Not to remove plant machinery mortgaged to the Bank and in case of
such removal shall replace the same by
machinery, plant and fixtures and
things of equivalent nature and value,
provided that in the event of the bank
agreeing in writing that any machinery
plant or things as aforesaid so
removed was redundant or became worn
out or absolute and need not be
replaced the same may be sold and the
sale proceeds applied towards the
satisfaction or payment of the
amount(s) due to the Bank.
To keep registers of properties 13. Registers of immovable properties
charge. and goods book-debts, movables and
other assets
hypothecated/pledged/mortgaged or
otherwise charged to the bank shall be
kept by the Borrower in respect of
each of the aforesaid credit
facilities and such registers shall
contain all particulars of such
immovable properties and goods
book-debts movables and other assets
hypothecated pledged mortgaged or
otherwise charged and/or such
immovable properties and goods
Such registers open for inspection book-debts movables and other assets
by the Bank as have been released by the bank and
withdrawn by the Borrower. Such
Registers shall at all times be open
for inspection of the bank and the
Borrowers shall if so required by the
Bank furnish to the bank daily or at
such intervals as the Bank may direct
from time to time a schedule or copy
of all the entries which shall have
been made in said Registers.
Right to charge interest at 14. Interest shall be charged on the
outstanding(s) in
10
<PAGE> 11
such rate(s) as may be determined by the accounts opened in respect of the
the Bank aforesaid credit facilities at such
rate(s) as may be determined by the
bank from time to time at the Bank's
sole discretion on the basis of any
internal credit rating accorded to the
Borrower or otherwise provided that
the rate(s) shall be subject to
changes in the State bank Advance Rate
and/or changes in interest rates
prescribed by the Reserve Bank of
India from time to time.
Where interest is charged by the Bank
at a concessionary rate or rates
because of the credit facilities being
granted by the Bank to the Borrower
under the Interest Subsidy Scheme or
any other Scheme(s) formulated by the
Government and/or Reserve Bank of
India and/or any other authority from
time to time, the Borrower agrees,
declares, confirms and affirms that in
the event of the withdrawal,
modification and/or variation of such
Scheme(s), the concessionary rate or
rates of interest shall stand
withdrawn and the usual rate or rates
of interest of the Bank applicable at
the material time to such credit
facilities shall become effective and
the Bank shall become entitled to
charge the Borrower such rates of
interest of the Bank applicable at the
material time to such credit
facilities and such difference shall
become due and payable by the Borrower
to the Bank from the date the
withdrawal, modification and/or
variation of such Scheme(s) becomes
effective. Interest shall be
calculated respectively on the daily
balance of such account(s) and be
debited thereto on the last working
day of the month or quarter according
to the practice of the Bank. The Bank
shall also be entitled to charge at
its own discretion such enhanced rates
of interest on the account(s) either
on the entire outstanding or on a
portion thereof as it may fix for any
irregularity and for such period as
the irregularity continues of for such
time as the bank deems it necessary
regarding being had to the nature of
the irregularity and the charging of
such enhanced rate of interest shall
be without prejudice to the bank's
other rights and remedies.
To maintain sufficient security 15. In respect of security created by
way of hypothecation/pledge/mortgage
or otherwise the Borrower shall at all
times maintain a sufficient quantity
and market value of goods, book-debts,
movables and other assets and also all
immovable properties given as
security, to provide the margins of
security required by the bank from
time to time and will forthwith
whenever necessary provide further
goods book debts, moveable assets and
other security (approved b the Bank)
to restore such margins or pay to the
bank the equivalent amount in cash. In
respect of letters of credit opened or
guarantees of indemnities issued by
Bank entitled to change margin the Bank on behalf of the Borrower,
the Borrower shall deposit sufficient
cash or other security as may be
acceptable to the Bank as margin money
as stipulated by the bank. The bank
shall be entitled to and shall as its
discretion, which shall be final and
binding on the Borrower, change the
markings and the Borrower shall be
bound by it notwithstanding any
margins earlier agreed to by the Bank.
To utilise facilities for 16. The Borrower expressly agrees and
undertakes that
11
<PAGE> 12
agreed purposes all the aforesaid credit facilities or
any of them shall be utilised for the
purposes set forth in the Borrower's
proposal and for no other purpose and
no change shall be made therein
without the written sanction of the
Bank.
To keep properties in good 17. The Borrower shall from time to
condition, to pay rates taxes etc. time and at all times during the
continuance of the aforesaid credit
facilities or any of them keep all
properties, goods, machineries and
other assets specified and mentioned
in this Agreement or any other
relative security documents in good
working condition and substantial
state of repairs and shall pay all
ground rent, rates taxes and
assessments present as well as future
payable in respect of the same
immediately they all shall become due
and also pay all electricity charges,
municipal rates and all other charges
and assessments, connected with the
business regularly and punctually and
in case the Borrower neglects to keep
the properties, goods, machineries,
and other assets secured to the Bank
or any part thereof in good and
Bank entitled to repair, pay rates substantial repair or pay the
taxes etc. electricity charges, ground rents,
rates, taxes, charges and assessments
as aforesaid, it shall be lawful for,
but not obligatory upon, the Bank to
have said securities or any part
thereof required and to such
electricity charges, ground rent,
taxes, charges and assessments. All
money, premia, costs, charges of such
repairs, the payment of the
electricity charges, ground rent, rate
taxaes, charges and assessments as
aforesaid shall be charge upon such
securities jointly with all principal
moneys and interests as if they formed
a part thereof.
To maintain sufficient interest in 18. The Borrower shall at all times
business. maintain sufficient financial interest
in the business and shall if so
considered necessary by the Bank bring
additional funds or assets by ways of
capital, deposits or otherwise. The
borrower shall not withdraw except
Not to withdraw or divert funds with the Bank's prior permission in
writing or divert or misuse the funds
and assets invested in or brought into
the business by the Borrower as
capital, deposits or otherwise.
To carry on business property. 19. The Borrower shall carry on the
business efficiently properly and
profitably and such business shall be
confined to such manufacturing and/or
trading activity as have been notified
to the Bank and for which the Bank has
sanctioned or agreed to sanction the
aforesaid credit facilities and shall
keep all the licenses, leases,
contracts, engagements, essential for
carrying on the manufacturing and/or
activity renewed from time to time and
To maintain proper books etc. shall not allow any interruptions or
disturbances to happen so as to
hamper/hinder/adversely affect the
business of the Borrower. The Borrower
shall maintain proper books of
accounts and such other registers,
books, documents, relating to the
business as may be statutorily
required or as may be statutorily
required or as may be required by the
Bank or as may be necessary and/or
generally kept in the business of the
kind carried on by the Borrower and
To audit accounts shall get the accounts books duly
audited and furnish to the Bank a copy
of the audited statements and the
auditor's report. The Borrower shall
if so required by the Bank allow the
Bank its officers, agents and nominees
and/or
12
<PAGE> 13
qualified auditors and/or technical
experts and/or management consultants
as may be appointed by the Bank to
inspect or audit such books of
accounts, registers, books and
documents and also furnish to the Bank
at such intervals as the Bank may
Bank entitled to inspect books etc. direct from time to time a schedule or
copy of all the entries which shall
have been made in such books.
To submit periodical statements 20. The Borrower shall submit to the
Bank periodically as required by the
Bank copies of the Balance Sheet and
Profit and Loss Account duly audited
and stock statements in the formats as
may be prescribed by the Bank from
time to time indicating correctly the
quantity and value of the stocks and
also statements of receivables
indicating the names of the debtors
amounts of the debts and the periods
for which they are outstanding
together with a certificate that the
quantities and amounts stated are
correct and that all stocks are fully
covered by insurance unless such
insurance is waived by the Bank and
will also furnish and verify all
statements, reports, returns,
certificates and information and will
also execute all documents and do all
Authority to Bank to act for acts and things which the Bank may
Borrower require to give effect to any of the
terms and conditions set out herein or
in the security documents or any of
them that may be executed and the
Borrower authorises the Banks and each
of its agents and nominees as Attorney
for and in the name of the Borrower to
do whatever the Borrower may be
required to do under this Agreement.
To carry on business transactions 21. The Borrower shall carry on the
through Bank/Associate Banks etc. entire banking transactions of the
business including merchant banking
business through the Bank or any of
its Associate Banks wherever the Bank
does not have a branch established. In
particular, the Borrower's entire
foreign exchange business, inland bill
business and deposits if any shall be
placed with the Bank or any of its
Associate Banks where the Bank does
not have a branch established thereat.
The Borrower may, however with the
prior permission in writing of the
Bank in this regard and to the extent
allowed and on such other terms and
conditions as may be stipulated deal
with any other Bank(s).
Release of goods under trust 22. Where goods movables and other
assets are pledged to the Bank, the
Bank may in its own discretion and at
the Borrower's specific request and
without detriment to the pledge
release the goods movables sand other
assets to pledged to the bank from its
possession to the borrower on trust
under a factory/mundy type pledge or
other basis and/or for any purpose
connected with the Borrower's trade
business or industry and in
consideration of the bank so handing
over the Borrower from time to time
any goods movables and other assets
lying on the godown factory or other
place approved by the bank under
pledge to the bank the Borrower shall
hold the goods, movables and other
assets as trustees and agents for and
on behalf of the bank. The Borrower
undertakes that such goods movables
and other assets shall in all respects
be treated by the Borrower in the
books of the Borrower as belonging to
and held on behalf of the Bank.
13
<PAGE> 14
Borrower to hand over to Bank 23. Where goods movables or other
documents of released goods. assets pledged to the Bank are
released to the Borrower on trust for
any purpose connected with Borrowers
trade business industry or otherwise
and are put in transit by the Borrower
for any purposed including for sale
thereof the Borrower shall hand over
to the Bank the relative railway or
other transport receipts invoices and
all documents and shall deliver back
to the bank the goods, movables and
other assets when the purpose for
which they are released on trust is
accomplished or to pay to the Bank the
sale proceeds or the proceeds of the
bills relating to the said goods,
movables or other assets. The Borrower
undertakes that the proceeds of sale
of such goods movables or other assets
shall in be treated by the Borrower in
the books of Borrower as belonging to
and held on behalf of the Bank.
