<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3573 77-0364572
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
------------------------
166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID T. MITCHELL
CHIEF EXECUTIVE OFFICER
JTS CORPORATION
166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ANDREI M. MANOLIU, ESQ.
MATTHEW W. SONSINI, ESQ.
COOLEY GODWARD LLP
3000 EL CAMINO REAL, 5 PALO ALTO SQUARE, PALO ALTO, CALIFORNIA 94306, (415)
843-5000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(1)(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock. . .$.001 par
value 10,037,500 Shares(1) $3.4375 $34,503,906.25 $10,455.73
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated maximum number of shares of the Common Stock of the
Registrant which may be issued to the Selling Security Holders upon
conversion of the Series B Preferred Stock, upon exercise of the Warrants
and upon payments of dividends on the outstanding shares of Series B
Preferred Stock in Common Stock. In the event of a stock split, stock
dividend or similar transaction involving the Common Stock of the
Registrant, in order to prevent dilution, the number of shares registered
shall be automatically increased to cover additional shares in accordance
with Rule 416(a) under the Securities Act.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
calculated in accordance with Rule 457(c) on the basis of the average of the
high and low sales prices reported for such securities by The American Stock
Exchange, Inc. on November 21, 1996.
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1996
PROSPECTUS
10,037,500 SHARES
[JTS CORPORATION LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, $.001 par value ("Common Stock"), of JTS
Corporation (the "Company" or "JTS") offered hereby have been issued or are
issuable upon (i) the conversion of Series B Preferred Stock, $.001 par value
(the "Series B Preferred Stock"), or the exercise of Common Stock purchase
warrants (the "Investor Warrants"), issued or issuable upon conversion of the
Series B Preferred Stock, issued to GFL Advantage Fund Limited and Genesee Fund
Limited -- Portfolio B in a November 1996 private placement, (ii) the payment of
dividends on the outstanding shares of Series B Preferred Stock in Common Stock,
and (iii) the exercise of Common Stock purchase warrants (the "Finder's
Warrants" and together with the Investor Warrants, the "Warrants") issued to
Wharton Capital Corporation (together with GFL Advantage Fund Limited and
Genesee Fund Limited -- Portfolio B, the "Selling Security Holders") in
consideration for financial consulting services furnished in connection with the
November 1996 private placement. See "Description of Capital Stock." All of the
shares are being offered hereby by the Selling Security Holders or by pledges,
donees, transferees or other successors in interest that receive such shares as
a gift, partnership distribution or other non-sale related transfer from time to
time on The American Stock Exchange, Inc. ("AMEX"), in privately negotiated
transactions, or by a combination of such methods of sale, at fixed prices that
may be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The shares are
being registered by the Company pursuant to registration rights granted to the
Selling Security Holders in connection with the November 1996 private placement.
The Selling Security Holders may effect such transactions by selling the shares
to or through broker-dealers and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Security
Holders or the purchasers of the shares for whom such broker-dealers may act as
agent or to whom they sell as principal or both. See "Selling Security Holders"
and "Plan of Distribution." The Common Stock is traded on AMEX under the symbol
"JTS." The last reported sales price of the Common Stock on AMEX on November 25,
1996 was $3.56 per share.
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT 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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $93,000. The aggregate proceeds to the Selling
Security Holders from the Common Stock will be the purchase price of the Common
Stock sold less the aggregate agents' commissions and underwriters' discounts,
if any, and other expenses of issuance and distribution not borne by the
Company. See "Plan of Distribution."
The Company has agreed to indemnify certain Selling Security Holders and
certain other persons against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act").
The Selling Security Holders and any broker-dealers or agents that
participate with the Selling Security Holders in the distribution of the shares
of Common Stock offered hereby may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
them and any profit on the resale of such shares may be deemed to be
underwriting commissions or discounts under the Act.
------------------------
December , 1996
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1996
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and financial statements and the
notes thereto appearing elsewhere in this Prospectus. This Prospectus Summary
and other parts of this Prospectus contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." Prospective investors should consider
carefully the information discussed under "Risk Factors."
THE COMPANY
JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS expects to begin volume production of
Nordic drives in the fourth quarter of fiscal 1997. JTS began volume production
of Palladium disk drives in October 1995. The Company markets its products to
original equipment manufacturers ("OEMs"), computer companies and second-tier
systems integrators for incorporation into their computer systems and
subsystems. The Company sells its products through a direct sales force
operating throughout the United States, Europe and Asia, as well as through
distributors in the United States, Europe, Latin America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995. In July 1996, the Company completed its merger (the
"Merger") with Atari Corporation ("Atari"). Since 1992, Atari has significantly
downsized its operations and going forward JTS is expected to represent a
significant portion of the Company's business. To obtain a low-cost
manufacturing source of hard disk drives, JTS entered into a verbal agreement in
March 1995 to acquire the hard disk drive division of Moduler Electronics
(India) Pvt. Ltd. ("Moduler Electronics"), located in Madras, India. JTS
subsequently assumed operational and management control of Moduler Electronics
and, in April 1996, purchased 90% of the company's outstanding capital stock.
Subsequent to the Merger, the Company changed its fiscal year 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 historical financial
position and results of operations of Atari for 1996 included elsewhere herein
are as of and for the six months ended June 30, 1996, which are based on the
fiscal year of Atari prior to the Merger.
COMPANY STRATEGY
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 capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook computers comparable to those offered by desktops.
Lastly, the notebook computer industry is generally migrating towards lower
profile computing devices. The pressure to reduce the profiles, increase the
capacities and lower the costs of personal computers has presented manufacturers
with a substantial ongoing technical challenge.
JTS has undertaken several key initiatives to meet the challenges currently
facing hard disk drive manufacturers and to position the Company to become a
leading international supplier of hard disk drives to the notebook and desktop
computer markets. These key initiatives include the following:
ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable storage market for lower
profiles, greater storage capacities and lower costs, JTS has
2
<PAGE> 4
developed its Nordic family of 3-inch form factor disk drives. The disks used in
the 3-inch format have 82% greater recording area than disks used in 2.5-inch
drives, the current industry standard for notebook computers, offering nearly
double the storage capacity at the same areal densities. Nordic drives also
offer cost advantages per megabits of storage space over competing drives. The
design of the Nordic drives makes them the lowest profile disk drives currently
in the market.
FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital Corporation, as an alternate source for JTS' disk drives
incorporating Nordic technology. The Company is currently negotiating a head
component supply agreement pursuant to which JTS seeks to acquire and design
into its disk drives magneto-resistant ("MR") head component technology, which
allows data to be recorded at much higher track densities than metal in-gap
("MIG") or inductive thin-film head technology. JTS intends to continue to take
advantage of its management's considerable experience in the computer industry
to obtain access to other key computer industry participants.
DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design drives that satisfy the customers'
end-product requirements using efficient and low-cost manufacturing methods. JTS
is committed to the timely development of new products and the continuing
evaluation of new technologies. In this regard, JTS is presently designing into
each of its hard disk drive product families various high performance features,
such as MR heads, new application specific integrated circuit ("ASIC")/channel
technology and advanced head lifters.
ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities in
Madras, India, JTS intends to capitalize upon a low-cost and highly-skilled
labor force. JTS believes that labor costs in India are significantly lower than
labor costs in other countries where hard disk drives are commonly manufactured,
such as Singapore, Malaysia and Thailand. To leverage its low-cost labor force,
JTS manufactures certain labor-intensive components in-house rather than
purchases such components from outside suppliers. The Company also utilizes many
common components in its 3-inch and 3.5-inch form factor disk drives, thereby
reducing inventory requirements, creating significant assembling efficiencies
and obtaining cost advantages from volume purchases of materials.
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 to 13 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investment in the Common Stock include the following factors:
- The Company has a history of losses and there can be no assurance that it
will achieve profitability.
- The report by the Company's independent accountants contains an
explanatory paragraph regarding factors which raise substantial doubt
about the Company's ability to continue as a going concern.
- The Nordic family of 3-inch form factor disk drives has only recently
been introduced to the market, and there is uncertainty of its market
acceptance.
- The hard disk drive industry is intensely competitive, and there can be
no assurance that the Company will compete successfully with other disk
drive companies and computer companies with disk drive operations, all of
which have significantly greater resources than the Company.
The Company was incorporated in Delaware on February 3, 1994, and its
corporate headquarters are located at 166 Baypointe Parkway, San Jose,
California 95134, where the telephone number is (408) 468-1800.
Certain trademarks of the Company and other companies are used in this
Prospectus and are the property of their respective holders.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock outstanding before the Offering.......... 104,732,381 shares(1)
Common Stock offered by the Selling Security
Holders............................................. 10,037,500 shares(2)
Common Stock to be outstanding after the Offering..... 114,732,381 shares(1)(2)
Use of proceeds....................................... The Company will not receive any of
the proceeds from the sale of Common
Stock by the Selling Security
Holders.
AMEX Symbol........................................... JTS
</TABLE>
- ---------------
(1) Excludes (i) 5,034,853 shares of Common Stock issuable upon exercise of
options outstanding as of October 31, 1996, of which 787,165 shares were
exercisable at such date at a weighted average exercise price of $0.36 per
share; (ii) 300,000 shares issuable upon exercise of warrants outstanding as
of October 31, 1996, at a weighted average exercise price of $0.25 per
share; (iii) 8,985,000 shares of Common Stock reserved for future issuance
under the Company's Amended and Restated 1995 Stock Option Plan; (iv)
450,000 shares of Common Stock reserved for future issuance under the
Company's 1996 Directors' Stock Option Plan; and (v) 2,596,419 shares of
Common Stock issuable upon conversion of the Company's 5 1/4% Convertible
Subordinated Debentures.
(2) Based upon: (i) conversion of all of the Series B Preferred Stock at $3.6125
per share of Common Stock (which price is equal to the average closing bid
price for the five trading days preceding the sale and issuance of the
Series B Preferred Stock (the "Series B Closing")); (ii) exercise of all of
the Investor Warrants issuable upon conversion of the Series B Preferred
Stock and all of the Finder's Warrants at $3.6125 per share of Common Stock;
(iii) payment of dividends on the outstanding shares of Series B Preferred
Stock in Common Stock; and (iv) further adjustment to the Series B Preferred
Stock conversion ratio due to anti-dilution adjustments. See "Description of
Capital Stock."
4
<PAGE> 6
JTS AND ATARI UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth the Unaudited Summary 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," included elsewhere herein) 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, were consummated as of June 30, 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 six months ended June 30, 1996 with the historical
financial position and results of operations of JTS as of and for the six months
ended July 28, 1996.
The Unaudited Summary 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) administrative efficiencies which may be obtained by
combining Atari and JTS or (b) costs of restructuring, integrating or
consolidating the two companies. 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 per share amounts.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 33,403 $ 36,076
Cost of revenues........................................ 86,964 56,943
Selling, marketing, general and administrative
expenses............................................. 26,918 11,881
Research and development expenses....................... 18,785 14,398
Operating loss(1)....................................... (99,264) (47,146)
Net loss before extraordinary credit.................... (96,926) (48,667)
Loss per common share before extraordinary credit....... (0.93) (0.47)
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
-----------------
<S> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 16,879
Current assets.......................................... 45,954
Working capital (deficit)............................... (5,731)
Total assets............................................ 120,304
Current liabilities..................................... 51,685
Long-term debt.......................................... 50,780
Stockholders' equity.................................... 17,839
</TABLE>
- ------------------
(1) Excludes the effect of the approximately $110.0 million non-recurring charge
for in-process research and development.
5
<PAGE> 7
RISK FACTORS
An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully before purchasing the Common Stock
offered hereby.
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 $32.5 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. On January 28,
1996, prior to the merger with Atari, 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 most recent 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.
On a pro forma combined basis as of June 30, 1996, JTS and Atari had a
working capital deficit of $5.7 million and a net worth of $17.8 million. On a
pro forma combined basis, JTS and Atari had net revenues of $36.1 million and an
operating loss of $47.1 million for the six months ended June 30, 1996.
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
"Business -- 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, therefore, 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.
NEED FOR ADDITIONAL FINANCING; POSSIBLE BREACH OF LOAN COVENANTS. The hard
disk drive business is extremely capital intensive, and JTS will need
significant additional financing resources in 1997 and over the next several
years for facilities expansion, capital expenditures, working capital, research
and development and vendor tooling. The issuance of equity or convertible debt
securities, upon conversion, would result in dilution of the voting control of
existing stockholders and could result in dilution to earnings per share. There
can be no assurance that additional funding will be available on terms
acceptable to JTS 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. In this regard, 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. Furthermore, certain
6
<PAGE> 8
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. JTS' failure to comply with such covenants could result in
the loss of such financing sources. In this regard, Moduler Electronics has
failed to obtain certain debt and equity capital required under one of its loan
agreements. In addition, Moduler Electronics failed to obtain the lender's
consent under a loan agreement to the acquisition of Moduler Electronics by JTS.
Although consent may not have been required under the loan agreement and the
lending institution has continued to transact business with Moduler Electronics
and JTS, there can be no assurance that it will continue to do so in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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, Western Digital and Maxtor Corporation
("Maxtor"). In addition, a number of computer companies, such as International
Business Machines Corp. ("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 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
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 "Business -- Initial Efforts to Achieve Market Acceptance of Hard Disk Drive
Products." 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. Generally, OEM customers for hard disk drives rely on a limited
number of suppliers. As a result, it may be necessary for JTS to displace
competitors 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 and that competitors will offer products which meet or
exceed the performance capabilities of JTS' current products. Due to such
pricing pressures, JTS' future gross margins will substantially depend 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
"Business -- Competition."
RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES. The hard disk drive
industry is characterized by rapid technological change and short product life
cycles. As a result, JTS must continually anticipate change and adapt its
products to meet demand for increased storage capacities. 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 calendar 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 selling prices than more mature
products. Therefore, JTS' ability to introduce new products on a timely basis 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 unsuccessful, if the
technologies that JTS has chosen not to develop prove to be
7
<PAGE> 9
competitive alternatives or by trends toward competing technologies, 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 a material 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.
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 ASICs, read channels, digital
signals wP and spindle motor drivers, and certain head stack components. 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,
long 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
JTS' 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
"Business -- 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. In this regard, certain personal computer manufacturers have
announced reductions in anticipated revenue growth. 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. 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
8
<PAGE> 10
demand. Any failure to collect or delay in collecting receivables could have a
material adverse effect on JTS' business, operating results and financial
condition.
DEPENDENCE ON COMPAQ COMPUTER RELATIONSHIP; CUSTOMER CONCENTRATION. JTS'
strategy to commercialize its products and achieve market acceptance has focused
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. In this regard,
JTS entered into a Development Agreement with Compaq in 1994 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 Nordic hard disk drives
from JTS within two years following Compaq's acceptance of the first of such
products. In return, JTS granted 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 was also granted a license to use the
Nordic designs to manufacture or to have manufactured Nordic drives on a
royalty-free basis in the event JTS fails to meet the agreed upon production
schedule or, if JTS is not in default under the agreement, to have Nordic drives
manufactured by third-parties upon payment of a royalty to JTS. 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 an alternate source of Nordic products, JTS 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 and others. 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. In the first half of calendar 1996, Compaq delayed
introduction of a notebook product line that incorporates the Company's hard
disk drives, which resulted in shipment delays by the Company to Compaq and
others. The Company may experience similar delays in the future. In fiscal 1996,
Olidata S.p.A., Connexe Peripherals, Ltd., Liuski International, Inc. and
Aashima Technology, B.V. accounted for approximately 34%, 12%, 11% and 10%,
respectively, of JTS' total revenue. For the first six months of fiscal 1997,
Markvision International, Peacock Systems GmbH and FutureTech International,
Inc. accounted for approximately 27%, 22% and 17%, 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 "Business -- Initial Efforts to
Achieve Market Acceptance of Hard Disk Drive Products."
RELIANCE ON LICENSED TECHNOLOGY. JTS currently owns no patents (other than
those acquired from Atari in the Merger) and has obtained licenses to a
substantial portion of the technology used in its hard disk drives pursuant to
license agreements with TEAC Corporation ("TEAC"), Pont Peripherals Corporation
("Pont") (formerly DZU 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
"Business -- 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.
9
<PAGE> 11
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, patents acquired in the Merger,
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.
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.
Pursuant to the Merger, JTS has exclusive use of the "Atari" name and
"Fuji" logo in all areas other than coin-operated arcade video game use. JTS
also has a portfolio of other intellectual properties of Atari including
patents, trademarks, and copyrights associated with its video game and computer
businesses. JTS believes these 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
JTS will be able to preserve any of these 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 the Atari
division's intellectual property and a license were not available on
commercially reasonable terms, JTS' business, financial condition and results of
operations could 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 the Atari patents or
other intellectual property rights or to defend against third party infringement
claims. The occurrence of litigation relating to patent enforcement, patent
infringement or other intellectual property matters, regardless of the outcome,
could have a material adverse effect on JTS' business, financial condition and
results of operations.
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 year 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. For example, the
Company's failure to obtain a term loan when expected in 1995 resulted in the
postponement of planned facilities improvements at Moduler Electronics and,
consequently, the curtailment of manufacturing capacity expansion. 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 "Business -- Manufacturing."
DEPENDENCE ON SINGLE MANUFACTURING FACILITY. Substantially all of JTS'
manufacturing operations take 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. See "Business -- Manufacturing."
10
<PAGE> 12
RISKS OF INTERNATIONAL SALES AND MANUFACTURING. In fiscal 1996 and the six
months ended July 28, 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. In the near
term, JTS expects to conduct substantially all of its manufacturing operations
in India, although JTS will 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'
subsidiary, Moduler Electronics, a five year reduced tax rate which is expected
to expire in 2001. In addition, Moduler Electronics is located in the Madras
Export Processing Zone, where it currently enjoys an exemption from Indian taxes
on export profits. To date, JTS has obtained only minimal benefits from such tax
exemptions. Such exemptions may be terminated or additional taxes may be imposed
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, Moduler Electronics 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. Such 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. See "Business -- Manufacturing."
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 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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
11
<PAGE> 13
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."
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, 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, hire and properly train a sufficient number of
qualified personnel or 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" and "Business -- 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 "Management." JTS does not have an employment agreement with any of
these individuals, other than Mr. Wing. 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 will
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 "Business -- 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 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.
RISK OF POTENTIAL LIABILITIES RELATED TO ATARI'S BUSINESS. 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 JTS plans to terminate numerous contracts and business
relationships, including several related to software development activities.
Although JTS 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 attention 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
divert management attention and financial resources and could have a material
adverse effect on JTS' business, operating results and financial condition.
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 $17.0 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
12
<PAGE> 14
subsidiaries or its successors. The Merger constituted a change in ownership
with respect to JTS, thus substantially restricting the use of JTS' pre-Merger
NOLs against post-Merger income of the Company. In addition, the Merger or
subsequent events have constituted or likely will constitute an event which
results in the imposition of restrictions on the ability of the Company to
utilize the pre-Merger NOLs and tax credit carryforwards of Atari against the
post-Merger income and tax liability of the Company. There can be no assurance
that the Company will be able to utilize all or any of the pre-Merger NOLs or
tax credit carryforwards of Atari or JTS.
CONTROL BY AFFILIATES; ANTI-TAKEOVER EFFECTS. Directors and executive
officers of the Company own approximately 31% of the outstanding shares of
Common Stock (assuming no exercise of options or warrants after October 31,
1996). As a result, these affiliates of JTS, acting together, have the ability
to exert significant influence over the election of directors and other
corporate actions affecting JTS. Certain provisions of the Certificate of
Incorporation and Bylaws of JTS and certain provisions of Delaware General
Corporation Law, including Section 203 thereof, may also discourage certain
transactions involving a change in control of JTS. In addition to the foregoing,
the ability of the Board of Directors of JTS 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 JTS. See "Principal and
Selling Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices. As
of October 31, 1996, the Company had approximately 104,732,381 shares of Common
Stock outstanding. In February and August 1997, approximately 16,200,000 shares
and 12,500,000 shares of 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. The holders of approximately 30,500,000 shares of Common Stock
(excluding the Selling Security Holders) are entitled to certain rights with
respect to registration of such shares under the Securities Act. JTS has
registered for sale on a Form S-8 Registration Statement under the Securities
Act an aggregate of 8,985,000 shares of Common Stock reserved for issuance under
JTS' Amended and Restated 1995 Stock Option Plan, 500,000 shares of Common Stock
reserved for issuance under JTS' 1996 Non-Employee Directors' Stock Option Plan,
and 900,000 shares of Common Stock reserved for issuance pursuant to the
exercise of options granted under Atari's 1986 Stock Option Plan which were
assumed by JTS in the Merger. See "Shares Eligible for Future Sale" and
"Registration Rights."
LIQUIDITY; STOCK PRICE VOLATILITY. The trading price of the 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 Common Stock.
13
<PAGE> 15
USE OF PROCEEDS
The shares of Common Stock offered by the Selling Security Holders may be
sold from time to time to purchasers directly by the Selling Security Holders
acting as principals for their own accounts in one or more transactions at a
fixed price, which may be changed, or at varying prices determined at the time
of sale or at negotiated prices. Alternatively, the Selling Security Holders may
from time to time offer the Common Stock through underwriters, dealers or agents
who may receive compensation in the form of underwriting discounts, commissions
or concessions from the Selling Security Holders and/or the purchasers of shares
for whom they may act as agent. Sales may be made on AMEX or in private
transactions.
The Selling Security Holders and any underwriters, dealers or agents that
participate in the distribution of the Common Stock offered hereby may be deemed
to be underwriters within the meaning of the Securities Act and any discounts,
commissions or concessions received by them and any provided pursuant to the
sale of shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is available and
is complied with.
The Company entered into agreements with certain of the Selling Security
Holders to register their Common Stock under applicable federal and state
securities laws. The Company will pay substantially all of the expenses incident
to the offering and sale of the Common Stock to the public, other than
commissions, concessions and discounts of underwriters, dealers or agents, if
any. Such expenses (excluding such commissions and discounts) are estimated to
be $93,000. The registration agreement provides for cross-indemnification of
such Selling Security Holders and the Company to the extent permitted by law,
for losses, claims, damages, liabilities and expenses arising, under certain
circumstances, out of any registration of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its capital stock
since inception. However, pursuant to the Series B Preferred Stock Subscription
Agreements entered into between the Company and each of GFL Advantage Fund
Limited and Genesee Fund Limited -- Portfolio B (the "Subscription Agreements"),
the Company is obligated to pay 5% annual dividends on the outstanding shares of
Series B Preferred Stock, payable in cash or Common Stock (the "Series B
Dividends"). The Company intends to pay the Series B Dividends in Common Stock.
Furthermore, the Company may issue additional shares of preferred stock in the
future which require the payment of cash or stock dividends. Other than the
Series B Dividends, the Company presently intends to retain earnings, if any,
for use in its business, and does not anticipate paying cash dividends in the
foreseeable future. In addition, the Company's Certificate of Incorporation
restricts the Company's ability to issue dividends with respect to capital stock
that is junior in preference to the Series B Preferred Stock or to authorize the
issuance of capital stock that is senior in dividend preference to the Series B
Preferred Stock. See "Description of Capital Stock."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the cash and cash equivalents balances and
the capitalization of the Company as of June 30, 1996 on a pro forma basis as if
the Merger had occurred on that date.
<TABLE>
<CAPTION>
PRO FORMA
AS OF JUNE 30,
1996
--------------
(IN THOUSANDS)
<S> <C>
Short-term debt:
Current maturities of long-term debt......................................... $ 1,723
Long-term debt:
Total long-term debt......................................................... $ 50,780
---------
Total debt................................................................ $ 52,503
---------
Stockholders' equity:
Preferred Stock: $0.001 par value, authorized 10,000,000 shares; none issued
and outstanding...........................................................
Common Stock: $0.001 par value, authorized 150,000,000 shares; 103,715,516
shares issued and outstanding(1).......................................... 1,039
Additional paid-in capital................................................... 307,797
Common stock warrants........................................................ 2,110
Notes receivable, secured by common stock.................................... (2,510)
Accumulated translation adjustments.......................................... (770)
Accumulated deficit.......................................................... (289,827)
---------
Total stockholders' equity................................................ 17,839
---------
Total capitalization................................................. $ 70,342
=========
</TABLE>
- ---------------
(1) Excludes (i) 5,034,853 shares of Common Stock issuable upon exercise of
options outstanding as of October 31, 1996, of which 787,165 shares were
exercisable at such date at a weighted average exercise price of $0.36 per
share; (ii) 300,000 shares issuable upon exercise of warrants outstanding as
of November 30, 1996, at a weighted average exercise price of $0.25 per
share; (iii) 8,985,000 shares of Common Stock reserved for future issuance
under the Company's Amended and Restated 1995 Stock Option Plan; (iv)
450,000 shares of Common Stock reserved for future issuance under the
Company's 1996 Directors' Stock Option Plan; and (v) 2,596,419 shares of
Common Stock issuable upon conversion of the Company's 5 1/4% Convertible
Subordinated Debentures.
15
<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Company's Common Stock was first traded on July 31, 1996 on AMEX under
the symbol "JTS." The following table sets forth, for the periods indicated, the
high and low closing prices per share for the Common Stock as reported on AMEX.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Year Ending February 2, 1997:
Third Quarter.............................................. $5.56 $3.25
Fourth Quarter (through November 25, 1996)................. $3.88 $3.13
</TABLE>
The closing price of the Common Stock on AMEX on November 25, 1996 was
$3.56 per share. The Company had approximately 2,499 holders of record of its
Common Stock as of October 31, 1996.
16
<PAGE> 18
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 June
30, 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 June
30, 1996 with the historical financial position and results of operations of JTS
as of and for the quarter ended July 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) administrative efficiencies which may be obtained by
combining Atari and JTS or (b) costs of restructuring, integrating or
consolidating the two companies. 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, JTS and Moduler Electronics which are included elsewhere
herein. All amounts are stated in thousands, except for per share amounts.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED JTS
AND MODULER
ATARI ELECTRONICS
FISCAL YEAR FISCAL YEAR PRO FORMA ATARI JTS
ENDED ENDED COMBINED SIX MONTHS SIX MONTHS PRO FORMA
DECEMBER 31, JANUARY 28, DECEMBER 31, ENDED ENDED COMBINED
1995 1996 1995 JUNE 30, 1996 JULY 28, 1996 JUNE 30, 1996
------------ ------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $ 14,626 $ 18,777 $ 33,403 $ 2,312 $ 33,764 $ 36,076
Cost of revenues............. 44,234 33,626 86,964 7,142 45,249 56,943
Selling, marketing, general
and administrative
expenses................... 18,647 5,777 26,918 2,888 7,746 11,881
Research and development
expenses................... 5,410 13,375 18,785 307 14,091 14,398
Operating loss(1)............ (53,665) (34,001) (99,264) (8,025) (33,322) (47,146)
Net loss before extraordinary
credit..................... (50,158) (35,170) (96,926) (1,717) (34,804) (48,667)
Loss per common share before
extraordinary credit....... (0.79) (7.63) (0.93) (0.03) (3.69) (0.47)
</TABLE>
<TABLE>
<CAPTION>
ATARI JTS PRO FORMA
AS OF JUNE 30, 1996 AS OF JULY 28, 1996 COMBINED
------------------- ------------------- ---------
<S> <C> <C> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents.................................. $21,195 $ 684 $ 16,879
Current assets............................................. 52,662 24,697 45,954
Working capital (deficit).................................. 46,859 (51,185) (5,731 )
Total assets............................................... 64,915 41,695 120,304
Current liabilities........................................ 5,803 75,882 51,685
Long-term debt............................................. 42,354 8,426 50,780
Stockholders' equity (deficit)............................. 16,758 (72,310) 17,839
</TABLE>
- ------------------
(1) Pro forma excludes the effect of the approximately $110.0 million
non-recurring charge for in-process research and development.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus 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, those discussed in this section, those
discussed in the section entitled "Risk Factors," and those discussed elsewhere
in this Prospectus.
The merger of Atari into JTS was consummated on July 30, 1996. Accordingly,
this discussion and analysis addresses the historical operating results for
Atari's fiscal year ended December 31, 1995 and JTS' fiscal year ended January
28, 1996 and the subsequent six month periods for each company. 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.
Throughout this discussion, "fiscal 1997" refers to JTS' fiscal year ending
February 2, 1997.
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. Shipments of Nordic disk drives to Compaq began 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. See "Notes to JTS Financial Statements."
All of JTS' products are manufactured in Madras, India by its Moduler
Electronics subsidiary. The number of employees at the Moduler Electronics
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.
18
<PAGE> 20
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
$11.5 million compared to a margin of $0.3 million for the first six months in
fiscal 1996. The $11.8 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 $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.
19
<PAGE> 21
Selling, general and administrative expenses for the first six months of
fiscal 1997 were $7.7 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 November 30, 1996. JTS is presently in negotiations
with Silicon Valley Bank to extend the term of the line of credit. As of July
28, 1996, all amounts available under this line were drawn down. 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 to Moduler Electronics during 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 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.
