<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 28, 1996
JTS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-21085 77-0364572
(Commission File No.) (IRS Employer Identification No.)
166 BAYPOINTE PARKWAY
SAN JOSE, CA 95134
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 468-1800
Total number of pages:
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ITEM 5. OTHER EVENTS
On July 30, 1996, Atari Corporation ("Atari") merged (the "Merger") with
and into JTS Corporation (the "Company"). Prior to the Merger, the Company's
fiscal year ended on the Sunday closest to January 31. As a result of the
Merger, the Company's fiscal year then ended on the Saturday closest to
December 31. On August 20, 1996, the Company filed a quarterly report on Form
10-Q which contained financial information for Atari's quarter ended June 30,
1996. The Company was not required to file a quarterly report on Form 10-Q
for the three months ended July 28, 1996. On September 18, 1996, the
Company's Board of Directors voted to approve a change in the fiscal year of
the Company to end on the Sunday closest to January 31 (See Item 8 herein).
Following are financial statements of the Company (excluding Atari) for the 6
months ended July 28, 1996 and Management's Discussion and Analysis of
Financial Condition and Results of Operations relating to such period and
unaudited pro forma condensed combined financial statements of Atari and the
Company.
A. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the discussion in
this filing contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, the Company's limited operating
history; the need for additional financing; the uncertainty of market
acceptances; the highly competitive market; the Company's ability to achieve
initial volume shipments of a 1 gigabyte 3-inch drive; the Company's
dependence on its relationship with Compaq Computer; and its dependence on
single manufacturing facility; those risk factors discussed from time to time
in the Company's SEC reports, including but not limited to the Company's
Registration Statement on Form S-4 (No. 333-06643), as well as those
discussed elsewhere in this filing and any documents actually or deemed
incorporated by reference.
The Merger was consummated on July 30, 1996. Accordingly, this discussion
and analysis addresses the historical operating results for each of Atari's
and JTS' most recent fiscal year and subsequent six months. The liquidity and
capital resources discussion and analysis is based on the unaudited pro forma
condensed combined balance sheets of Atari and JTS as of June 30, 1996.
JTS AND MODULER ELECTRONICS BACKGROUND
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping hard disk drives. In October 1995,
JTS began shipment of Palladium disk drives to customers in the United States
and Europe. JTS began shipment of Nordic disk drives to Compaq in June 1996. JTS
does not expect volume shipments of Nordic disk drives to commence until the
fourth quarter of fiscal 1997. There can be no assurance that JTS will be
successful in the production of these products or that they will have market
acceptance.
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 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 fiscal year 1996
report of independent public accountants of JTS' financial statements includes
an explanatory paragraph describing uncertainties concerning the ability of JTS
to continue as a going concern.
All of JTS' products are manufactured in Madras, India by its Moduler
Electronics subsidiary. The number of employees at the Moduler facility grew
from 1,140 on December 22, 1995 to 4,008 as of July 28, 1996. 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 of results of operations for the year ended January 28,
1996.
JTS AND MODULER ELECTRONICS PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE
YEAR ENDED JANUARY 28, 1996 COMPARED TO THE 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 $5.4 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 product 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 S.p.A., 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.
<PAGE>
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 unsellable 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 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 revenues.
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. 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 revenues.
JTS SIX MONTHS ENDED JULY 28, 1996 COMPARED TO SIX MONTHS ENDED JULY 30,
1995
Revenues for the first six months of fiscal 1997 were $33.8 million compared
to $3.9 million for the first six months of fiscal 1996. Revenues for the first
six months of fiscal 1997 were comprised primarily of sales of the Company's 1
gigabyte and 1.6 gigabyte Palladium 3 1/2-inch disk drives. Minimal product
revenues were recorded in the first six months of fiscal 1996, as the Company
initiated volume shipments of disk drives in October 1995. However, JTS earned
$3.8 million of technology license revenue during the first six months of fiscal
1996 as a result of achieving certain development milestones under the
Technology Transfer and License Agreement with Western Digital. JTS' management
expects revenues from its 1 gigabyte drives to be nominal for the rest of the
fiscal year. JTS recently began shipment of its 1.2 gigabyte Palladium drives,
the sales of which are expected to increase in the near future. There can be no
assurance that product sales will materialize as expected.