Bank may fix limits for retiring 24. The Bank may at its own discretion
bills or making remittances. and at the specific request of the
Borrower grant the facility of cash
accommodation to the Borrower by
fixing limits in respect of goods,
book debts movables and other assets
hypothecated or against the security
of pledge of goods, movables and other
assets for the purpose of either (i)
retiring documentary bills drawn on
the Borrower covering purchase of
goods required for the Borrower's
manufacturing activities consigned
from various places, or (ii) making
remittances of the cost price of the
materials direct to the suppliers by
the bank subject, of course, to the
advance being limited in each case to
such percent of the said bills or the
cost price of the materials
respectively as may be decided by the
Bank from time to time and where the
bank so grants the facility the
Borrower hereby acknowledges in
consideration thereof the Bank shall
have a change by way of pledge over
the documents of title to goods
movables and other assets received
with the bills or otherwise which will
be in custody of the Bank or which may
come into the bank's custody and for
this purpose the documents of title to
goods movables and other assets shall
be deemed to have been delivered by
the Borrower to the bank for creating
pledge of goods movables and other
assets covered by the documents and in
further consideration of the delivery
by the Bank of the said documents of
title to goods movables and other
assets to the Borrower or to the
clearing agents of the Borrower under
the Borrower's instructions and on
behalf of the Borrower while the
Bank's charge thereon and the
Borrower's own indebtedness or
obligation in respect of the said
advances or other valuable
consideration are subsisting, the
Borrower undertakes to clear land
store and hold the goods movables and
other assets received under the said
documents for and on behalf of the
Bank as trustees and agents and if so
required by the bank to deliver
possession of the goods movables and
other assets to the Bank to be held by
the bank as pledgee of the said goods
movables and other assets.
Borrower's undertakings 25. For the purpose of clauses 22 and
23 the Borrower undertakes and
declares that:
(1) To handover and redeliver goods
etc. The
14
<PAGE> 15
Borrower shall at any time hand
over or redeliver or cause to be
handed over or redelivered to
the Bank forthwith on demand all
goods movables and other assets
and documents of title thereto
and goods, movables and other
assets covered by such documents
including any policies of
insurance pertaining thereto and
authorise the bank or any person
or persons authorised by the
Bank in writing in that behalf
to enter the Borrower's godown
premises or any other place
where such goods movables and
other assets and documents of
title thereto are laying kept or
Not to deal with goods etc. stored and to take possession of
said goods, movables and other
assets and documents of title
thereto wheresoever situate at
any time without giving to the
Borrower any notice of the
Bank's intention to do so and
the Borrower hereby desires and
requires all persons in whose
custody the said goods movables
and other assures are for the
time being to yield possession
thereof according to the Bank.
(2) The Borrower shall not deal with
the goods movables and other
assets and documents of title
thereto or the goods movables
and other assets covered by the
documents except under and in
accordance with the Bank's
written instruction.
(3) The Borrower shall whether or
not in possession of the goods
movables and other assets or
documents of title thereto are
Not to deal with goods etc. delivered to the Bank repay the
outstanding in the said accounts
within such number of days of
its being utilised as may be
specified by the bank from time
to time.
(4) The Borrower shall indemnify the
bank (i) against all losses,
costs, damages expenses
whatsoever that the Bank may
incur or sustain by reason of
the Borrower's act, default or
omission of the Borrower's
servants or employees or other
persons acting on behalf of the
Borrower in respect of goods
movables and other assets
Due to discrepancies in documents pledged to the bank and released
to the Borrower on trust; (ii)
against all losses, costs,
damages expenses or consequences
whatsoever that the Bank may
incur or sustain as a result of
the Bank's complying with the
Borrower's clearing agents the
documents covering
15
<PAGE> 16
the goods movables and other
assets (a) whether or not the
said documents are in order; (b)
notwithstanding any
discrepancies that may be
present between the price/value,
quantity and quality of the
goods movables and other assets
covered by the documents and
price, quantity and quality
specified in the contract; and
(iii) against all consequences
the suppliers losses and damages
that may arise as a result of
the Bank's complying with the
Borrower's requests to effect
advance payments from time to
time to the suppliers (a)
whether or not the suppliers
consign the goods movables and
other assets; (b) whether or not
the documents in respect thereof
are received by the Bank; and
(c) notwithstanding any
discrepancy between the quantity
or quality of the goods movables
and other assets received from
the suppliers and that of the
contracted quantity and quality.
Machineries charged to be movable 28. All the machineries of the
properties Borrower hypothecated pledged
mortgaged or otherwise charged to the
Bank shall be treated as movable
properties and not as immovable
properties and shall bear the
nameplate of the Bank indicating that
the said machineries are hypothecated
pledged mortgaged or otherwise charged
as the case may be to the bank. The
Borrower shall also exhibit
conspicuously in the main hall of the
factory a list showing the items of
machineries hypothecated, pledged,
mortgaged or otherwise charged to the
Bank.
To provide access to goods. 29. In respect of goods movables and
other assets stored and held in
godowns owned or hired by or let to
the Borrower, the Borrower shall
provide the bank and its agents and
nominees with an unimpaired access to
the godowns at all times hew are hired
by or let to the Borrower the Borrower
shall furnish to the bank a letter
Borrower the Borrower shall furnish to
the bank a letter from the land/lord
Furnish letter from landlord owner owner consenting to continue such
unimpaired access to the godown to the
Bank and its agents and nominees and
also declaring that notwithstanding
any claim of the bank on all the goods
movables and other assets stored and
held therein and hypothecated pledged
mortgaged or otherwise charged to the
Bank and that the Bank its agents and
nominees shall have the right to
remove the goods movables and other
assets so stored and held in the
godowns whenever desired by the Bank.
Bank entitled to inspect etc. goods 30. In respect of goods-book debts,
released on trust. movables and other assets
hypothecated. pledged mortgaged or
otherwise charged to the bank or which
are released to the Borrower on trust
under a factory mundy type pledge or
other basis, the Bank's agents and
nominees shall be entitled at all
times without notice to the Borrower
but at
16
<PAGE> 17
the Borrower's risk and expenses and
if so required as Attorney for and in
the name of the Borrower's risk and
expensive place were the said goods
book-debts movable and other assets
may be and inspect value insure
superintend dispose and/or take
particulars of all or any part of the
said good-book debts movable and other
assets and check any statements
accounts reports and information and
do all such acts, deeds and things
necessary to preserve and protect the
same and the Borrower confirms,
affirms and undertakes to give all
assistance co-operations as may be
necessary in this regard.
To insure properties charged. 31. All goods book-debts movables and
other assets hypothecated, pledged,
mortgaged or otherwise charged to the
Bank as security for any of the
aforesaid credit facilities and also
all immovable properties given as
security for all such facilities or
any of them as may be required by the
Bank shall be kept at the Borrower's
risk and expense in good condition and
fully insured against loss or damages
as may be required by the bank due to
any reason whatsoever and particularly
the machine hypothecated and/or
pledged to the Bank against fire
and/or such other risk(s) as the Bank
may from time to time stipulate in the
joint names of the Borrower and the
Bank with an insurance company
approved by the bank and for such
amount as the bank may consider
necessary and that the insurance
policies shall be delivered to the
bank when required by the Bank to do
so. If the Borrowers fails to effect
such insurance the Bank may, but
without being obliged to do so, insure
the said goods movables and other
assets and immovable properties
against fire and/or such risk(s) in
joint names and debit the premium and
On default Bank may insure other charges to any account of the
Borrower opened or to be opened and in
the event of the Bank being at any
time apprehensive that the safety of
the goods movable and other assets and
machinery is likely to be endangered
owing to riot and /or strike
(including fire arising therefore)
and/or floods earthquakes., etc. and /
or also resulting in the loss of
production therefore the Borrower to
insure the same in such joint names
against any damage arising therefor
the cost of such extra insurance being
payable by the Borrower and be debited
to any such account. If the Bank
desires that the goods, movable and
other assets shall be insured against
that the Borrower shall provide the
necessary conifer therefore. The
Borrower shall provide, if the Bank so
directs, a sufficient insurance cover
against breakdown of such machinery
and against loss and damage by fire
lighting and flood to any immovable
properties of the Borrower. The
Borrower further expressly agrees that
the bank shall be entitled to adjust
settle compromise or refer to such
adjustment settle compromise or refer
to activating any dispute arising
under or in connection with any
insurance and such adjustment,
settlement compromise and any award
made on such arbitration shall be
valid and binding on the Borrower and
also receive all moneys payable under
any such insurance or under any claim
made thereunder and to give a valid
receipt therefor, and that the amount
so received shall be credited to the
Borrower's
17
<PAGE> 18
account and the Borrower shall not
raise any question that a larger sum
might or might or ought to have
received or be entitled to dispute its
liability for the balance remaining
due on my account or accounts after
such credit. Provided that the Bank
may its sole, absolute and unqualified
discretion waive all or any of these
requirements.
Not to compound or release 32. The Borrower shall not compound or
book-debts. release any of the book-debts not do
anything whereby the recovery of the
same may be impeded, delayed or
prevented, without the consent in
writing of the Bank first had and
obtained.
Not to call uncalled capital 33. *The Borrower shall as soon as any
without notice to Bank. call in respect of its shares has been
resolved upon by the Directors or as
soon as it shall have been resolved to
issue any unissued share capital or to
create any new shares immediately give
notice of such call to the Bank or
give notice to the bank of the
intention of the Borrower to issue or
create any such share capital as
aforesaid and the proposed amount
thereof. And shall not until the
expiration of seven clear days from
the time when such notice shall have
been sent to the bank issue any notice
to the members of the Borrower in
respect of payment of any
_________________ or issue or create
any such existing or new shares
respectively as aforesaid. And if the
Bank shall so require every notice
prospectus application form or
allotment letter sent out by the
Borrower in pursuance of any such
resolution shall direct the members or
applicants for allotment of the shares
of the Borrower to pay the call so
made or the moneys payable in respect
of the said existing new shares to the
Bank or as it shall direct and if no
such requisition be made by the bank
the members applicants or allottees
shall be direct to pay any call or
other moneys into the Bank's office
(as may be informed or notified) to
the joint account of the Borrower and
the Bank or in such manner as the Bank
may direct and the Bank shall be
entitled to require all such calls or
moneys received by the Borrower to be
applied either wholly or partly in or
towards the payment or satisfaction of
the principal sum interest and other
moneys due to the Bank but in default
of the Bank requiring the said calls
or moneys received by the Borrower to
be applied either wholly or partly in
or towards the payment or satisfaction
of the principal sum interest and
other moneys due to the Bank but in
default of the Bank requiring the said
calls or moneys to be so applied as
aforesaid within one month of their
being paid, the Borrower may without
the consent of the bank apply the
whole or the balance thereof over and
above what shall be required by the
bank to be otherwise applied to the
general purposes of the Borrower as it
shall think fit proved also that all
money's hereunder to be received by
the Borrower from its members in
advance of calls upon the shares shall
be held by the Borrower from its
members in advance of calls upon the
shares shall be held by the Borrower
upon trust for the bank and so as to
form part of the security and shall be
dealt within the manner hereinbefore
mentioned in the case of calls or
other moneys received by the Borrower.