20
<PAGE> 22
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 $7 million for vendor tooling and equipment to
expand manufacturing capacity for the remainder of fiscal 1997. In fiscal 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.
In September 1996, the Company sold certain of its real estate acquired
from Atari in the Merger to one of its board members for $10,000,000. The
property was sold at fair value, and the Company has an option to repurchase the
property one year from the date of sale for $10,000,000. Also, in early November
1996, the Company completed a $15,000,000 private financing involving the sale
of its Series B Convertible Preferred Stock. JTS anticipates that with proceeds
from the sale of real estate and the preferred stock together with existing cash
it will be able to fund operations through the end of the current fiscal year
ending February 2, 1997, including planned expense increases, working capital
increases and capital expenditures required to manufacture one million drives
per quarter. Thereafter, the Company anticipates that it will require additional
funds to finance its growth. 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 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
21
<PAGE> 23
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 July 1996, Atari had approximately 95,000 units of Jaguar in inventory.
The Company anticipates writing down an additional $3.8 million in Jaguar
inventory in the third quarter of fiscal 1997.
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
22
<PAGE> 24
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.
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 12 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.
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. Subsequent to
June 30, 1996, an additional write-down of $2.2 million was recorded based on
management's revised estimate of sales.
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. Subsequent to June 30, 1996, the Company wrote down $0.7
million of development cost.
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 51/4% Convertible Debentures.
23
<PAGE> 25
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in this Prospectus. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the Section
entitled "Risk Factors," those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," those discussed
elsewhere in this Prospectus.
JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS expects to begin volume production of
Nordic drives in the fourth quarter of fiscal 1997. JTS began volume production
of Palladium disk drives in October 1995. The Company markets its products to
OEMs, computer companies and second-tier systems integrators for incorporation
into their computer systems and subsystems. The Company sells its products
through a direct sales force operating throughout the United States, Europe and
Asia, as well as through distributors in the United States, Europe, Latin
America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995. In February 1996, the Company signed a merger agreement with
Atari and Atari concurrently loaned $25 million to JTS which supported the
Company's operations and continued growth. In June 1996, the principal amount of
the loan was increased to $30.0 million and the loan was subsequently canceled
upon closing of the Merger. To obtain a low-cost manufacturing source of hard
disk drives, JTS entered into a verbal agreement in March 1995 to acquire the
hard disk drive division of Moduler Electronics (India) Pvt. Ltd. ("Moduler
Electronics"), located in Madras, India. JTS subsequently assumed operational
and management control of Moduler Electronics and, in April 1996, purchased 90%
of the company's outstanding capital stock. On July 30, 1996, the Company
completed its merger with Atari, with JTS as the surviving entity. Since 1992,
Atari has significantly downsized its operations and going forward JTS is
expected to represent a significant portion of the Company's business.
INDUSTRY BACKGROUND
Disk Drive Market
The hard disk drive industry is intensely competitive and is dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as 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.
Disk Drive Technology
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
24
<PAGE> 26
drives are "intelligent" disk drives which incorporate an embedded ASIC
controller to manage communications with the computer. The magnetic heads
employed in disk drives have traditionally been based on inductive-head
technology which combines the read and write function within a single head. MR
head technology, which segregates the read and write function to different
elements of the head to optimize performance, has emerged recently as an
alternative to inductive-head technology. Management believes that the superior
performance offered by MR technology will make it the dominant head technology
of the future.
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, therefore, more heads to
offer the same recording capacity as larger form factor drives. 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, power conservation features and lightweight
design, presently dominate the notebook computer market.
Emerging Industry Trends
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 capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook computers comparable to those offered by desktops.
Lastly, the notebook computer industry is generally migrating towards lower
profile computing devices. The pressure to reduce the profiles, increase the
capacities and lower the costs of personal computers has presented manufacturers
with a substantial ongoing technical challenge.
JTS' STRATEGY
JTS has undertaken several key initiatives to meet the challenges currently
facing hard disk drive manufacturers and to position the Company to become a
leading international supplier of hard disk drives to the notebook and desktop
computer markets. These key initiatives include the following:
ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable storage market for lower
profiles, greater storage capacities and lower costs, JTS has developed its
Nordic family of 3-inch form factor disk drives. The disks used in the 3-inch
format have 82% greater recording area than disks used in 2.5-inch drives, the
current industry standard for notebook computers, offering nearly double the
storage capacity at the same areal densities. Nordic drives also offer cost
advantages per megabit of storage space. The design of the Nordic drives makes
them the lowest profile disk drives currently in the market.
FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital, as an alternate source for disk drives incorporating Nordic
technology. The Company is currently negotiating a head component supply
agreement pursuant to which JTS seeks to acquire and design into its disk drives
MR head component technology, which allows data to be recorded and read at much
higher track densities than MIG or inductive thin-film head technology. JTS
intends to establish similar arrangements with other major computer OEMs and
notebook manufacturers. The Company intends to continue to take advantage of its
management's considerable experience in the computer industry to obtain access
to other key computer industry participants.
25
<PAGE> 27
DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design drives that satisfy the customers'
end-product requirements using efficient and low-cost manufacturing methods. JTS
is committed to the timely development of new products and the continuing
evaluation of new technologies. In this regard, JTS is presently designing into
each of its hard disk drive product families various high performance features,
such as MR heads, new ASIC/channel technology and advanced head lifters.
ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities in
Madras, India, JTS has capitalized on a low-cost and highly-skilled labor force.
JTS believes that labor costs in India are significantly lower than labor costs
in other countries where hard disk drives are commonly manufactured, such as
Singapore, Malaysia and Thailand. To leverage its low-cost labor force, JTS has
chosen to manufacture certain labor-intensive components in-house rather than
purchase such components from outside suppliers. The Company also uses many
common components in its 3-inch and 3.5-inch form factor disk drives, thereby
reducing inventory requirements, creating significant assembling efficiencies
and providing cost advantages from volume purchases of materials.
INITIAL EFFORTS TO ACHIEVE MARKET ACCEPTANCE OF HARD DISK DRIVE PRODUCTS
JTS believes that the most efficient means to introduce new technologies
and products into the market is by forming key strategic alliances with major
customers, suppliers and other disk drive manufacturers. The Company believes
that by working with major manufacturers in the development of its disk drives,
it can better understand and cater to the needs of the manufacturers' end
product. In addition, by forming alliances with suppliers and other disk
manufacturers the Company can reduce time to market as well as meet the quantity
and timing demands of its larger customers. In connection with the Company's
strategy of establishing JTS' Nordic family of disk drives as the standard for
notebook computers, the Company has entered into two key strategic alliances
with companies in the computer industry.
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, has agreed to
design JTS' Nordic disk drives into at least one of Compaq's products and has
agreed to purchase from JTS a minimum number of hard disk drives from JTS within
two years following Compaq's acceptance of the first of such products in June
1996. 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 or to have manufactured Nordic drives on a
royalty-free basis in the event JTS fails to meet the agreed upon production
schedule or, if JTS is not in default under the agreement, to have Nordic drives
manufactured by third-parties upon payment of a royalty to JTS. 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. The Company began shipments of Nordic disk drives to Compaq in June 1996.
Volume shipments of Nordic disk drives are expected to begin in the fourth
quarter of fiscal 1997. See "Risk Factors -- Dependence on Compaq Computer
Relationship; Customer Concentration."
Western Digital
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 an alternate source of Nordic drives to Compaq. As of
January 28, 1996, Western Digital had made milestone payments to
26
<PAGE> 28
JTS in the 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. The Technology
Transfer and License Agreement restricts JTS from sublicensing Nordic
technology, under certain circumstances, until 1998. See "-- Patents and
Licenses." JTS intends to establish similar arrangements with other major
computer OEMs and notebook computer manufacturers. See "Risk
Factors -- Dependence on Compaq Computer Relationship; Customer Concentration."
PRODUCTS
JTS' disk drives are characterized by the following design features:
LOW-PROFILE AND FULLY-ENCAPSULATED 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 made possible by the drive's
high level of electronic integration that permits placement of the printed
circuit board assembly ("PCBA") 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. 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.
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 due to JTS' use of highly-integrated ASIC
controllers. 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.
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. Common componentry also simplifies inventory management and provides JTS
with purchasing-cost advantages.
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 capacity presently ranges from 1.0 gigabytes for the
two-disk version to 1.2 and 2.1 gigabytes for the three-disk version. The two-
and three-disk Nordic drives are significantly thinner than the two- and
three-disk 2.5-inch drives (10.5mm and 12.5mm compared to 17mm and 19mm), 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.
Moreover, the Nordic drives consume approximately the same amount of power as
2.5-inch drives, making them well suited for battery operated applications.
Nordic drives are currently offered at prices that are competitive with the
prices of 2.5-inch drives.
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 an
alternate 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 obligates Compaq to purchase a minimum number of
disk drives over a two year period. Production and shipment to Compaq of
27
<PAGE> 29
Nordic disk drives commenced in the second quarter of fiscal 1997. Volume
shipments of Nordic disk drives are expected to begin in the fourth quarter of
fiscal 1997. See "-- Initial Efforts to Achieve Market Acceptance of Hard Disk
Drive Products."
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 1.2 gigabytes to 2.0 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.
MANUFACTURING
JTS' manufacturing strategy is to be a low-cost producer of hard disk
drives for the notebook and desktop personal computer markets by capitalizing on
low labor costs, common componentry and selective vertical integration. 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 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 further reduce JTS' manufacturing costs by
capitalizing on the low-cost labor base in India. At present, JTS is vertically
integrated in certain labor intensive components, such as head stacks.
All of JTS' manufacturing operations are currently conducted at its
subsidiary, Moduler Electronics, located in Madras, India, which JTS acquired in
April 1996. Moduler Electronics 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. JTS subsequently
assumed operational and management control of certain portions of the hard disk
drive business of Moduler Electronics. In April 1996, JTS purchased 90% of the
outstanding capital stock of Moduler Electronics. 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.
The Madras facility presently occupies 85,000 square feet. 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. JTS believes that
labor costs in India are significantly lower than labor costs in other countries
where hard disk drives are commonly manufactured, such as Singapore, Malaysia
and Thailand. As of October 31, 1996, 5,547 individuals were employed at Moduler
Electronics. In 1995, Moduler Electronics was granted a five year "tax holiday"
which is expected to expire in 2001, 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
or additional taxes may be imposed at any time, for political or economic
reasons, in which event JTS would become subject to significantly greater taxes
on sales of disk drives outside of India. 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. Such 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.
28
<PAGE> 30
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 alternate 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.
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. See "Risk Factors -- Availability of Components and
Materials; Dependence on Suppliers," "-- Expansion of Manufacturing Capacity,"
"Dependence on Single Manufacturing Capacity," "-- Risks of International Sales
and Manufacturing," and "-- Production Yields; Product Quality."
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 capacities 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. The
Company is currently negotiating a head component supply agreement pursuant to
which JTS seeks to acquire and design into its disk drives MR head component
technology, which allows data to be recorded and read at much higher track
densities than MIG or inductive thin-film head technology. 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 1.8 gigabytes in the fourth
quarter of fiscal year 1997. As of October 31, 1996, JTS employed 372
individuals in engineering support and research and development.
SALES AND MARKETING; CUSTOMERS
JTS sells and markets its products through a direct sales force that
operates in the United States, Europe and Asia. In addition, JTS sells and
markets its products through an international network of distributors to OEMs,
VARs and systems integrators. The Company presently has sales offices throughout
the world that market JTS disk drives. International sales account for 81% of
revenues in fiscal 1996 and 40% of revenues for the first six months of fiscal
1997.
29
<PAGE> 31
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 approximately
34%, 12%, 11% and 10%, respectively, of JTS' total revenues. For the first six
months of fiscal 1997, Markvision, Peacock Systems GmbH and FutureTech
International, Inc. accounted for approximately 27%, 22% and 17%, 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.
BUSINESS OF ATARI DIVISION
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. (See Note 14 to Atari Financial Statements for discussion of
segment information.)
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. 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.
By late 1995, Atari recognized that despite a significant commitment of
financial resources 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. As a result of Atari's investment
in game design, 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. In 1996, Atari plans to continue its efforts to license titles
for its game library to third party publishers and to sell various properties
held for investment purposes.
PATENTS AND LICENSES
JTS currently owns no patents (other than those acquired from Atari in the
Merger) and has licensed in a substantial portion of the technology used in its
hard disk drives pursuant to license agreements with Pont,
30
<PAGE> 32
TEAC 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 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. Under the TEAC
Agreement, JTS has granted TEAC certain pricing preferences on purchases of
Nordic drives. 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.
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.
31
<PAGE> 33
The Company has exclusive use of the "Atari" name and "Fuji" logo in all
areas other than coin-operated arcade video game use. The Company also has a
portfolio of other intellectual properties including patents, trademarks, and
copyrights associated with the Atari video game and computer businesses. The
Company believes that such patents, trademarks and other intellectual property
are important assets. As of December 31, 1995, The Company held over 150 patents
in the United States and other jurisdictions relating to the business of the
Atari division 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 the Company will be able to preserve
any of the Atari division's other intellectual property rights. The occurrence
of litigation relating to patent infringement or other intellectual property
matters, regardless of the outcome, could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 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 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. As of July 28, 1996, JTS had a backlog
of 344,123 units for a total of $54.8 million deliverable over the next five
months. Backlog on any given date is not necessarily indicative of total orders
for a given period, which may be more or less than expected.
EMPLOYEES
As of October 31, 1996, JTS (excluding the Atari division) had 5,752
full-time employees, of whom 176 were located in San Jose, California, 5,547
were located in Madras, India, 22 were located in the Far East and 7 were
located in Europe. Of the full-time employees, 4,771 are engaged in
manufacturing, 27 in marketing, sales and service, 372 in product development
and 38 in administration and finance. Due to disappointing sales of Jaguar and
related products, Atari reduced its workforce from 101 persons at December 31,
1994 to 73
32
<PAGE> 34
persons at December 31, 1995 and to 17 persons at July 31, 1996. JTS does not
presently anticipate any further reductions in the Atari division's workforce.
As of October 31, 1996, the Atari division had approximately 11 employees in the
United States, including three in engineering and product development, six in
marketing, sales and distribution and two in general administration and
management. In addition, the Atari division had six employees outside the United
States at October 31, 1996.
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, Sunnyvale and Santa Clara,
California, Madras, India, Singapore, Slough, England, Viannen, the Netherlands
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 JTS 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. The Madras facility is owned by the
Indian Government, and JTS currently pays $14,000 per month for its use. 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. Such allotment letters authorize JTS to occupy
the premises so long as the space is used in the reasonable conduct of JTS'
business and rents are paid in a timely fashion. The allotment letters and 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. 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.
In addition, JTS leases a 7,200 square feet facility in Sunnyvale,
California under a lease which expires in 2001. JTS 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, the Netherlands. Each of these leases was assumed by JTS
when it merged with Atari, and each facility is presently used primarily for the
Atari division's operations.
The following table summarizes the principal properties occupied by the
Company:
<TABLE>
<CAPTION>
EXPIRATION DATE
LOCATION SQUARE FOOTAGE OF LEASE
----------------------------------------------- -------------- ---------------
<S> <C> <C>
Administrative and Sales Offices:
San Jose, California......................... 52,000 July 2000
Sunnyvale, California........................ 7,200 2001
Slough, England.............................. 33,600 September 1997
Viannen, The Netherlands..................... 19,400 September 1996
Singapore.................................... 1,500 July 1997
Taiwan....................................... 1,144 July 1997
Manufacturing Facility:
Madras, India................................ 85,000 *
Warehouse Facility:
Santa Clara, California...................... 20,200 July 1999
</TABLE>
- ---------------
* Occupied pursuant to allotment letters provided certain conditions are
satisfied.
33
<PAGE> 35
LEGAL PROCEEDINGS
The Company 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. The
Company has filed a counter-suit alleging damages of approximately $8.3 million.
The Company is a defendant and counter claimant in a civil action for
alleged breach of contract brought in U.S. District Court for the Southern
District of New York, case number 95 Civ. 1935, by Tradewell, Inc., a New York
corporation, seeking specific performance for release of goods having a value of
$1.6 million. The Company 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 resolution, the Company now seeks damages of
approximately $2.5 million.
The Company is a defendant in a civil action brought in England titled
Bullfrog Production, Ltd., v. Atari Corporation, Case No. 1996 B No. 584, for
which Bullfrog obtained judgment against the Company in the amount of $250,000
plus interest and costs.
The Company 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 to the action for
goods sold and delivered and work in process for approximately $3 million.
The Company 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. A
counterclaim has been filed by Probe against the Company for alleged breach of
contract. In connection with this matter, Acclaim Entertainment, an affiliate of
Probe, is expected to file a claim against the Company in the near future
seeking damages in excess of $1.25 million.
On January 23, 1992, certain debenture holders filed an involuntary
bankruptcy petition against The Federated Group, Inc., a subsidiary of the
Company and formerly a subsidiary of Atari. The case has been appealed to the
Ninth Circuit Court of Appeals, and the parties are presently awaiting the
hearing for oral arguments, which is scheduled for December 12, 1996.
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. The Company and VLLI
have entered into a settlement agreement, but the action has not yet been
formally dismissed.
The Company is presently, and may become in the future, a defendant in
certain other actions relating to the downsizing of Atari's operations. The
above actions may include claims for attorneys fees and interest. The Company
believes that none of these claims will have an adverse effect on its business,
financial condition or results of operations.
34
<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of JTS as of the date of this Prospectus 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
W. Virginia Walker 51 Executive Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Kenneth D. Wing 48 Executive Vice President, Research &
Development Quality/Reliability
Amit Chokshi 41 Executive Vice President, Worldwide
Operations and Managing Director of
India Operations
Steven L. Kaczeus 62 Chief Technical Officer
Rick R. Brantmeyer 49 Senior Vice President, Sales and
Marketing
Jean D. Deleage 56 Director
Roger W. Johnson 62 Director
Lip-Bu Tan 36 Director
Jack Tramiel 68 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.
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
Administration and Chief Financial Officer of Scios Inc. from 1985 to 1995.
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. 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.
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.
35
<PAGE> 37
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 in Mechanical Engineering from the University
of Bridgeport and University of Budapest, Hungary, respectively.
MR. RICK R. BRANTMEYER joined JTS in July 1996 as Senior Vice President,
Sale and Marketing. Prior to joining JTS, Mr. Brantmeyer served as Senior Vice
President, Sales and Marketing of Maxtor from July 1995 to June 1996. From April
1991 to July 1995, Mr. Brantmeyer worked at Western Digital in several
capacities, including Vice President, Marketing, Vice President, Key Accounts
and Vice President, Retail Sales.
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 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.
MR. JACK TRAMIEL became a director of JTS in June 1996 when Atari merged
with JTS. Mr. Tramiel and a group of associates purchased Atari Corporation May
1984 and Mr. Tramiel served as Atari's Chairman of the Board of Directors until
June 1996. Mr. Tramiel served as Atari's Chief Executive Officer from May 1984
through May 1988.
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
The Board of Directors of JTS has an Audit Committee, a Compensation
Committee and a Non-Officer Stock Option Committee. The Audit Committee consists
of Messrs. Jack Tramiel and Roger W. Johnson. The Audit Committee makes
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of audits and other services provided by JTS'
independent auditors, and reviews and evaluates JTS' internal audit and control
functions.
JTS' Compensation Committee consists of Messrs. Jack Tramiel, Lip-Bu Tan
and Jean D. Deleage. The Compensation Committee makes recommendations concerning
salaries and incentive compensation, awards stock options to employees and
consultants under the Company's 1995 Stock Option Plan and otherwise determines
compensation levels and performs such other functions regarding compensation as
the Board may delegate.
JTS' Non-Officer Stock Option Committee consists of Mr. David T. Mitchell.
The Non-Officer Stock Option Committee administers the Company's 1995 Amended
and Restated Stock Option Plan, including the granting of any options under such
plan.
36
<PAGE> 38
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Board of Directors of 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. Mr.
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.
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 express terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Board) 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. 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 nor will such individual's be eligible to receive such grants
until the 1998 stockholders' meeting.
Outstanding options under the Directors' Plan 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 in 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.
37
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended January 28, 1996
and January 27, 1995, the compensation paid to or earned by JTS' Chief Executive
Officer and JTS' five other most highly compensated executive officers whose
total annual salary and bonuses exceeded $100,000 as of January 28, 1996
(together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL --------------------------
COMPENSATION RESTRICTED SECURITIES
--------------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#)
- --------------------------------------------- ----- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
David T. Mitchell(2)......................... 1996 $ 226,972 -- -- --
President and Chief Executive Officer 1995 139,081 -- -- --
Sirjang L. Tandon(3)......................... 1996 176,923 -- -- --
Chairman of the Board of Directors and 1995 161,538 -- -- --
Corporate Technical Strategist
Kenneth D. Wing(4)........................... 1996 199,835 -- -- 100,000
Executive Vice President, Research & 1995 103,790 -- -- --
Development Quality/Reliability
Amit Chokshi(5).............................. 1996 104,327 -- -- 200,000
Executive Vice President, Worldwide 1995 -- -- -- --
Operations and Managing Director of India
Operations
Steven L. Kaczeus............................ 1996 168,191 -- -- 242,500
Chief Technical Officer 1995 187,231 -- -- --
David B. Pearce(6)........................... 1996 206,192 -- -- 8,750
Former executive officer 1995 203,308 -- -- --
</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 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 lapses 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 lapsed with respect
to one-eighth of such shares on January 1996 and as to 1/48th of such shares
monthly thereafter. The Company has made a loan to Mr. Wing which is
forgivable over a 2-year period, of which $80,000 of loan principal and
accrued interest has been forgiven on January 1, 1996 and $80,000 of loan
principal and accrued interest will be forgiven on January 1, 1997. See
"Employment Agreement."
(5) Mr. Chokshi became Executive Vice President, Worldwide Operations and
Managing Director of India Operations of JTS in June 1995.
(6) Mr. Pearce served as the Company's Chief Executive Officer from inception to
March, 1996. Mr. Pearce purchased 450,000 shares of restricted 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 lapses with respect to 1/42nd of such shares monthly
commencing January 15, 1996. At the time of termination of Mr. Pearce's
employment with the Company in March 1996, an
38
<PAGE> 40
aggregate of 267,187 shares of his Common Stock had vested. JTS repurchased
the remaining 182,813 shares at the $0.25 per share purchase price.
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 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.
1995 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, 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 an consultants to JTS. As of October 31, 1996, options to
purchase 3,999,674 shares of JTS Common Stock had been granted under the 1995
Plan. The 1995 Plan will terminate in February 2006, unless sooner terminated by
the Board of Directors.
The 1995 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 Compensation Committee of the Board of Directors administers the
1995 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 Director, with authority to grant sock 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 1995 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 1995 Plan is ten years. Options granted under the 1995 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 up to 18 months after his or her death.
The exercise price of incentive stock options granted under the 1995 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 1995
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 1995 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 an as to 1/48th of such shares each
month thereafter.
The 1995 Plan and options outstanding thereunder will be appropriates
adjusted as to the class and the maximum number of shares subject to the 1995
Plan and the class, number of shares and price pre share of stock subject to
such outstanding options in the event of stock splits, stock dividends,
recapitalizations and similar events. Under the 1995 Plan, the 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.
39
<PAGE> 41
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 FISCAL YEAR 1996
The following table contains information concerning the grant of stock
options under the 1995 Plan to each Named Executive Officer during fiscal 1996:
<TABLE>
<CAPTION>
POTENTIALLY
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
PERCENTAGE OF STOCK
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERMS(3)
OPTIONS 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 $39,750
Amit Chokshi 100,000 2.5 0.25 6/7/2005 15,750 39,750
100,000 2.5 0.25 11/29/2005 15,750 39,750
Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 38,194 96,394
David B. Pearce 8,750 0.2 0.25 6/7/2005 1,378 3,478
</TABLE>
- ---------------
(1) Under the 1995 Plan, options granted to employees vest at the rate of
one-eighth at the end of six months and an additional 1/48 per month until
all options have become vested at the end of four years' service. In the
event an option was granted to an existing employee of JTS (rather than a
newly-hired employee), such option shall vest at the rate described above
based on the grant date of such option.
(2) Based on total grants of options to purchase 3,999,674 shares of Common
Stock.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years), and is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annual for the entire term of the option and the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.
40
<PAGE> 42
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
January 28, 1996 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of January 28, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
YEAR-END(#)(1) YEAR-END($)(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON 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 -- -- 33,333/66,667(2 ) 0/0
22,916/71,084(3 ) 0/0
Steven L. Kaczeus -- -- 125,313/117,187 0/0
David B. Pearce -- -- 8,750/0 0/0
</TABLE>
- ---------------
(1) Fair market value of 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.
(2) Options granted to Amit Chokshi on June 7, 1995.
(3) Options granted to Amit Chokshi on November 29, 1995.
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. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
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.
41
<PAGE> 43
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 both Tantec and Maazda and owned a controlling interest in Moduler
Electronics prior to JTS' acquisition of a 90% interest in Moduler. 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 $1.00 per share in exchange for
cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred
Stock in the First Series A Financing included the following:
<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<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
Steven L. Kaczeus(3)................... 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 is a Managing General Partner of three funds affiliated with
Sofinnova Management, L.P. ("Sofinnova").
(3) 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.
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
42
<PAGE> 44
Series A Financing for a purchase price of $1.00 per share in exchange for cash
and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the
Second Series A Financing included the following:
<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<S> <C> <C> <C>
Entities affiliated with the Walden
Group of Venture Capital Funds(1).... 3,000,000 $3,000,000 --
Entities affiliated with Burr Egan..... 1,437,500 437,500 1,000,000
David T. Mitchell(2)................... 1,010,196 -- 1,010,196
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.
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 -- Initial Efforts to Achieve Market Acceptance of
Hard Disk Drive Products."
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.
From January 1996 to April 1996, JTS received an aggregate of approximately
$2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"),
from certain significant stockholders of JTS. The Bridge Notes accrued interest
at a rate of 10% per annum and were canceled after principal and accrued
43
<PAGE> 45
interest were paid in full in July 1996. Individuals and entities to whom Bridge
Notes were issued included the following:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
STOCKHOLDER(S) BRIDGE NOTE ($)
---------------------------------------------------- -------------------
<S> <C>
Tantec.............................................. $ 1,000,000
Entities affiliated with Burr Egan.................. 260,000
Entities affiliated with the Walden Group of Venture
Capital Funds..................................... 200,000
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 (which
converted into Common Stock on a one-for-one basis upon the closing of the
Merger) 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. JTS
has a right of first refusal to purchase the remaining 10% equity interest in
Moduler Electronics, owned by a family member of Sirjang Lal Tandon, at 10% of
the net book value of Moduler Electronics at the time of the purchase.
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 Moduler Electronics furnished by certain Indian
banks. See Notes 4 and 5 to the Financial Statements to the Hard Disk Drive
Division of Moduler Electronics (India) Private Ltd.
In September 1996, JTS and Jack Tramiel, a director of the Company, entered
into an Agreement for Purchase and Sale of Real Property with Repurchase Option
and related documents, pursuant to which JTS sold to Mr. Tramiel certain
properties in Texas and Southern California in exchange for $10,000,000. The
properties had been acquired by the Company in connection with its merger with
Atari in July 1996. Mr. Tramiel was a director of Atari prior to the Merger. The
property was sold at fair value and the Company has an option to repurchase the
property one year from the date of sale for $10,000,000.
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.
44
<PAGE> 46
PRINCIPAL STOCKHOLDERS AND SELLING SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1996 (unless otherwise
noted) held by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director and
Named Executive Officer of the Company, (iii) the Selling Security Holders and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated below, to the knowledge of the Company, all persons listed
below have sole voting and investment power with respect to their shares of
Common Stock, except to the extent authority is shared by spouses under
applicable law. None of the Selling Security Holders is currently an affiliate
of the Company or has had a material relationship with the Company during the
last three years. Except as otherwise provided below, the address of each person
listed below is c/o the Company, 166 Baypointe Parkway, San Jose, California
95134.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING
--------------------------- ---------------------------
NUMBER(1)(2) PERCENT(3) NUMBER(1)(2) PERCENT(3)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
SELLING SECURITY HOLDERS:
GFL Advantage Fund Limited................ 3,806,227(4) 3.6% 0 0
Genesee Fund Limited -- Portfolio B....... 761,245(4) * 0 0
Wharton Capital Corporation............... 37,500(5) * 0 0
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS:
Jack Tramiel(6)........................... 12,490,616 11.9% 12,490,616 11.9%
TimeWarner................................ 8,670,000 8.3% 8,670,000 8.3%
Warner Communications, Inc.