The gross margin for the first six months of fiscal 1997 was a deficit of
$11.3 million compared to a margin of $0.3 million for the first six months in
fiscal 1996. The $11.6 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 $14.1 million for the first six
months of fiscal year 1997 compared to $3.9 million for the first six months 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.
<PAGE>
Selling, general and administrative expenses for the first six months of
fiscal 1997 were $8.0 million compared to $1.6 million for the first six months
of fiscal 1996. The increase resulted from the expansion of JTS' operations and
the commencement of marketing and sales efforts. 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
revenues.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources is based on the
unaudited pro forma condensed combined balance sheets of Atari and JTS. Such pro
forma balance sheets combine the balance sheet of Atari as of June 30, 1996 and
the balance sheet of JTS as of July 28, 1996.
On a pro forma combined basis, at June 30, 1996, the Company had cash and
cash equivalents of $16.9 million, a working capital deficit of $5.7 million and
a net worth of $17.8 million.
At June 30, 1996, total debt, including bank credit lines and notes payable,
was $64.9 million. JTS has a $5.0 million revolving Line of Credit with Silicon
Valley Bank which bears interest at the bank's prime rate plus .75% and becomes
due and payable on September 27, 1996. As of July 28, 1996, all amounts
available under this line were drawn. JTS also had equipment lease financing of
$4.2 million at July 28, 1996. There were $5.5 million of working capital loans
outstanding between Moduler Electronics and three Indian banks at interest rates
ranging from 13% to 15% as of July 28, 1996 as well as term loan facilities with
the Industrial Credit and Investment Corporation of India Limited (ICICI) and
the Shipping Credit and Investment Corporation of India Limited (SICI) in the
amount of $12.5 million at interest rates of LIBOR plus 2.75% and LIBOR plus 4%,
respectively. At July 28, 1996, Moduler Electronics' borrowings under these term
loan facilities were $6.0 million, and these two loans become due in 2000 and
2002, respectively. Amounts borrowed under these loan agreements have been used
for working capital purposes, tooling, facilities expansion and purchases of
capital equipment.
Certain of these financings made to JTS and Moduler Electronics are
contingent on their ability to comply with stringent financial covenants. In
this regard, Moduler Electronics did not obtain certain debt and/or equity
capital required under one of its loan agreements. JTS has informed the
lender that it intends to provide such capital by the fourth quarter of
fiscal 1997. 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 on
April 4, 1996. Such consents were not obtained, but the lending institution
has continued to transact business with 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 renew
or maintain its current financing facilities.
At July 28, 1996, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued by Atari in
1987.
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. The Company's accounts
receivable are heavily concentrated with a small number of customers. Sales
to Futuretech and Markvision accounted for approximately 44% of the JTS'
sales in the six months ended July 28, 1996. If any large customer of the
Company became unable to pay its debts to the Company, liquidity would be
adversely affected. In the event the Company is unable to increase sales or
maintain production yields at acceptable levels there would be a significant
adverse impact on liquidity. This would require the Company to either obtain
additional capital from external sources or to curtail its capital, research
and development and working capital expenditures. Such curtailment could
adversely affect the Company's future years' operations and competitive
position. Due to delays in the receipt of additional financing, the Company
took action in September 1996 to conserve its cash resources by reducing the
production of drives planned for the third and fourth quarters of fiscal 1997.
<PAGE>
The 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. For example, the
Company expects to spend approximately between $7 and $12 million for vendor
tooling and equipment to expand manufacturing capacity for the remainder of
fiscal 1997. In fiscal year 1998, the Company plans approximately $45 million
in capital expenditures related primarily to equipment and facilities
required to increase drive production volumes. In addition, significant cash
resources will be required to fund purchases of inventory needed to achieve
anticipated sales levels. Failure to receive such cash resources will
negatively impact the Company's ability to manufacture its products at
required levels.
The Company recently sold certain of its real estate acquired from Atari in
the Merger to one of its board members for $10 million. The property was sold
at book value, and the Company has an option to repurchase the property one year
from the date of sale for $10 million.
The precise amount and timing of the Company's funding needs cannot be
determined at this time, and will depend upon a number of factors, including
the market demand for the Company's products, the availability of critical
components, the Company's strategic alliances for the purchase of its
products, the progress of the Company's product development efforts and the
Company's inventory and accounts receivable management. The Company currently
expects that it would seek to obtain such funds from additional borrowing
arrangements and/or a public or private offering of debt or equity
securities. There can be no assurance that funds required by the Company in
the future will be available on terms satisfactory to the Company or at all.