- ----------------
* To be deleted in case of non-corporate Borrower.
18
<PAGE> 19
Not to allow receiver to be 34. *The Borrower shall not (a) allow
appointed, distress of execution to any Receiver to be appointed of the
believed and Memorandum of Articles undertaking or of the properties,
to be altered. immovable and movable, of the Borrower
mortgaged, pledged and/or charged to
the bank or any part thereof (b) allow
any distress or execution to be levied
upon or against the same or any part
thereof and (c) make or attempt to
make without the previous consent of
the Bank in writing any alterations of
its memorandum of Articles of
Association or in its capital
structure.
To alter Memorandum or Articles 35. *The Borrower shall forthwith and
when required. from time to time as may be required
by the Bank make such alterations or
additions of its Memorandum of
Articles of Association or in its
capital structure as may be necessary
to conform to this Agreement.
To make arrangements for supply of 36. The Borrower shall make long-term
raw materials. arrangements for a steady and regular
supply of raw materials as may be
required for it's business.
Not to vary shareholding of 37. During the currency of these
Directors. presents the shareholding of such or
the shareholding in the Borrower who
are it's Directors at present and the
without the previous written connect
of the Bank first obtained
Bank to appoint nominee Directors 38. During the subsistence of the
liability of the Borrower under or in
respect of any of the aforesaid credit
facilities, The Bank without prejudice
to its rights referred to in this
Agreement shall have a right to
appoint and/ or remove, from time to
time, a Director or Directors of the
Board of Directors as nominee Director
or Directors so appointed by the Bank
shall not be liable to retire by
rotation and need not possess any
share qualifications prescribed by the
Articles of Association of the
Borrower.
To continue borrowings within 39. The Borrower shall at all times
drawing power allotted. confine the Borrower to the drawing to
the drawing power allotted within the
limit of the particular facility,
namely, the value of the security less
the stipulated margin, and in no case
shall exceed such limit. The Bank may,
however, at the specific request of
the Borrower and in it's own
discretion allow drawing beyond such
drawing power for such time as may be
considered necessary and shall at any
time without any notice call upon the
Borrower to repay such excess
drawings. All rights and obligations
of the Bank and the Borrower
respectively hereunder and under any
arrangements Letter or other documents
shall extend to such exceed drawings
notwithstanding the specific limit
stipulated. All the rights and
securities created hereunder in favor
of the Bank and obligation of the
Borrower thereunder will extend to
cover the Borrower's liabilities to
the Bank , under any account
whatsoever ever of the Borrower with
the Bank notwithstanding that such
account may not relate to any
particular facility agreed to be
granted by the Bank to the Borrower.
- ----------------
* To be deleted in case of non-corporate Borrower.
* To be deleted in case of non-corporate Borrower.
19
<PAGE> 20
Bank may release excess of security. 40. At any time or from time to time
before repayment of the amount due to
the Bank whenever the value of the
security for the time being held by
the Bank under the security documents
or otherwise shall be in excess or
amount due to the Bank, the Bank may
at the request of the Borrower and at
it's discretion release to the
Borrowers such as excess security.
Provided Always that Bank may refuse
to release such excess security as
aforesaid in its discretion if there
are other liabilities whatsoever of
Bank's general lien or right of the Borrower to the Bank absolute or
set-off not affected. contingent which in the opinion of the
Bank might not be adequately secured.
Nothing contained in this clause in
particular and in this Agreement or
any security documents between the
Bank and the Borrower in general shall
be construed as excluding the general
lien and/or the right of set-off the
Bank for may balance due to the Bank
on any account or in respect of any
liability whatsoever over any security
for the time being held by or
remaining with the Bank.
Bank not liable for verifications 41. The Bank shall not be under any
of quantity or quality of goods. liability whatsoever towards the
Borrower or any other person for
verification of the quantity and/or
quality of any goods movables or other
assets shown in the relevant invoices
statements or other documents
notwithstanding that it may have taken
possession of such goods movables or
other assets by way of hypothecation
pledge or otherwise or for any loss or
damage to the goods, movables and
other assets and other documents and
given security from whatever cause or
in whatever manner arising whether
such goods movables or other assets
shall be in the possession of the Bank
or not at the time of such loss or
damage or the happening of the cause
hereof. The Borrower doth and shall at
all times indemnify and keep
indemnified the Bank from and against
To indemnify the Bank against all actions, suits, proceedings,
losses etc. costs, charges, claims, and demands
whatsoever that may at any time arise
or be brought or made by any person
against the Bank in respects of any
acts matters and things lawfully done
or caused by the Bank in connection
with the said goods movables and other
assets or in pursuance of the rights
and powers of the Bank under this
Agreement or other security documents.
No responsibility will with the Bank
in respect of the quantity, quality or
condition or on whatever account on
final turn-out of the goods movables
and other assets in possession of the
Bank not responsible for quantity, Bank under this agreement or under
quality or condition of goods. security documents between the Bank
and the Borrower including goods
movables and other assets which may
have come into the possession of the
Bank by the Bank exercising any of its
rights under this Agreement or any
security documents or otherwise and/or
in respect of the correctness validity
sufficiency or genuineness of any of
the documents relating thereto.
Negative Covenants by the Borrower 42. The Borrower shall not during the
subsistence of the liability of the
Borrower to Bank under or in respect
of any of the aforesaid credit
facilities without the written
20
<PAGE> 21
consent of the Bank --
Change, or alter capital (a) change or in any way alter the
capital structure of the
borrowing concern;
Effect Scheme (b) effect any scheme of
amalgamation or reconstitution;
Implement new Scheme (c) implement a new scheme of
expansion or take up an allied
line of business or manufacture;
Declare dividend (d) declare a dividend or
distributes profits after
deduction of taxes, except where
the installments of principal
and interest payable to the Bank
in respect of the aforesaid
credit facilities and being paid
regularly and there are no
irregularities whatsoever in
respect of any of the aforesaid
credit facilities.
(e) enlarge the scope of the other
manufacturing/trading
Enlarge the scope of activities activities, if any, undertaken
at the time of the application
and notified to the Bank as
such;
(f) withdraw or allow to be
withdrawn any moneys brought in
Withdraw moneys by promoters and by the promoters and direct or
directors relatives and friends of the
promoters or directors of the
Borrower;
(g) invest any funds by way of
deposits, or loans or in share
capital of any other concern
Invest funds (including subsidiaries) so long
s any money is due to the Bank;
the Borrower will, however, be
free to deposit funds by way of
security, with third parties in
the normal course of business or
if required for the business;
(h) borrow or obtain credit
facilities of any description
from any other bank or credit
Borrower obtain credit facilities agency or money-lenders or enter
into any hire purchase
arrangement during the
subsistence of the liability of
the Borrower to the Bank.
Borrower's covenants in respect of 43. In respect of advances granted by
discounting of bills etc. Bank to the Borrower by way of
purchase/negotiation/discounting of
clean/documentary/demand/usance bills
of exchange drawn by the Borrower on
his/its/their various customers and
expressed in foreign currency or
Indian rupees and whether under
letters of credit or otherwise and/or
in respect of said bills tendered for
collection the borrower agrees and
covenants with the Bank as under;
(a) that the bills shall bear, where
necessary adequate stamp duty
before purchase/negotiations/
discounting shall be drawn by
the Borrower in conformity with
the pro forma prescribed under
the Reserve Bank of India New
Bill Market Scheme, indicating
on the face thereon the
21
<PAGE> 22
description and quantity of
goods sold and the number and
date of the carrier's receipt;
(b) that the bills shall be drawn
with a usance, ordinarily, of
not exceeding 90 days;
(c) that the bills pertaining to
supplies made to Government
departments and quasi-Government
bodies as well as statutory
Corporations and Government
Companies shall be drawn in
conformity with the pro forma
prescribed under the Reserve
Bank of India Scheme;
(d) that at the time of offering
upcountry usance bills for
discount the bills shall be
accompanied by railway receipts
or motor transport receipts of
approved Transport Companies
together with the relative
original invoices and that the
documents will be delivered to
the drawees only after the bills
are accepted;
(e) that in the case of local sales,
bills shall be accompanied by
copies of invoices bearing
acknowledgments of the
purchasers in token of their
having received the goods and
shall be offered for discount
only after acceptance of bills
by the drawees;
(f) that upcountry or local bills
will not be collected by the
borrower through other banks;
(g) that the Borrower shall ensure
at upcountry bills are accepted
by the drawees on presentation
or unpaid on due dates, the Bank
shall be entitled to recover the
amount of such bills along with
overdue interest and other
incidental charges by debit to
the accounts of Borrower.