75 Rockefeller Plaza
New York, NY 10019
Sirjang L. Tandon(7)...................... 7,761,673 7.4% 7,761,673 7.4%
David T. Mitchell(8)...................... 4,010,196 3.8% 4,010,196 3.8%
Jean D. Deleage(9)........................ 3,937,500 3.8% 3,937,500 3.7%
Lip-Bu Tan(10)............................ 2,800,000 2.7% 2,800,000 2.7%
Leonard Tramiel(11)....................... 5,213,946 4.9% 5,213,946 4.9%
Steven L. Kaczeus(12)..................... 417,386 * 417,386 *
Kenneth D. Wing(13)....................... 302,083 * 302,083 *
David B. Pearce........................... 260,000 * 260,000 *
Amit Chokshi(14).......................... 29,166 * 29,166 *
Roger W. Johnson.......................... -- * -- *
All current directors and executive
officers as a group (11 persons)(15).... 32,163,098 30.7% 32,163,098 30.7%
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(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 Common Stock shown as
beneficially owned by them.
(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 104,732,381 shares of Common Stock outstanding as of October 31,
1996.
(4) Beneficial ownership is shown as of November 5, 1996. Beneficial ownership
is based upon: (i) conversion of all of the Series B Preferred Stock at
$3.6125 per share of Common Stock (which price is equal to the average
closing bid price for the five days preceding the Series B Closing); and
45
<PAGE> 47
(ii) exercise of all of the Investor Warrants issuable upon conversion of
the Series B Preferred Stock at $3.6125 per share of Common Stock. The sale
and issuance of the Series B Preferred Stock occurred on November 5, 1996.
See "Description of Capital Stock." The Certificate of Designations
provides that GFL Advantage Fund Limited and Genesee Fund Limited-Portfolio
B may not convert the Preferred Stock at any time to acquire a number of
shares of Common Stock in excess of that number which would result in
beneficial ownership of more than 4.9% of the Company's outstanding Common
Stock at any time.
(5) Beneficial ownership is shown as of November 5, 1996 and consists of 37,500
shares of Common Stock issuable upon exercise of the Finder's Warrants,
which are immediately exercisable. The Finder's Warrants were issued on
November 5, 1996.
(6) Includes 11,597,315 shares held by Mr. 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
issuable pursuant to options exercisable within 60 days of October 31,
1996.
(7) Includes 2,411,673 shares of Common Stock held by Lunenburg S.A. Sirjang L.
Tandon, a director of JTS, may have shared voting power over the shares
held by Lunenberg S.A. Also includes 4,350,000 shares of Common Stock held
by the Tandon Family Partnership, of which Mr. Tandon is a general partner.
Mr. Tandon disclaims beneficial ownership of the shares held by Lunenberg
S.A. and the Tandon Family Partnership except to the extent of his
proportionate partnership and shareholder interests therein.
(8) Consists of 4,010,196 shares held by Mr. Mitchell and Jintamai K. Mitchell
as trustees of the Mitchell 1990 Rev. Trust UTA 3390, as amended.
(9) Includes 3,896,550 shares and 40,950 shares of Common Stock held by Alta V
Limited Partnership and Customs House Partners, respectively. Jean D.
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. Mr.
Deleage disclaims beneficial ownership of such shares except to the extent
of his proportionate partnership interests therein.
(10) Includes 700,000, 600,000, 500,000, 300,000, 200,000, 200,000, 200,000 and
100,000 shares of Common 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.; 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. Mr. Tan disclaims
beneficial ownership of such shares except to the extent of his
proportionate partnership interests in such entities.
(11) Includes 55,000 shares issuable pursuant to options exercisable within 60
days of October 31, 1996, and 40,000 shares held of record by Mr. Tramiel's
wife, Preeva Tramiel. Of the remaining 5,158,946 shares of Common Stock,
4,000,000 shares are pledged as collateral under a loan agreement with Mr.
Tramiel's father, Jack Tramiel, a director of the Company.
(12) Includes 156,875 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(13) Includes 166,666 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(14) Includes 29,166 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(15) Includes 32,184,767 shares of Common Stock held by executive officers,
directors and entities affiliated with certain directors and includes
options to purchase 179,166 shares of Common Stock held by executive
officers that are exercisable within 60 days of October 31, 1996. See
footnotes (6), (7), (8), (9), (10), (12), (13) and (14).
46
<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, 9,985,000 shares of undesignated, "blank check" preferred
stock, $.001 par value per share, and 15,000 shares of Series B Preferred Stock.
The following summary of certain provisions of the capital stock of the
Company does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Certificate of Incorporation and
Bylaws which are included as exhibits to the Registration Statement of which
this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of October 31, 1996, there were outstanding 104,732,381 shares of Common
Stock held of record by approximately 2,499 stockholders, options to purchase
5,034,853 shares of Common Stock, and warrants to purchase 300,000 shares of
Common Stock. Upon the completion of this offering, assuming full conversion of
the Series B Preferred Stock, full exercise of the Warrants, payment of the
Series B Dividends in Common Stock, and certain anti-dilution adjustments to the
Series B Preferred Stock conversion ratio and assuming no exercise of
outstanding stock options or outstanding warrants after October 31, 1996, the
Company will have 114,732,381 shares of Common Stock outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. However, the Subscription Agreements restrict the
payment of dividends with respect to capital stock of the Company that is junior
to the Series B Preferred Stock, including the Common Stock. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the payment of the liquidation preference of the Series B
Preferred Stock and any other series of preferred stock that the Company may
designate and issue in the future. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of Series B Preferred
Stock and any other series of preferred stock that the Company may designate and
issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 9,985,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any such series. The issuance of preferred stock could adversely
affect the rights and powers, including voting rights, of holders of Common
Stock and the availability of earnings and assets for dividends, other
distributions and payments upon liquidation to the holders of Common Stock. The
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of the Company. In certain circumstances, such
issuances could have the effect of decreasing the market price of the Common
Stock.
Of the 10,000,000 shares of preferred stock authorized for issuance by the
Company, 15,000 shares have been designated as Series B Preferred Stock, all of
which are outstanding. The holders of Series B Preferred Stock have the right to
convert all or a portion of the Series B Preferred Stock into units consisting
of Common Stock and Investor Warrants at the earlier of the date of
effectiveness of this Registration Statement or eighty days after the issuance
and sale of the Series B Preferred Stock (the "Series B Closing"). The Series B
Preferred Stock, together with any accrued and unpaid dividends, may be
converted into Common Stock at a conversion price (the "Initial Conversion
Price") equal to the lower of (i) 85% of the average
47
<PAGE> 49
lowest trading price for the five days immediately preceding the conversion
notice date; or (ii) 100% of the average closing bid price for the five days
preceding the Series B Closing. In addition, for every 10 shares of Common Stock
issued upon conversion of the Series B Preferred Stock, the holder thereof shall
be entitled to receive an Investor Warrant to purchase one share of Common
Stock. See "Warrants". The Series B Preferred Stock is convertible at the option
of the Company at any time after three years from the date of the Series B
Closing.
The Initial Conversion Price of the Series B Preferred Stock is subject to
proportional adjustment for stock splits, stock dividends, recapitalizations and
the like. The Initial Conversion Price is subject to further adjustment in the
event that (i) the Registration Statement is not declared effective within 80
days of the Series B Closing, (ii) the Registration Statement ceases to remain
effective for a specified period, or (iii) the conversion rights of the holders
of the Series B Preferred Stock are suspended for any reason.
The Series B Preferred Stock, together with any accrued and unpaid
dividends, may be redeemed by the Company in whole or in part at any time after
six months following the Series B Closing at a price equal to the market value
of the Common Stock, assuming conversion of the Series B Preferred Stock at the
then prevailing conversion price at the time of redemption.
The holders of the Series B Preferred Stock may cause the Company to
repurchase all or any portion of the holders' Series B Preferred Stock upon the
occurrence of certain events, including the absence of closing bid prices for
the Common Stock for ten consecutive trading days, the failure of the Common
Stock to be listed for trading on AMEX, the New York Stock Exchange or the
Nasdaq National Market, the Company's default in the performance of any material
obligations under the transaction documents relating to the sale of Series B
Preferred Stock, the inability of the holders of Series B Preferred Stock to use
this Registration Statement for a period of 30 or more days after it is declared
effective, and any merger of the Company in which stockholders of the Company do
not hold at least 51% of the stock of the surviving company or in which the
stock of the surviving company is not listed for trading on AMEX, the New York
Stock Exchange or Nasdaq National Market. Such repurchase will be for cash at
the market value of the Common Stock into which the Series B Preferred Stock
could be converted at the time of repurchase, plus accrued dividends and
interest.
WARRANTS
Investor Warrants
The holders of Series B Preferred Stock have the right to convert all or a
portion of the Series B Preferred Stock into units consisting of Common Stock
and Investor Warrants. For every 10 shares of Common Stock issued upon
conversion of the Series B Preferred Stock, the holder thereof shall be entitled
to receive an Investor Warrant to purchase one share of Common Stock. Each
Investor Warrant is exercisable for one share of Common Stock at 110% of the
lower of the average closing bid price of the Company's Common Stock for the
five days immediately preceding (i) the conversion notice date or (ii) the
Series B Closing. The Investor Warrants are exercisable in full or in part at
any time or from time to time for up to three years after the issuance date of
the Investor Warrants. The exercise price of the Investor Warrants is subject to
adjustment under certain circumstances, including dividends, stock splits,
reorganizations, reclassification, and consolidations. The holders may elect to
exercise the Investor Warrants, in whole or in part by receiving shares of
Common Stock equal to the net issuance value upon surrender of the Investor
Warrants.
Finder's Warrants
In connection with the issuance of Series B Preferred Stock to GFL
Advantage Fund Limited and Genesee Fund Limited -- Portfolio B in a November
1996 private placement, the Company issued 37,500 Finder's Warrants to Wharton
Capital Corporation in consideration for financial consulting services furnished
to the Company. Each Finder's Warrant is exercisable for one share of Common
Stock at $4.2625 per share, which price is equal to 110% of the closing price of
the Company's Common Stock on the issuance date of the Finder's Warrants. The
Finder's Warrants are exercisable in full or in part at any time or from time to
time through November 5, 1999. The exercise price of the Finder's Warrants is
subject to adjustment under certain
48
<PAGE> 50
circumstances, including dividends, stock splits, reorganizations,
reclassifications and consolidations. The holders of the Finder's Warrants may
elect to exercise the Finder's Warrants in whole or in part by receiving shares
of Common Stock equal to the net issuance value upon surrender of the Finder's
Warrants.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated February 3, 1995, by and
among the Company and the undersigned holders of Common Stock, as amended (the
"Registration Rights Agreement"), the holders of 30,500,000 shares of Common
Stock are entitled to certain rights with respect to the registration of the
Common Stock under the Securities Act. Under the terms of the Registration
Rights Agreement, the Company is obligated to register the shares of Common
Stock held by such holders under the Securities Act upon the request of the
holders and the satisfaction of certain conditions, including a proposed
aggregate offering price of at least $500,000. Furthermore, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or the account of any holder of securities of the Company, the
holders are entitled to written notice of such registration and are entitled to
include, at the Company's expense, such shares of their Common Stock in such
registration, provided, among other conditions, that the underwriters of any
such offering have the right to limit the number of shares included in such
registration. All fees, costs and expenses of such registrations (other than
underwriting discounts and commissions and legal expenses of such holders) will
be borne by the Company.
In addition, pursuant to registration rights agreements between the Company
and certain of the Selling Security Holders, such holders are entitled to
certain registration rights with respect to the Common Stock issuable upon
conversion of their shares of Series B Preferred Stock and upon exercise of
their Warrants under the Securities Act. Such registration rights will only
become available to the Selling Security Holders if the Company fails to
maintain the effectiveness of this Registration Statement as required by the
registration rights agreements.
DELAWARE TAKEOVER STATUTE AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the 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 (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.
49
<PAGE> 51
The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called meeting and may not be effected by
written consent. In addition, the Company's Certificate of Incorporation and
Bylaws 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 are 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 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 Company. These provisions are designed to
reduce the vulnerability of the 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 Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing change in the management of the Company. See
"Risk Factors -- Control by Affiliates; Anti-takeover Effects."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation contains certain provisions
permitted under Delaware Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Company's Certificate of Incorporation also contains provisions indemnifying
the directors and officers of the Company to the fullest extent permitted by
Delaware General Corporation Law. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors.
TRANSFER AGENT
The transfer agent for the Common Stock of the Company is Registrar and
Transfer Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. As of October 31, 1996, the Company
had approximately 104,732,381 shares of Common Stock outstanding. In February
and August 1997, approximately 16,200,000 shares and 12,500,000 shares of 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 period
from the dates such shares were issued. The holders of approximately 30,500,000
shares of Common Stock are entitled to certain rights with respect to
registration of such shares under the Securities Act. JTS has registered for
sale on a Form S-8 Registration Statement under the Securities Act an aggregate
of 8,985,000 shares of Common Stock reserved for issuance under JTS' Amended and
Restated 1995 Stock Option Plan, 500,000 shares of Common Stock reserved for
issuance under JTS' 1996 Non-Employee Directors' Stock Option Plan, and 900,000
shares of Common Stock reserved for issuance pursuant to the exercise of options
granted under Atari's 1986 Stock Option Plan which were assumed by JTS in the
Merger.
50
<PAGE> 52
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Security Holders that they
intend to sell all or a portion of the shares of Common Stock offered hereby
from time to time on AMEX, in privately negotiated transactions or otherwise and
that sales will be made at fixed prices that may be changed, at market prices
prevailing at the times of such sales, at prices related to such market prices
or at negotiated prices. The Selling Security Holders may also make private
sales directly or through a broker or brokers, who may act as agent or as
principal. In connection with any sales, the Selling Security Holders and any
brokers participating in such sales may be deemed to be underwriters within the
meaning of the Securities Act. The Company will receive no part of the proceeds
of sales made hereunder.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Security Holders (and, if they act as agent for the
purchaser of such shares of Common Stock, from such purchaser). Brokerage fees
may be paid by the Selling Security Holders, which may be in excess of usual and
customary brokerage fees. Broker-dealers may agree with the Selling Security
Holders to sell a specified number of shares of Common Stock at a stipulated
price, and, to the extent such a broker-dealer is unable to do so acting as
agent for the Selling Security Holders, to purchase as principal any unsold
shares at the price required to fulfill the broker-dealer's commitment to the
Selling Security Holders. Broker-dealers who acquire shares of Common Stock as
principal may thereafter resell such shares from time to time in transactions
(which may involve crosses and block transactions and which may involve sales to
and through other broker-dealers, including transactions of the nature described
above) on AMEX in privately negotiated transactions or otherwise at fixed prices
that may be changed, at market prices prevailing at the time of sale, at prices
related to such market prices or at negotiated prices, and in connection with
such resales may pay to or receive from the purchasers of such shares
commissions computed as described above.
The Company and certain of the Selling Security Holders have each agreed to
indemnify the other against certain liabilities, including certain liabilities
under the Securities Act.
Any shares of Common Stock covered by this Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under that Rule
rather than pursuant to this Prospectus.
There can be no assurance that any of the Selling Security Holders will
sell any or all of the shares of Common Stock offered by them hereunder.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of Atari and its subsidiaries as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
have been included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of JTS and The Hard Disk Drive Division of Moduler
Electronics (India) Private Limited included in this 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.
51
<PAGE> 53
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are necessarily incomplete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. All material terms of the subject
matter relating to any such statements or contracts are set forth in this
Prospectus. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and
exhibits. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and copies of all or any part thereof may be obtained from
the Public Reference Branch of the Commission upon payment of certain fees
prescribed by the Commission.
The Company is subject to the informational requirements of the Exchange
Act of 1934, as amended, and, in accordance therewith, files annual and
quarterly reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information may be inspected and copied
at the public reference facilities maintained by the Commission at the address
set forth above, and at the regional offices maintained by the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained at prescribed rates from the public reference facilities of the
Commission at the address noted above. The Common Stock of the Company is traded
on AMEX. Reports, proxy statements and other information concerning the Company
may be inspected at AMEX, at 86 Trinity Place, New York, NY 10006-1881.
52
<PAGE> 54
ATARI CORPORATION, JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JTS CORPORATION
Report of Arthur Andersen LLP......................................................... F-2
Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-3
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-4
Statements of Stockholders' Deficit from inception (February 3, 1994) to
January 28, 1996.................................................................... F-5
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-6
Notes to Financial Statements......................................................... F-7
Unaudited Condensed Consolidated Balance Sheets as of July 28, 1996 and January 28,
1996................................................................................ F-16
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended
July 28, 1996 and July 30, 1995..................................................... F-17
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 28, 1996
and July 30, 1995................................................................... F-18
Unaudited Notes to Consolidated Financial Statements.................................. F-19
THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
Report of Arthur Andersen LLP......................................................... F-20
Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-21
Statement of Revenues and Expenses for the period from February 1, 1995 to January 28,
1996................................................................................ F-22
Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-23
Notes to Financial Statements......................................................... F-24
ATARI CORPORATION
Report of Deloitte & Touche LLP....................................................... F-38
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-39
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and
1993................................................................................ F-40
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1994, and 1993...................................................................... F-41
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-42
Notes to Consolidated Financial Statements............................................ F-43
Unaudited Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995....... F-51
Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 1996
and June 30, 1995................................................................... F-52
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996
and June 30, 1995................................................................... F-53
Unaudited Notes to Consolidated Financial Statements.................................. F-54
ATARI CORPORATION AND JTS CORPORATION
Unaudited Pro Forma Condensed Combined Financial Statements........................... F-55
Unaudited Pro Forma Condensed Combined Balance Sheets................................. F-56
Unaudited Pro Forma Condensed Combined Statements of Operations....................... F-57
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.................. F-59
</TABLE>
F-1
<PAGE> 55
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-2
<PAGE> 56
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-3
<PAGE> 57
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-4
<PAGE> 58
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-5
<PAGE> 59
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-6
<PAGE> 60
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-7
<PAGE> 61
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-8
<PAGE> 62
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-9
<PAGE> 63
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-10
<PAGE> 64
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-11
<PAGE> 65
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-12
<PAGE> 66
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-13
<PAGE> 67
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-14
<PAGE> 68
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-15
<PAGE> 69
JTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28,
1996
JULY 28, -----------
1996
---------
(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..................................................... 681 812
Inventories........................................................... 12,761 2,093
Prepaid and other current assets...................................... 911 240
------ ------
24,697 11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,830 7,943
GOODWILL.............................................................. 168 --
------ ------
TOTAL....................................................... $ 41,695 $ 19,813
====== ======
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
------ ------
75,882 27,116
------ ------
LONG-TERM OBLIGATIONS................................................. 8,426 3,485
------ ------
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,697
and 27,785 shares, respectively..................................... 29,697 27,785
------ ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
outstanding: 9,447 and 7,367 shares, respectively................... -- --
Additional paid-in capital............................................ 8,059 6,004
Deferred compensation................................................. (3,420) (4,320)
Notes receivable from stockholders.................................... (2,510) (623)
Accumulated deficit................................................... (74,439) (39,634)
------ ------
(72,310) (38,573)
------ ------
TOTAL....................................................... $ 41,695 $ 19,813
====== ======
</TABLE>
See accompanying notes.
F-16
<PAGE> 70
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
-------------- --------------
<S> <C> <C>
REVENUE:
Product sales................................................... $ 33,764 $ 48
Technology license revenue...................................... -- 3,829
-------------- --------------
33,764 3,877
-------------- --------------
COST AND EXPENSES:
Cost of sales................................................... 45,249 3,498
Research and development........................................ 14,091 3,887
Selling, general and administrative............................. 7,746 1,557
-------------- --------------
67,086 8,942
-------------- --------------
OPERATING LOSS (33,322) (5,065)
Interest income................................................... 153 --
Interest expense.................................................. (1,790) --
Other income (expense)............................................ 155 5
-------------- --------------
NET LOSS $(34,804) $ (5,060)
========== ==========
NET LOSS PER COMMON SHARE......................................... $ (3.69) $ (1.16)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 9,434 4,360
========== ==========
See accompanying notes.
</TABLE>
F-17
<PAGE> 71
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 28, 1996 JULY 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations........................................ $ (32,356) $ (7,045)
-------- --------
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.
F-18
<PAGE> 72
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............................................... $(34,923) $(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......................................... 1,984 --
------- ------
$ 12,761 $ 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.
F-19
<PAGE> 73
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.
Arthur Andersen, LLP
San Jose, California
April 4, 1996
F-20
<PAGE> 74
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-21
<PAGE> 75
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-22
<PAGE> 76
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-23
<PAGE> 77
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-24
<PAGE> 78
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-25
<PAGE> 79
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-26
<PAGE> 80
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-27
<PAGE> 81
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-28
<PAGE> 82
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-29
<PAGE> 83
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-30
<PAGE> 84
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-31
<PAGE> 85
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-32
<PAGE> 86
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-33
<PAGE> 87
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-34
<PAGE> 88
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-35
<PAGE> 89
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
See notes to consolidated financial statements.
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
F-36
<PAGE> 90
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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-37
<PAGE> 91
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-38
<PAGE> 92
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-39
<PAGE> 93
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-40
<PAGE> 94
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-41
<PAGE> 95
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-42
<PAGE> 96
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-43
<PAGE> 97
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-44
<PAGE> 98
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-45
<PAGE> 99
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-46
<PAGE> 100
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-47
<PAGE> 101
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-48
<PAGE> 102
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-49
<PAGE> 103
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-50
<PAGE> 104
ATARI CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $700 held as restricted balances at
December 31, 1995)............................................... $ 21,195 $ 28,941
Marketable securities............................................... -- 21,649
Accounts receivable (less allowances for returns and doubtful
accounts:
June 30, 1996 $3,995; December 31, 1995 $4,221).................. 648 2,468
Inventories (See Note 2)............................................ 4,598 10,934
Subordinated secured convertible note with JT Storage, Inc.
(See Note 4)..................................................... 25,000 --
Other current assets................................................ 1,221 1,134
--------- ---------
Total current assets........................................ 52,662 65,126
GAME SOFTWARE DEVELOPMENT COSTS -- Net................................ 901 758
EQUIPMENT AND TOOLING -- Net.......................................... 406 671
REAL ESTATE HELD FOR SALE............................................. 10,445 10,468
OTHER ASSETS.......................................................... 501 546
--------- ---------
TOTAL................................................................. $ 64,915 $ 77,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 2,623 $ 4,954
Accrued liabilities................................................. 3,180 5,088
--------- ---------
TOTAL CURRENT LIABILITIES............................................. 5,803 10,042
--------- ---------
LONG-TERM OBLIGATIONS................................................. 42,354 42,354
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -- authorized, 10,000,000 shares;
none outstanding................................................. -- --
Common stock, $.01 par value -- authorized, 100,000,000 shares;
(outstanding: June 1996, 63,854,718;
December 1995, 63,687,118)....................................... 639 637
Additional paid-in capital.......................................... 196,704 196,209
Unrealized gain on marketable securities............................ -- 7,088
Accumulated translation adjustments................................. (770) (663)
Accumulated deficit................................................. (179,815) (178,098)
--------- ---------
Total shareholders' equity....................................... 16,758 25,173
--------- ---------
TOTAL....................................................... $ 64,915 $ 77,569
========= =========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE> 105
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 30, 1996 AND JUNE 30, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JUNE 30, JUNE 30,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
NET REVENUE............................................................ $ 2,312 $ 7,762
COST AND EXPENSES:
Cost of revenues..................................................... 7,142 5,689
Research and development............................................. 307 3,574
Marketing and distribution........................................... 976 5,157
General and administrative........................................... 1,912 3,390
------- -------
Total operating expenses..................................... 10,337 17,810
------- -------
OPERATING LOSS......................................................... (8,025) (10,048)
Other income(expense), net............................................. 6,783 1,000
Interest income........................................................ 663 1,806
Interest expense....................................................... (1,138) (1,171)
------- -------
NET LOSS............................................................... $(1,717) $(8,413)
======= =======
LOSS PER COMMON SHARE:................................................. $ (0.03) $ (0.13)
======= =======
Number of shares used in computations................................ 63,770 63,643
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE> 106
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 30, JUNE 30,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used by operations.............................................. $ (4,027) $ (20,171)
-------- --------
INVESTING ACTIVITIES:
Sale of marketable securities............................................ 20,908 51,916
Proceeds from property sales............................................. 33 --
Property purchases....................................................... -- (204)
Borrowing by JTS......................................................... (25,000) --
Stock dividend received on investment.................................... -- 82
Decrease in other assets................................................. 68 189
Increase in software development costs................................... (143) (4,298)
-------- --------
Net cash provided (used) by investing activities......................... (4,134) 47,685
-------- --------
FINANCING ACTIVITIES:
Extinguishment of debt................................................... (75) (53)
Issuance of common stock................................................. 497 46
-------- --------
Net cash provided (used) by financing activities......................... 422 (7)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH & EQUIVALENTS..................................................... (7) 58
-------- --------
NET DECREASE IN CASH & EQUIVALENTS....................................... (7,746) 27,565
CASH & EQUIVALENTS:
Beginning of period...................................................... 28,941 22,592
-------- --------
End of period............................................................ $ 21,195 $ 50,157
======== ========
NON CASH INVESTING ACTIVITIES:
Unrealized gain on marketable securities................................. $ -- $ 2,294
</TABLE>
F-53
<PAGE> 107
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 second quarter of 1996 and 1995 were June 30, and July 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>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Finished goods....................................... $ 4,300 $ 9,927
Raw materials and work-in-process.................... 298 1,007
------ -------
Total...................................... $ 4,598 $ 10,934
====== =======
</TABLE>
NOTE 3. REPURCHASE OF 5 1/4% SUBORDINATED CONVERTIBLE DEBENTURES
In the first six months 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 a credit of $47,250.
NOTE 4. MERGER 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
was consummated in the third quarter of 1996. In connection with the merger, the
Company extended a bridge loan to JTS in the amount of $25.0 million with a
stated interest rate of 8 1/2% per annum.
F-54
<PAGE> 108
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 $112.5 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, the
value of the assumed JTS options and warrants of $11.1 million and the direct
transaction costs of $1.4 million. 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 Company allocated $133.6
million to purchased technology, $110.0 million of which represented in-process
research and development. The $110.0 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 for the
year ended December 31, 1995 give effect to the 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 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 $110.0 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, and JTS.
F-55
<PAGE> 109
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ATARI JTS
JUNE 30, JULY 28, PRO FORMA PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.......................... $ 21,195 $ 684 (5,000)(k) $ 16,879
Accounts receivable........................... 648 9,660 10,308
Other receivables............................. -- 681 681
Inventories................................... 4,598 12,761 17,359
Subordinated secured convertible note......... 25,000 -- (25,000)(k) --
Other current assets.......................... 1,221 911 (1,405)(i) 727
--------- -------- ---------
Total current assets....................... 52,662 24,697 45,954
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) 17,955
17,955(d)
--------- -------- ---------
TOTAL...................................... $ 64,915 $ 41,695 $ 120,304
========= ======== =========
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 11,589
Current portion of long-term obligations...... -- 1,723 1,723
--------- -------- ---------
Total current liabilities.................. 5,803 75,882 51,685
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 7,934 103,159(a,c) 307,797
Deferred compensation......................... -- (3,420) 3,420(c) --
Common stock warrants......................... -- 125 1,985(b) 2,110
Notes receivable from sale of common stock.... -- (2,510) (2,510)
Accumulated translation adjustments........... (770) (770)
Accumulated deficit........................... (179,815) (74,439) 74,439(c) (289,827)
(110,012)(e)
--------- -------- ---------
Total shareholders' equity (deficit)....... 16,758 (72,310) 17,839
--------- -------- ---------
TOTAL................................. $ 64,915 $ 41,695 $ 120,304
========= ======== =========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-56
<PAGE> 110
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT 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
write- 3,924(f)
downs........................... 7,142 45,249 628(h) 56,943
Research and development........... 307 14,091 14,398
Sales, marketing, general and
administrative.................. 2,888 7,746 1,247(g) 11,881
-------- -------- --------
Total operating expenses........ 10,337 67,086 83,222
OPERATING LOSS....................... (8,025) (33,322) (47,146)
Gain on sale of marketable
securities...................... 6,347 -- (6,347)(1) --
Other income, net.................. 436 155 591
Interest income.................... 663 153 (452)(k) 364
Interest expense................... (1,138) (1,790) 452(k) (2,476)
-------- -------- --------
Loss before income taxes........ (1,717) (34,804) (48,667)
Income tax credit.................... -- -- --
-------- -------- --------
NET LOSS............................. $ (1,717) $ (34,804) $ (48,667)
======== ======== ========
LOSS PER COMMON SHARE................ $ (0.03) $ (3.69) $ (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.