ATARI BACKGROUND
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
<PAGE>
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 July 1996, Atari had approximately
95,000 units of Jaguar in inventory.
ATARI YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31,
1994
Total revenues for Atari 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 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.
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.
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.
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,
<PAGE>
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.
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.
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.
ATARI SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30,
1995
Net sales for the first six months ended 1996 were $2.3 million as compared
to $7.8 million for the same period of 1995. Sales of Jaguar and related
products represented 52% of sales for 1996 and 72% for 1995, and sales of other
products and royalties represented the balance of revenues in each such year.
The reduction in revenues was primarily the result of lower unit volumes of
Jaguar products and lower average selling prices of Jaguar and certain of its
software titles. As a result of the Jaguar price reductions and substantial
curtailment of sales and marketing activities for Jaguar, Atari expects sales of
Jaguar and related products to decline substantially in 1996 and thereafter.
Cost of sales for the first six months of 1996 were $7.1 million. Included
in cost of sales in 1996 were inventory write-downs of $5.0 million relating to
Jaguar products. These write-downs resulted from management's revised estimates
of sales resulting from continued disappointing sales of Jaguar.
Research and development expenses for the first six months were $0.3 million
as compared to $3.6 million for the 1995 period. The substantial decline is due
to the elimination of the Company's internal Jaguar development team and other
development staff in the fourth quarter 1995. As of June 30, 1996, the Company
had capitalized $0.9 million of development costs associated with certain CD
titles.
Marketing and distribution expenses were $1.0 million for the first six
months of 1996 as compared to $5.2 million for the 1995 period. The reduction
was due to the curtailment of marketing activities for Jaguar products.
General and administrative expenses for the first six months of 1996 were
$2.0 million as compared to $3.4 million for 1995. The decrease in such expenses
was primarily the result of staff reductions, reduced rent, and other reductions
in operating costs.
Other income (expense), net for the six months ended 1996 was $6.8 million
as compared to $1.0 million in 1995. For 1996, the company sold the remaining
portion of its holdings in Dixon PLC, a retailer in England, and realized a gain
of $6.3 million.
Interest income for 1996 was $0.7 million as compared to $1.8 million for
1995. The decrease in interest income is attributable to significantly lower
cash balances during the first half of 1996 compared to 1995.
Interest expense for the first six months of both periods was $1.2 million
and is a result of Atari's 5 1/4% Convertible Debentures.
<PAGE>
B. Financial Statements of JTS Corporation (excluding Atari) for the
six months ended July 28, 1996
JTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 28, JANUARY 28,
1996 1996
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalent and restricted cash............................. $ 684 $ 547
Trade accounts receivable, less allowance for doubtful accounts of
$1,011 and $730, respectively........................................ 9,660 1,286
Receivable from Moduler Electronics................................... -- 6,892
Other receivables..................................................... 694 812
Inventories........................................................... 12,910 2,093
Prepaid and other current assets...................................... 611 240
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24,559 11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,830 7,943
GOODWILL.............................................................. 168 --
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TOTAL............................................................. $41,557 $ 19,813
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LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................... $10,400 $ 4,323
Notes payable to stockholders......................................... 1,965 1,000
Note payable to Atari Corporation..................................... 30,000 --
Accounts payable --
Trade............................................................... 23,385 7,226
Moduler Electronics................................................. -- 9,546
Accrued liabilities................................................... 8,409 3,501
Current portion of capitalized lease obligation and long-term debt.... 1,723 1,520
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75,882 27,116
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LONG-TERM OBLIGATIONS................................................. 8,426 3,485
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REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,697
and 27,785 shares, respectively...................................... 29,697 27,785
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STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
outstanding: 9,447 and 7,367 shares, respectively.................... -- --
Additional paid-in capital............................................ 8,411 6,004
Deferred compensation................................................. (3,660) (4,320)
Notes receivable from stockholders.................................... (2,610) (623)
Accumulated deficit................................................... (74,589) (39,634)
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(72,448) (38,573)
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TOTAL............................................................. $41,557 $ 19,813
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</TABLE>
See accompanying notes.