(h) that the Bank shall be at
liberty not to accept cheques
drawn on local banks from the
drawees in payment of bills
drawn on them unless such
cheques are tendered at the Bank
before clearing hours on due
dates. In the even of cheques
being received late after
clearing hours on due dates, the
Bank may treat the relative
bills as unpaid and may debit
the amounts thereof to the
account of the Borrower on due
dates;
(i) that the Borrower shall furnish
to the Bank in advance a list of
local parties on whom the
Borrower intends to drawn usance
bill
22
<PAGE> 23
for prior approval of the Bank;
(j) that the Borrower shall abide by
such terms and conditions as the
Bank may from time to time
stipulate;
(k) that unless otherwise specified
the rates for discounting the
bills will be the same rate
which is applicable to advances
granted to the Borrower against
stocks;
(i) service chargers on the
amount of each bill and
out-of-pocket expenses
towards registration; postal
charges etc., per instrument
as per the bank's Schedule
of standard charges in force
from time to time;
Provided always the bank at
its discretion shall be
entitled to revise the
aforesaid charges from time
to time;
(m) the Bank may send the bills
either by registered
acknowledgment due post or
registered post or ordinary post
or by any courier service, as is
decided by the Bank in its
discretion to any of its own
offices or to any of the
Scheduled Banks (reference being
to Schedule II of the Reserve
Bank of India Act, 1934) or
other Commercial Bank and/or
Co-operative Bank or directly to
the drawees at the Borrower's
risk and responsibility as to
the losses if any on the bills
or the proceeds of the bills or
of the goods represented by the
bills due to any cause
whatsoever and the Borrower
agrees to hold the Bank harmless
and indemnified from and against
all consequences that may arise
from its doing so and from and
against all losses, charges and
expenses in sending the bills
accepted under these
arrangements in the manner of
aforesaid;
(n) where the bills accepted for
collection are drawn on
Central/State Government
Departments/Agencies and/or
Public Sector Undertakings
and/or Railways and/or other
parties and/or borrower's
customers accompanied by either
railway receipts, shipping
documents or receipt notes, take
delivery notes receipted
challans or inspection rates in
cases where the railway
receipts, shipping documents or
motor receipts have been
forwarded/direct to the
concerned drawees/consignees and
offered by the Borrower to the
Bank for collection the Borrower
shall deposit with the Bank
copies or the relevant documents
along
23
<PAGE> 24
with the bills signed by the
borrower and invoices evidencing
despatch of goods to the parties
mentioned therein;
(o) where at the request of the
Borrower the Bank has agreed to
include in the facilities
granted under this Agreement
credit sales made by the
Borrower to the customers of the
Borrower whereby finished goods
are directly sent to the
customers at their requests and
copies of the of relative
invoices with or without
receipted challans or accepted
delivery notes, receipt notes,
inspection notes, are tendered
by the Borrower to the Bank as
evidencing despatch of finished
goods and where under such
circumstances or any other
circumstances the Borrower
receives payment of the bills
the Borrower shall immediately
deposit the proceeds of the
bills and the sale proceeds of
the goods covered by invoices
directly received by the
Borrower or the agents of the
Borrower whether in cash or by
cheques or by any other mode of
payment in the said account(s)
with the Bank towards payment of
the outstandings in respect of
the advances granted on the
evidence of such invoices;
(p) the Borrower shall repay the
Bank's advances within such
number of days as may be
stipulated by the Bank of the
utilisation of the advances by
the Borrower on each occasion
whether or not the payment of
the said bills/invoices is
received by the borrower or if
the bills are returned unpaid by
any reason whatsoever the
Borrower shall reimburse the
Bank immediately on receipt of
the Bank's advice;
(q) the Borrower shall indemnify the
Bank and keep the Bank harmless
and indemnified at all times
against all losses damages
actions costs (as between
Advocate and client) charges or
expenses which may be made
against or sustained or incurred
by the Bank (and whether paid by
the Bank or not) as a result of
or in consequence of the Bank
having agreed to
purchase/negotiate/discount/
collect the said bills as also
as a result o for in consequence
of the Bank through any of its
offices of correspondents in
India and elsewhere guaranteeing
any irregularities or
discrepancies that may be
existing in the documents
relating to the said bills in
24
<PAGE> 25
connection therewith.
(r) the Bank shall have first and
paramount lien on the bills and
the moneys received there under
and the goods in course of
transit covered by the documents
of title to goods or other
documents which purport to
represent rights of title to
goods accompanying the bills
shall remain pledged to the Bank
and irrespective of its rights
as pledgee of such goods in case
of any dispute the Bank shall
have the Banker's lien on all
bills goods securities documents
and moneys belonging or
purporting to belong to the
Borrower for all moneys claims
and demands due or to become due
from the Borrower to the Bank;
(s) in case of the bills/invoices
are passed for payment for a
reduced amount, the Borrower
authorises the Bank to accept
such reduced payment and the
Borrower shall make good the
shortage or any loss arising
therefrom and the Bank will not
be responsible;
(t) where the drawees return unpaid
the bills/invoices to the
Borrower direct, the Borrower
shall immediately on receipt
thereof return the
bills/invoices to the Bank and
the bank's acceptances thereof
shall be without prejudice to
its right of recovery of the
amounts covered by the
bills/invoices from the
Borrower.
44. In respect of advances granted by
the bank to the Borrower by way of
drawee bills acceptance limit and/or
drawee bills discounting limit wherein
usance bills drawn on the Borrower by
the suppliers of goods and accepted by
the Borrower are lodged with the Bank
for discounting; the Borrower hereby
agrees and covenants with the Bank for
discounting, the Borrower hereby
agrees and covenants with the Bank as
under:
(a) The Borrower hereby confirms
that at the request of the
Borrower the bank has agreed in
its sole and absolute discretion
to discount usance bills with
usance ordinarily not exceeding
90 days, drawn on the Borrower
for an amount at any time not
exceeding the drawee bills
discounting limit granted within
the overall limit (hereinafter
referred to as "the Bills").
(b) Whenever the Borrower requires
the bank to discount the Bills,
the Borrower shall lodge with
the bank the Bills together with
the original and/or copies of
invoices and the receipted
delivery challans evidencing the
supply to the Borrower of the
goods
25
<PAGE> 26
drawn by the drawers of the
Bills (hereinafter called "the
Suppliers").
(c) The Borrower hereby confirms and
declares that the amounts
represented by the Bills drawn
on the Borrower by the Suppliers
will be due and owing by the
Borrower to the Suppliers and
that the goods represented by
the invoices accompanying the
Bills will have been duly
ordered and received by the
Borrower and that the amounts of
such Bills will be paid by the
Borrower to the bank at
maturity.
(d) The Borrower declares and
confirms that on the Bank
discounting the Bills the Bank
will have good title thereto and
will be entitled to have the
Bills rediscounted with Reserve
Bank of India, Discounted and
Finance House of India Limited,
any scheduled commercial bank or
any other approved financial
institution or otherwise deal
with the Bills as the holder
thereof.
(e) The Borrower further confirms
that notwithstanding anything to
the contrary contained in any
documents or letters written by
the Borrower to the Suppliers or
by the Suppliers to the
Borrower, the Borrower shall be
irrevocably, absolutely and
unconditionally liable to pay to
the Bank the amounts of the
Bills discounted with the Bank
at the maturity of such Bill.
(f) The Borrower agrees, declare and
confirms that the Borrower will
be liable to the Bank as
aforesaid on the Bills and that
the Bank shall be entitled to
enforce all its rights against
the Borrower as the holder of
such bills and that he Borrower
shall continue to be so liable
notwithstanding any claims
right, dispute or litigation
arising or which may arise
between the Borrower and the
Suppliers/drawers.
(g) The Borrower agrees and confirms
that on the acceptance of the
Bills by the Borrower and as the
same being discounted by the
Bank, the proceeds thereof shall
be paid by the Bank to the
Suppliers by means of Bankers
Cheque or by any other means as
my be deemed fit by the Bank.
(h) The Amount of
discount/commission/or exchange
at the same rate as applicable
to the discounting of drawer
bill or other rate as may be
decided by the bank, as the case
may be, will be recovered by the
bank by debit to the cash credit
account of the Borrower in the
event of non-payment
26
<PAGE> 27
thereof by the Borrower
on the due date.
(45) Notwithstanding any of the provisions
of the Contract Act or any other law in
respect of advances against accepted
usance bills where the bills are drawn by
the Borrower and accepted b the drawees
the Borrower agrees that the subsequent
credit to the accounts(s) under these
facilities, unless specifically
apportioned by the Borrower or the Bank to
the discharge of any particular bill not
with discharge the debt represented by
such bills.
Not to draw bills on branches of 46. The Borrower hereby declares that
the Borrower or on firms in which bills shall not be drawn on any of the
the Borrower has interest. Borrower's branches nor on any firm in
which the Borrower has any proprietary
partnership or other interest and that
if on any occasion or occasions the bank
in its sole discretion accepts such bills
for collection and makes advances there
against the same shall not be deemed as
the Bank having agreed to accept
thereafter other bills of such nature.
Bills and document to represent 47. The Borrower undertakes that all bills
genuine sales. and documents tendered by the Borrower to
the bank shall represent genuine sales
transactions covering movement of goods
represented by the railway receipts or
truck receipts or shipping or other
documents accompanying such bills that the
amounts of such bills shall truly
represent the value of the goods so
transported/shipped and that every such
bills tendered by the Borrower to the Bank
shall be in respect of execution of
definite orders received by the Borrower.
48. In respect of advances granted by the
Bank to the Borrower for the purpose of
the business of the Borrower of leasing or
hire-purchase the Borrower agrees and
covenants with the Bank as under.
(a) The monies advanced by
the Bank to the Borrower
for hire of vehicles
shall be utilised for
acquisition of
machinery, equipment,
vehicles and such other
movable assets as may be
the subject matter of
leasing and hire
purchase and which shall
be hypothecated to the
Bank.
(b) Before availing of any
advance, the Borrower
shall deposit with the
Bank the original
Agreement of Lease
and/or Hire-Purchase in
respect of the
hypothecated assets. The
Borrower shall also
deposit with the Bank:
(i) Copies of
invoices; and
(ii) Letters
confirming that
the hypothecated
assets are
covered for
comprehensive
risks for the
entire period of
the Agreement.
(c) The Borrower undertakes
to provide the Bank in
respect of vehicles
hypothecated to the bank
with all particulars of
registration
27
<PAGE> 28
entered in the
Registration Book of the
hypothecated vehicle by
the relevant Road
Transport Authority
including the entry to
the effect that the
interest of the Borrower
is duly recorded in the
Registration Book. Such
particulars, certified
by the Borrower to be
true particulars, shall
be lodged with the
bank within 60 (sixty)
days of representing the
relative Agreements of
Lease and/or Hire
Purchase to the Bank.
(d) The amount of
installments received by
the Borrower from the
Leases and/or the Hirers
will as and when
received be forthwith
paid by the Borrower to
the credit of the
relevant Account.
(e) The Borrower undertakes
not to enter into any
Lease and/or Hire
Purchase Agreements
without satisfying
themselves about the
financial status of the
Lessees and/or Hirers
and their capacity to
pay installments and
without verifying the
statements made by the
Lessees and/or Hirers in
their proposal forms.
The Borrower shall give
the hypothecated assets
on leases and/or Hires
the proposal form and/or
the lease Agreements
and/or Hire-Purchase
duly signed by them. The
Borrower shall not vary
the terms or wording of
the proposal form and/or
the Lease Agreements
and/or Hire-Purchase
agreements without the
prior consent of the
Bank and should the
Borrower contravene the
terms of this Clause,
the Bank shall have the
right to terminate this
Agreement and decline to
finance the Borrower
further. The Bank
retains the rights to
decline to accept for
making advances any
Lease and/or
Hire-Purchase Agreements
executed by any Lessees
and/or Hirers without
assigning any reasons
for such non-acceptance.