F-57
<PAGE> 111
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 2,494(g) 26,918
-------- -------- --------
Total operating expenses............ 68,291 52,778 132,667
OPERATING LOSS........................... (53,665) (34,001) (99,264)
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) (96,926)
Income tax credit........................ -- -- --
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) $ (96,926)
======== ======== ========
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) (0.93)
Number of shares used in computation..... 63,697 4,611 (j) 103,697
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-58
<PAGE> 112
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....................................... 1,405,048
------------
TOTAL..................................................... $ 112,498,048
============
</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 allocated as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 24,696,763
Equipment and tooling.......................................... 20,599,675
In-process technology.......................................... 110,011,856
Existing technology............................................ 23,541,619
Liabilities assumed............................................ (84,307,614)
Goodwill....................................................... 17,955,749
------------
TOTAL..................................................... $112,498,048
============
</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 allocation 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 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.
F-59
<PAGE> 113
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 an allocation of the fair value of those assets. Such allocation
assigned $110.0 million to purchased in-process research and development. The
$110.0 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 recorded a one-time expense charge of
approximately $3.4 million of deferred compensation which it is currently
amortizing. Such expense has not been recorded in the accompanying pro forma
financial statements.
F-60
<PAGE> 114
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 6
Use of Proceeds........................ 14
Dividend Policy........................ 14
Capitalization......................... 15
Price Range of Common Stock............ 16
Selected Pro Forma Financial Data...... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 24
Management............................. 35
Certain Transactions................... 42
Principal Stockholders and Selling
Security Holders..................... 45
Description of Capital Stock........... 47
Shares Eligible for Future Sale........ 50
Plan of Distribution................... 51
Legal Matters.......................... 51
Experts................................ 51
Additional Information................. 52
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,037,500 SHARES
[JTS CORPORATION LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
DECEMBER , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee and the AMEX application fee.
<TABLE>
<S> <C>
Registration fee................................................... $10,456
AMEX application fee............................................... 17,500
Blue sky qualification fee and expenses............................ 0
Printing and engraving expenses.................................... 30,000
Legal fees and expenses............................................ 25,000
Accounting fees and expenses....................................... 10,000
Transfer agent and registrar fees.................................. 0
Miscellaneous...................................................... 0
-------
Total.................................................... $92,956
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under Securities Act.
The Registrant's Bylaws 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 are entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also 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 provides 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 does 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 is 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 does 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's incorporation in February 1994, the Company has sold
and issued the following unregistered securities:
(1) In February 1994, the Company issued 1,000 shares of Common Stock
at a price of $.01 per share for an aggregate price of $10.00 to the Tandon
Family Partnership, of which Sirjang L. Tandon is the General Partner.
II-1
<PAGE> 116
(2) In February 1994, the Company issued 111 shares of Common Stock to
TEAC Corporation ("TEAC") in exchange for certain assets and licensing
royalty rights pursuant to a corporate partnering agreement. In February
1995, the Board of Directors approved a 4350-for-1 Common Stock Split.
(3) From February 1995 to August 1995, the Company issued 17,696,370
shares of Series A Preferred Stock at a price of $1.00 per share
convertible into 17,696,370 shares of Common Stock to fifty eight (58)
accredited investors for cash in the aggregate amount of $17,696,370. All
of the Company's outstanding shares of Series A Preferred Stock converted
into Common Stock on a one-for-one basis upon the closing of the Company's
merger with Atari in July 1996.
(4) In January 1996, the Company made loans to each of David T.
Mitchell, Kenneth D. Wing, Virginia Walker and David B. Pearce, all of whom
are current or former executive officers of the Company, in connection with
the purchase by such individuals of 2,000,000 shares, 300,000 shares,
250,000 shares and 450,000 shares of Common Stock, respectively, at a
purchase price of $0.25 per share and for an aggregate offering price of
$750,000 pursuant to the terms of restricted stock purchase agreements.
(5) In April 1996, the Company acquired Moduler Electronics in
exchange for issuing 1,911,673 shares of Series A Preferred Stock and a
warrant to purchase 750,000 shares of Common Stock at a exercise price of
$0.25 per share to Lunenberg S.A., an affiliate of Sirjang L. Tandon. Such
Warrant has been exercised 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 $29,000,000.
(6) On October 31, 1996, the Company issued 15,000 shares of Series B
Preferred Stock at a purchase price of $1,000.00 per share to Genesee Fund
Limited-Portfolio B and GFL Advantage Fund Limited for an aggregate
offering price of $15,000,000. The Series B Preferred Stock is convertible
into units consisting of Common Stock and Investor Warrants. The Series B
Preferred Stock, together with any accrued and unpaid dividends, may be
converted into Common Stock at a conversion price equal to the lower of (i)
85% of the average lowest trading price for the five days preceding the
conversion notice date or (ii) 100% of the average closing bid price for
the five days preceding the Series B Closing. In addition, for every 10
shares of Common Stock issued upon conversion of the Series B Preferred
Stock, the holder thereof shall be entitled to receive one Investor
Warrant. The Investor Warrants are exercisable at a purchase price per
share of the lower of 110% of (i) the arithmetic average of closing prices
for five consecutive trading days used to compute conversion of shares of
Series B Preferred Stock in respect of the issuance of the particular
Investor Warrant and (iii) $3.6125, subject to adjustment. In connection
with the issuance of Series B Preferred Stock to GFL Advantage Fund Limited
and Genesee Fund Limited -- Portfolio B, the Company issued 37,500 Finder's
Warrants to Wharton Capital Corporation in consideration for financial
consulting services furnished to the Company. See "Description of Capital
Stock -- Series B Preferred Stock -- Warrants."
The sale and issuances of securities in the transactions described in
paragraphs (1), (2), (3), (5) and (6) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) and/or
Regulation D promulgated under the Securities Act. The sale and issuance of
securities in the transactions described in paragraph (4) were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated under the Securities Act. Appropriate legends are affixed to the
stock certificates and/or warrants issued in such transactions.
II-2
<PAGE> 117
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------------------------------------------------------------
<S> <C> <C>
3.1* -- Amended and Restated Certificate of Incorporation, as amended
3.2* -- Amended and Restated Bylaws of JTS Corporation
4.1* -- Form of Specimen Common Stock Certificate of JTS Corporation
4.2* -- Registration Rights Agreement, dated February 3, 1995, as amended by and
between the holders of Series A Preferred Stock and the Company
4.3 -- Certificate of Designations of Series B Preferred Stock, dated November 5,
1996
4.4 -- Registration Rights Amendment, dated November 5, 1996 by and between the
holders of Series B Preferred Stock and the Company
5.1 -- Opinion of Cooley Godward LLP as to legality of securities being registered
10.1* -- Amended and Restated 1995 Stock Option Plan and forms of stock option
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
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
</TABLE>
II-3
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------------------------------------------------------------
<S> <C> <C>
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* -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987
10.31* -- Federated Group/Security Pacific National Bank Indenture, dated April 15,
1985
10.32* -- First Supplemental Federated Group/Security Pacific National Bank Indenture,
dated September 24, 1987
10.33* -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18,
1995, issued to Silicon Valley Bank
10.34* -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4,
1996, issued to Lunenburg S.A.
10.35 -- Agreement for Purchase and Sale of Real Property with Repurchase Option dated
September 10, 1996, between JTS and Jack Tramiel
10.36 -- Series B Preferred Stock Subscription Agreement dated as of November 5, 1996
by and between the holder of Series B Preferred Stock and the Company
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
24.1 -- Powers of Attorney. Reference is made to page II-6.
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's Registration
Statement on Form S-4 (No. 333-06643), as amended, which became effective on
July 12, 1996.
+ Confidential Treatment has previously been granted for portions of this
Exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
Financial Statement 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.
II-4
<PAGE> 119
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus 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; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 15, or otherwise, 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
Securities 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 matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, JTS
Corporation has duly caused this 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 29th day of November, 1996.
JTS Corporation
By /s/ DAVID T. MITCHELL
------------------------------------
David T. Mitchell
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David T. Mitchell and W. Virginia Walker,
and each or any one of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments and registration statements filed pursuant
to Rule 462 or otherwise) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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
- --------------------------------------------- --------------------------- ------------------
<S> <C> <C>
/s/ DAVID T. MITCHELL President, Chief Executive November 29, 1996
- --------------------------------------------- Officer and Director
David T. Mitchell (Principal Executive
Officer)
/s/ W. VIRGINIA WALKER Executive Vice President, November 29, 1996
- --------------------------------------------- Finance and Administration,
W. Virginia Walker Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
/s/ SIRJANG LAL TANDON Chairman of the Board and November 29, 1996
- --------------------------------------------- Corporate Technical
Sirjang Lal Tandon Strategist
Director
- ---------------------------------------------
Jean D. Deleage
/s/ LIP-BU TAN Director November 29, 1996
- ---------------------------------------------
Lip-Bu Tan
/s/ JACK TRAMIEL Director November 29, 1996
- ---------------------------------------------
Jack Tramiel
/s/ ROGER W. JOHNSON Director November 29, 1996
- ---------------------------------------------
Roger W. Johnson
</TABLE>
II-6
<PAGE> 121
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 of 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 subject 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
II-7
<PAGE> 122
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 BEGINNING
OF PERIOD EXPENSES WRITE-OFFS OF 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-1
<PAGE> 123
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
- -------- ---------------------------------------------------------------------- ----------
<S> <C> <C> <C>
3.1* -- Amended and Restated Certificate of Incorporation, as amended.........
3.2* -- Amended and Restated Bylaws of JTS Corporation........................
4.1* -- Form of Specimen Common Stock Certificate of JTS Corporation..........
4.2* -- Registration Rights Agreement, dated February 3, 1995, as amended by
and between the holders of Series A Preferred Stock and the Company...
4.3 -- Certificate of Designations of Series B Preferred Stock, dated
November 5, 1996......................................................
4.4 -- Registration Rights Amendment, dated November 5, 1996 by and between
the holders of Series B Preferred Stock and the Company...............
5.1 -- Opinion of Cooley Godward LLP as to legality of securities being
registered............................................................
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...................................................
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..........................
</TABLE>
<PAGE> 124
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
----------------------------------------------------------------------
<S> <C> <C> <C>
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* -- Atari and Security Pacific National Bank Indenture, dated April 29,
1987..................................................................
10.31* -- Federated Group/Security Pacific National Bank Indenture, dated April
15, 1985..............................................................
10.32* -- First Supplemental Federated Group/Security Pacific National Bank
Indenture, dated September 24, 1987...................................
10.33* -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December
18, 1995, issued to Silicon Valley Bank...............................
10.34* -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated
April 4, 1996, issued to Lunenburg S.A................................
10.35 -- Agreement for Purchase and Sale of Real Property with Repurchase
Option, dated September 10, 1996, between JTS and Jack Tramiel........
10.36 -- Form of Series B Preferred Stock Subscription Agreement dated as of
November 5, 1996......................................................
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 Exhibit 5.1..................
24.1 -- Powers of Attorney. Reference is made to page II-6....................
27.1 -- Financial Data Schedule...............................................
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's Registration
Statement on Form S-4 (No. 333-06643), as amended, which became effective on
July 12, 1996.
+ Confidential Treatment has previously been granted for portions of this
Exhibit.
<PAGE> 1
EXHIBIT 4.3
JTS CORPORATION
CERTIFICATE OF DESIGNATIONS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
JTS Corporation, a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of
the Corporation by the Certificate of Incorporation, as amended, of the
Corporation, the Board of Directors of the Corporation, at a meeting duly called
and held on October 29, 1996, adopted a resolution providing for the creation of
a series of the Corporation's Preferred Stock, $.001 par value, which series is
designated "Series B Convertible Preferred Stock," which resolution is as
follows:
RESOLVED, that pursuant to authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, as amended,
the Board of Directors does hereby provide for the creation of a series of the
Preferred Stock, $.001 par value (hereafter called the " Preferred Stock"), of
the Corporation, and to the extent that the voting powers and the designations,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations or restrictions of such rights have
not been set forth in the Certificate of Incorporation, as amended, of the
Corporation, does hereby fix the same as follows:
SERIES B CONVERTIBLE PREFERRED STOCK
SECTION 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as "Series B Convertible Preferred Stock" (the "Series B
Convertible Preferred Stock"), and the number of shares constituting the Series
B Convertible Preferred Stock shall be 15,000, and shall not be subject to
increase.
SECTION 2. STATED CAPITAL. The amount to be represented
-1-
<PAGE> 2
in stated capital at all times for each share of Series B Convertible Preferred
Stock shall be the sum of (i) $1,000, (ii) to the extent legally available, the
accrued but unpaid dividends on such share of Series B Convertible Preferred
Stock, and (iii) to be determined on at least a quarterly basis, an amount equal
to the accrued and unpaid interest on dividends in arrears through the date of
determination (as provided in Section 4).
SECTION 3. RANK. All Series B Convertible Preferred Stock
shall rank (i) senior to the Common Stock, par value $.001 per share (the
"Common Stock"), of the Corporation, now or hereafter issued, as to payment of
dividends and distribution of assets upon liquidation, dissolution, or winding
up of the Corporation, whether voluntary or involuntary, and (ii) on a parity
with any additional series of preferred stock of any class which the Board of
Directors or the stockholders may from time to time authorize, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary.
SECTION 4. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of
shares of Series B Convertible Preferred Stock shall be entitled to receive,
when, as, and if declared by the Board of Directors of the Corporation (the
"Board of Directors" or the "Board") out of funds legally available for such
purpose, dividends at the rate of $50.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
and shall be payable in cash quarterly on February 1, May 1, August 1, and
November 1 of each year commencing February 1, 1997 (except that if any such
date is a Saturday, Sunday, or legal holiday, then such dividend shall be
payable on the next succeeding day that is not a Saturday, Sunday, or legal
holiday) to holders of record as they appear on the stock books of the
Corporation on such record dates, not more than 20 nor less than 10 days
preceding the payment dates for such dividends, as shall be fixed by the Board.
Dividends on the Series B Convertible Preferred Stock shall be paid in cash or,
subject to the limitations in Section 4(b) hereof, shares of Common Stock of the
Corporation or any combination of cash and shares of Common Stock, at the option
of the Corporation as hereinafter provided. The amount of the dividends payable
per share of Series B Convertible Preferred Stock for each quarterly dividend
period shall be computed by dividing the annual dividend amount by four. The
amount of dividends payable for the initial dividend period and any period
shorter than a full quarterly dividend period shall be computed on the basis of
a 360-day year of twelve 30-day months. Dividends not paid on a payment date,
whether or not such dividends have been declared, will bear interest at the rate
of 12% per annum until paid. No dividends or other distributions, other than
-2-
<PAGE> 3
dividends payable solely in shares of Common Stock or other capital stock of the
Corporation ranking junior as to dividends to the Series B Convertible Preferred
Stock (collectively, the "Junior Dividend Stock"), shall be paid or set apart
for payment on any shares of Junior Dividend Stock, and no purchase, redemption,
or other acquisition shall be made by the Corporation of any shares of Junior
Dividend Stock unless and until all accrued and unpaid dividends on the Series B
Convertible Preferred Stock and interest on dividends in arrears at the rate
specified herein shall have been paid or declared and set apart for payment.
If at any time any dividend on any capital stock of the
Corporation ranking senior as to dividends to the Series B Convertible Preferred
Stock (the "Senior Dividend Stock") shall be in default, in whole or in part, no
dividend shall be paid or declared and set apart for payment on the Series B
Convertible Preferred Stock unless and until all accrued and unpaid dividends
with respect to the Senior Dividend Stock, including the full dividends for the
then current dividend period, shall have been paid or declared and set apart for
payment, without interest. No full dividends shall be paid or declared and set
apart for payment on any class or series or the Corporation's capital stock
ranking, as to dividends, on a parity with the Series B Convertible Preferred
Stock (the "Parity Dividend Stock") for any period unless all accrued but unpaid
dividends (and interest on dividends in arrears at the rate specified herein)
have been, or contemporaneously are, paid or declared and set apart for such
payment on the Series B Convertible Preferred Stock. No full dividends shall be
paid or declared and set apart for payment on the Series B Convertible Preferred
Stock for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series B Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series B
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series B Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series B
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 4
shall not be deemed to include any stock dividend or distributions made in
connection with any liquidation, dissolution, or winding up of the Corporation,
whether voluntary or involuntary.
-3-
<PAGE> 4
(b) If the Corporation elects in the exercise of its sole
discretion to issue shares of Common Stock in payment of dividends on the Series
B Convertible Preferred Stock, the Corporation shall issue and dispatch, or
cause to be issued and dispatched, to each holder of such shares a certificate
representing the number of whole shares of Common Stock arrived at by dividing
the per share Computed Price of such shares of Common Stock into the total
amount of cash dividends such holder would be entitled to receive if the
aggregate dividends on the Series B Convertible Preferred Stock held by such
holder which are being paid in shares of Common Stock were being paid in cash;
provided, however, that if certificates representing shares of Common Stock are
issued and dispatched to holders of Series B Convertible Preferred Stock
subsequent to the third trading day after a dividend payment date, the
percentage used to calculate the Computed Price will be reduced by one for each
trading day after the third trading day following such dividend payment date to
the date of dispatch of shares of Common Stock. No fractional shares of Common
Stock shall be issued in payment of dividends. In lieu thereof, the Corporation
may issue a number of shares of Common Stock to each holder which reflects a
rounding to the nearest whole number of shares of Common Stock or may pay cash.
The Corporation shall not exercise its right to issue shares of Common Stock in
payment of dividends on Series B Convertible Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held in the Corporation's treasury,
is insufficient to pay the portion of such dividends to be paid in shares of
Common Stock;
(ii) the issuance or delivery of shares of Common Stock as a dividend
payment would require registration with or approval of any governmental
authority under any law or regulation, and such registration or approval has not
been effected or obtained;
(iii) the shares of Common Stock to be issued as a dividend payment
have not been authorized for listing, upon official notice of issuance, on any
securities exchange or market on which the Common Stock is then listed; or have
not been approved for quotation if the Common Stock is traded in the
over-the-counter market;
(iv) the Computed Price (determined without regard to the proviso to
the definition thereof) is less than the par value of one share of Common Stock;
-4-
<PAGE> 5
(v) the shares of Common Stock (A) cannot be sold or transferred
without restriction by unaffiliated holders who receive such shares of Common
Stock as a dividend payment or (B) are no longer listed on a national securities
exchange, on the Nasdaq National Market or the Nasdaq SmallCap Market; or
(vi) the issuance of shares of Common Stock in payment of dividends on
Series B Convertible Preferred Stock held by any Restricted Person (as defined
in Section 9(a) hereof) would result in any Restricted Person beneficially
owning more than 4.9% of the Common Stock, determined as provided in the proviso
to the second sentence of Section 9(a) hereof.
Shares of Common Stock issued in payment of dividends on
Series B Convertible Preferred Stock pursuant to this Section shall be, and for
all purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common Stock of the Corporation; the issuance and delivery thereof is
hereby authorized; and the dispatch thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable dividend payment date.
"Computed Price" of one share of Common Stock on any date
means 100 percent of the arithmetic average of the per share Trading Price (as
defined in Section 9(b)) of the Common Stock on the five trading days ending one
trading day prior to the applicable dividend payment date; provided, however,
that, notwithstanding the foregoing, in no event shall the Computed Price be
less than $.001 per share.
SECTION 5. LIQUIDATION PREFERENCE. In the event of a
liquidation, dissolution, or winding up of the Corporation, whether voluntary or
involuntary, the holders of Series B Convertible Preferred Stock shall be
entitled to receive out of the assets of the Corporation, whether such assets
constitute stated capital or surplus of any nature, an amount per share of
Series B Convertible Preferred Stock equal to the sum of (i) all dividends
accrued and unpaid thereon to the date of final distribution to such holders,
(ii) accrued and unpaid interest on dividends in arrears to the date of
distribution, and (iii) $1,000.00 (collectively, "the Liquidation Preference"),
and no more, before any payment shall be made or any assets distributed to the
holders of Common Stock or any other class or series of the Corporation's
capital stock ranking junior as to liquidation rights to the Series B
Convertible Preferred Stock (collectively, the "Junior Liquidation Stock");
provided, however, that such rights shall accrue to the holders of Series B
Convertible Preferred Stock only in the event that the Corporation's payments
with respect to the liquidation preference
-5-
<PAGE> 6
of the holders of capital stock of the Corporation ranking senior as to
liquidation rights to the Series B Convertible Preferred Stock (the "Senior
Liquidation Stock") are fully met. After the liquidation preferences of the
Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series B Convertible Preferred Stock and any other class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series B Convertible Preferred Stock (the "Parity Liquidation Stock" ) in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series B Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution, or winding up of the Corporation.
SECTION 6. MANDATORY REDEMPTION. (a) Notwithstanding any other
provision herein, unless the Stockholder Approval shall have been obtained from
the stockholders of the Corporation or waived by the American Stock Exchange,
Inc. (the "AMEX"), the Corporation shall not be required to issue upon
conversion of shares of Series B Convertible Preferred Stock more than
20,946,476 shares (such amount to be subject to equitable adjustment from time
to time for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring after the date of
filing this Certificate of Designations with the Secretary of State of the State
of Delaware) of Common Stock (the "Maximum Share Amount"), less the aggregate
number of shares of Common Stock issued by the Corporation pursuant to Section 4
as dividends on the Series B Convertible Preferred Stock, upon conversion of
shares of Series B Convertible Preferred Stock pursuant to Section 9. The
Maximum Share Amount shall be allocated among the shares of Series B Convertible
Preferred Stock at the time of initial issuance thereof pro rata based on the
total number of authorized shares of Series B Convertible Preferred Stock
provided in Section 1. Each certificate for shares of Series B Convertible
Preferred Stock initially issued shall bear a notation as to the number of
shares constituting the portion of the Maximum Share Amount allocated to the
shares of Series B Convertible Preferred Stock represented by such certificate
for purposes of conversion thereof. The Corporation shall maintain records which
show the number of shares of Common Stock issued by the Corporation pursuant to
Section 4 as dividends on the shares of Series B Convertible Preferred Stock
represented by each certificate, which
-6-
<PAGE> 7
records shall be controlling in the absence of manifest error. Upon surrender of
any certificate for shares of Series B Convertible Preferred Stock for transfer
or re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 9(a) of less than all of the shares of Series B Convertible
Preferred Stock represented thereby), the Corporation shall make a notation on
the new certificate issued upon such transfer or re-registration or evidencing
such unconverted shares, as the case may be, as to the remaining number of
shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the shares of Series B Convertible Preferred Stock evidenced by
such new certificate (including, without limitation, by taking into account the
number of shares of Common Stock issued by the Corporation pursuant to Section 4
as a dividend on the shares of Series B Convertible Preferred Stock represented
by the certificate so surrendered and not previously reflected on the
certificate so surrendered, as shown on the records maintained by the
Corporation). If any certificate for shares of Series B Convertible Preferred
Stock is surrendered for split-up into two or more certificates representing an
aggregate number of shares of Series B Convertible Preferred Stock equal to the
number of shares of Series B Convertible Preferred Stock represented by the
certificate so surrendered (as reduced by any contemporaneous conversion of
shares of Series B Convertible Preferred Stock represented by the certificate so
surrendered), each certificate issued on such split-up shall bear a notation of
the portion of the Maximum Share Amount allocated thereto determined by pro rata
allocation from among the remaining portion of the Maximum Share Amount
allocated to the certificate so surrendered. If any shares of Series B
Convertible Preferred Stock represented by a single certificate are converted in
full pursuant to Section 9, all of the portion of the Maximum Share Amount
allocated to such shares of Series B Convertible Preferred Stock which remains
unissued after such conversion shall be re-allocated pro rata to the outstanding
shares of Series B Convertible Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series B Convertible Preferred Stock so converted, and if there shall be no
other shares of Series B Convertible Preferred Stock held of record by such
holder at the close of business on such date, then such portion of the Maximum
Share Amount shall be allocated pro rata among the shares of Series B
Convertible Preferred Stock outstanding on such date.
(b) The Corporation shall promptly, but in no event later than
five business days after the occurrence, give notice to each holder (by
telephone line facsimile transmission at such number as such holder has
specified in writing to the Corporation for such purposes or, if such holder
shall not have specified any
-7-
<PAGE> 8
such number, by overnight courier or first class mail, postage prepaid, at such
holder's address as the same appears on the stock books of the Corporation) and
any holder may at any time after the occurrence give notice to the Corporation,
in either case, if on any ten trading days within any period of 20 consecutive
trading days the Corporation would not have been required to convert shares of
Series B Convertible Preferred Stock of such holder in accordance with Section
9(a) as a consequence of the limitations set forth in Section 6(a) had all
outstanding shares of Series B Convertible Preferred Stock held by such holder
been converted into Common Stock on each such day, determined without regard to
the limitation, if any, on such holder contained in the proviso to the second
sentence of Section 9(a) (any such notice, whether given by the Corporation or a
holder, an "Inconvertibility Notice"). If the Corporation shall have given or
been required to give any Inconvertibility Notice, or if a holder shall have
given any Inconvertibility Notice, then within ten business days after such
Inconvertibility Notice is given or was required to be given, the holder
receiving or giving, as the case may be, the Inconvertibility Notice shall have
the right by written notice to the Corporation (which written notice may be
contained in the Inconvertibility Notice given by the holder) to direct the
Corporation to redeem the portion of such holder's outstanding shares of Series
B Convertible Preferred Stock (which, if applicable, shall be all of such
holder's outstanding shares of Series B Convertible Preferred Stock) as shall
not, on the business day prior to the date of such redemption, be convertible
into shares of Common Stock by reason of the limitations set forth in Section
6(a) (determined without regard to the limitation, if any, on such holder
contained in the proviso to the second sentence of Section 9(a)), within ten
business days after such holder so directs the Corporation, at a price per share
equal to the Redemption Price (as defined herein). If a holder directs the
Corporation to redeem outstanding shares of Series B Convertible Preferred Stock
and, prior to the date the Corporation is required to redeem such shares of
Series B Convertible Preferred Stock, the Corporation would have been able,
within the limitations set forth in Section 6(a), to convert all of such
holder's outstanding shares of Series B Convertible Preferred Stock (determined
without regard to the limitation, if any, on such holder contained in the
proviso to the second sentence of Section 9(a)) on any ten trading days within
any period of 20 consecutive trading days commencing after the period of 20
consecutive trading days which gave rise to the applicable Inconvertibility
Notice from the Corporation or such holder of shares of Series B Convertible
Preferred Stock, as the case may be, had all of such holder's outstanding shares
of Series B Convertible Preferred Stock been surrendered for conversion into
Common Stock on each of such ten trading days within such 20
-8-
<PAGE> 9
trading day period, then the Corporation shall not be required to redeem any
shares of Series B Convertible Preferred Stock by reason of such
Inconvertibility Notice.
(c) Notwithstanding the giving of any notice by the
Corporation to the holders of Series B Convertible Preferred Stock pursuant to
Section 6(a) or the giving or the absence of any notice by the holders of the
Series B Convertible Preferred Stock in response thereto or any redemption of
shares of Series B Convertible Preferred Stock pursuant to Section 6(b),
thereafter the provisions of Section 6(b) shall continue to be applicable on any
occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the AMEX.
(d) As used herein, the term "Section 6 Redemption Date" means
each date on which the Corporation is required to redeem shares of Series B
Convertible Preferred Stock as provided in this Section 6. On each Section 6
Redemption Date, the Corporation shall make payment in immediately available
funds of the applicable Redemption Price to such holder of shares of Series B
Convertible Preferred Stock to be redeemed to or upon the order of such holder
as specified by such holder in writing to the Corporation at least one business
day prior to such Section 6 Redemption Date. If the Corporation is required to
redeem all or any portion of a holder's outstanding shares of Series B
Convertible Preferred Stock pursuant to this Section 6, the Corporation shall
make payment to such holder of the shares of Series B Convertible Preferred
Stock to be redeemed in respect of each share of Series B Convertible Preferred
Stock to be redeemed of an amount equal to the greater of (a) the product of (A)
the amount of the Liquidation Preference of such share of Series B Convertible
Preferred Stock determined as of the applicable Section 6 Redemption Date times
(B) 117.65% and (b) an amount equal to the product obtained by multiplying (x)
the number of shares of Common Stock which would, but for the redemption
pursuant to this Section 6, be issuable on conversion in accordance with Section
9(a) of one share of Series B Convertible Preferred Stock and any accrued and
unpaid dividends thereon and any accrued and unpaid interest on dividends
thereon in arrears if a notice of conversion were given by the holder of such
Series B Convertible Preferred Stock on the applicable Section 6 Redemption Date
(determined without regard to any limitation on conversion contained in Section
9(a)) times (y) the arithmetic average of the Trading Price (as defined in
Section 9(b)) of the Common Stock for the five consecutive trading days ending
one trading day prior to the Section 6 Redemption Date (such greater amount
being referred to herein as the " Redemption Price"). Upon redemption of less
than all of the shares of Series B Convertible Preferred Stock evidenced
-9-
<PAGE> 10
by a particular certificate, promptly, but in no event later than three business
days after surrender of such certificate to the Corporation, the Corporation
shall issue a replacement certificate for the shares of Series B Convertible
Preferred Stock evidenced by such certificate which have not been redeemed. Only
whole shares of Series B Convertible Preferred Stock may be redeemed.