<PAGE>
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 28, 1996 JULY 30, 1995
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<S> <C> <C>
REVENUE:
Product sales....................................................... $ 33,764 $ 48
Technology license revenue.......................................... -- 3,829
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33,764 3,877
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COST AND EXPENSES:
Cost of sales....................................................... 45,100 3,498
Research and development............................................ 14,091 3,887
Selling, general and administrative................................. 8,045 1,557
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67,236 8,942
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OPERATING LOSS (33,472) (5,065)
Interest income....................................................... 153 --
Interest expense...................................................... (1,790) --
Other income (expense)................................................ 155 5
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NET LOSS.............................................................. $(34,954) $(5,060)
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NET LOSS PER COMMON SHARE............................................. $ (3.71) $ (1.16)
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SHARES USED IN COMPUTING NET LOSS PER SHARE........................... 9,434 4,360
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</TABLE>
See accompanying notes.
<PAGE>
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 28, 1996 JULY 30, 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations......................................... $(32,356) $(7,045)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases.................................................. (2,501) (3,056)
Cash acquired from the Moduler acquisition.......................... 1,634 --
-------------- -------
Net cash used in investing activities............................. (867) (3,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock........................... -- 8,855
Proceeds from note payable -- Atari Corporation..................... 30,000 --
Other............................................................... 3,360 1,848
-------------- -------
Net cash provided by financing activities......................... 33,360 10,703
NET INCREASE IN CASH AND EQUIVALENTS.................................. 137 602
CASH AND EQUIVALENTS:
Beginning of period................................................. 547 --
-------------- -------
End of period....................................................... $ 684 $ 602
-------------- -------
-------------- -------
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.
<PAGE>
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.
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 six months then ended as if the acquisition took
place at the beginning of each period.
<TABLE>
<CAPTION>
JULY 28, JULY 30,
1996 1995
---------- ---------
<S> <C> <C>
Revenues...................................................... $ 33,764 $ 5,532
Net loss...................................................... $(35,073) $(12,392)
</TABLE>
NOTE 3. -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 28, JANUARY 28,
1996 1996
--------- -----------
<S> <C> <C>
Raw materials............................................... $ 8,163 $2,093
Work in process............................................. 2,614 --
Finished goods.............................................. 2,133 --
------- --------
$12,910 $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 was consummated in
the third quarter of 1996. In connection with the merger, Atari extended a
bridge loan to the Company in the amount of $25.0 million with a stated
interest rate of 8 1/2% per annum.
<PAGE>
C. Pro Forma Financial Information for JTS and Atari
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 merger of Atari and JTS which occurred on July 30, 1996.
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 June 30, 1996. Such pro forma balance sheet
combines Atari's balance sheet as of June 30, 1996 and the balance sheet of
JTS as of July 28, 1996. Although the business combination resulted 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, owns approximately 62% of the combined equity.
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 fair value of JTS assets and
liabilities will be revised as updated information becomes available. The
Company allocated $133.6 million to purchased technology, $110 million of
which represented in-process research and development. The $110 million was
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 of 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 six months ended June 30,1996 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 June 30, 1996 with the
JTS pro forma statement of operations for the six months ended July 28, 1996.
Such statements do not include the effect of the approximately $110 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
preparations 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 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 and JTS.