(f) The Borrower undertakes
to see that the Lessees
and/or Hirers discharge
their obligations under
the Lease and/or
Hire-Purchase Agreements
executed by them without
any prejudice to the
rights of the Bank and
any failure on the part
of the Lessees and/or
Hirers to carry out
their obligations shall
be promptly reported to
the Bank. In the event
of any failure or
default in payment of
the advance or any part
thereof, insolvency or
winding-up or
liquidation of the
Lessees and/or Hirers or
any of them, or
termination of the said
Lease and/or Hire
Purchase Agreements, the
Borrower undertakes to
repay the advance made
and outstandings in
respect
28
<PAGE> 29
thereof at the time of
such failure, default,
insolvency, winding-up
or liquidation without
the Bank being obliged
with either to take
steps to recover the
amount from the Lessees
and/or Hirers or to
exhaust the security.
(g) The Borrower agrees,
declares, confirms and
affirms that the Bank
shall be at liberty to
fix and/or revise
drawing power in the
relevant Cash Credit
Account each month by
suitably reducing the
drawing power in respect
of installments/rentals
due during the month or
adding the amounts of
installments/rentals
relating to fresh
advances, if any
granted. Provided Always
that the drawing power
shall be allowed against
hypothecated assets
leased and/or hired
under the Lease and/or
Hire-Purchase Agreements
and the relative
receivables till such
time as suitable
security documents as
desired by the bank
_____________ executed
by the Borrower.
Provided Further that no
_______________ power
shall be allowed against
hypothecated assets
which are found be
second hand. And
Provided Further that
the drawing power shall
be restricted to such
percent of the value of
the hypothecated assets
or the value of the
relating rentals or
receivables accruing to
the Borrower within such
period as may prescribed
by the Bank from time to
time.
(h) The Borrower undertakes
and assures the Bank
that the monthly
instalments in respect
of all the Agreements of
Lease and/or
Hire-Purchase deposited
with the Bank and/or
will be duly paid as and
when due.
(i) In the event of the
Borrower or any Lesses
and/or Hirer of the
hypothecated assets
terminating the relative
Lease and/or
Hire-Purchase Agreement,
the Borrower undertakes
to notify immediately
the Bank of such
termination and the
Borrower undertakes
forthwith to pay the
Bank the total amount of
instalments then
outstanding under the
terminated Lease and/or
Hire-Purchase Agreement
to the Bank together
with interest.
(j) The Borrower shall keep
and maintain a proper
register of assets
leased and/or hired by
them showing therein
full and correct
particulars of assets
leased and/or hired by
them, the price of such
assets and sales tax
29
<PAGE> 30
thereon, the name of the
Lessee and/or Hirer to
whom each of such assets
is given lease and/or
hire, the instalments
agreed to and amounts of
instalments received.
The said register and
all books of accounts
maintained by the
Borrower in respect of
all Lease and/or
Hire-Purchase Agreements
shall be open for
inspection at all times
by the Manager, Auditor,
Inspector or any other
Office of the bank. The
Borrower shall once a
month, in a form
approved by the bank,
submit to the Bank a
statement before the 5th
day of every month in
respect of the previous
month giving details of
the instalments due
under each Lease and/or
Hire-Purchase Agreements
which have been
deposited with the bank
and giving such other
particulars as may be
required by the Bank.
(k) The Borrower agrees,
declares, confirms and
affirms that the
outstandings in the
relevant Account shall
at all times be fully
covered by the value of
the hypothecated assets
less the stipulated
margins. If at any time,
the drawing power
yielded by the
hypothecated assets held
by the Borrower falls
below the amount
borrowed, the Borrower
shall forthwith adjust
such excess borrowings
under advice to the
Bank. The Borrower shall
submit to the bank at
monthly intervals
statements showing the
total outstandings
against Lease and/or
Hire-Purchase Agreements
(separately) entered
into by the Borrower
adding thereto the fresh
Lease and/or
Hire-Purchase Agreements
entered into by it and
reducing the instalments
and/or rentals received
from the Lessee and/or
Hirers during the
relative month. The
Borrower shall indicate
in the monthly
statements separately
the overdue
instalments/rentals, if
any , under the Lease
and/or Hire-Purchase
Agreements.
(l) The Borrower undertakes
to get in respect of the
vehicles registered in
the name of the Lessees
and/or Hirers an
endorsement in the
respective certificate
of Registration that the
vehicle is under Lease
and/or Hire-Purchase
Agreement with the
Borrower. The Borrower
shall not cancel such
endorsement in the
Certificate of
Registration of the
vehicle until the
advances made by the
Bank against the vehicle
are paid in full to the
Bank. All charges of
registration, payment of
any taxes, licence fees
or insurance premia on
the vehicle(s) or any
charges for upkeep or
repairs or maintenance
shall be that of the
Lessee and/or Hirers or
the Borrower and
30
<PAGE> 31
the bank shall not be
called upon or be bound
to pay such charges
under any circumstances.
The Borrower hereby
agrees to indemnify the
bank and/or any of its
officers, servants or
agents against loss by
reason of damage or
destruction or loss of
the hypothecated assets
or any of them from any
cause whatsoever or by
reason of all claims
whatsoever by third
parties in respect of
the same.
(m) The Borrower shall not
avail of any advance
from any other bank or
from any other person on
the assets hypothecated
and charged to the bank
and the Borrower and/or
Lessees and/or Hirers
shall not have or be
deemed to have any
authority to create a
lien or charge upon the
hypothecated assets in
respect of any repairs,
alterations or additions
thereto.
(n) The Borrower both hereby
lastly agree that the
Borrower will at any
time on demand by the
Bank execute at the cost
in all respect of the
Borrower (a) Assignments
in favour of the bank of
all or any of the lease
and/or Hire-Purchase
Agreements deposited by
the Borrower with the
Bank in respect of the
hypothecated assets in
such forms as the Bank
may require and will
also sign and give
notices of such
assignments to the
Lessees and/or Hirers or
other persons concerned
and (b) Irrevocable
Power of Attorney
authorising the Bank to
recover the instalments,
purchase price, interest
and all other moneys
payable under the
relevant Lease and/or
Hire-Purchase Agreements
and to have and exercise
all the rights and
authorities of the
Borrower under such
Agreements and to file
suits for the purpose,
such power to be in the
form required by the
Bank.
49. The Borrower agrees declares affirms
and conforms that notwithstanding any of
the provisions of the Contract Act or any
other law, on any terms and conditions to
the contrary contained in this Agreement
and/or any security documents any payment
made by the Borrower to the _____ shall
unless otherwise agreed to by the Bank in
writing be appropriated by the bank in the
manner following:
Right of the Bank to (1) Firstly towards charges
appropriate monies received. expenses and other moneys,
due and payable or becoming
due and payable to the
Bank;
(2) Secondly towards interests
due and payable and/or
accruing due and payable to
the Bank; and
(3) lastly towards repayment of
the amount of any
31
<PAGE> 32
instalments of the
principal sum due and
payable or becoming due and
payable to the Bank;
all the aforesaid amounts having
become due and payable by the
Borrower to the bank under this
Agreement and/or under any of the
security document executed between
the Borrower and the Bank whether
the recovery thereof has or has
not become barred by any law in
force for the time being as to the
limitation of suits.
Bank not responsible for damage to 50. The Bank shall not be responsible
goods etc. for any damage caused to goods, movables
and other assets in course of transit
covered by the bills accepted by the bank
as security or for loss of the * goods,
movables and other assets or for delayed
deliver short delivery or wrong delivery
of goods movables and other assets, or for
delayed long presentation of bills to
paying authorities or drawees for any
reason whatsoever and in case the bills
are sent for collection direct to other
banks or bankers or Government
departments/agencies/institutions or
quasi-Government bodies/public sector
undertakings/railways or other parties or
the Borrower's customers the Banks shall
not be responsible for the non-receipt by
it of the remittance representing the
proceeds of the bills and the relative
bills will be collected entirely at the
Borrower's risk and responsibility. The
Borrower shall be responsible for the
costs and charges incurred by the
collecting bank or bankers in this behalf
and shall pay the Bank these costs and
charges.
To give possession of goods etc. on 51. The Bank may at any time whether
demand. a demand for the payment of any money for
any account has been made or not call upon
the Borrower to give possession of goods,
movables and other assets hypothecated to
the Bank and the Borrower declares that on
the Borrower doing so the goods, movables
and other assets shall stand pledged to
the Bank without in any manner affecting
the rights of the Bank under the security
documents executed in favour of the Bank.
To repay Term Loan by instalments 52. (a) That in respect of the
and other facilities on demand. credit facilities by way of term loans
granted by the Bank to the Borrower, the
Borrower shall repay the amount of the
principal together with interest, costs,
charges, expenses and other monies due to
the Bank by such instalments and on such
dates as may be stipulated by the Bank
from time to time until the entire amounts
due under the term loans facilities have
been repaid. If there is any default in
payment of any one of such instalments on
due date the agreement to receive payment
by instalments shall stand determined at
the option of the Bank and the bank shall
be at liberty to demand payment of and the
Borrower shall be bound and liable to pay
forthwith on such demand the balance
amount due to the Bank.
(b) That in respect to all other
credit facilities granted by the Bank to
the Borrower, the Borrower shall pay to
the Bank forthwith on demand by the Bank
the
32
<PAGE> 33
balance or balances then outstanding and
owing to the Bank under any of the
Borrower's account or accounts in respect
of such credit facilities together with
interest costs and expenses due in respect
thereof.
Power of Attorney to Bank. 53. (i) The Borrower irrevocably
constitutes and appoints the Bank to be
the Borrower's true and lawful attorney to
do and execute for and in the name and on
behalf of the Borrower and where the
Borrower is more than one individual
jointly and severally, all or any of the
following acts deeds and things, that is
to say:
(a) To take over on the
business of the bank
and complete engagements
and contracts;
(b) To sign register file
any application forms,
contracts, agreements,
transfers, acceptance,
receipts, acquaintances,
returns and any other
documents and go sign
and endorse al cheques,
promissory notes, bills
of exchange, bills of
lading, dividend
mandates or other orders
for payment of money or
delivery of property;
(c) To sell, transfer sign
or deal with any goods
movables and other
assets;
(d) To demand and receive
all debts sums of money
principal money
dividends interest and
dues of whatever nature;
(e) To appoint selling
agents and if necessary
to undertake new kind of
activity;
(f) To realise the assets
whether movable or
immovable including the
goodwill of the
business.