(e) As used in this Section 6, "Stockholder Approval" means
the approval by a majority of the votes cast by the holders of shares of Common
Stock (in person or by proxy) at a meeting of the stockholders of the
Corporation (duly convened at which a quorum was present), or a written consent
of holders of shares of Common Stock entitled to such number of votes given
without a meeting, of the issuance by the Corporation of 20% or more of the
outstanding Common Stock of the Corporation for less than the greater of the
book or market value of such Common Stock on conversion of the Series B
Convertible Preferred Stock, as and to the extent required under Section 713 of
the rules of the AMEX (or any successor or replacement provision thereof).
Although the Stockholder Approval shall relieve the Corporation of its
obligation to redeem shares of Series B Convertible Preferred Stock, the
Corporation shall not be entitled to delay or defer any redemption of shares of
Series B Convertible Preferred Stock required by this Section 6 in order to seek
the Stockholder Approval.
(f) The shares of Series B Convertible Preferred Stock shall
not be subject to mandatory redemption by the Corporation except as provided
herein.
SECTION 7. NO SINKING FUND. The shares of Series B Convertible
Preferred Stock shall not be subject to the operation of a purchase, retirement,
or sinking fund.
SECTION 8. OPTIONAL REDEMPTION. So long as the Corporation is
in compliance in all material respects with its obligations to the holders of
shares of Series B Convertible Preferred Stock (including, without limitation,
its obligations under the Registration Rights Agreements between the Corporation
and the original holders of the Series B Convertible Preferred Stock
(collectively, the "Registration Rights Agreements") and the provisions of this
Certificate of Designations), the Corporation shall have the right, exercisable
on not less than 20 days or more than 30 days written notice to the holders of
record of the shares of Series B Convertible Preferred Stock to be redeemed, at
any time on or after the date which is six months after the date of initial
issuance of shares of Series B Convertible Preferred Stock (the "Issuance Date")
to redeem all, and from time to time to redeem any part of not less than 500
shares (or such lesser number of shares of Series B Convertible Preferred Stock
as shall remain outstanding at the time of exercise of such redemption right),
of Series B
-10-
<PAGE> 11
Convertible Preferred Stock in accordance with this Section 8. Any notice of
redemption (a "Notice of Redemption") under this Section shall be delivered to
the holders of the shares of Series B Convertible Preferred Stock at their
addresses appearing on the records of the Corporation; provided, however, that
any failure or defect in the giving of notice to any such holder shall not
affect the validity of notice to or the redemption of shares of Series B
Convertible Preferred Stock of any other holder. Any Notice of Redemption shall
state (1) that the Corporation is exercising its right to redeem all or a
portion of the outstanding shares of Series B Convertible Preferred Stock
pursuant to this Section 8, (2) the number of shares of Series B Convertible
Preferred Stock held by such holder which are to be redeemed, (3) the Redemption
Price per share of Series B Convertible Preferred Stock to be redeemed or the
formula for determining the same, determined in accordance herewith and (4) the
date of redemption of such shares of Series B Convertible Preferred Stock,
determined in accordance with this Section (the "Redemption Date"). On the
Redemption Date and after receipt by the Corporation of certificates for shares
of Series B Preferred Stock to be redeemed pursuant to this Section 8, the
Corporation shall make payment of the applicable Redemption Price to each holder
of shares of Series B Convertible Preferred Stock to be redeemed to or upon the
order of such holder as specified by such holder in writing to the Corporation
at least one business day prior to the Redemption Date. If the Corporation
exercises its right to redeem all or a portion of the outstanding shares of
Series B Convertible Preferred Stock the Corporation shall make payment to the
holders of the shares of Series B Convertible Preferred Stock to be redeemed in
respect of each share of Series B Convertible Preferred Stock to be redeemed of
an amount equal to the Redemption Price. Upon redemption of less than all of the
shares of Series B Convertible Preferred Stock evidenced by a particular
certificate, promptly, but in no event later than three business days after
surrender of such certificate to the Corporation, the Corporation shall issue
and deliver to the holder of record of the surrendered certificate (or such
holder's assignee) a replacement certificate for the shares of Series B
Convertible Preferred Stock which have not been redeemed. Only whole shares of
Series B Convertible Preferred Stock may be redeemed. If the Corporation
exercises its right to redeem less than all outstanding shares of Series B
Convertible Preferred Stock, then such redemption shall be made, as nearly as
practical, pro rata among the holders of record of the Series B Convertible
Preferred Stock. Except as otherwise permitted by Section 9 hereof in connection
with a conversion of shares of Series B Convertible Preferred Stock pursuant to
Section 9(a), no share of Series B Convertible Preferred Stock as to which the
holder exercises the right of conversion pursuant to Section 9 hereof may be
redeemed by
-11-
<PAGE> 12
the Corporation pursuant to this Section 8 on or after the date of exercise of
such conversion right regardless of whether the Notice of Redemption shall have
been given prior to the date of exercise of such conversion right.
SECTION 9. CONVERSION.
(a) CONVERSION AT OPTION OF HOLDER. The holders of the Series
B Convertible Preferred Stock may, upon surrender of the certificates therefor,
convert any or all of their shares of Series B Convertible Preferred Stock into
units consisting of (1) fully paid and nonassessable shares of Common Stock and
such other securities and property as hereinafter provided and (2) common stock
purchase warrants in the form hereinafter provided (the "Warrants") to purchase
shares of Common Stock and such other securities and property as hereinafter and
in the Warrants provided. Commencing on the earlier of (1) the date which is 80
days after the Issuance Date and (2) the Registration Effective Date, and at any
time thereafter, each share of Series B Convertible Preferred Stock may be
converted at the principal executive offices of the Corporation, the office of
any transfer agent for the Series B Convertible Preferred Stock, if any, the
office of any transfer agent for the Common Stock or at such other office or
offices, if any, as the Board of Directors may designate, into units initially
consisting of (1) such number of fully paid and nonassessable shares of Common
Stock (calculated as to each conversion to the nearest 1/100th of a share)
determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued
but unpaid dividends to the Conversion Date on the share of Series B Convertible
Preferred Stock being converted, and (iii) accrued but unpaid interest on the
dividends on the share of Series B Convertible Preferred Stock being converted
in arrears to the Conversion Date by (y) the lower of (a) the product of (I) the
Conversion Percentage times (II) the arithmetic average of the Trading Price of
the Common Stock on the five consecutive trading days immediately preceding the
Conversion Date or (b) $3.6125 (subject to equitable adjustments for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring on or after the date of filing of this Certificate of
Designations with the Secretary of State of the State of Delaware), and (2)
Warrants initially entitling the holder to purchase a number of shares of Common
Stock equal to the quotient obtained by dividing (x) the number of shares of
Common Stock issuable in respect of such conversion, determined in accordance
with clause (1) of this sentence, by (y) ten and having the terms and conditions
provided in Section 9(e) hereof, in each case subject to adjustment as
hereinafter provided (the "Conversion Rate"); provided, however, that in no
event shall any holder of
-12-
<PAGE> 13
shares of Series B Convertible Preferred Stock be entitled to convert any shares
of Series B Convertible Preferred Stock in excess of that number of shares of
Series B Convertible Preferred Stock upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and any
person whose beneficial ownership of shares of Common Stock would be aggregated
with such holder's beneficial ownership of shares of Common Stock for purposes
of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and
collectively, the "Restricted Persons") (other than shares of Common Stock
deemed beneficially owned through the ownership of unconverted shares of Series
B Convertible Preferred Stock and unexercised Warrants) and (2) the number of
shares of Common Stock issuable upon the conversion of the number of shares of
Series B Convertible Preferred Stock with respect to which the determination in
this proviso is being made, would result in beneficial ownership by any
Restricted Person of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Exchange
Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1)
of the proviso to the immediately preceding sentence. The "Conversion Price"
shall be equal to the Conversion Amount divided by the Conversion Rate.
(b) CERTAIN DEFINITIONS.
"Computation Date" means (1) the date which is 80 days after
the Issuance Date, unless the Registration Statement theretofore has been
declared effective by the SEC, (2) each date which is 30 days after a
Computation Date, if the Registration Statement has not been declared effective
by the SEC prior to such 30th day, (3) if the Registration Statement has not
been declared effective by the SEC within 80 days after the Issuance Date, the
date on which the Registration Statement is declared effective by the SEC, (4)
the date which is 30 days after the date on which the Registration Statement
ceases to be available for use by any holder of shares of Series B Convertible
Preferred Stock which is named therein as a selling stockholder with the SEC,
if, at any time during which the Registration Statement is required by the
Registration Rights Agreements to remain available for such, the Registration
Statement ceases to be so available for any reason (including, without
limitation, by reason of an SEC stop order, a material misstatement or omission
therein or the information contained in the Registration Statement having become
outdated) and shall remain so unavailable on such 30th day, (5) the date on
which the Registration Statement becomes available for use by holders of
-13-
<PAGE> 14
shares of Series B Convertible Preferred Stock, if the Registration Statement
shall have become unavailable for such use as described in the preceding clause
(4) of this paragraph, (6) the date which is 30 days after the date on which any
holder of shares of Series B Convertible Preferred Stock shall have become
unable to convert shares of Series B Convertible Preferred Stock in accordance
with Section 9(a) for any reason (other than by reason of the 4.9% limitation
set forth in Section 9(a)), if any holder of shares of Series B Convertible
Preferred Stock shall remain unable so to convert shares of Series B Convertible
Preferred Stock on such 30th day, and (7) the date on which holders of shares of
Series B Convertible Preferred Stock become able to convert shares of Series B
Convertible Preferred Stock, if any holder of shares of Series B Convertible
Preferred Stock shall have become unable to convert such shares as described in
the preceding clause (6) of this paragraph; provided, however, that a
Computation Date shall not be deemed to have occurred by reason of clause (4) or
(5) if, during a period that a Computation Date would have occurred under clause
(4) or (5), the Company has exercised its rights under Section 3(f) of the
Registration Rights Agreement.
As used herein, the "Conversion Amount" initially shall be
equal to $1,000.00, subject to adjustment as hereinafter provided.
As used herein, "Conversion Date" shall mean the date on which
the notice of conversion is actually received by the Corporation, whether by
mail, courier, personal service, telephone line facsimile transmission or other
means, in case of a conversion at the option of the holder pursuant to Section
9(a).
As used herein, "Conversion Percentage" shall mean 85 percent,
except that, if (x) the Registration Statement is not ordered effective by the
SEC within 80 days after the Issuance Date, (y) the Registration Statement shall
cease to be available for use by any holder of shares of Series B Convertible
Preferred Stock which is named therein as a selling stockholder for any reason
(including, without limitation, by reason of an SEC stop order, a material
misstatement or omission in the Registration Statement or the information
contained in the Registration Statement having become outdated)(other than by
reason of the Corporation exercising its rights under Section 3(f) of the
Registration Rights Agreement)) or (z) a holder of shares of Series B
Convertible Preferred Stock having become unable to convert any shares of Series
B Convertible Preferred Stock in accordance with Section 9(a) (other than by
reason of the 4.9% limitation set forth in Section 9(a)) then the percentage
stated above in this paragraph shall be reduced by two and one-half percentage
points
-14-
<PAGE> 15
(subject to the percentage limitation set forth in Section 2(c) of the
Registration Rights Agreements) on each Computation Date (pro rated in the case
of any Computation Date which is less than 30 days after a Computation Date)
unless, in lieu of such reduction in respect of any particular Computation Date,
the Company shall have made cash payments on a timely basis in the amounts
specified in Section 2(c) of the Registration Rights Agreements.
As used herein, "Registration Effective Date" shall mean, with
respect to any share of Series B Convertible Preferred Stock, the date on which
the Registration Statement is first ordered effective by the SEC.
As used herein, "Registration Statement" shall mean the
Registration Statement required to be filed by the Corporation with the SEC
pursuant to Section 2(a) of the Registration Rights Agreements.
As used herein, "SEC" shall mean the United States Securities
and Exchange Commission.
As used herein, the "Trading Price" of any security on any
date shall mean the lowest sale price (regular way) of such security on such
date on the principal securities exchange on which such security is listed for
trading, as reported by Bloomberg L.P.
(c) OTHER PROVISIONS. Notwithstanding anything in this Section
9(c) to the contrary, no change in the Conversion Amount pursuant to Section
9(c) shall actually be made until the cumulative effect of the adjustments
called for by this Section 9(c) since the date of the last change in the
Conversion Amount would change the Conversion Amount by more than 1%. However,
once the cumulative effect would result in such a change, then the Conversion
Rate shall actually be changed to reflect all adjustments called for by this
Section 9(c) and not previously made. Notwithstanding anything in this Section
9(c), no change in the Conversion Amount shall be made that would result in a
Conversion Price of less than the par value of the Common Stock into which
shares of Series B Convertible Preferred Stock are at the time convertible.
The holders of shares of Series B Convertible Preferred Stock
at the close of business on the record date for any dividend payment to holders
of Series B Convertible Preferred Stock shall be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such
-15-
<PAGE> 16
dividend payment date; provided, however, that the holder of shares of Series B
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any record date for a dividend payment and the opening
of business on the corresponding dividend payment date must pay to the
Corporation, within five days after receipt by such holder, an amount equal to
the dividend payable on such shares on such dividend payment date if such
dividend is paid by the Corporation to such holder. A holder of shares of Series
B Convertible Preferred Stock on a record date for a dividend payment who (or
whose transferee) tenders any of such shares for conversion into shares of
Common Stock and Warrants on or after such dividend payment date will receive
the dividend payable by the Corporation on such shares of Series B Convertible
Preferred Stock on such date, and the converting holder need not make any
payment of the amount of such dividend in connection with such conversion of
shares of Series B Convertible Preferred Stock. Except as provided above, no
adjustment shall be made in respect of cash dividends on Common Stock or Series
B Convertible Preferred Stock that may be accrued and unpaid at the date of
surrender of shares of Series B Convertible Preferred Stock.
The right of the holders of Series B Convertible Preferred
Stock to convert their shares shall be exercised by delivering to the
Corporation or its agent, as provided above, a written notice, duly signed by or
on behalf of the holder, stating the number of shares of Series B Convertible
Preferred Stock to be converted. Such notice may be delivered by mail, courier,
personal service, telephone line facsimile transmission or other means.
Promptly, but in no event later than ten business days after delivery of a
notice of conversion, such holder shall surrender for such purpose to the
Corporation or its agent, as provided above, certificates representing shares to
be converted, duly endorsed in blank or accompanied by proper instruments of
transfer. If such holder shall fail to deliver certificates representing shares
to be converted in such form on or prior to such tenth business day, such notice
of conversion shall not be effective, unless otherwise agreed by the
Corporation, but such failure shall not affect such holder's right to convert
such shares at a date after the date such notice of conversion was given. The
Corporation shall pay any tax arising in connection with any conversion of
shares of Series B Convertible Preferred Stock except that the Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery upon conversion of shares of Common
Stock, Warrants or other securities or property in a name other than that of the
holder of the shares of the Series B Convertible Preferred Stock being
converted, and the Corporation shall not be required to issue or deliver any
such shares or other
-16-
<PAGE> 17
securities or property unless and until the person or persons requesting the
issuance thereof shall have paid to the Corporation the amount of any such tax
or shall have established to the satisfaction of the Corporation that such tax
has been paid.
The Corporation (and any successor corporation) shall take all
action necessary so that a number of shares of the authorized but unissued
Common Stock (or common stock in the case of any successor corporation)
sufficient to provide for the conversion of the Series B Convertible Preferred
Stock outstanding and exercise of the Warrants issuable on such conversion upon
the basis hereinbefore provided are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Series B Convertible Preferred Stock shall be convertible or for which the
Warrants shall be exercisable as herein provided, the Corporation shall at the
same time also make proper provision so that thereafter there shall be a
sufficient number of shares of Common Stock authorized and reserved, free from
preemptive rights, for conversion of the outstanding Series B Convertible
Preferred Stock on the new basis. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all of the outstanding shares of Series B Convertible Preferred Stock and
exercise of all Warrants issued and issuable upon conversion of the shares of
Series B Convertible Preferred Stock, the Corporation promptly shall seek such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
In case of any consolidation or merger of the Corporation with
any other corporation (other than a wholly-owned subsidiary of the Corporation)
in which the Corporation is not the surviving corporation, or in case of any
sale or transfer of all or substantially all of the assets of the Corporation,
or in the case of any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property, the
Corporation shall make appropriate provision or cause appropriate provision to
be made so that each holder of shares of Series B Convertible Preferred Stock
then outstanding shall have the right thereafter to convert such shares of
Series B Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series B Convertible Preferred
-17-
<PAGE> 18
Stock could have been converted immediately prior to the effective date of such
consolidation, merger, sale, transfer, or share exchange and that on a basis
which preserves the economic benefits of the conversion rights of the holders of
shares of Series B Convertible Preferred Stock on a basis as nearly as practical
as such rights exist hereunder prior thereto. If, in connection with any such
consolidation, merger, sale, transfer, or share exchange, each holder of shares
of Common Stock is entitled to elect to receive securities, cash, or other
assets upon completion of such transaction, the Corporation shall provide or
cause to be provided to each holder of Series B Convertible Preferred Stock the
right to elect the securities, cash, or other assets into which the Series B
Convertible Preferred Stock held by such holder shall be convertible after
completion of any such transaction on the same terms and subject to the same
conditions applicable to holders of the Common Stock (including, without
limitation, notice of the right to elect, limitations on the period in which
such election shall be made, and the effect of failing to exercise the
election). The Corporation shall not effect any such transaction unless the
provisions of this paragraph have been complied with. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers, or
share exchanges.
If a holder shall have given a notice of conversion of shares
of Series B Convertible Preferred Stock, upon surrender of certificates
representing shares of Series B Convertible Preferred Stock for conversion, the
Corporation shall issue and deliver to such person certificates for the Common
Stock and Warrants issuable upon such conversion within three business days
after such surrender of certificates and the person converting shall be deemed
to be the holder of record of the Common Stock and Warrants issuable upon such
conversion, and all rights with respect to the shares surrendered shall
forthwith terminate except the right to receive the Common Stock and Warrants or
other securities, cash, or other assets as herein provided. If a holder shall
have given a notice of conversion as provided herein, the Corporation's
obligation to issue and deliver the certificates for Common Stock and Warrants
shall be absolute and unconditional, irrespective of the absence of any action
by the converting holder to enforce the same, any waiver or consent with respect
to any provision thereof, the recovery of any judgment against any person or any
action to enforce the same, any failure or delay in the enforcement of any other
obligation of the Corporation to the holder of record, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the holder of any obligation to the Corporation, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Corporation to the holder in connection with such conversion. If the Corporation
fails to issue
-18-
<PAGE> 19
and deliver the certificates for the Common Stock and Warrants to the holder
converting shares of Series B Convertible Preferred Stock pursuant to the first
sentence of this paragraph as and when required to do so, in addition to any
other liabilities the Corporation may have hereunder and under applicable law,
the Corporation shall pay or reimburse such holder on demand for all
out-of-pocket expenses including, without limitation, fees and expenses of legal
counsel incurred by such holders as a result of such failure.
No fractional shares of Common Stock or Warrants to purchase
fractional shares of Common Stock shall be issued upon conversion of Series B
Convertible Preferred Stock but, in lieu of any fraction of a share of Common
Stock or Warrants to purchase fractional shares of Common Stock which would
otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation at
its option (a) may pay in cash an amount equal to the product of (i) the
arithmetic average of the Trading Price of a share of Common Stock on the three
consecutive trading days ending on the trading day immediately preceding the
Conversion Date and (ii) such fraction of a share or (b) may issue an additional
share of Common Stock or Warrant to purchase an additional share of Common
Stock.
The Conversion Amount shall be adjusted from time to time
under certain circumstances, subject to the provisions of the first three
sentences of the first paragraph of this Section 9(c), as follows:
(i) In case the Corporation shall issue rights or warrants on
a pro rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the average daily Trading Prices of the Common Stock
on the 30 consecutive business days commencing 45 business days before the
record date (the "Current Market Price"), then in each such case the Conversion
Amount in effect on such record date shall be adjusted in accordance with the
formula
C(1) = C x O + N
O + N x P
M
where
C(1) = the adjusted Conversion Amount
C = the current Conversion Amount
-19-
<PAGE> 20
O = the number of shares of Common Stock outstanding on the record date.
N = the number of additional shares of Common Stock issuable pursuant to the
exercise of such rights or warrants.
P = the offering price per share of the additional shares (which amount
shall include amounts received by the Corporation in respect of the
issuance and the exercise of such rights or warrants).
M = the Current Market Price per share of Common Stock on the record date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C(1) = C x M
-----
M - F
where
C(1) = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of Common Stock on the record date
mentioned below.
F = the aggregate amount of such cash dividend and/or the fair market value
on the record date of the assets or securities to be distributed divided
by the number of shares of Common Stock outstanding on the record date.
The Board of Directors shall determine such fair market value, which
determination shall be conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series B
-20-
<PAGE> 21
Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest
cent or to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant
to the fifth paragraph of this Section 9(c), the holder of any Series B
Convertible Preferred Stock thereafter surrendered for conversion shall become
entitled to receive securities, cash, or assets other than Common Stock, the
number or amount of such securities or property so receivable upon conversion
shall be subject to adjustment from time to time in a manner and on terms nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in subparagraphs (i) to (iii) above.
Except as otherwise provided above in this Section 9, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
Whenever the Conversion Amount is adjusted as herein provided,
the Corporation shall send to each transfer agent, if any, for the Series B
Convertible Preferred Stock and the Common Stock, and to the principal
securities exchange, if any, on which the Series B Convertible Preferred Stock
and the Common Stock is traded, or the Nasdaq National Market if the Series B
Convertible Preferred Stock or Common Stock is admitted for a quotation thereon,
a statement signed by the Chairman of the Board, the President, or any Vice
President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 9, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series B Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
Whenever the Corporation shall propose to take any of the
actions specified in the fifth paragraph of this Section 9(c) or in
subparagraphs (i) or (ii) of the eighth paragraph of this Section 9(c) which
would result in any adjustment in the Conversion Amount under this Section 9(c),
the Corporation shall cause a notice to be
-21-
<PAGE> 22
mailed at least 20 days prior to the date on which the books of the Corporation
will close or on which a record will be taken for such action, to the holders of
record of the outstanding Series B Convertible Preferred Stock on the date of
such notice. Such notice shall specify the action proposed to be taken by the
Corporation and the date as of which holders of record of the Common Stock shall
participate in any such actions or be entitled to exchange their Common Stock
for securities or other property, as the case may be. Failure by the Corporation
to mail the notice or any defect in such notice shall not affect the validity of
the transaction.
(d) CONVERSION AT OPTION OF CORPORATION. So long as the
Corporation shall be in compliance in all material respects with its obligations
to the holders of the Series B Convertible Preferred Stock (including its
obligations under the Registration Rights Agreements and the provisions of this
Certificate of Designations) and so long as the Registration Statement shall be
effective, the Corporation shall have the right, exercisable at any time after
the date which is three years after the date of original issuance of the Series
B Convertible Stock by at least 20 business days but not more than 30 business
days prior notice (a "Corporation Conversion Notice") to the holders of the
Series B Convertible Preferred Stock to require the holders of the Series B
Convertible Preferred Stock to convert, in accordance with the provisions, and
subject to the limitations, of this Section 9, all or any part of the
outstanding shares of Series B Convertible Preferred Stock into shares of Common
Stock and Warrants to the extent the same are at such time convertible into
shares of Common Stock and Warrants. The Corporation Conversion Notice shall
state (1) the number of shares of Series B Convertible Preferred Stock which the
Corporation seeks to require to be converted into shares of Common Stock and
Warrants and (2) the date for such conversion (the "Corporation Conversion
Date"). If the Corporation shall give a Corporation Conversion Notice, then,
unless theretofore converted by the holder or redeemed by the Corporation in
accordance herewith, and, so long as the Registration Statement shall remain
effective on the Corporation Conversion Date and the Corporation shall be in
compliance in all material respects with its obligations to the holders of the
Series B Convertible Preferred Stock (including its obligations under the
Registration Rights Agreements and the provisions of this Certificate of
Designations) on the Corporation Conversion Date, then on the Corporation
Conversion Date such shares of Series B Convertible Preferred Stock covered by
such Corporate Conversion Notice (or such lesser number of shares of Series B
Convertible Preferred Stock as are convertible into Common Stock and Warrants on
the Corporation Conversion Date) shall be converted into such number of shares
of
-22-
<PAGE> 23
Common Stock and Warrants as shall be determined pursuant to this Section 9 as
if the conversion of such number of shares of Series B Convertible Preferred
Stock were made by the holders thereof in accordance herewith without any
further action on the part of the holders of such shares of Series B Convertible
Preferred Stock. Upon receipt by the Corporation of certificates for shares of
Series B Convertible Preferred Stock converted into shares of Common Stock and
Warrants in accordance with this Section 9(e) after a Corporation Conversion
Notice is given, the Corporation shall issue and, within three trading days
after such surrender, deliver to or upon the order of such holder (1) that
number of shares of Common Stock as shall be issuable in respect of the
conversion of the number of shares of Series B Convertible Preferred Stock
converted, together with accrued and unpaid dividends thereon to the date of
conversion and accrued and unpaid interest on dividends on such shares which are
in arrears, into Common Stock and Warrants as shall be determined in accordance
herewith, (2) certificates for that number of Warrants as shall be issuable in
respect of the number of shares of Common Stock referred to in the immediately
preceding clause (1) and (3) a new certificate for the balance of shares of
Series B Convertible Preferred Stock, if any.
(e) FORM OF WARRANT. The Warrants issuable upon conversion of
shares of Series B Convertible Preferred Stock shall be in the following form:
[FORM OF WARRANT]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase (1)
-----------
Shares of Common Stock of JTS
Corporation
JTS CORPORATION
- --------
(1) Insert appropriate number in accordance with Section 9(a) and 9(c) of the
Certificate of Designations.
-23-
<PAGE> 24
COMMON STOCK PURCHASE WARRANT
JTS CORPORATION, a Delaware corporation (the "Company") hereby
certifies that, for value received, [FILL IN NAME] or registered assigns (the
"Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company at any time or from time to time after the date hereof, and before
5:00 p.m., New York City time, on the Expiration Date (as defined herein),
______________* fully paid and nonassessable shares of Common Stock, $.001 par
value, of the Company at a purchase price per share equal to the Purchase Price
(as hereinafter defined). The number of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided in this Warrant.
As used herein the following terms, unless the context
otherwise requires, have the following respective meanings:
(a) The term "Business Day" as used herein shall mean a day on which
the New York Stock Exchange is open for business.
(b) The term "Common Stock" includes the Company's Common Stock, $.001
par value per share, as authorized on the date hereof, and any other securities
into which or for which the Common Stock may be converted or exchanged pursuant
to a plan of recapitalization, reorganization, merger, sale of assets or
otherwise.
(c) The term "Company" shall include JTS Corporation and any
corporation that shall succeed to or assume the obligation of JTS Corporation
hereunder.
(d) The term "Expiration Date" refers to [INSERT DATE WHICH IS 3 YEARS
AFTER CONVERSION DATE IN RESPECT OF WHICH WARRANT IS ISSUED].
(e) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holder of this Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of this Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 4.
-24-
<PAGE> 25
(f) The term "Purchase Price" shall mean $[INSERT LOWER OF 110% OF (X)
THE ARITHMETIC AVERAGE OF CLOSING PRICE FOR FIVE CONSECUTIVE TRADING DAYS USED
TO COMPUTE CONVERSION OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK IN
RESPECT OF THE ISSUANCE OF THE PARTICULAR WARRANT AND (Y) $3.6125], subject to
adjustment as provided in this Warrant.
1. EXERCISE OF WARRANT.
1.1 EXERCISE AT OPTION OF HOLDER. (a) This Warrant may be
exercised by the Holder hereof in full or in part at any time or from time to
time during the exercise period specified in the first paragraph hereof until
the Expiration Date by surrender of this Warrant and the subscription form
annexed hereto (duly executed) by such Holder, to the Company at its principal
office, accompanied by payment, in cash or by certified or official bank check
payable to the order of the Company in the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the Holder in the
subscription form by (b) the Purchase Price then in effect. On any partial
exercise the Company will forthwith issue and deliver to or upon the order of
the Holder hereof a new Warrant or Warrants of like tenor, in the name of the
Holder hereof or as such Holder (upon payment by such Holder of any applicable
transfer taxes) may request, providing in the aggregate on the face or faces
thereof for the purchase of the number of shares of Common Stock for which such
Warrant or Warrants may still be exercised.