<PAGE>
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
ATARI JTS
JUNE 30, JULY 28, PRO FORMA PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents.................... $21,195 $ 684 (5,000)(k) $ 16,879
Accounts receivable..................... 648 9,660 10,308
Other receivables....................... -- 694 694
Inventories............................. 4,598 12,910 17,508
Subordinated secured convertible note... 25,000 -- (25,000)(k) --
Other current assets.................... 1,221 611 (410)(i) 1,422
------- --------- ---------
Total current assets................. 52,662 24,559 46,811
GAME SOFTWARE DEVELOPMENT
COSTS................................... 901 -- 901
EQUIPMENT AND TOOLING..................... 406 16,830 3,770 (d) 21,006
REAL ESTATE HELD FOR SALE................. 10,445 -- -- 10,445
INTANGIBLE & OTHER ASSETS................. 501 -- 23,542 (d) 24,043
GOODWILL.................................. -- 168 (168)(c) 17,888
17,888 (d)
------- --------- ---------
TOTAL............................... $ 64,915 $ 41,557 $121,094
------- --------- ---------
------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings.......................... $ -- $ 10,400 $ 10,400
Notes payable to stockholders............ -- 1,965 1,965
Subordinated secured convertible note.... -- 30,000 (30,000)(k) --
Accounts payable......................... 2,623 23,385 26,008
Accrued liabilities...................... 3,180 8,409 790 (i) 12,379
Current portion of long-term obligations. -- 1,723 1,723
------- --------- ---------
Total current liabilities........... 5,803 75,882 52,475
LONG-TERM OBLIGATIONS..................... 42,354 8,426 50,780
REDEEMABLE PREFERRED STOCK................ -- 29,697 (29,697)(c) --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock............................. 639 400 (a) 1,039
Additional paid-in capital............... 196,704 8,286 102,907 (a,c) 307,897
Deferred compensation.................... -- (3,660) 3,660 (c) --
Common stock warrants.................... -- 125 1,985 (b) 2,110
Notes receivable from sale of common stock -- (2,610) (2,610)
Accumulated translation adjustments...... (770) (770)
Accumulated deficit...................... (179,815) (74,589) 74,589 (c) (289,827)
(110,012)(e)
-------- --------- ---------
Total shareholders' equity (deficit) 16,758 (72,448) 17,839
-------- --------- ---------
TOTAL........................... $ 64,915 $ 41,557 $121,094
-------- --------- ---------
-------- --------- ---------
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(In thousands, expect per share data)
<TABLE>
<CAPTION>
ATARI JTS
SIX MONTHS ENDED SIX MONTHS ENDED PRO FORMA PRO FORMA
JUNE 30, 1996 JULY 28,1996 ADJUSTMENTS COMBINED
---------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES...................... $ 2,312 $ 33,764 $ 36,076
--------- --------- --------
COST AND EXPENSES:
Cost of revenues and inventory 3,924 (f)
writedowns................... 7,142 45,100 628 (h) 56,794
Research and development........ 307 14,091 14,398
Sales, marketing, general and
administrative............... 2,888 8,045 1,278 (g) 12,211
--------- --------- --------
Total operating expenses... 10,337 67,236 83,403
OPERATING LOSS................... (8,025) (33,472) (47,327)
Gain on sale of marketable securities 6,347 -- (6,347)(l) --
Other income, net.................... 436 155 591
Interest income...................... 663 153 (452)(k) 364
Interest expenses.................... (1,138) (1,790) 452 (k) (2,476)
--------- --------- --------
Loss before income taxes....... (1,717) (34,954) (48,848)
Income tax credit..................... -- -- --
--------- --------- --------
NET LOSS.............................. $ (1,717) $ (34,954) (48,848)
--------- --------- --------
--------- --------- --------
LOSS PER COMMON SHARE.................. $ (0.03) $ (3.71) $ (0.47)
Number of shares used in computation... 63,770 9,434 (j) 103,305
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
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: 7,847(f)
Cost of revenues.............................. 44,234 33,626 1,257(h) 86,964
Research and development...................... 5,410 13,375 18,785
Sales, marketing, general and administrative.. 18,647 5,777 2,555(g) 26,979
------------ ---------------- ----------
Total operating expenses................... 68,291 52,778 132,728
OPERATING LOSS.................................. (53,665) (34,001) (99,325)
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) (96,987)
Income tax credit............................... -- -- --
------------ ---------------- ----------
NET LOSS BEFORE EXTRAORDINARY CREDIT............ $ (50,158) $ (35,170) $ (96,987)
------------ ---------------- ----------
------------ ---------------- ----------
LOSS PER COMMON SHARE BEFORE EXTRAORDINARY
CREDIT......................................... $ (0.79) $ (7.63) $ (0.94)
Number of shares used in computation............ 63,697 4,611 (j) 103,697
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
<PAGE>
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 follow:
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
------------
------------
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:
Current assets............................... $ 24,559,000
Equipment and tooling........................ 20,600,000
In-process technology....................... 110,012,000
Existing technology.......................... 23,542,000
Liabilities assumed...... ................... (84,308,000)
Goodwill..................................... 17,888,000
------------
TOTAL................................... $112,293,000
------------
------------
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 and interest between Atari and JTS.
(l)-- Reflects elimination of nonrecurring gain on sale of a marketable
security.
No deferred tax adjustment is made as the deferred tax assests,
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.