(g) If considered proper, to
wind up the Borrower's
business;
(h) To tender contract for
purchase, accept and
sign the transfer into
the name of the Borrower
of any securities, to
apply for and accept
allotment of any shares
and securities which nor
or shall hereafter be
entitled to demand
receive and collect
interest and dividend
due or to accrue due on
any such securities
shares stocks debentures
funds and other
securities and apply the
proceeds of such sale
endorsement transfer
negotiations and
assignment and recovery
of any interest and
dividend satisfaction of
any monies due by the
Borrower to the Bank and
to endorse and transfer
all or any such
securities which may
from time to time or at
any time be in the
possession of the Bank
whether for safe custody
or otherwise or held by
the bank as security for
any money payable to the
bank by the borrower in
respect of any account
33
<PAGE> 34
or general balance of
account or otherwise.
(i) To appoint a proxy or
proxies for the purpose
of representing the
Borrower and voting in
meeting or meetings of
any Company or
corporation in which the
Borrower holds any
shares, debentures,
stocks, etc.
(k) To attend and represent
the Borrower before any
authority or tribunal
and for that purpose to
sign execute and deliver
all such documents and
make all such
declaration as may be
necessary;
(l) Generally to act in the
premises as fully and
effectually with all
intents and purposes and
to do all things as are
necessary and which the
Borrower would do if
personally present;
(m) For all and any of the
purposes aforesaid to
appoint a substitute or
substitutes;
(ii) The borrower hereby ratifies
and confirms all the acts things
deeds performed or to be performed
by the Bank or its nominees or
substitutes in pursuance of any of
the aforesaid powers and the
powers hereby conferred shall not
be determined or affected by the
fact of the Borrower acting
personally or through another in
the premises;
(iii) The powers vested in the
Bank shall be irrevocable and
subsist in favour of the Bank till
all the dues of the Borrower to
the Bank are fully satisfied;
(iv) The aforesaid powers under
this clause may be exercised by
the Bank in its sole discretion
but the exercise of the powers is
not obligatory on the Bank.
Security to be continuing security. 54. The security created and
indemnities and undertakings given herein
and/or by the security documents executed
in favour of the Bank for various credit
facilities shall operate as continuing
security and/or indemnities and/or
undertakings for all moneys indebtedness
and liabilities of the Borrower under such
credit facilities and will operate as
security and/or indemnities and/or
undertakings for the ultimate balance or
aggregate balance with interest thereon
and costs charges and expenses if any to
become payable upon the account(s) being
closed and fresh accounts being opened in
respect of fresh credit facilities being
granted within the overall limit
sanctioned to the Borrower or either or
any of them being brought to credit at any
time or from time to time or any partial
payments made thereto or any fluctuations
of such account(s) and if the whole of the
Bank's duties dues shall be repaid and the
whole of the security be withdrawn the
account(s) or either of any of
34
<PAGE> 35
them may nevertheless at any time before
such account(s) has or have been closed,
be continued under this Agreement upon the
security as aforesaid being again
furnished.
Term loan to become payable 55. In respect of the credit facilities
forthwith on happening of certain granted to be granted by the bank by way
events. of term loans either in Indian or foreign
currencies the Borrower agrees and
declares that notwithstanding anything
contained herein or in any other security
documents the entire amounts of the term
loans or the balances then due shall, if
so decided by the bank, become forthwith
due and payable by the Borrower to the
bank, upon the happening of any of the
following events and the Bank shall be
entitled to enforce its security;
(a) any instalment of the
principal remaining
unpaid for a period
exceeding one month
after the due date for
payment thereof has
expired;
(b) any interest remaining
unpaid and in arrears
for a period of one
month after the same
have become due whether
demanded or not;
(c) the Borrower committing
any breach or default in
the performance or
observance of any of the
covenants contained in
these presents and/or
the Borrower's proposal
and/or the security
documents or any other
term or condition
relating to the term
loans;
(d) The Borrower entering
into any arrangement or
composition with the
Borrower's creditors or
committing any act of
insolvency;
(e) any execution or
distress being enforced
or levied against the
whole or any part of the
Borrower's property;
(f) on a winding up petition
being filed or the
Borrower being a limited
company going into
liquidation (except for
the purpose of
amalgamation or
reconstruction);
(g) a receiver being
appointed in respect of
the whole or any part of
the property of the
Borrower;
(h) the Borrower ceasing, or
threatening to cease, to
carry on business;
(i) the occurrence of any
circumstance which is
prejudicial to or
impairs, imperils or
depreciates or which is
likely to prejudice,
impair, imperil or
depreciate the security
given to the Bank; and
(j) the occurrence of any
event or circumstance
which prejudicially or
adversely affect in
35
<PAGE> 36
the manner the capacity
of the Borrower to repay
the amount due under the
term loans.
On the question whether any of the above
events has happened, the decision of the
Bank shall be conclusive and binding on
the Borrower.
Provided always that the bank may in its
discretion refrain from forthwith
enforcing its right under this Agreement
inspite of the happening of any of the
contingencies aforesaid and provided
further that the failure or deal by the
Bank in exercising any right, power or
privilege hereunder or under any of the
security documents shall not
impair/extinguish the same or operate as
waiver of the same nor shall any single or
partial exercise of any right, power or
privilege preclude any further exercise of
the same or the exercise of any outer
right, power or privilege. The rights and
remedies provided herein are in the
security documents and cumulative and not
exclusive of any rights and remedies
provided by law.
56. In respect of the credit facilities
granted or to be granted by way of term
loans or such facilities/lines of credit
as may be granted in foreign currencies
(hereinafter referred to as foreign
currency loans), the borrower hereby
agrees and covenants with Bank as under:
(i) The Bank may, without
prejudice to any of the
rights as may be
available to the Bank
under any other
agreement, remit the
instalments under the
foreign currency loans
by debiting the rupee
equivalents of such
instalments, as and when
falling due, converted
at such rate of exchange
as may be ruling at the
material time as between
the concerned foreign
currency and Indian
Rupee and the Borrower
hereby indemnifies the
bank against any claims
or claims, loss or
losses or damages,
actions, costs and
expanses whatsoever
which may be brought or
made against or
sustained or incurred by
the Bank (and whether
paid by the Bank or not)
or which the Bank may
become liable in making
such remittances;
(ii) In the event of the
borrower defaulting in
effecting the remittance
of any of the
instalments falling due
under the foreign
currency loans, the bank
may, without prejudice
to any other remedy or
without being obliged to
do so, shall be entitled
to debit the Rupee
equivalent of the said
instalment (converted at
such rate of exchange as
may be ruling at that
material time as between
the concerned foreign
currency and Indian
Rupee) to any cash
credit/overdraft account
of the borrower opened
or to be opened with the
Bank and all such
amounts so debited shall
be charged with interest
as applicable to the
36
<PAGE> 37
said account as provided
in clause No 14 above;
(iii) Such remittances made by
the bank shall not
absolve the borrower
protanto from his
liability under the
foreign currency loans
nor shall they be
deemed, in so far as the
borrower's liability to
the bank and the
relative security
charged therefor in
favour of the Bank are
concerned, to reduce the
outstandings under the
foreign currency loans
to the extent of the
defaulted amounts of
instalments so remitted
by the Bank
notwithstanding the
remittances so made, the
Bank reserves the right
to set off or other
legal remedies as
against the borrower
according to the law of
the country where such
foreign currency loans
have been made
available.
57. In respect of the facilities granted
by the Bank of Issue of letters of credit,
guarantees including deferred payment
guarantees and indemnities whether in
Indian or foreign currencies, the Borrower
hereby agrees and covenants with the Bank
as under:
(i) To indemnify the Bank
against any claim or
claims, loss or damage
actions costs (as
between Advocate and
client), charges and
expenses whatsoever
which may be brought or
made against or
sustained or incurred by
the Bank (and whether
paid by the Bank or not)
or which the Bank may
become liable under or
in respect of such
letters of credit
guarantees and
indemnities;
(ii) The Bank may in its sole
absolute and unqualified
discretion and without
reference to the
Borrower and without the
Bank being required to
ascertain whether or not
there was any breach or
the part of the Borrower
of the Agreement
executed between the
Borrower and the
beneficiaries in whose
favour the guarantees
and/or indemnities are
or were executed by the
bank and without the
Bank being required to
go into the validity or
otherwise of the demand
for payment made against
the Bank and
notwithstanding any
directions to the
contrary given by the
Borrower or any other
person on the ground of
a dispute as to the
liability of the
Borrower or otherwise
admit or compromise and
pay or submit to
arbitration or dispute
or resist any claim or
demand made against the
Bank under or in respect
of such guarantees and
indemnifies, this
counter-indemnity/
guarantee contained
herein of the Borrower
being available to the
Bank in respect of any
action or payment which
the Bank may take or
make; and
37
<PAGE> 38
(iii) In the event of any
payment being made by
the bank pursuant to an
letter of credit,
guarantee/indemnity
issued by the Bank on
behalf of the borrower,
the Bank without
prejudice to any other
remedy it may have shall
be entitled to debit the
said payment to any
account of the borrower
opened/to be opened with
the Bank and all such
amounts unless adjusted
against any cash margin
available and properly
applicable to the said
letter of credit,
guarantee/indemnity
shall also be charged
with interest as
applicable to the
account in which they
are debited as provided
in clause No. 14 above.
58. If the Borrower be more than one
individual all shall be bound hereunder
jointly and severally or if a firm or
members of a firm, such firm and all such
members and all the members thereof, from
time to time, shall be bound hereunder
jointly and severally notwithstanding any
changes in the ____________________
thereof and whether such firm consents of
or be reduced _________ individual any
time and that if the Borrower be more than
one individual at any time, any notice
served on any such one individual shall be
deemed to be service of such notice on all
such individuals.
59. Any notice of communication or demand
by the Bank in writing the Borrower under
this Agreement or any security documents
shall be deemed to have Borrower at the
address notified by the Borrower and such
notice or communication or demand shall be
deemed to have been received by the
Borrower four days after the date of
posting thereof and shall be sufficient if
signed by any officer of the Bank and in
proving such service it shall be
sufficient if it is established that the
envelope containing such notice,
communication or demand was properly
addressed and put into the post office.
60. The Borrower shall bear and pay all
costs charges and expenses (between
Advocate and Client) including stamp duty
registration and other charges payable in
respect of this Agreement and also in
respect of other security documents to be
executed between the parties hereto as
stipulated in this Agreement and if any
penalty or charges are paid or become
payable by the Bank, the Borrower shall
pay to the Bank the amount thereof with
interest thereon at the rate aforesaid
forthwith on demand by the Bank.