(b) Notwithstanding any other provision of this Warrant, in no
event shall the holder of this Warrant be entitled at any time to purchase a
number of shares of Common Stock on exercise of this Warrant in excess of that
number of shares upon purchase of which the sum of (1) the number of shares of
Common Stock beneficially owned by such holder and any person whose beneficial
ownership of shares of Common Stock would be aggregated with such holder's
beneficial ownership of shares of Common Stock for purposes of Section 13(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Regulation 13D-G thereunder (each a "Restricted Person" and collectively, the
"Restricted Persons") (other than shares of Common Stock deemed beneficially
owned through the ownership of the unexercised portion of this Warrant and
shares of Preferred Stock beneficially owned by all such Restricted Persons) and
(2) the number of shares of Common Stock issuable upon exercise of the portion
of this Warrant with respect to which the determination in this sentence is
being made, would result in beneficial ownership by any Restricted Person of
more than 4.9% of the outstanding shares of Common Stock. For
-25-
<PAGE> 26
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act and Regulation
13D-G thereunder, except as otherwise provided in clause (1) of the immediately
preceding sentence.
1.2 NET ISSUANCE. Notwithstanding anything to the contrary
contained in Section 1.1, the Holder may elect to exercise this Warrant in whole
or in part by receiving shares of Common Stock equal to the net issuance value
(as determined below) of this Warrant, or any part hereof, upon surrender of
this Warrant at the principal office of the Company together with notice of such
election, in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = Y (A-B)
---------
A
Where: X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock as to which this
Warrant is to be exercised
A = the current fair market value of one share of Common
Stock calculated as of the last trading day immediately
preceding the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as
of a specified date shall mean with respect to each share of Common Stock the
average of the closing bid prices of the Common Stock on the principal
securities market on which the Common Stock may at the time be traded over a
period of five Business Days consisting of the day as of which the current fair
market value of a share of Common Stock is being determined (or if such day is
not a Business Day, the Business Day next preceding such day) and the four
consecutive Business Days prior to such day. If on the date for which current
fair market value is to be determined the Common Stock is not eligible for
trading on any securities market, the current fair market value of Common Stock
shall be the highest price per share which the Company could then obtain from a
willing buyer (not a current employee or director) for shares of Common Stock
sold by the Company, from authorized but unissued shares, as determined in good
faith by the Board of Directors of the Company,
-26-
<PAGE> 27
unless prior to such date the Company has become subject to a merger,
acquisition or other consolidation pursuant to which the Company is not the
surviving party, in which case the current fair market value of the Common Stock
shall be deemed to be the value received by the holders of the Company's Common
Stock for each share thereof pursuant to the Company's acquisition.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon
as practicable after the exercise of this Warrant, and in any event within three
days thereafter, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as such Holder (upon payment by such Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which such Holder shall be entitled on such exercise, in such
denominations as may be requested by such Holder, plus, in lieu of any
fractional share to which such Holder would otherwise be entitled, cash equal to
such fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which
such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.;
RECLASSIFICATION, ETC. In case at any time or from time to time, all the holders
of Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each
-27-
<PAGE> 28
such case the Holder of this Warrant, on the exercise hereof as provided in
Section 1, shall be entitled to receive the amount of stock and other securities
and property (including cash in the cases referred to in subdivisions (b) and
(c) of this Section 3) which such Holder would hold on the date of such exercise
if on the date hereof the Holder had been the holder of record of the number of
shares of Common Stock called for on the face of this Warrant and had
thereafter, during the period from the date hereof to and including the date of
such exercise, retained such shares and all such other or additional stock and
other securities and property (including cash in the case referred to in
subdivisions (b) and (c) of this Section 3) receivable by the Holder as
aforesaid during such period, giving effect to all adjustments called for during
such period by Section 4.
4. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
In case at any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person, or (c)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, sale or conveyance, the Company shall give at least 30
days notice to the Holder of such pending transaction whereby the Holder shall
have the right to exercise this Warrant prior to any such reorganization,
consolidation, merger, sale or conveyance. Any exercise of this Warrant pursuant
to notice under this paragraph shall be conditioned upon the closing of such
reorganization, consolidation, merger, sale or conveyance which is the subject
of the notice and the exercise of this Warrant shall not be deemed to have
occurred until immediately prior to the closing of such transaction.
5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the
Company shall (i) issue additional shares of the Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive
-28-
<PAGE> 29
event or events described herein in this Section 5. The Holder of this Warrant
shall thereafter, on the exercise hereof as provided in Section 1, be entitled
to receive that number of shares of Common Stock determined by multiplying the
number of shares of Common Stock which would be issuable on such exercise as of
immediately prior to such issuance by a fraction of which (i) the numerator is
the Purchase Price in effect immediately prior to such issuance and (ii) the
denominator is the Purchase Price in effect on the date of such exercise.
6. FURTHER ASSURANCES. The Company will take all action that
may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of stock, free from all taxes,
liens and charges with respect to the issue thereof, on the exercise of all or
any portion of this Warrant from time to time outstanding.
7. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of
all or substantially all of the assets of the Company to or consolidation
or merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up
of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation,
-29-
<PAGE> 30
merger, dissolution, liquidation or winding-up, and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or a favorable vote of stockholders if either is required. Such notice shall be
mailed at least ten days prior to the date specified in such notice on which any
such action is to be taken or the record date, whichever is earlier.
8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF
WARRANTS. The Company will at all times reserve and keep available, solely for
issuance and delivery on the exercise of this Warrant, all shares of Common
Stock (or Other Securities) from time to time issuable on the exercise of this
Warrant.
9. TRANSFER OF WARRANT. This Warrant shall inure to the
benefit of the successors to and assigns of the Holder. This Warrant and all
rights hereunder, in whole or in part, is registrable at the office or agency of
the Company referred to below by the Holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
10. REGISTER OF WARRANTS. The Company shall maintain, at the
principal office of the Company (or such other office as it may designate by
notice to the Holder hereof), a register in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each successor and prior owner of such Warrant.
The Company shall be entitled to treat the person in whose name this Warrant is
so registered as the sole and absolute owner of this Warrant for all purposes.
11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon
the surrender hereof by the Holder hereof at the office or agency of the Company
referred to in Section 10, for one or more new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares of Common Stock which may be subscribed for purchase hereunder, each
of such new Warrants to represent the right to subscribe for and purchase such
number of shares as shall be designated by said Holder hereof at the time of
such surrender.
12. REPLACEMENT OF WARRANT. On receipt of evidence
-30-
<PAGE> 31
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement or security
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, on surrender and cancellation of this Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
tenor.
13. WARRANT AGENT. The Company may, by written notice to the
Holder, appoint an agent having an office in the United States of America, for
the purpose of issuing Common Stock (or Other Securities) on the exercise of
this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section
11, and replacing this Warrant pursuant to Section 12, or any of the foregoing,
and thereafter any such issuance, exchange or replacement, as the case may be,
shall be made at such office by such agent.
14. REMEDIES. The Company stipulates that the remedies at law
of the Holder of this Warrant in the event of any default or threatened default
by the Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the Holder hereof to purchase Common Stock, and no mere
enumeration herein of the rights or privileges of the Holder hereof, shall give
rise to any liability of such Holder for the Purchase Price or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
16. NOTICES, ETC. All notices and other communications from
the Company to the registered Holder of this Warrant shall be mailed by first
class certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by such Holder or at the address shown for
such Holder on the register of Warrants referred to in Section 10.
17. INVESTMENT REPRESENTATIONS. By acceptance of this Warrant,
the Holder represents to the Company that this Warrant is
-31-
<PAGE> 32
being acquired for the Holder's own account and for the purpose of investment
and not with a view to, or for sale in connection with, the distribution
thereof, nor with any present intention of distributing or selling the Warrant
or the Common Stock issuable upon exercise of the Warrant. The Holder
acknowledges that the Holder has been afforded the opportunity to meet with the
management of the Company and to ask questions of, and receive answers from,
such management and the Company's counsel about the business and affairs of the
Company and concerning the terms and conditions of the offering of this Warrant,
and to obtain any additional information, to the extent that the Company
possessed such information or could acquire it without unreasonable effort or
expense, necessary to verify the accuracy of the information otherwise obtained
by or furnished to the Holder hereof in connection with the offering of this
Warrant. The Holder hereof asserts that it may be considered to be a
sophisticated investor, is familiar with the risks inherent in speculative
investments such as in the Company, has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in this Warrant and the Common Stock issuable upon
exercise of this Warrant, and is able to bear the economic risk of the
investment. The Holder acknowledges and agrees that this Warrant and, except as
otherwise provided in the Registration Rights Agreement, the Common Stock
issuable upon exercise of this Warrant (if any) have not been (and at the time
of acquisition by the Holder, will not have been or will not be), registered
under the Securities Act or under the securities laws of any state, in reliance
upon certain exemptive provisions of such statutes. The Holder recognizes and
acknowledges that such claims of exemption are based, in part, upon the
representations of the Holder contained herein. The Holder further recognizes
and acknowledges that because this Warrant and, except as provided in the
Registration Rights Agreement, the Common Stock issuable upon exercise of this
Warrant (if any) are unregistered, they may not be eligible for resale, and may
only be resold in the future pursuant to an effective registration statement
under the Securities Act and any applicable state securities laws, or pursuant
to a valid exemption from such registration requirements. Unless the shares of
Common Stock have theretofore been registered for resale under the Securities
Act, the Company may require, as a condition to the issuance of Common Stock
upon the exercise of this Warrant (i) in the case of an exercise in accordance
with Section 1.1 hereof, a confirmation as of the date of exercise of the
Holder's representations pursuant to this Section 17 or (ii) in the case of an
exercise in accordance with Section 1.2 hereof, an opinion (in form and
substance reasonably satisfactory to the Company) of counsel reasonably
satisfactory to the Company that the shares of Common Stock to be issued upon
such exercise may be issued without
-32-
<PAGE> 33
registration under the Securities Act.
18. LEGEND. Unless theretofore registered for resale under the
Securities Act, each certificate for shares issued upon exercise of this Warrant
shall bear the following legend:
The securities represented by this certificate have not been registered under
the Securities Act of 1933, as amended. The securities have been acquired for
investment and may not be sold, transferred or assigned in the absence of an
effective registration statement for the securities under the Securities Act of
1933, as amended, or an opinion of counsel that registration is not required
under said Act.
19. MISCELLANEOUS. This Warrant and any terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement or such change, waiver, discharge
or termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the internal laws of the State of California.
The headings in this Warrant are for purposes of reference only, and shall not
limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
IN WITNESS WHEREOF, JTS Corporation has caused this Warrant to
be executed on its behalf by one of its officers thereunto duly authorized.
Dated: JTS CORPORATION
By:___________________________
Title:
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO JTS CORPORATION
1. The undersigned Holder of the attached original, executed Warrant
hereby elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as
-33-
<PAGE> 34
defined in the Warrant, of JTS Corporation, a Delaware corporation (the
"Company").
2. The undersigned Holder (check one):
__ (a) elects to pay the aggregate purchase price for such shares of
Common Stock (the "Exercise Shares") (i) by lawful money of the
United States or the enclosed certified or official bank check
payable in United States dollars to the order of the Company in the
amount of $___________ or (ii) by wire transfer of United States
funds to the account of the Company in the amount of $____________,
which transfer has been made before or simultaneously with the
delivery of this Form of Subscription pursuant to the instructions
of the Company;
or
__ (b) elects to receive shares of Common Stock having a value equal to
the value of the Warrant calculated in accordance with Section 1.2
of the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
Name: _____________________________________
Address: _____________________________________
_____________________________________
Dated:____________ ___, _____ ____________________________
(Signature must conform to
name of Holder as specified
on the face of the Warrant)
____________________________
____________________________
(Address)
[END OF FORM OF WARRANT]
SECTION 10 REDEMPTION AT OPTION OF HOLDERS. (i) Each
-34-
<PAGE> 35
holder of shares of Series B Convertible Preferred Stock shall be entitled, at
such holder's option, by notice to the Corporation given within 20 days after
the occurrence of an Optional Redemption Event, to require the Corporation to
redeem all or a portion of such shares following the occurrence of an Optional
Redemption Event.
An Optional Redemption Event means any one of the following
events:
(A) For any period of ten consecutive trading days following
the SEC Effective Date there shall be no closing lowest sale price of the Common
Stock on any national securities exchange or the Nasdaq National Market;
(B) The Common Stock ceases to be listed for trading on any
national securities exchange or the Nasdaq National Market for ten consecutive
days;
(C) The inability for 30 or more consecutive days of any
holder of shares of Series B Convertible Preferred Stock who is entitled to
optional redemption rights under this Section 10 to sell such shares of Common
Stock issued or issuable on conversion of shares of Series B Convertible
Preferred Stock pursuant to the Registration Statement for any reason on each
day in such 30-day period; provided, however, that if the Corporation exercises
its rights under Section 3(f)(ii) of the Registration Rights Agreements, then
this provision shall be inapplicable solely during the period that Section
3(f)(ii) is in effect;
(D) The Corporation shall fail or default in the performance
of any material obligation to a holder of shares of Series B Convertible
Preferred Stock under the terms of the Certificate of Designations or under any
of the Registration Rights Agreements or any other agreements or documents
entered into in connection with the issuance of shares of Series B Convertible
Preferred Stock, as such instruments may be amended from time to time;
(E) Any consolidation or merger of the Corporation with or
into another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to such
transaction do not collectively own at least 51% of the outstanding voting
securities of the surviving corporation of such consolidation or merger
immediately following such
-35-
<PAGE> 36
transaction or the common stock of such surviving corporation is not listed for
trading on the AMEX, the NYSE or the Nasdaq National Market; or
(F) The taking of any action, including any amendment
to the Corporation's Certificate of Incorporation, which materially and
adversely affects the rights of any holder of shares of Series B
Convertible Preferred Stock; provided that this Section F shall not
apply to the Corporation's issuance of securities in a financing so
long as the Board of Directors shall have determined that the terms of
any such financing are fair to the holders of Series B Convertible
Preferred Stock.
(ii) To exercise the optional redemption right, a holder of
shares of Series B Convertible Preferred Stock shall deliver to the Corporation
a notice of redemption (an "Optional Redemption Notice"), accompanied by the
certificate for the shares of Series B Convertible Preferred Stock to be
redeemed. Any Optional Redemption Notice shall state (1) that the holder
delivering such notice is thereby requiring the Corporation to redeem shares of
Series B Convertible Preferred Stock pursuant to this Section 10, (2) the
Optional Redemption Event giving rise to such redemption, and (3) the number of
shares of Series B Convertible Preferred Stock held by such holder which are to
be redeemed. In no event later than five business days following receipt of such
notice by the Corporation, the Corporation shall make payment in immediately
available funds of the applicable Redemption Price with respect to the shares of
Series B Convertible Preferred Stock to be redeemed to or upon the order of such
holder as specified by such holder in the Optional Redemption Notice. Upon
redemption of less than all of the shares of Series B Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three business days after surrender of such certificate to the Corporation,
the Corporation shall issue a replacement certificate for the shares of Series B
Convertible Preferred Stock which have not been redeemed. Only whole shares of
Series B Convertible Preferred Stock may be redeemed.
SECTION 11. VOTING RIGHTS. Except as otherwise required by law
or expressly provided herein, shares of Series B Convertible Preferred Stock
shall not be entitled to vote on any matter.
The affirmative vote or consent of the holders of a majority
of the outstanding shares of the Series B Convertible Preferred Stock, voting
separately as a class, will be required for (1) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Certificate of Incorporation if the amendment, alteration, or repeal materially
-36-
<PAGE> 37
and adversely affects the powers, preferences, or special rights of the Series B
Convertible Preferred Stock, or (2) the creation and issuance of any Senior
Dividend Stock or Senior Liquidation Stock; provided, however, that any increase
in the authorized preferred stock of the Corporation or the creation and
issuance of any stock which is both Junior Dividend Stock and Junior Liquidation
Stock or any other capital stock of the Corporation ranking on a parity with the
Series B Convertible Preferred Stock shall not be deemed to affect materially
and adversely such powers, preferences, or special rights; provided, further,
however, except as provided by applicable law, no consent or approval shall be
required in the event that the Corporation shall issue any equity or debt
securities of the Corporation in a financing so long as the Board of Directors
shall have determined that the terms of any such financing are fair to the
holders of the Series B Convertible Preferred Stock.
SECTION 12. OUTSTANDING SHARES. For purposes of this
Certificate of Designations, all shares of Series B Convertible Preferred Stock
shall be deemed outstanding except (i) from the date of surrender of
certificates representing shares of Series B Convertible Preferred Stock for
conversion into Common Stock, all shares of Series B Convertible Preferred Stock
converted into Common Stock; (ii) from the date of registration of transfer, all
shares of Series B Convertible Preferred Stock held of record by the Corporation
or any subsidiary or Affiliate (as defined herein) of the Corporation and (iii)
from the Redemption Date, all shares of Series B Convertible Preferred Stock
which are redeemed, so long as in each case the Redemption Price of such shares
of Series B Convertible Preferred Stock shall have been paid by the Corporation
as and when required hereby. For the purposes of this Certificate of
Designations, "Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Corporation.
"Control" is the power to direct the management and policies of a person,
directly or through one or more intermediaries, whether through the ownership of
voting securities, by contract, or otherwise.
-37-
<PAGE> 38
IN WITNESS WHEREOF, JTS Corporation has caused this
certificate to be signed by W. Virginia Walker, its Executive Vice President,
Finance and Administration, Chief Financial Officer and Secretary, this 1st day
of November, 1996.
JTS CORPORATION
By /s/ W. Virginia Walker
______________________________
W. Virginia Walker
-38-
<PAGE> 1
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of October 31, 1996 (this
"Agreement"), is made by and between JTS CORPORATION, a Delaware corporation
(the "Company"), and the person named on the signature page hereto (the "Initial
Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of
October 31, 1996, between the Initial Investor and the Company (the
"Subscription Agreement"), the Company has agreed, upon the terms and subject to
the conditions of the Subscription Agreement, to issue and sell to the Initial
Investor an aggregate of 12,500 shares (the "Preferred Shares") of preferred
stock of the Company as provided in the Subscription Agreement, which shares of
Preferred Stock are convertible into units consisting of (x) shares (the
"Conversion Shares") of Common Stock, $.001 par value (the "Common Stock"), of
the Company and (2) warrants (the "Warrants") to purchase shares of Common Stock
(the "Warrant Shares"); and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares and the Warrant Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investor" means the Initial Investor and any transferee or
assignee who agrees to become bound
-1-
<PAGE> 2
by the provisions of this Agreement in accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares, the Warrant
Shares and any shares of Common Stock issued by the Company to any Investor as a
dividend on the Preferred Shares.
(iv) "Registration Statement" means a registration statement of the
Company under the Securities Act, including any amendment thereto.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall prepare, and on or prior
to the date which is 30 days after the date of the closing under the
Subscription Agreement (the "Closing Date"), file with the SEC a Registration
Statement on Form S-1 covering at least 8,333,000 shares of Common Stock as
Registrable Securities, and which Registration Statement shall state that, in
accordance with Rule 416 under the Securities Act, such Registration Statement
also covers such indeterminate number of additional shares of Common Stock as
may become issuable upon conversion of the Preferred Shares to prevent dilution
resulting from stock splits, stock dividends or similar transactions or by
reason of changes in the conversion price of the Preferred Shares in accordance
with the terms
-2-
<PAGE> 3
thereof. If at any time the number of shares of Common Stock included in the
Registration Statement required to be filed as provided in the first sentence of
this Section 2(a) shall be insufficient to cover the number of shares of Common
Stock issuable on conversion in full of the unconverted Preferred Shares and
exercise in full of the unexercised Warrants and Warrants which may be issued
upon exercise of the unconverted Preferred Stock, then promptly, but in no event
later than 20 days after such insufficiency shall occur, the Company shall file
with the SEC an additional Registration Statement on Form S-3, if available, or
Form S-1 or other applicable form (which shall not constitute a post-effective
amendment to the Registration Statement filed pursuant to the first sentence of
this Section 2(a)) covering such number of shares of Common Stock as shall be
sufficient to permit such conversion. For all purposes of this Agreement (other
than Section 2(c) hereof) such additional Registration Statement shall be deemed
to be the Registration Statement required to be filed by the Company pursuant to
Section 2(a) of this Agreement, and the Company and the Investors shall have the
same rights and obligations (other than Section 2(c) hereof) with respect to
such additional Registration Statement as they shall have with respect to the
initial Registration Statement required to be filed by the Company pursuant to
this Section 2(a).
(b) CERTAIN OFFERINGS. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Company shall have the right to select one legal counsel and an investment
banker or bankers and manager or managers to administer the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering. The Investors who hold the
Registrable Securities to be included in such underwriting shall pay all
underwriting discounts and commissions and other fees and expenses of such
investment banker or bankers and manager or managers so selected in accordance
with this Section 2(b) (other than fees and expenses relating to registration of
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) PAYMENTS BY THE COMPANY. If (1) the Registration Statement
covering the Registrable Securities which is required to be filed by the Company
pursuant to
-3-
<PAGE> 4
the first sentence of Section 2(a) hereof is not effective within 80 days after
the Closing Date, (2) the Registration Statement required to be filed by the
Company pursuant to Section 2(a) shall cease to be available for use by any
holder of shares of Series B Convertible Preferred Stock which is named therein
as a selling stockholder for any reason (including, without limitation, by
reason of an SEC stop order, a material misstatement or omission in such
Registration Statement or the information contained in such Registration
Statement having become outdated (other than the Registration Statement having
become outdated in connection with the Company's exercise of its rights pursuant
to Section 3(f)(ii) hereof)) or (3) a holder of shares of Series B Convertible
Preferred Stock having become unable to convert any shares of Series B
Convertible Preferred Stock in accordance with Section 9(a) of the Certificate
of Designations (other than by reason of the 4.9% limitation set forth therein),
then, in lieu of the adjustment of the Conversion Percentage (as defined in the
Certificate of Designations on any particular Computation Date) the Company
shall have the right to make payment to the Initial Investor in such amount and
at such time as shall be determined pursuant to this Section 2(c). The amount to
be paid by the Company to the Initial Investor shall be determined as of each
Computation Date, and such amount shall be equal to two-and-one-half percent
(2.5%) of the aggregate subscription price paid by the Initial Investor for the
Preferred Shares pursuant to the Subscription Agreement (each, a "Periodic
Amount"); provided, however, that the maximum aggregate amount payable by the
Company pursuant to this Section 2(c) shall be an amount equal to fifteen
percent (15%) of the aggregate subscription price paid by the Initial Investor
pursuant to the Subscription Agreement. If the Company elects to make payment
hereunder of any Periodic Amount, such payment shall be made by the Company by
wire transfer in immediately available funds on the applicable Computation Date
to such account as shall be specified for such purpose by the Initial Holder.
As used in this Section 2(c), "Computation Date" shall have
the meaning provided in the Certificate of Designations.
(d) PIGGY-BACK REGISTRATIONS. If at any time the Company shall
determine to prepare and file with the SEC a Registration Statement relating to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 or their
then equivalents relating to equity securities to be issued solely in connection
with any
-4-
<PAGE> 5
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within ten (10) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation is necessary to
effect an orderly public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement, based on the number of
securities for which registration is requested except to the extent such pro
rata exclusion of such other securities is prohibited under any written
agreement entered into by the Company with the holder of such other securities
prior to the date of this Agreement, in which case such other securities shall
be excluded, if at all, in accordance with the terms of such agreement. No right
to registration of Registrable Securities under this Section 2(d) shall be
construed to limit any registration required under Section 2(a) hereof. The
obligations of the Company under this Section 2(d) may be waived by Investors
holding a majority in interest of the Registrable Securities and shall expire
after the Company has afforded the opportunity for the Investors to exercise
registration rights under this Section 2(d) for two registrations; provided,
however, that any Investor who shall have had any Registrable Securities
excluded from any Registration Statement in accordance with this Section 2(d)
shall be entitled to include in an additional Registration Statement filed by
the Company the Registrable Securities
-5-
<PAGE> 6
so excluded. Notwithstanding any other provision of this Agreement, if the
Registration Statement required to be filed pursuant to Section 2(a) of this
Agreement shall have been ordered effective by the SEC and the Company shall
have maintained the effectiveness of such Registration Statement as required by
this Agreement and if the Company shall otherwise have complied in all material
respects with its obligations under this Agreement, then the Company shall not
be obligated to register any Registrable Securities on such Registration
Statement referred to in this Section 2(d).
(e) ELIGIBILITY FOR FORM S-3. The Company shall file all
reports required to be filed by the Company with the SEC in a timely manner so
as to become eligible for the use of Form S-3 and so as to maintain such
eligibility for the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of
the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 30 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (1) such date as is three years after the Closing Date and (2) the
date on which the Investors no longer beneficially own any Registrable
Securities, which Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
if the Company is seeking to accomplish a Significant Business Development (as
defined in Section 3(f)) and notifies the Investors in writing of such intent
and otherwise complies with the provisions of Section 3(f) hereof prior to the
time that the Registration Statement has been declared effective, the Company
shall have the right, for a period of up to thirty (30) days, to delay seeking
effectiveness of the Registration Statement provided that such period of up to
thirty (30) days ends on or before the 80th day following the Closing Date or
such later date as agreed to by the Investors.
-6-
<PAGE> 7
(b) subject to the provisions of paragraph (f)(ii) below, prepare and
file with the SEC such amendments (including post-effective amendments) and
supplements to the Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary to keep the Registration
Statement effective at all times until such date as is three years after the
Closing Date, and, during such period, comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities of
the Company covered by the Registration Statement until such time as all of such
Registrable Securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof as set forth in the
Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times until the earlier
of (A) such date as is three years after the Closing Date and (B) the date on
which the Investors no longer beneficially own any Registrable Securities, (iii)
take such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times until the earlier of (A) such date as is
three years after the date such
-7-
<PAGE> 8
Registration Statement is first ordered effective by the SEC and (B) the date on
which the Investors no longer beneficially own any Registrable Securities and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto (I) to qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (II) to subject
itself to general taxation in any such jurisdiction, (III) to file a general
consent to service of process in any such jurisdiction, (IV) to provide any
undertakings that cause more than nominal expense or burden to the Company or
(V) to make any change in its charter or by-laws, which in each case the Board
of Directors of the Company determines to be contrary to the best interests of
the Company and its stockholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) (i) as promptly as practicable after becoming aware of such event,
notify each Investor of the happening of any event of which the Company has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement to correct such untrue statement or
omission, and deliver a number of copies of such supplement or amendment to each
Investor as such Investor may reasonably request;
(ii) Notwithstanding Section 3(f)(i), if at the time the Company
notifies the Investors as contemplated by Section 3(f)(i) that such event
relates to a prospective development which constitutes a Significant Business
Development (as defined herein) of the Company, then the Company shall not be
required to make such amendment or supplement for a period of up to thirty (30)
days commencing on the date the prospectus included in the Registration
Statement becomes unavailable for use due to such Significant Business
Development; provided, however, that the Company may not invoke the provisions
of this
-8-
<PAGE> 9
Section 3(f)(ii) for more than thirty (30) days during any 180 day period;
(iii) A "Significant Business Development" shall mean (a) any
business combination transaction involving the purchase of the Company at a
premium to the market price of the Common Stock or a purchase of all or
substantially all of the assets of the Company at a price which, if the
consideration therefor were distributed to the stockholders of the Company,
would constitute a premium to the market price of the Common Stock at the time
such transaction is first publicly announced by the Company, (b) any business
combination transaction involving the acquisition by the Company of another
business for aggregate consideration in an amount in excess of $50 million, or
(c) any financing transaction involving the raising by the Company of funds in
an amount in excess of $10 million;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling stockholders'
counsel by the Investors who hold a majority in interest of the Registrable
Securities being sold to review and comment on the Registration Statement and
all amendments and supplements thereto a reasonable period of time prior to
their filing with the SEC;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Company's Registration Statement on Form S-4 which was
declared effective by the SEC on July 12, 1996;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given
-9-
<PAGE> 10
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters; and (ii) an opinion, dated such
date, from counsel representing the Company for purposes of such Registration
Statement, in form and substance as is customarily given in an underwritten
public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential. The Company shall hold in confidence and shall not make any
disclosure of information concerning an Investor provided to the Company
pursuant to Section 4(e) hereof unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a
-10-
<PAGE> 11
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other order from a court
or governmental body of competent jurisdiction or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement. The Company agrees that it shall, upon learning
that disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor, at its expense, to undertake appropriate
action to prevent disclosure of, or to obtain a protective order for, such
information;
(l) use its best efforts (i) to cause all the Registrable Securities
covered by the Registration Statement to be listed on the American Stock
Exchange, Inc. ("AMEX") or such other principal securities market on which
securities of the same class or series issued by the Company are then listed or
traded or (ii) if securities of the same class or series as the Registrable
Securities are not then listed on AMEX or any such other securities market, to
cause all of the Registrable Securities covered by the Registration Statement to
be listed on the Nasdaq National Market or the New York Stock Exchange;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement) an
instruction substantially in the form attached hereto as EXHIBIT 1 and an
opinion of such
-11-
<PAGE> 12
counsel, if required by the Company's transfer agent, in the form attached
hereto as EXHIBIT 2; and
(o) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least four (4) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and
-12-
<PAGE> 13
customary form, including, without limitation, customary indemnification and
contribution obligations, with the managing underwriter of such offering and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities, unless such Investor
has notified the Company in writing of such Investor's election to exclude all
of such Investor's Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3 and other than
the legal fees for the Investors, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees and
the fees and disbursements of counsel for the Company, shall be borne by the
Company.