<PAGE>
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 allocation of the fair value of those assets. The
fair value of JTS assets and liabilities will be revised as updated
information become available. Such allocation assigned $110 million to
purchased in-process research and development. The $110 million will be
expensed in the third calendar quarter 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
approximately $3.7 million of deferred compensation which it is currently
amortizing. Such expense has not been recorded in the accompanying pro forma
financial statements.
<PAGE>
ITEM 7. EXHIBITS
Exhibit
- -------
99.1 Press Release dated as of September 25, 1996 entitled "JTS Update"
ITEM 8. CHANGE IN FISCAL YEAR.
On September 18, 1996, the Board of Directors of JTS Corporation voted
to approve a change in the fiscal year of the Company from a 52/53 week
fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. The Company will file
its transition report on Form 10-Q for its quarter ending October 27, 1996.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JTS CORPORATION
Dated: September 26, 1996 By: /s/ W. Virginia Walker
------------------------
W. Virginia Walker
Executive Vice President,
Finance and Administration,
Chief Financial Officer and
Secretary
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
99.1 Press release dated as of September 25, 1996 entitled
"JTS Update"
<PAGE>
Exhibit 99.1
JTS UPDATE
SEPTEMBER 25, 1996, 8:30 PM EDT
SAN JOSE, Calif., Sept. 25 -- Tom Mitchell, President and Chief Executive
Officer of JTS Corporation (AMEX:JTS) (the "Company") commented in an update
of the Company's operation. "We are pleased to announce that in the next few
weeks we will start volume production of our second generation of 3-inch hard
drive products for notebook computers. These drives offer greater capacity at
a lower cost than the 2.5-inch hard drive currently used in notebook
computers. In October of 1995, JTS commenced production of 3.5-inch hard
drives for desktop computers in our factory in Madras, India. During the
second quarter of this year, we shipped a total of 118,000 drives, or
approximately 8,000 drives per week. We are currently shipping approximately
20,000 drives per week and have the capacity to ship 25,000 per week. We
expect to double our capacity to approximately 50,000 units per week by the
end of the calendar year. When the final results are in, we anticipate that
revenues will have nearly doubled in the third quarter from the second, and
will have grown over 100% in the fourth quarter versus the third. We expect
that in the first quarter of fiscal 1998, ending April 30, 1997, we will ship
over $100 million in hard drives.
"However, as a result of the following factors, we are about 90 days behind
meeting the publicly stated estimates for the sales forecast set forth in the
SEC documents filed when JTS merged with Atari. First, the Company is
experiencing sales delays as several of its new customers have taken longer
than expected to re-configure their notebook computers as well as their
manufacturing operations, to utilize JTS's new family of 3-inch hard drives.
Five companies have now completed their new designs to accommodate a 3-inch
disk drive format. Second, a major manufacturer decided to switch its order
for the Company's initial 3-inch hard drive to the Company's new 1 gigabyte
capacity hard drive, which is expected to ship in October. Third, we had
expected to initiate a financing approximately 45 days ago and the delay in
completing a financing has resulted in a slower ramp up of our production
volume. We had originally forecast that we would achieve $230 million in
revenues in the 12 months ending January 31, 1997. The company is currently
pursuing financing. Assuming adequate financing, we now anticipate that we
will achieve these results by the 12 months ending April 30, 1997 and we also
expect to turn profitable about that time. Given the magnitude of what we've
already accomplished, we're confident that the Company is well positioned to
achieve both its short and long term revenue and profitability targets."
JTS Corporation was founded in 1994 to design, manufacture, and supply
enhanced-capacity hard disk drives for the notebook and desktop personal
computer market. The president and chief executive officer of JTS, Tom
Mitchell, is formerly the president and chief operating officer of Conner
Peripherals and co-founder, president and chief operating officer of Seagate
Technology. JTS merged with the Atari Corporation on July 30, 1996.
Except for the historical information contained herein, the discussion in
this press release contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, the Company's limited operating
history; the need for additional financing; the uncertainty of market
acceptances; the highly competitive market; the Company's ability to achieve
initial volume shipments of a 1 gigabyte 3-inch drive; the Company's
dependence on its relationship with Compaq Computer, its dependence on a
single manufacturing facility and those risk factors discussed from time to
time in the Company's SEC reports, including but not limited to the Company's
Registration Statement on Form S-4 (333-06643), in addition to those
discussed elsewhere in this press release.