IN WITNESS WHEREOF the parties here to
have executed these presents the day and
year first hereinabove written.
SIGNED by Name
38
<PAGE> 39
of the Designation
Department
of the bank and as such one of
the authorised officers of the
said Bank for on behalf of the For and on behalf of State Bank of
Bank Hyderabad
(Designation)
(Authorised Officer)
_____________________________
* The common Seal of the Company or the society must be affixed in
accordance with the Articles of Association of the Company or the
By-laws of the Society.
39
<PAGE> 40
H.O. 1355
FORM C-2
STATE BANK OF HYDERBAD
(AGREEMENT OF HYPOTHECATION
OF GOODS AND ASSETS)
(NOT TO BE ATTESTED)
(Particulars of charge to be registered
with Registrar of Companies in the case of
borrower companies) (To be stamped as an
Agreement and General Power of Attorney)
MEMORANDUM OF AGREEMENT made the _________
day of ______________________ one thousand
nine hundred and ___________________ between
* Please insert the name of the Borrower
Please insert the name of the Borrower
***Please insert the name of the firm
OR
MODULAR ELECTRONICS (India) Limited, a company within the meaning
of the Companies Act, 1956, and having registered office at
present carrying on the business of Manufacture of Electronic
Components of computer hardware (hereinafter referred to as "the
Borrower" which expression shall unless repugnant to the context
of meaning thereof be deemed to include its successors and
permitted assigns) of the One Part
and STATE BANK OF HYDERABAD, A Corporation constituted under
State Bank of India (Subsidiary Banks) Act No. 38 of 1959 and
having its Head Office at Gunfoundry, Hyerabad
and amongst other places a branch at 56, Cathedral Road Madras-86
(hereinafter referred to as "the Bank") which expression shall
unless repugnant to the context or meaning thereof be
40
<PAGE> 41
deemed to include its successors and assigns) of the Other part.
WHEREAS in terms of the Agreement of Loan executed by the
Borrower on the ___________________ day of __________ 19
(hereinafter referred to as "said Agreement of Loan") the Bank
has agreed to finance the business of the Borrower by granting
all or some or any of the credit facilities by way of overdrafts,
demand loans, loans, cash creditors (by way of pledge lock and
key type, factory type or mundy type or by hypothecation or in
any other form including working capital term loan, term loans
(including funding of interest or in any other form granted as
part of rehabilitation packages), pre-shipment and post-shipment
credits, opening of letters of credit, issuing of guarantees
including deferred payment guarantees and indemnities,
negotiation and discounting of bills and cheques, inland as well
as foreign, and such other facilities as may be agreed upon from
time to time between the Bank and the borrower for sums not
exceeding at any one time in the aggregate the sum Rs.
210,00,000/00 (Rupees Two _______________________ only)
(hereinafter referred to as "the aforesaid credit facilities") on
the terms and conditions specified and contained therein.
AND WHEREAS one of the conditions specified and contained in
this said Agreement of Loan is that the borrower shall as
security for due payment of the said sum of Rs. 210,00,000/00 and
interest discount commission charges and costs (between Advocate
and client) and expenses payable to or incurred by the Bank in
relation thereto hypothecate by way of first charge all the
Borrower's goods book-debts and all other movable assets.
AND WHEREAS the Bank has requested the Borrower to execute
these presents which the Borrower has agreed to do in the manner
hereinafter expressed.
Hypothecation of goods etc. (1) This in pursuance of the said Agreement of
Loan and in consideration of the Bank having
granted and/or agreed to grant to the Borrower all
or some or any of the aforesaid credit facilities
for the purposes and subject to the terms and
conditions specified and contained in the said
Agreement of Loan and in consideration of the
Premises aforesaid it is hereby agreed and
declared that all present and future goods
book-debts and all other movable assets of the
Borrower including documents of title to the
goods, outstanding moneys, receivables including
receivables by way of cash assistance and/or cash
incentives under the Cash Incentive Scheme or any
other Scheme claims including claims by way of
refund of customs/excise duties under the Duty
Drawback Credit Scheme or any other Scheme, bills,
invoices documents, contracts, insurance policies,
guarantees, engagements, securities, investments
and rights and the present machinery listed in the
schedule hereinto and all future machinery
belonging to or in the possession or under the
41
<PAGE> 42
control of the Borrower wherever _______ stored
and kept and whether in possession of the Borrower
or of the Bank or of any third party whether in
India or elsewhere throughout the world (including
all such goods, other movable assets as may be in
course of shipment transit or delivery)
(hereinafter referred to as "the said goods and
assets") shall stand hypothecated to the Bank by
way of first charge (subject, however, to any
charge in favour of any third party which may have
been modified by the Borrower and accepted by the
Bank or of any third party whether in India or
elsewhere throughout the world (including all such
goods, other movable assets as may be in course of
shipment transit or delivery) (hereinafter
referred to as "the said goods and assets") shall
stand hypothecated to the Bank by way of first
charge (subject, however, to any charge in favour
of any third party which may have been notified by
the Borrower to the bank under or in respect of
all or some or any of the aforesaid credit
facilities granted or to be granted to the
Borrower and also as security for the payment and
discharged of all indebtedness whatsoever or
liability of the Borrower to the Bank in respect
of any liability undertaken by the Bank under any
letter of credit opened or otherwise in respect of
any account at any office of the Bank (whether in
India or elsewhere and whether accrued, accruing
or contingent and whether solely or jointly with
others) any bills of exchange promissory notes or
instruments at any time drawn made accepted or
endorsed by the Borrower solely or jointly with
others which the Bank may discount or become
interested in together with all interest discount
commission charges costs (between Advocate and
Client) and expenses payable to or incurred by the
Bank in relation thereto, Provided however, that
where the Bank has at the specific request of the
Borrower and in sole discretion communicated in
writing to the Borrower that in respect of any
specific items of goods, book-debts and other
movable assets this charge by way of hypothecation
will not operate, such goods book-debts and other
movable assets shall be deemed as not having been
hypothecated to the Bank as stated therein before.
Rights to charge interest at (2) Interest shall be charged on the
such rate(s) as may be outstanding(s) in the accounts opened in respect
determined by the Bank of the aforesaid credit facilities at such
rate(s) as may be determined by the Bank from time
to time at the Bank's sole discretion on the basis
of the any internal credit rating accorded to the
Borrower or otherwise provided that the rate(s)
shall be subject to changes in the State Bank
Advance Rate and/or changes in the interest rates
prescribed by the Reserve Bank of India from time
to time. Where interest is charged by the Bank at
a concessionary rate or rates because of the
credit facilities being granted by the Bank to the
Borrower under the Interest Subsidy Scheme or any
other Scheme(s) formulated by the Government
and/or Reserve Bank of India and/or or any other
authority from time to time, the Borrower agrees
declares confirms and affirms that in the event of
the withdrawal, modification and/or variation of
such Scheme(s), the concessionary rate or rates of
interest of the Bank applicable at the material
time to such credit facilities shall become
effective and the
42
<PAGE> 43
Bank shall become entitled to charge the Borrower
such rate or rates of interest and the Borrower
shall pay to the Bank on demand the difference
between such concessionary rate or rates and the
usual rate or rates of interest of the bank
applicable at the material time to such credit
facilities and such difference shall become due
and payable by the Borrower to the Bank from the
date the withdrawal, modification and/or variation
of such Scheme(s) becomes effective, interest
shall be calculated respectively on the daily
balance of such account(s) and be debited thereto
on the last working day of the month or quarter
according to the practice of the Bank. The Bank
shall also be entitled to charge at its own
Rights to enhance the rate of discretion such enhanced rates of interest on the
interest. account(s) either of the entire outstandings or on
a portion thereof as it may fix for an
irregularity and for such period as the
irregularity continues or for such time as the
Bank deems it necessary regard being had to the
nature of their regularity and the charging of
such enhanced rate of interest shall be without
prejudice to the Bank's other rights and remedies.
(3) That the bank shall not be required to grant
or continue all or some or any of the aforesaid
credit facilities otherwise than at the Bank
discretion and in no circumstances for sums
exceeding at any one time in the aggregate the sum
of Rs. 210,00,000/00 (Rupees Two __________only)
or a sum equal to a stated percentage of the value
of the said goods and assets which the Bank may
specify from time to time whichever sum may be the
less, valuation being done in the manner and at
the rate approved by the Bank.
(4) That the Borrower will at all times maintain a
sufficient quantity a market value of the said
goods and assets to provide margins security
required by the Bank from time to time and will
forthwith whenever necessary provide further goods
and assets (approved by the Bank) to restore such
margins or pay the Bank the equivalent cash. In
respect of the letters of credit opened or
guarantees or indemnities issued by the Bank on
behalf of the Borrower, the Borrower's deposit
sufficient cash or others security as may be
acceptable to Bank as margin money as stipulated
by the Bank. The Bank shall be entitled to and
shall at its sole discretion charge margins and
the Borrower shall be bound by it not withstanding
margins earlier agreed to by the Bank.
(5) That the Bank shall be at liberty to leave any
of the said goods and assets that may be
hypothecated as aforesaid valued by an appraiser
appointed by the Bank and the Borrower shall
render/give all assistance/co-operation to such
appraiser and the fees and expenses of such
appraisement shall be debited to the said
accounts opened by the Bank and shall be in charge
on the security created hereunder.
To insure property charged (6) That all the said goods book debts and other
movable assets hypothecated, or otherwise charged
to the Bank as security for the aforesaid credit
facilities or any of them as may be required by
the Bank shall be kept at the Borrower's risk and
expense in good condition and fully insured by the
Borrower against loss or damages as may be
required by the Bank due to any reason whatsoever
and particularly the machineries hypothecated to
the Bank, against the fire and or such risk(s) as
the Bank may from time to time stipulate in the
joint names of the Borrower and the Bank with an
insurance company approved by the Bank and for
such amount as the Bank may consider necessary and
that the insurance policies shall be delivered to
the Bank when required by the Bank to do so, if
the Borrower fails to effect such insurance the
Bank may, but without being obliged to do so,
insure the said goods and other assets against the
fire and/or such risk(s) in such joint names and
debit the premium and other charges to any account
of the Borrower opened or to be opened and in the
On default the Bank may event of the Bank being at any time apprehensive
insure that the safety of the goods and other assets and
machinery is likely to be endangered owing to riot
and/or strike (including fire arising therefrom)
and/or floods earthquakes etc. and/or also
resulting in the loss of production therefrom the
Bank may of its discretion but without being bound
to do so insure or require the Borrower to
insure the same in such joint names against any
damage arising therefrom the cost of such extra
insurance being payable by the Borrower and be
debited to any such account. If the Bank desires
that the said goods, and other movable assets
shall be insured against theft the Borrower shall
provide the necessary cover therefor. The Borrower
shall provide if the bank so directs sufficient
insurance cover against breakdown of such
machineries and against loss and damage by fire
lighting and flood to such properties of the
Borrower. The Borrower further expressly agrees
that the Bank shall be entitled to adjust settle
compromise or relet to arbitration any dispute
arising under or in connection with any insurance
and such adjustment, settlement compromise and any
award made on such arbitration shall be valid and
binding on the Borrower and also to receive all
moneys payable under any such insurance or under
any claim made thereunder and to give a valid
receipt therefor, and that the amount so received
shall be credited to the Borrower's account and
the Borrower shall not raise any question that a
large sum might or ought to have been received or
be entitled to dispute his liability for the
balance remaining due to any account or accounts
after such credit, provided that the bank may at
its own absolute and unqualified discretion waive
all or any of these requirement.