-13-
<PAGE> 14
6. INDEMNIFICATION. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act, any underwriter (as defined in the Securities Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, liabilities or
expenses (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for
-14-
<PAGE> 15
any legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (I) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter for
such Indemnified Person expressly for use in connection with the preparation of
the Registration Statement or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; and (III)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such
-15-
<PAGE> 16
Investor will reimburse any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim as does not
exceed the amount of the net proceeds to such Investor as a result of the sale
of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; provided, however, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the
-16-
<PAGE> 17
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. In such event, the
Company shall pay for only one separate legal counsel for the Investors; such
legal counsel shall be selected by the Investors holding a majority in interest
of the Registrable Securities included in the Registration Statement to which
the Claim relates. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
-17-
<PAGE> 18
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the
Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of all or any portion
of such securities (or all or any portion of the Preferred Shares) of
Registrable Securities only if: (a) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (b) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration rights
are being transferred or assigned, (c) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, and (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein.
In connection with any such transfer the Company shall, at its sole cost and
expense, promptly after such assignment take such actions as shall be reasonably
acceptable to the Initial Investor and such transferee to assure that the
Registration Statement and related prospectus are available for use by such
transferee for sales of the Registrable Securities in respect of which the
rights to registration have been so assigned.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement
may be amended and the
-18-
<PAGE> 19
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and Investors who hold a majority in interest of the Registrable
Securities. Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by certified mail, return receipt requested, properly addressed and with
proper postage pre-paid (i) if to the Company, at JTS Corporation, 166 Baypointe
Parkway, San Jose, California 95134, Attention: Chief Financial Officer,
telephone line facsimile transmission No. (408) 468-1619, (ii) if to the Initial
Investor, c/o Genesee Investments, 10500 N.E. 8th Street, Suite 1920, Bellevue,
Washington 98004-4332, telephone line facsimile transmission No. (206) 462-4645
and (iii) if to any other Investor, at such address as such Investor shall have
provided in writing to the Company, or at such other address as each such party
furnishes by notice given in accordance with this Section 11(b), and shall be
effective, when personally delivered, upon receipt and, when so sent by
certified mail, four days after deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it
-19-
<PAGE> 20
may conflict therewith and shall be deemed modified to conform with such statute
or rule of law. Any provision hereof which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other
provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to perform
its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay.
(j) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
JTS CORPORATION
By__________________________
Name:
Title:
INITIAL INVESTOR:
NAME:_______________________
By__________________________
Name:
Title:
-21-
<PAGE> 22
Exhibit A--Schedule of Initial Investors
<TABLE>
<CAPTION>
No. of Purchase Total
Name and Address Series B Preferred Shares Price Purchase Price
- ---------------- ------------------------- -------- --------------
<S> <C> <C> <C>
Genesee Fund Limited- 2,500 $1,000 $ 2,500,000
Portfolio B
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
GFL Advantage Fund Limited 12,500 $1,000 $12,500,000
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
</TABLE>
-22-
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
November 25, 1996
JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Dear Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by JTS Corporation (the "Company") of a Registration Statement
on Form S-1 (the "Registration Statement") with the Securities and Exchange
Commission covering a total of 10,037,500 shares (the "Shares") of common
stock, $0.001 par value ("Common Stock") issued or are issuable upon (i) the
conversion of Series B Preferred Stock, $.001 par value (the "Series B
Preferred Stock"), or the exercise of Common Stock purchase warrants, issued or
issuable upon conversion of Series B Preferred Stock, issued to GFL Advantage
Fund Limited and Genesee Fund Limited-Portfolio B, (ii) the payment of
dividends on the outstanding shares of Series B Preferred Stock in Common
Stock, and (iii) the exercise of Common Stock purchase warrants issued to
Wharton Capital Corporation, as described in the Registration Statement.
In connection with this opinion, we have examined the Registration Statement,
the Company's Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, and such other documents, records, certificates, memoranda and
other instruments as we deem necessary as a basis for this opinion. We have
assumed the genuineness and authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies thereof, and the due execution and delivery of all documents where due
execution and delivery are a prerequisite to the effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares, when issued in accordance with the Registration Statement,
will be validly issued, fully paid, and nonassessable.
<PAGE> 2
JTS Corporation
November 19, 1996
Page 2
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Andrei M. Manoliu
___________________________
Andrei M. Manoliu
AMM/kal
<PAGE> 1
Exhibit 10.35
AGREEMENT FOR PURCHASE AND SALE
OF REAL PROPERTY WITH REPURCHASE OPTION
THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY WITH REPURCHASE
OPTION (the "Agreement") is made and entered into as of the 10th day of
September, 1996 by and between JTS CORPORATION ("Seller" or "JTS"), and JACK
TRAMIEL ("Buyer" or "Tramiel").
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Seller and Buyer hereby agree as follows:
1. DEFINITIONS. Unless the context otherwise specifies or requires, for
the purposes of this Agreement all words and phrases having their initial
letters capitalized herein shall have the meanings set forth in SCHEDULE 1
attached hereto.
2. PURCHASE AND SALE. Seller agrees to sell the real property described
on the attached EXHIBIT A (collectively the "Property") to Buyer, and Buyer
agrees to purchase the Property from Seller, on all of the terms, covenants and
conditions set forth in this Agreement.
3. PURCHASE PRICE. The total purchase price for the Property (the
"Purchase Price") shall be the sum of Ten Million Dollars ($10,000,000) which,
subject to all prorations and adjustments provided in this Agreement, shall be
paid by Buyer to Seller through escrow on the Closing Date in cash.
4. CONDITIONS TO AGREEMENT.
4.1 BUYER'S CONDITIONS PRECEDENT. Buyer's obligation to purchase
the Property or otherwise to perform any obligation provided in this Agreement
shall be conditioned expressly upon the fulfillment to Buyer's reasonable
satisfaction of each of the following conditions precedent:
4.1.1 The due and timely performance by Seller of each and
every covenant, undertaking and agreement to be performed by Seller as provided
in this Agreement.
4.1.2 As of the Closing Date, there shall have been no
material adverse change in the condition of the Property, or any portion
thereof.
4.2 SELLER'S CONDITIONS PRECEDENT. Seller's obligation to sell the
Property shall be conditioned expressly upon the fulfillment to Seller's
reasonable satisfaction of each of the following conditions precedent:
1.
<PAGE> 2
4.2.1 Buyer's due execution and delivery to Seller on
the Closing Date of a Memorandum of the Option to Repurchase in the form
attached hereto as EXHIBIT B for each county in which any of the Property is
located (COLLECTIVELY THE "OPTION MEMORANDA").
4.2.2 The due and timely performance by Buyer of each
and every covenant, undertaking and agreement to be performed by Buyer as
provided in this Agreement.
4.3 REMOVAL OF TITLE CONDITIONS. Buyer has notified Seller of
its objections to the disapproved exceptions listed on Schedule 2 attached
hereto (the "Disapproved Exceptions"). Following the Closing Date Seller shall,
at its sole cost and expense, remove the Disapproved Exceptions.
4.4 TERMINATION. In the event any of the foregoing conditions
are neither fulfilled, nor waived as provided above, Buyer, at its election by
written notice to Seller, may terminate this Agreement and be released from all
obligations under this Agreement. In the event of termination by Buyer all funds
deposited in escrow by Buyer or paid by Buyer to Seller outside of escrow and
all interest accrued on such funds shall be returned immediately to Buyer, and
all documents deposited in escrow by Buyer or Seller shall be returned to the
depositing party.
5. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
5.1 SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Seller
hereby makes the following covenants, representations and warranties to and for
the benefit of Buyer:
5.1.1 Seller will convey to Buyer all its right,
title and interest in the Property to Buyer, including the assignment of all
right, title and interest Seller may have as landlord under the Tenant Occupancy
Leases.
5.1.2 Neither Seller's execution of this Agreement
nor performance by Seller of any of its obligations hereunder (i) violates or
shall violate any written agreement to which Seller is bound, or (ii) shall
constitute a violation or breach by Seller of any judgment, order, writ,
injunction or decree issued or imposed upon Seller, and no approval, consent,
order, authorization, designation, filing (other than recording), registration,
notification of, by or with any judicial or governmental authority is required
in conjunction with Seller's execution of this Agreement and performance of its
obligations hereunder.
5.1.3 Seller shall deliver to Buyer on the Closing
date a certified copy of the resolution of its board of directors authorizing
the transactions contemplated by this Agreement.
5.1.4 At any time following the Closing Date and
during the term of this Agreement, Buyer shall, upon the written request of
Seller, cause the Property or any portion of it, to be listed for sale, and
shall cooperate fully with Seller in the marketing of the Property.
2.
<PAGE> 3
5.2 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes
the following representations and warranties to and for the benefit of Buyer:
5.2.1 Neither Buyer's execution of this Agreement nor
performance by Buyer of any of its obligations hereunder (i) violates or shall
violate any written agreement to which Buyer is bound, or (ii) shall constitute
a violation or breach by Buyer of any judgment, order, writ, injunction or
decree issued or imposed upon Buyer, and no approval, consent, order,
authorization, designation, filing (other than recording), registration,
notification of, by or with any judicial or governmental authority is required
in conjunction with Buyer's execution of this Agreement and performance of its
obligations hereunder.
5.2.2 Buyer is fully familiar with the Property due
to Buyer's affiliation with the previous owner of the Property. Buyer is
purchasing the Property based solely on his own knowledge and investigation of
the Property (to the extent he deems any such investigation necessary in light
of his prior knowledge of the Property), in its "as-is, where-is" condition,
without reliance upon any representation or warranty of Seller.
6. TITLE, ESCROW AND CLOSING.
6.1 CONDITIONS OF TITLE. Seller shall convey title to the
Property upon the close of escrow by grant deeds (the "Deeds") subject to no
exceptions other than the following (the "Conditions of Title"):
6.1.1 The lien for local real estate taxes and
assessments not yet due or payable;
6.1.2 All items set forth in Schedule B of the Title
Reports for the portions of the Property located in California and all items set
forth in Schedule C of the Title Reports for the portions of the Property
located in Texas, with the understanding that Seller, following the Closing
Date, shall remove the exceptions described on the SCHEDULE 2, attached hereto;
6.1.3 Interests of tenants pursuant to Tenant
Occupancy Leases; and
6.1.4 The Option Memoranda.
6.2 TITLE INSURANCE. Buyer's obligation to purchase the
Property shall be subject to the irrevocable commitment of the Title Company to
issue upon payment of its normal premium on the close of escrow of the
transaction contemplated by this Agreement its CLTA Owner's Policy of Title
Insurance for each portion of the Property located in California and its
standard form of Texas Land Title form of owner's policy of title insurance for
each portion of the Property located in Texas, insuring Buyer in the aggregate
amount of $10,000,000, that fee simple title to the Property is vested in Buyer
subject only to the Conditions of Title. Buyer shall be entitled to direct the
Title Company to allocate the amount of insurance to individual parcels for the
purpose of issuing individual policies of title insurance if Buyer so chooses.
3.
<PAGE> 4
6.3 CLOSING DATE. Through an escrow established with the Title
Company, Buyer and Seller shall consummate this transaction on September 12,
1996, or such later date as the parties shall mutually agree upon (the "Closing
Date").
6.4 DEPOSITS AND DELIVERIES BY SELLER. Seller shall deposit or
cause to be deposited into escrow with the Title Company, or deliver directly to
Buyer outside of escrow, on or before the Closing Date, the following documents
duly executed and acknowledged as required:
6.4.1 The Deeds.
6.4.2 An Assignment of Leases in the form attached
hereto as EXHIBIT C transferring to Buyer all of Seller's interest as landlord
under the Tenant Occupancy Leases, and all guarantees thereof, if any, (the
"Assignment of Leases").
6.4.3 An Affidavit of Non-Foreign Status.
6.4.4 Seller's written escrow instructions to close
escrow in accordance with the terms of this Agreement.
6.4.5 Counterpart originals of the Option Memoranda.
6.4.6 Such other documents, resolutions, consents and
affidavits necessary or advisable to effect the valid consummation of the
transaction evidenced by this Agreement.
6.5 DEPOSITS AND DELIVERIES BY BUYER. Buyer shall deposit or
cause to be deposited into escrow with the Title Company, or deliver directly to
Seller outside of escrow, on or before the Closing Date, each of the following
documents duly executed and acknowledged as required and funds:
6.5.1 Cash, wire transfer, cashier's check, or other
immediately available funds, which shall equal the Purchase Price (the "Purchase
Funds").
6.5.2 A counterpart original of the Assignment of
Leases.
6.5.3 Counterpart originals of the Option Memoranda.
6.5.4 Buyer's written escrow instructions to close
escrow in accordance with the terms of this Agreement.
6.6 CLOSING. The Title Company shall close escrow on the
Closing Date when and if it is irrevocably committed to issue the title
insurance described in SECTION 6.2 above and has received all of the documents
and funds listed in SECTIONS 6.4 and 6.5 above. The Title Company shall close
escrow by:
4.
<PAGE> 5
6.6.1 Recording the Deeds and the Option Memoranda,
in that order.
6.6.2 Issuing to Buyer the owner's policy of title
insurance described in SECTION 6.2 above.
6.6.3 Delivering to Buyer the original of the
Assignment of Leases and Non-Foreign Affidavit, each duly executed by Seller.
6.6.4 Delivering to Seller both original counterparts
of the Option Memoranda, and the Purchase Funds, after taking into account
Seller's share of prorations.
6.6.5 Delivering to Buyer and Seller copies of all
other documents and things deposited and/or delivered through escrow, the
originals of which are not being delivered by the Title Company to such parties,
together with Title Company's final closing statement for the subject
transaction.
6.7 PRORATIONS.
6.7.1 Rents and other income, current taxes,
insurance premiums and management, service, operating and maintenance expenses
shall be prorated between Seller and Buyer as of the Closing Date. All bonds,
assessments, encumbrances and other charges against the Property levied on or
before the Closing Date shall be assumed by Buyer.
6.7.2 All deposits made by tenants of the Property as
security for rent, cleaning or any other purpose and prepaid rents and all
interest accrued or due on such sums shall, at the sole option of Buyer, be
credited against the Purchase Price to be paid by Buyer.
6.8 CLOSING COSTS. Seller shall pay the cost of all transfer,
sales and conveyance taxes imposed by any governmental authority upon this
transaction, title insurance and endorsement premiums for the title insurance,
recording fees and escrow fees incurred in connection with the contemplated
transaction.
6.9 POSSESSION. Right to possession of the Property shall
transfer to Buyer on the Closing Date, subject to the rights of the tenants
under the Tenant Occupancy Leases.
7. COMMISSIONS.
7.1 BROKERAGE COMMISSION AND FINDER'S FEE. Each party to this
Agreement warrants to the other no person or entity can properly claim a right
to a real estate commission, real estate finder's fee, real estate acquisition
fee or other real estate brokerage-type compensation (collectively, "Real Estate
Compensation") based upon the acts of that party with respect to the transaction
contemplated by this Agreement, and each party hereby agrees to indemnify,
defend and protect the other against and to hold the other harmless from any
loss, cost or expense (including but not limited to attorneys' fees and returned
commissions) resulting from any claim for Real Estate Compensation by any person
or entity based upon such acts.
5.
<PAGE> 6
7.2 GRANT OF OPTION TO REPURCHASE. Tramiel does hereby grant
JTS an option to purchase the Property from Tramiel upon the following terms and
conditions:
7.2.1 PURCHASE PRICE. In the event the option is
exercised the purchase price for the Property shall be Ten Million Dollars
($10,000,000) (THE "OPTION PRICE"), subject to reduction in accordance with the
provisions of Section 7.2.5, below.
7.2.2 TITLE AND COSTS. In the event that the option
is exercised, the Property shall be conveyed free and clear of all liens and
encumbrances other than the lien for current real property taxes not yet due and
the Conditions of Title and the Tenant Occupancy Leases, and any other leases or
rental agreements relating to the property entered into by Tramiel with the
approval of JTS following the Closing Date, shall be assigned to JTS. JTS shall
pay the transfer tax upon conveyance of the Property, recording costs, and the
cost of any title insurance and escrow fees. Current taxes, insurance, premiums
and management, service, operating and maintenance expenses shall be prorated
between JTS and Tramiel as of the date Tramiel conveys the Property to JTS.
7.2.3 EXERCISE OF THE OPTION. The option may be
exercised at any time prior to the first anniversary of the Closing Date, but in
no event shall the closing take place until after such first anniversary. The
Property shall be conveyed to JTS, the purchase price shall be paid by JTS to
Tramiel, and the Tenant Occupancy Leases, and any other leases or rental
agreements entered into by Tramiel with the approval of JTS following the
Closing Date, shall be assigned to JTS by Tramiel, no later than thirty (30)
days following the first anniversary of the Closing Date. The option shall be
exercised by giving written notice of JTS's election to exercise the option to
Tramiel. If the option is not exercised within the time provided, unless the
date for the exercise of the option shall be extended in writing, the option
shall terminate.
7.2.4 ADDITIONAL ENCUMBRANCES, ALTERATIONS. Tramiel
shall not further encumber the Property, grant any easements, or agree to any
restrictions upon the Property without the prior written consent of JTS. Tramiel
shall not make any alterations to the Property nor convey title to the Property
to any third person until such time as the option shall have expired, except as
provided in Section 7.2.5 below.
7.2.5 SALE OF 11820 W. OLYMPIC BOULEVARD, LOS
ANGELES, CA. Atari Corporation entered into a purchase agreement with The Oved
Intervivos Trust Dated May 12, 1988, The Frederick H. Leeds Intervivos Trust of
November 30, 1990 and the Sheila L. Greger Intervivos Trust dated May 12, 1989
for the sale of that portion of the Property known as 11820 W. Olympic
Boulevard, West Los Angeles, California (the "West Los Angeles Site") for a
purchase price of $2,400,000. In the event Tramiel completes this transaction,
or any other transaction for the sale of the West Los Angeles Site with the
approval of JTS, the Option Price shall be reduced by the net sales proceeds
received by Tramiel upon his sale of the West Los Angeles Site. Tramiel has
indicated to JTS that he has negotiated a transaction with Kim Dunitz, the owner
of a one twenty-fourth interest in the West Los Angeles Site, to pay her a total
of $100,000 in exchange for her interest. The net sales proceeds shall be the
gross sales price less the sum of all Tramiel's expenses, taxes, commissions,
costs, transfer fees, closing
6.
<PAGE> 7
costs incurred in connection with such sale and any amount up to $100,000 (or
greater amount if agreed to in writing by JTS) paid by Tramiel to Kim Dunitz in
exchange for her interest in the West Los Angeles Site.
7.2.6 RECORDING. The parties agree to record a
memorandum of this Agreement. If the option is not exercised JTS agrees to
deliver quitclaim deeds for the Property to Tramiel.
8. RIGHT OF FIRST OFFER. The property located at 7060 W. Sunset
Boulevard, Los Angeles (the "Sunset/LaBrea Site") is encumbered by that certain
Declaration of Establishment of Restrictions and Covenants Affecting Land (the
"Declaration") recorded March 23, 1988 as Document #88-396092 in which a certain
person has a right of first offer concerning the Sunset/LaBrea Site. Because
Tramiel's offer to purchase each parcel comprising the Property is not
severable, JTS must notify the holder of such right of first offer of the terms
of this Agreement. In the event that, after the closing of the sale to Tramiel,
such person elects to purchase the Property, Tramiel, at the direction of JTS,
shall convey the Property either directly to such person or to JTS, upon payment
to Tramiel of the amount of Ten Million Dollars.
9. GENERAL PROVISIONS.
9.1 NOTICES. Any notice required or permitted to be given
under this Agreement shall be in writing and (i) personally delivered, (ii) sent
by United States mail, registered or certified mail, postage prepaid, return
receipt requested, (iii) sent by Federal Express or similar nationally
recognized overnight courier service, or (iv) transmitted by facsimile with a
hard copy sent within one (1) business day by any of the foregoing means, and in
all cases addressed as follows, and such notice shall be deemed to have been
given upon the date of actual receipt or delivery (or refusal to accept
delivery) at the address specified below (or such other addresses as may be
specified by notice in the foregoing manner) as indicated on the return receipt
or air bill:
To Seller: JTS CORPORATION
166 Baypointe Parkway
San Jose, CA 95134
Attn: Chief Financial Officer
With a copy to: Andrei Manoliu, Esq.
Cooley Godward
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Fax No. (415) 857-0663
Phone No. (415) 843-5000
7.
<PAGE> 8
To Buyer: MR. TRAMIEL
18331 Lexington Drive
Monte Sereno, CA 95030
With a copy to: Adron W. Beene, Esq.
6453 Hidden Creek Court
San Jose, CA 95120
Fax No. (408) 997-8439
Phone No. (408) 323-9223
9.2 ENTIRE AGREEMENT; NO MODIFICATIONS. This Agreement, together with
the schedules and exhibits attached hereto, incorporates all agreements,
warranties, representations and understandings between the parties to the
Agreement with respect to the subject matter hereof and constitutes the entire
agreement of Seller and Buyer with respect to the purchase and sale of the
Property. Any prior or contemporaneous correspondence, memoranda,
understandings, offers, negotiations and agreements, oral or written, are merged
herein and replaced in total by this Agreement and the exhibits hereto and shall
be of no further force or effect. This Agreement may not be modified or amended
except in a writing signed by Seller and Buyer.
9.3 TIME. Time is of the essence in the performance of the parties'
respective obligations set forth in this Agreement.
9.4 ATTORNEYS' FEES; VENUE. In the event any action or proceeding at
law or in equity between Buyer and Seller to enforce or interpret any provision
of this Agreement or to protect or establish any right or remedy of either Buyer
or Seller hereunder, the unsuccessful party to such action or proceeding shall
pay to the prevailing party all costs and expenses including, without
limitation, reasonable attorneys' and paralegals' fees and expenses, incurred by
such prevailing party, in such action or proceeding and in any appeal in
connection therewith, whether or not such action, proceeding or appeal is
prosecuted to judgment or other final determination, together with all costs of
enforcement and/or collection of any judgment or other relief. Venue shall be in
Santa Clara County.
9.5 SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Buyer
without the prior written consent of Seller which may be granted or withheld by
Seller in its sole discretion. Subject to the foregoing provision, this
Agreement shall inure to the benefit of and be binding upon the parties to this
Agreement and their respective successors and assigns.
9.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each such counterpart shall be deemed to be an original; all
counterparts so executed shall constitute one instrument and shall be binding on
all of the parties to this Agreement notwithstanding that all of the parties are
not signatory to the same counterpart.
8.
<PAGE> 9
9.7 CONSTRUCTION. This Agreement shall be governed by and construed
under the laws of the State of California. The parties acknowledge that each
party and its counsel have reviewed and revised this Agreement and that no rule
of construction to the effect that any ambiguities are to be resolved against
the drafting party shall be employed in the interpretation of this Agreement or
any schedules or exhibits to it or any document executed and delivered by either
party in connection with this Agreement. All captions in this Agreement are for
reference only and shall not be used in the interpretation of this Agreement or
any related document. If any provision of this Agreement shall be determined to
be illegal or unenforceable, such determination shall not affect any other
provision of this Agreement and all such other provisions shall remain in full
force and effect.
9.8 FURTHER ASSURANCES. The parties agree to enter into such further
documents as may be necessary to effect the transactions contemplated hereby.
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of
the date and year first written above:
SELLER: BUYER:
JTS Corporation
By /s/ W. Virginia Walker /s/ Jack Tramiel
______________________________ ____________________________
Jack Tramiel
Its Executive Vice President
_____________________________
9.
<PAGE> 10
SCHEDULE 1
DEFINED TERMS
For the purposes of this Agreement, the following words and phrases shall have
the following meanings unless the context otherwise specifies or requires:
"TENANT OCCUPANCY LEASES" shall mean all leases, work letter
agreements, improvement agreements, and other rental agreements, if any, listed
in SCHEDULE B TO THE ASSIGNMENT OF LEASES (which is attached to this Agreement
as EXHIBIT C) with respect to occupancy or use of the Property by tenants.
"TITLE COMPANY" shall mean Stewart Title Company whose address for this
transaction is as follows:
Stewart Title Company
180 Montgomery Street, Suite 840
San Francisco, CA 94104
Attn: Terry Duwell, Escrow Officer
Escrow No. 20101847
Fax No. (415) 986-5973
Phone No. (415) 705-8970
"TITLE REPORTS" shall mean the preliminary title reports with respect
to the Property described as follows:
40020708 8/25/96 (West Los Angeles, Los Angeles County)
80127028 8/8/96 (Costa Mesa, Orange County)
40020707 8/12/96 (Sunset/La Brea, Los Angeles County)
96116311B 8/14/96 (Champions Terrace, Harris County)
96116311A 8/14/96 (Deerbrook, Harris County)
96302992 8/9/96 (Mesquite and Carrollton, TX, Dallas County)
1.
<PAGE> 11
SCHEDULE 2
DISAPPROVED EXCEPTIONS
Title Report No. Disapproved Exceptions
West Los Angeles #6,7,8,9,12 of Schedule B
40020708
Sunset LaBrea #13 (but only to the extent of the right of first
40020707 offer contained therein), 15 of Schedule B
Costa Mesa #8 of Schedule B
80127028
Champions Terrace #6,7,8,10 of Schedule C
96116311B
Deerbrook #6,7,8,9,10 of Schedule C
96116311A
Mesquite and Carrollton #5,6,7,10,11,12,13 of Schedule C
96302992
2.
<PAGE> 12
EXHIBIT A
LEGAL DESCRIPTION
[to be attached]
<PAGE> 13
EXHIBIT A
Legal Description of Orange County Property
<PAGE> 14
EXHIBIT A
DESCRIPTION: THE LAND REFERRED TO HEREIN IS SITUATED IN THE COUNTY
OF LOS ANGELES, STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS:
PARCEL 1:
A PORTION OF BLOCK 34 OF PACIFIC FARMS, IN THE CITY OF LOS ANGELES, AS PER MAP
RECORDED IN BOOK 1 PAGE 43 AND 44 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER
OF SAID COUNTY, DESCRIBED AS FOLLOWS:
BEGINNING AT THE INTERSECTION OF THE SOUTHERLY LINE OF OLYMPIC BOULEVARD, AS
DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED IN BOOK 17331 PAGE
349, OFFICIAL RECORDS OF SAID COUNTY, WITH A LINE WHICH IS PARALLEL WITH AND
DISTANT 308.19 FEET SOUTHWESTERLY (MEASURED ALONG THE NORTHWEST LINE OF SAID
BLOCK FROM THE NORTHEASTERLY LINE OF SAID BLOCK 34; THENCE EASTERLY ALONG SAID
SOUTHERLY LINE ON A CURVE, CONCAVE TO THE NORTH, HAVING A RADIUS OF 2055 FEET, A
DISTANCE OF 162.72 FEET, MORE OR LESS, TO A POINT DISTANT WESTERLY 158.86 FEET,
MEASURED ALONG SAID SOUTHERLY LINE FROM THE NORTHEASTERLY LINE OF SAID BLOCK 34;
THENCE SOUTHERLY PARALLEL WITH SAID NORTHEASTERLY LINE, 58.97 FEET, MORE OR
LESS, TO THE BEGINNING OF A TANGENT CURVE, CONCAVE TO THE NORTHEAST, HAVING A
RADIUS OF 308.6 FEET, WHICH SAID CURVE INTERSECTS THE SOUTHERLY LINE OF SAID
BLOCK 34 AT A POINT DISTANT WESTERLY THEREON 110.65 FEET FROM THE MOST EASTERLY
CORNER OF SAID BLOCK; THENCE SOUTHEASTERLY ALONG SAID CURVE 180.74 FEET, MORE OR
LESS, TO SAID SOUTHERLY LINE; THENCE WESTERLY ALONG SAID SOUTHERLY LINE, 221.28
FEET, MORE OR LESS, TO A LINE WHICH IS PARALLEL WITH THE NORTHEASTERLY LINE OF
SAID BLOCK 34 AND PASSES THROUGH THE POINT OF BEGINNING; THENCE NORTHWESTERLY
ALONG SAID PARALLEL LINE, 199.35 FEET, TO THE POINT OF BEGINNING.
PARCEL 2:
AN EASEMENT FOR SPUR TRACK PURPOSES, OVER A STRIP OF LAND, 9 FEET IN WIDTH,
MEASURED AT RIGHT ANGLES, OR RADIALLY, EXTENDING FROM THE SOUTHERLY LINE OF SAID
OLYMPIC BOULEVARD, TO THE SOUTHERLY LINE OF SAID BLOCK 34, THE SOUTHWESTERLY
LINE OF SAID STRIP OF LAND BEING THE NORTHEASTERLY LINE OF THE HEREINBEFORE
DESCRIBED PARCEL 1.