(7) That the Bank its Agents and Nominees shall be
entitled, at all times without notice to the
Borrower but at the Borrower's risk and expense
and if so required as Attorney for and in the name
of the Borrower to enter any place where the said
goods and assets may be and inspect, value insure,
superintend disposal and/or take particulars of
all or any or part of the said goods and assets
and check any statements accounts reports
information and for the purpose of such entry to
do all acts, deeds and things deemed necessary by
the Bank including breaking open of anyplace where
the hypothecated goods and the banks agreement or
other documents relating to the hypothecated goods
and the books of account or other documents
relating to the hypothecated debts or assets may
be lying or stored or kept and also on any default
of the Borrower in payment of any money hereby
secured or the performance of any obligation of
the Borrower to the Bank or breach of any terms of
the said Agreement of Loan or the occurrence of
any circumstances in the opinion of the Bank
endangering this security to take charge of,
seize, recover, receive, take possession of,
inter- alia, by putting its locks on the godowns
and other places where the hypothecated goods or
account books and other documents relating to the
hypothecated book-debts are lying or kept and to
appoint receiver or remove all or any part of the
said goods and assets and also all books of
accounts, papers documents, and vouchers and other
records relating thereto, and also to give notices
and demands to debtors and third parties liable
therefor sue for recovery receive and give
receipts for the same and/or sell, realise,
dispose at and deal with in any manner including
by tender or public auction or private contract
and whether with or without the intervention of
Court all or any part of the said goods and assets
and to enforce realise settle compromise submit to
arbitration and deal in any manner with any rights
and debts or claims relating therefor and to
complete any engagements and carrying on the
business of the Borrower through Agents, Managers
or otherwise without being bound to exercise any
of these powers or being liable for any loss in
the exercise thereof and without prejudice to the
Bank's rights and remedies of suit or otherwise
and notwithstanding there may be any pending suit
or other proceedings the Borrower undertaking to
give immediate possession to the Bank on demand of
the aid goods and assets and to give notices to
debtors as and when required by the Bank to
transfer and deliver to the Bank all relative
bills contracts securities papers and documents
and agreeing to accept the Bank's account of sales
receipts and realisations as sufficient proof of
amounts, realised and relative and expenses to pay
any shortfall or deficiency thereby shown provided
that the Bank shall be entitled at all times to
apply any other money or monies in its hands
standing to the credit of or belonging to the
Borrower in or towards payment of any amount for
the time being payable to the bank in respect of
all or some or any of the aforesaid credit
facilities granted and/or agreed to be granted by
the Bank or otherwise as aforesaid and to recover
at any time from the Borrower by suit or otherwise
the balance remaining payable to the Bank in
respect of the aforesaid credit facilities or
otherwise notwithstanding that all or any of the
securities may not have been realised provided
also that subject to these powers of the Bank the
Borrower may with the approval of the Bank deal
with the said goods and assets from time to time
in due course of business provided the margin of
security required by the Bank is fully maintained
and on the terms of payment or delivery to the
Bank of the proceeds thereof or documents therefor
immediately thereof.
8. That the Borrower will submit to the Bank monthly
or oftener as may be required statements of the
said goods and assets hypothecated to the Bank in
the form prescribed by the Bank from time to time
with list of current insurance policies and
amounts verified by certificate of the Borrower
that the quantities and amounts stated are correct
and that all the said goods and assets are fully
covered by insurance and will also furnish and
verify all statements reports returns,
certificates and information and will also execute
all documents and do all acts and things which the
bank may require to give effect here to and all
the Borrower authorises the bank and each of its
Agents and Nominees as attorney for and in the
name of
43
<PAGE> 44
the Borrower to do whatever the Borrower may be
required to do hereunder.
9. That this Agreement shall operate as a
continuing security for all moneys indebtedness
and liabilities aforesaid notwithstanding the
existence of a credit balance in the account or
accounts at any time or any partial payments or
fluctuations of accounts.
10. That nothing herein contained shall prejudice
and ___________ remedies of the bank in respect of
any present guarantee obligation or decree for any
indebtedness or liability of the Borrower to the
Bank.
11. That the Borrower declares that all the said
goods and assets hypothecated hereunder and are at
present in existence and all the said goods and
assets over which security may be created
hereafter for all or some or any of the aforesaid
credit facilities and are in existence at the time
of such creation of security are and shall be the
absolute property of the Borrower at his/its sole
disposal and free from any prior charge lien or
encumbrance as have been notified to the bank and
accepted by it as having priority over its charge
and all the future goods and assets to be given as
security to the bank shall likewise be the
unencumbered absolute and disposable property of
the Borrower and the Borrower shall not without
the Bank's prior permission create any mortgage,
charge, lien or encumbrance of any kind upon or
over the same or the undertaking property (whether
movable or immovable) and assets (including
uncalled share capital or any part thereof in the
case of Borrower company) except to the Bank nor
suffer any such mortgage, charged lien or
encumbrance to effect the same or any part thereof
nor do or allow anything that may prejudice the
security while Borrower remains indebted or liable
to the Bank in any manner without Bank's written
consent. The Borrower shall also not report to
outside borrowings without the bank's prior
written consent.
12. Subject always to the Bank's right powers and
privileges under this Agreement or otherwise the
Borrower may with the approval of the bank and in
due course of business sell from time to time the
said goods and assets which have been hypothecated
to the Bank provided the margins of security
required by the Bank are always fully maintained
and on the terms of payment and deliver to the
Bank of the proceeds thereof the documents
relating thereto immediately on receipt and on the
express understanding the security created
hereunder and all realisations recoveries and
insurance proceeds thereof and all rights and
interests in respect and all documents therefor
shall always be kept distinguishable and held as
the Bank's exclusive property specifically
appropriated to the security created hereunder to
be dealt with only under the directions of the
Bank.
13. That the Bank shall not be under any liability
whatsoever towards the Borrower or any other
person for any loss or damage to the said goods
and assets the subject
44
<PAGE> 45
of this Agreement from or in whatever cause or
manner arising whether such goods and assets shall
be in the possession of the bank or not at the
time of such loss or damage or the happening of
the cause thereof. The Borrower shall at all times
indemnify and keep indemnified the Bank from and
against all suits proceedings costs charges claims
and demands whatsoever that may at any time arise
or be brought or made by the any person against
the bank in respect of any acts matter and things
lawfully done or caused to be done by the Bank in
connection with the said goods and assets or in
pursuance of the rights and power of the Bank
under this Agreement.
14. That the Borrower shall display the Bank's
name on the godown factory and other places
approved by the Bank where such goods and assets
as are hypothecated to the Bank and against which
limits for purposes of drawings have been fixed
under all or some any of the aforesaid credit
facilities have been stored indicating that such
goods and assets are hypothecated to the Bank.
15. All the machineries of the Borrower
hypothecated and charged to the Bank shall be
treated as movable property and not as an
immovable property and shall bear the name of the
Bank indicating that the said machineries are
hypothecated and charged to the Bank. The Borrower
shall also exhibit conspicuously in the main-hall
of the factory a list showing the items of
machineries hypothecated and charged to the Bank.
THE SCHEDULE REFERRED TO HEREINABOVE
(Give description of the machinery hypothecated)
IN WITNESS WHEREOF the parties hereto have
executed these presents the day and year first
hereinabove written.
THE COMMON SEAL* OF MODULAR ELECTRONICS (India)
______________.
was hereunto fixed pursuant to the resolution of
the Board of Directors passed in that behalf
on _________________ day of _______________ 1996
in the presence of ____________________________
______________________________________
__________________
* The Common Seal of the Company or Society must be affixed in accordance with
the Articles of Association of the Company or the Bye-laws of the Society.
45
<PAGE> 46
SIGNED by ______________________ For and on behalf
of the ____________________ State Bank of Hyerabad
(Department)
signed Sealed and Delivered by For and on behalf of Messrs
Shri/Smi./Kum.
for and on behalf of
Messrs
as Proprietor/Proprietress Proprietor/Proprietress
OR
Signed Sealed and Delivered by For and on behalf of Messrs
Shri/Smi./Kum. 1.
Shri/Smi./Kum. 2.
Shri/Smi./Kum. 3.
Shri/Smi./Kum. 4.
for and on behalf of Partners
Messrs
as partners
OR
Signed Sealed and Delivered by For and on behalf of Messrs
Shri
for and on behalf of
Messrs
as karta of his joint family Karta
THE COMMON SEAL - OF THE ABOVE
NAMED
was hereunto
affixed in pursuance of a __ OF THE _______________
Committee of __ of the said Society
__ on the day of
and these presents have been signed
by(1)
and _________
(2)
MEMBERS OF THE
Members of the said Committee and MANAGING COMMITTEE
the Secretary thereof SECRETARY
______________________ of the Bank and as such one
of the authorised (Designation)
_______________________ Officers of the said bank
for and behalf of the Bank
___________________________________ (Authorised
Officers)
46
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
/S/ Arthur Andersen
----------------------------------
San Jose, California
July 9, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of JT Storage Inc. on Form
S-4 of our report dated March 1, 1996 (April 8, 1996 as to Note 16) relating to
Atari Corporation, appearing in the Joint Proxy Statement/Prospectus, which is
a part of this Registration Statement, and to the references to us under the
heading "Experts" in such Joint Proxy Statement/Prospectus.
/s/ Deloitte & Touche
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DELOITTE & TOUCHE LLP
San Jose, California
July 9, 1996