PARCEL 3
PARCEL D OF PARCEL MAP L.A. NO. 5795, IN THE CITY OF LOS ANGELES, AS PER
MAP FILED IN BOOK 205, PAGES 27, 28 AND 29 OF PARCEL MAPS, IN THE OFFICE
OF THE COUNTY RECORDER OF SAID COUNTY.
<PAGE> 15
EXHIBIT A (CONTINUED)
PARCEL 4
NON EXCLUSIVE EASEMENTS FOR ROADWAY, WALKWAY, SURFACE DRAINAGE AND INGRESS AND
EGRESS AND PARKING OF MOTOR VEHICLES AND INCIDENTAL PURPOSES OVER THOSE PORTIONS
OF PARCELS A, B, C PARCEL MAP L.A. NO. 5795, IN THE CITY OF LOS ANGELES, AS PER
MAP FILED IN BOOK 205, PAGES 27, 28, AND 29 OF PARCEL MAPS, IN THE OFFICE OF THE
COUNTY RECORDER OF SAID COUNTY AS MORE FULLY SET IN PARAGRAPH 3A AND 3B AND
DELINEATED ON EXHIBIT "A" IN THE DECLARATION OF ESTABLISHMENT OF RESTRICTIONS
AND COVENANTS AFFECTING LAND RECORDED MARCH 23, 1988, AS INSTRUMENT NO.
88-39602.
PARCEL 5
AN EXCLUSIVE EASEMENT IN, TO, OVER, UNDER AND ACROSS THOSE PORTIONS OF PARCEL A,
B, C SHOWN ON PARCEL MAP NO. 5795 AS RECORDED IN BOOK 205, PAGES 27-29 OF PARCEL
MAPS, (THE "SERVIENT PROPERTY") AS REQUIRED FOR THE EXISTENCE AND MAINTENANCE OF
ANY AND ALL IMPROVEMENTS WHICH ENCROACH AS OF THE DATE HEREOF UPON THE SERVIENT
PROPERTY FROM ANY PORTION OF PARCEL D AS SHOWN ON PARCEL MAP NO. 5795 AS
RECORDED IN BOOK 205, PAGES 27-29, INCLUSIVE, AS OF THE DATE HEREOF. GRANTOR
FURTHER CONFIRMS AND AGREES THAT GRANTEE HAS THE RIGHT TO ENTER THE SERVIENT
PROPERTY TO REPAIR, MAINTAIN SUCH ENCROACHING IMPROVEMENT WHICH EXIST AS OF THE
DATE HEREOF, AS GRANTED IN DEED DATED MARCH 17, 1988, RECORDED MARCH 23, 1988 AS
INSTRUMENT NO. 88- 396094, OFFICIAL RECORDS.
<PAGE> 16
EXHIBIT A
Legal Description of Los Angeles County Property
<PAGE> 17
EXHIBIT "A"
A METES AND BOUNDS DESCRIPTION of a tract or parcel of land containing 0.9189
acres (40,028 square feet) located in the Wherry B. Adams Survey, Abstract No.
95, Harris County, Texas; being that portion know as Reserve "G" in Deerbrook
Mall, a subdivision of 95.1343 acres approved by the city of Humble, Texas, on
March 11, 1984 (not yet recorded) the 95.1343 acre tract described in deed of
record under File Code No. 070-00-0208, Clerk's File No. J331875 of the Harris
County Official Public Records of Real Property; said 0.9189 acre parcel being
more particularly described as follows:
BEGINNING at a 1-inch iron pipe with cap found at the most westerly southwest
corner of Deerbrook Mall, same being the southeast corner of Lot 10, Block 9 in
the Second Replat of Northshire Section 3, a subdivision of record in Volume
306; Page 124 of the Harris County Map Records; said iron pipe parking the
southwest corner of the herein described parcel;
THENCE, North 20(degree) 53' 25" West, 116.00 feet along the east line of the
aforementioned Lot 10, to a 1-inch iron pipe with cap found on the southerly
right-of-way line of Canterbury Driver (60-foot wide);
THENCE, North 20(degree) 00' 44" East, 43.57 feet to an "X" mark found in
concrete for the northwest corner of the parcel being described;
THENCE, North 69(degree) 05' 29" East, 109.82 feet to a 5/8 inch iron foot set
at an angle point;
THENCE, North 36(degree) 24' 19" East, 59.36 feet to a nail set for corner in
the arc of a non-tangent curve to the left;
THENCE, 13.12 feet along the arc of said non-tangent curve to the 1 ft. having a
radius of 547.58 feet, a central angle of 01(degree) 2" and chord bearing South
57(degree) 04' 48" East, 13.12 feet to a nail set at the end of said curve and
point of tangency;
THENCE; South 57(degree) 45' 59" East, 224.17 feet to a 5/8-inch iron rod set
for the southeast corner;
THENCE; South 69(degree) 06' 35" West 303.80 feet to the POINT OF BEGINNING AND
CONTAINING 0.9189 acre (40,028 square feet) of land area.
<PAGE> 18
EXHIBIT A
Legal Description of Orange County Property
<PAGE> 19
EXHIBIT A
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF
ORANGE, AND IS DESCRIBED AS FOLLOWS:
PARCEL 1 OF LOT LINE ADJUSTMENT NO. LL-92-03, IN THE CITY OF COSTA MESA,
COUNTY OF ORANGE, STATE OF CALIFORNIA, AS PER INSTRUMENT RECORDED
SEPTEMBER 3, 1992 AS INSTRUMENT NO. 92-596398 OF OFFICIAL RECORDS OF SAID
ORANGE COUNTY.
<PAGE> 20
EXHIBIT A
Legal Description of Dallas County Property
<PAGE> 21
EXHIBIT A
Legal description of land:
TRACT I
Lots 7A and 7B, in Block A, of TREASURY ADDITION, an addition to the
City of Mesquite, Dallas County, Texas, according to the Map or Plat
thereof recorded in Volume 84240, Page 3231, Map Records, Dallas
County, Texas, and Certificate of Correction of Error, filed 12/15/89,
recorded in Volume 89243, Page 2092, Real Property Records, Dallas
County, Texas.
TRACT II, PARCEL I
BEING a track of land in the M.P. Green Survey, Abstract No. 519,
Dallas County, located in the city limits of Carrollton, Texas, and
also being a part of Lot 1, Block 2, CAPITAL CENTER - PHASE I, as filed
for record in Volume 83168, Page 2036, Plat Records, Dallas County,
Texas and being more particularly described as follows:
BEGINNING at a found iron rod in the west right-of-way of Interstate
Highway 35-E, said point being the southeast corner of Lot 1, Block 2
"Capital Center Phase I" as filed for record in Volume 83168, Page
2036, Plat Records, Dallas County, Texas;
THENCE South 59(degree)19'36" West, departing said right-of-way line, a
distance of 575.75 feet to a set iron rod for a corner, said corner
being on the east right-of-way line of Crescent Drive (60 feet wide);
THENCE North 30(degree)40'24" West, along said east right-of-way line,
a distance of 483.74 feet to a set iron rod for a corner;
THENCE North 59(degree)19'36" East, a distance of 595.32 feet to a set
iron rod for a corner, on the west right-of-way line of said Interstate
Highway 35-E;
THENCE Southeasterly, along said right-of-way and along a circular
curve to the left, having a radius of 11,609.16 feet whose back tangent
bears South 27(degree)09'44" East, through a central angle of
2(degree)23'22", an arc distance of 484.17 feet to the POINT OF
BEGINNING AND CONTAINING 282,432 square feet or 6.484 acres of land
more or less.
1.
<PAGE> 22
TRACT II, PARCEL II
BEING a tract of land in the M.P. Green Survey, Abstract No. 519,
Dallas County, located in the City of Carrollton, Texas, and also being
a part of Lot 1, Block 2, CAPITAL CENTER - PHASE I, as filed for record
in Volume 83168, Page 2036, Plat Records of Dallas County, Texas, and
being more particularly described as follows:
BEGINNING at a set iron rod in the common east line of proposed
Crescent Drive (60 foot R.O.W.) and the west line of Lot 1, Block 2
"Capital Center Phase I" and said POINT OF BEGINNING being North
30(degree)40'24" West, along said common line a distance of 483.74 feet
from the southwest corner of Lot 1, Block 2 "Capital Center - Phase I";
THENCE North 30(degree)40'24" West, continuing along said common line a
distance of 209.17 feet to a set iron rod for a corner;
THENCE North 59(degree)19'36" East, departing said common line a
distance of 610.05 feet to a set iron rod for a corner in the west
right-of-way line of Interstate Highway 35-E;
THENCE Southeasterly, along said right-of-way line and along a circular
curve to the left having a radius of 11,609.19 feet whose black tangent
bears South 26(degree)07'38" East, through a central angle of
1(degree)02'06" an arc length of 209.69 feet to a set iron rod for a
corner;
THENCE South 59(degree)19'36" West, departing said west right-of-way
line, a distance of 595.32 feet to the POINT OF BEGINNING AND
CONTAINING 125,997 square feet or 2.893 acres of land more or less.
2.
<PAGE> 23
EXHIBIT A
Legal Description of Harris County Property
<PAGE> 24
EXHIBIT A TO SPECIAL WARRANTY DEED
PARCEL 1
ALL OF RESERVE "B" OF CASHEL FOREST, SECTION ONE, ACCORDING TO THE MAP OR PLAT
THEREOF RECORDED IN VOLUME 176, PAGE 35 OF THE MAP RECORDS OF HARRIS COUNTY,
TEXAS
PARCEL 2
ALL OF RESERVE "G" OF DEERBROOK MALL, ACCORDING TO THE MAP OR PLAT THEREOF
RECORDED IN VOLUME 334 PAGE 1 OF THE MAP RECORDS OF HARRIS COUNTY, TEXAS, AND
BEING MORE PARTICULARLY DESCRIBED BY METES AND BOUNDS ON EXHIBIT "A" ATTACHED
HERETO.
<PAGE> 25
EXHIBIT B TO PURCHASE AGREEMENT
FORM OF MEMORANDUM OF OPTION
TO REPURCHASE IN RECORDABLE FORM
attached
<PAGE> 26
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
COOLEY GODWARD & CASTRO
HUDDLESON & TATUM
5 PALO ALTO SQUARE
3000 EL CAMINO REAL
PALO ALTO, CA 94306-2115
ATTN: ANNA B. POPE, ESQ.
MEMORANDUM OF OPTION
THIS MEMORANDUM OF OPTION (the "Memorandum") is entered into as of
, 1996 between JTS CORPORATION ("JTS"), and JACK TRAMIEL ("Tramiel"), in
reference to the following:
1. OPTION. JTS and Tramiel entered into that certain AGREEMENT
FOR PURCHASE AND SALE OF REAL PROPERTY WITH REPURCHASE OPTION (the "Purchase
Agreement") as of the day of September, 1996.
2. GRANT OF OPTION TO REPURCHASE. Pursuant to the Purchase
Agreement, Tramiel did and does hereby, grant JTS an option to purchase the
property described on the attached Exhibit A (the "Property") from Tramiel upon
the terms and conditions set forth in the Purchase Agreement.
3. ADDITIONAL ENCUMBRANCES, ALTERATIONS. Tramiel agreed in the
Purchase Agreement, among other things, that Tramiel shall not further encumber
the Property, grant any easements, or agree to any restrictions upon the
Property without the prior written consent of JTS. Tramiel shall not make any
alterations to the Property nor convey title to the Property to any third person
until such time as the option shall have expired.
4. NOTICE. The purpose of this Memorandum is to identify the
Purchase Agreement for the purposes of information and notice. The sole
instrument for determining the terms, conditions and provisions of, and the
parties' rights under, the Purchase Agreement is the Purchase Agreement itself.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as
of the day and year first hereinabove written.
JTS Corporation
By
------------------------------- ---------------------------------
Jack Tramiel
Its
------------------------------
1.
<PAGE> 27
STATE OF ______________________________ )
) ss.
COUNTY OF _____________________________ )
On _______________________, 19___, before me,_______________________________,
personally appeared _______________________________________________,
[ ] personally known to me
-OR-
[ ] proved to me on the basis of satisfactory evidence
to be the person(s) whose name(s) is/are subscribed
to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s) or the
entity upon behalf of which the person(s) acted,
executed the instrument.
Witness my hand and official seal.
___________________________________
Signature of the Notary
This certificate must be attached Title or Type of Document:
to the document described at right: Number of Pages: Date of Document:
Signer(s) other than named above:
(C)1993 National Notary Association, Canoga Park, CA
CAPACITY CLAIMED BY SIGNER
Though statute does not require the
Notary to fill in the data below, doing so
may prove invaluable to persons relying
on the document.
[ ] Individual
[ ] Corporate Officer(s)
[ ] Partner(s) [ ] Limited
[ ] General
[ ] Attorney-in-Fact
[ ] Trustee(s)
[ ] Guardian/Conservator
[ ] Other:
SIGNER IS REPRESENTING:
Name of person(s) or entity(ies)
STATE OF ____________________________ )
) ss.
COUNTY OF ___________________________ )
On _______________________, 19___, before me,_____________________________,
personally appeared _______________________________________________,
[ ] personally known to me
-OR-
[ ] proved to me on the basis of satisfactory evidence
to be the person(s) whose name(s) is/are subscribed
to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s) or the
entity upon behalf of which the person(s) acted,
executed the instrument. SIGNER IS REPRESENTING:
Witness my hand and official seal.
___________________________________
Signature of the Notary
CAPACITY CLAIMED BY SIGNER
Though statute does not require the
Notary to fill in the data below, doing so
may prove invaluable to persons relying
on the document.
[ ] Individual
[ ] Corporate Officer(s)
[ ] Partner(s) [ ] Limited
[ ] General
[ ] Attorney-in-Fact
[ ] Trustee(s)
[ ] Guardian/Conservator
[ ] Other:
SIGNER IS REPRESENTING:
Name of person(s) or entity(ies)
2.
<PAGE> 28
This certificate must be attached Title or Type of Document:
to the document described at right:
Number of Pages: Date of Document:
Signer(s) other than named above:
(C)1993 National Notary Association, Canoga Park, CA
3.
<PAGE> 1
EXHIBIT 10.36
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of the date of
acceptance set forth below, by and between JTS CORPORATION, a Delaware
corporation, with headquarters located at 166 Baypointe Parkway, San Jose,
California 95134 (the "Company"), and the undersigned (the "Buyer"), a British
Virgin Islands corporation.
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D as promulgated by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act");
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, shares of non-voting, convertible
preferred stock of the Company which will be convertible into units consisting
of (1) shares of Common Stock, $.001 par value (the "Common Stock"), of the
Company and (2) warrants to purchase shares of Common Stock (the "Warrants"),
subject to acceptance of this Agreement by the Company; and
WHEREAS, contemporaneously with the execution and delivery of
this Agreement, the Company and Genesee Fund Limited-Portfolio B are executing
and delivering a Subscription Agreement (the "Portfolio B Subscription
Agreement") providing for the purchase and sale, upon the terms and subject to
the conditions provided therein, of shares of non-voting, convertible preferred
stock for an aggregate purchase price of $2,500,000.00; and
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION. The undersigned hereby agrees to purchase
from the Company the number of shares (the "Preferred Shares") of Series B
Convertible Preferred Stock, $.001 par value (the "Preferred Stock"), of the
Company set forth on the signature page of this Agreement, having the terms and
conditions as set forth in the form of Certificate of Designations attached
hereto as ANNEX I (the "Certificate of Designations") at the price per share and
for the aggregate purchase price set forth on the signature page of this
Agreement. The purchase price for the Preferred Shares shall be payable in
United States Dollars. The shares of
-1-
<PAGE> 2
Common Stock issuable upon conversion of the Preferred Stock are referred to
herein as the "Conversion Shares." The shares of Common Stock issuable upon
exercise of the Warrants are referred to herein as the "Warrant Shares." The
Conversion Shares and the Warrant Shares are referred to herein as the "Common
Shares." The Common Shares and the Preferred Shares are referred to herein
collectively as the "Shares." The Shares and the Warrants are referred to herein
collectively as the "Securities."
(b) FORM OF PAYMENT. The Buyer shall pay the purchase price
for the Preferred Shares by delivering good funds in United States Dollars to
the escrow agent (the "Escrow Agent") identified in the Joint Escrow
Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). Such
delivery of funds shall be made against delivery by the Company of the
certificates for the Preferred Shares registered in the name of the Buyer.
Promptly following payment by the Buyer to the Escrow Agent of the purchase
price of the Preferred Shares, but in no event later than the two New York Stock
Exchange trading days after such payment, the Company shall deliver certificates
for the Preferred Shares, registered in the name of the Buyer, to the Escrow
Agent. By signing this Agreement, the Buyer and the Company each agrees to all
of the terms and conditions of, and becomes a party to, the Joint Escrow
Instructions, all of the provisions of which are incorporated herein by this
reference as if set forth in full.
(c) METHOD OF PAYMENT. Payment of the purchase price for the
Preferred Shares shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: Advantage/JTS
Not later than 4:00 p.m., New York City time, on the date which is one New York
Stock Exchange trading day after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Buyer or its legal
counsel, the Buyer shall deposit with the Escrow Agent the aggregate purchase
price for the Preferred Shares.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
-2-
<PAGE> 3
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the
Preferred Shares for its own account for investment only and not with a view
towards the public sale or distribution thereof other than in connection with
the registration thereof under the 1933 Act;
(b) ACCREDITED INVESTOR. The Buyer is an "accredited investor"
as that term is defined in Rule 501 of the General Rules and Regulations under
the 1933 Act by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of
the Securities by the Buyer shall be made pursuant to registration of the Shares
being offered and sold under the 1933 Act or pursuant to an exemption from
registration;
(d) COMPANY RELIANCE. The Buyer understands that the Preferred
Shares are being offered and sold, and the Common Shares and the Warrants are
being offered, to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying upon the truth and accuracy of, and the Buyer=s compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Preferred Shares and to receive an offer of the Common Shares and the Warrants;
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Preferred Shares and the offer of the Common Shares which have been requested by
the Buyer. The Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Joint Proxy Statement/Prospectus, dated July 15, 1996, of the
Company, (2) Form 8-A, dated July 25, 1996, (3) Final Prospectus pursuant to
Rule 424(b)(3), dated July 17, 1996, (4) Current Reports on Form 8-K, dated July
28, 1996, September 26, 1996 and September 27, 1996, (5) the Company's
Registration Statement on Form S-8, dated July 31, 1996 and (6) the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996
(collectively, the "SEC Reports"). The Buyer understands that its investment in
the Securities involves a high degree of risk;
-3-
<PAGE> 4
(f) ABSENCE OF APPROVALS. The Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities; and
(g) SUBSCRIPTION AGREEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Buyer and is a valid
and binding agreement of the Buyer enforceable in accordance with its terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and
agrees with, the Buyer that:
(a) ORGANIZATION AND AUTHORITY. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has all requisite corporate power and authority to (i)
own, lease and operate its properties and to carry on its business as now being
conducted, and (ii) to execute, deliver and perform its obligations under this
Agreement, the Registration Rights Agreement, the form of which is attached
hereto as ANNEX III (the "Registration Rights Agreement"), the Certificate of
Designations, the Warrants, and the other agreements to be executed and
delivered by the Company in connection herewith, and to consummate the
transactions contemplated hereby. The Company is duly qualified to do business
as a foreign corporation and is in good standing in all jurisdictions wherein
such qualification is necessary and where failure so to qualify could have a
material adverse effect on the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company.
(b) CAPITALIZATION. The authorized capital stock of the
Company currently consists of (a) 150,000,000 shares of Common Stock, $.001 par
value, of which 104,732,381 shares were outstanding as of October 31, 1996, all
of which are fully paid and nonassessable, and on the Closing Date (as defined
herein) there will be no material increase from October 31, 1996 in the number
of shares of Common Stock outstanding; and (b) 10,000,000 shares of Preferred
Stock, $.001 par value, and of which 15,000 shares will be designated as Series
B Convertible Preferred Stock. As of October 31, 1996, the Company had
outstanding options to purchase 5,034,853 shares of Common Stock. The Company
does not have outstanding any material amount of securities (or obligations to
issue any such securities) convertible into, exchangeable for or otherwise
entitling the holders thereof to acquire shares of Common
-4-
<PAGE> 5
Stock, except as disclosed in the SEC Reports. The outstanding shares of Common
Stock and outstanding options, warrants and other securities to purchase Common
Stock have been duly authorized and validly issued. None of such outstanding
shares of Common Stock, options, warrants and other securities has been issued
in violation of the preemptive rights of any securityholder of the Company.
(c) CONCERNING THE SECURITIES. The Shares have been duly
authorized and the Preferred Shares, when issued and paid for in accordance with
this Agreement, and the Common Shares, when issued upon conversion of the
Preferred Shares, or exercise of the Warrants, as the case may be, will be duly
and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive or similar rights of any stockholder of the Company, as such, to
acquire any of the Securities. The Common Stock has been listed for trading on
the American Stock Exchange, Inc. ("AMEX") since July 30, 1996, is currently
listed for trading thereon and (1) the Company and the Common Stock meet the
criteria for continued listing and trading on AMEX; (2) the Company has not been
notified since July 30, 1996 by AMEX of any failure or potential failure to meet
the criteria for continued listing and trading on AMEX and (3) no suspension of
trading in the Common Stock is in effect. Subject to the following sentence, the
Company knows of no reason that the Common Shares will not be eligible for
listing on AMEX. The Company has informed the Buyer that as of the date hereof,
the Company does not satisfy the numerical listing criterion set forth in
Section 101(a) of the AMEX Company Guide, and the Company has informed the Buyer
that AMEX may determine in the future that the Company's Common Stock is no
longer eligible for listing and trading on AMEX as a result of the Company's
failure to satisfy such numerical listing criterion; provided, however, that
nothing contained in this representation shall affect the Company's obligations
under the Certificate of Designations including, without limitation, Section 10
thereof.
(d) SUBSCRIPTION AGREEMENT; REGISTRATION RIGHTS AGREEMENT;
WARRANTS. This Agreement, the Registration Rights Agreement and the Warrants
have been duly and validly authorized by the Company, this Agreement has been
duly executed and delivered on behalf of the Company and this Agreement is, the
Registration Rights Agreement, when executed and delivered by the Company, will
be, and the Warrants, when executed and delivered by the Company and issued from
time to time upon conversion of the Preferred Stock, will be valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally and limits upon rights to indemnity.
-5-
<PAGE> 6
(e) NON-CONTRAVENTION. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the issuance of
the Preferred Shares and the other transactions contemplated by this Agreement,
the Registration Rights Agreement and the terms of the Preferred Stock and the
Warrants do not and will not conflict with or result in a breach by the Company
of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound
which would have a material adverse effect on the Company or any applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
United States federal or state regulatory body, administrative agency or other
governmental body having jurisdiction over the Company or any of its properties
or assets which would have a material adverse effect on the Company.
(f) APPROVALS. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the stockholders of the Company is required to be
obtained by the Company for (1) the issuance and sale of the Preferred Shares as
contemplated by this Agreement, (2) the issuance of Common Shares and Warrants
on exercise of the Preferred Shares and (3) the issuance of Common Shares on
exercise of the Warrants.
(g) INFORMATION PROVIDED. The information provided by or on
behalf of the Company to the Buyer in connection with the transactions
contemplated by the Agreement, including, without limitation, the information
referred to in Section 2(e) of this Agreement and the information concerning the
manufacture, sale and marketing of the Company's 1 gigabyte 3-inch internal hard
drive for notebook computers, does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstance under which they are made,
not misleading.
(h) ABSENCE OF CERTAIN CHANGES. Since July 17, 1996, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company, except as disclosed in the SEC Reports.
(i) ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board or
body pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against the Company or any of its subsidiaries, wherein an
unfavorable decision, ruling or finding
-6-
<PAGE> 7
would have a material adverse effect on the properties, business, condition
(financial or other), results of operations or prospects of the Company and its
subsidiaries taken as a whole or the transactions contemplated by this Agreement
or any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
The Company has informed the Buyer that the Company has entered into a
settlement with Venture Lending & Leasing, Inc. ("VLLI") concerning VLLI's
action against the Company relating to the relocation of certain leased
equipment from its initial location to Madras, India, in alleged violation of
the lease agreement. The Company has informed the Buyer that VLLI's complaint
concerning such action has not yet been dismissed. The Company does not believe
that the outcome of such litigation will have a material adverse effect on the
Company.
(j) PROPERTIES. The Company and its subsidiaries have good
title to all property real and personal (tangible and intangible) and other
assets owned by it, free and clear of all security interests, charges,
mortgages, liens or other encumbrances, except such as are described in the SEC
Reports or such as do not materially interfere with the use of such property
made, or proposed to be made, by the Company or its subsidiaries. The leases,
licenses or other contracts or instruments under which the Company and its
subsidiaries lease, hold or are entitled to use any property, real or personal,
are valid, subsisting and enforceable with only such exceptions as do not
materially interfere with the use of such property made, or proposed to be made,
by the Company or its subsidiaries. Neither the Company nor any of its
subsidiaries has received notice of any material violation of any applicable
law, ordinance, regulation, order or requirement relating to its owned or leased
properties.
(k) LABOR RELATIONS. No material labor problem exists or, to
the knowledge of the Company, is imminent with respect to any of the employees
of the Company or any of its subsidiaries.
(l) SEC FILINGS. The Company has timely filed all required
forms, reports and other documents with the SEC, except that the Company failed
to file in a timely manner its Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996. All of such forms, reports and other documents
complied, when filed, in all material respects, with all applicable requirements
of the 1933 Act and the Securities Exchange Act of 1934, as amended (the "1934
Act").
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
-7-
<PAGE> 8
(a) TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the
Preferred Shares and the Warrants have not been and are not being registered
under the provisions of the 1933 Act and, except as provided in the Registration
Rights Agreement, the Common Shares have not been and are not being registered
under the 1933 Act, and may not be transferred unless (A) subsequently
registered thereunder or (B) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect that the Securities to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration; (2) any sale of
the Securities made in reliance on Rule 144 promulgated under the 1933 Act may
be made only in accordance with the terms of said Rule and further, if said Rule
is not applicable, any such resale of Securities under circumstances in which
the seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder (other than pursuant to Section 4(d) hereof and
pursuant to the Registration Rights Agreement).
(b) RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that
the certificates for the Preferred Shares and the Warrants and, until such time
as the Common Shares have been registered under the 1933 Act as contemplated by
the Registration Rights Agreement, the certificates for the Common Shares, may
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the certificates for the
Securities):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under the Securities
Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
(c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to
enter into the Registration Rights Agreement on or before the Closing Date.
(d) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof to the Buyer promptly
-8-
<PAGE> 9
after such filing. The Buyer agrees to cooperate with the Company in connection
with such filing and, upon request of the Company, to provide all information
relating to the Buyer reasonably required for such filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before
the Closing Date, the Company shall file a listing application for the Common
Shares with AMEX and shall provide evidence of such filing to the Buyer. The
Company shall use its best efforts to obtain approval by AMEX of the listing of
the Common Shares, subject to official notice of issuance, as promptly as
possible after the Closing Date. The Company shall inform the Buyer of such
approval promptly after the same is given. So long as the Buyer beneficially
owns any of the Preferred Shares, the Warrants or the Common Shares, the Company
shall file all reports required to be filed with the SEC pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the Company shall not terminate its status as an issuer required to file
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would permit such termination.
(f) USE OF PROCEEDS. The Company will use the proceeds from
the sale of the Preferred Shares for the Company's internal working capital
purposes and not for the purpose of any investment in or loan to any other
person.
(g) BLUE SKY LAWS. On or before the Closing Date, the Company
shall take such action as shall be necessary to qualify, or to obtain an
exemption for, the Preferred Shares for sale to the Buyer pursuant to this
Agreement, the Common Shares and Warrants for issuance to the Buyer on
conversion of the Preferred Shares and the Common Shares for issuance to the
Buyer upon exercise of the Warrants under such of the securities or "blue sky"
laws of jurisdictions in the United States as shall be applicable to the sale of
the Preferred Shares pursuant to this Agreement, the issuance of Common Shares
and Warrants on conversion of the Preferred Shares and the issuance of Common
Shares on exercise of the Warrants. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws on or prior to the Closing Date.
(h) CERTAIN EXPENSES. Whether or not the closing occurs, the
Company shall pay or reimburse the Buyer for all reasonable legal fees and
expenses of counsel to the Buyer for the preparation and negotiation of, and
closing under, this Agreement (but not to exceed $10,000).
(i) CERTAIN ISSUANCES OF SECURITIES. Unless the Company
obtains Shareholder Approval (as defined in the Certificate
-9-
<PAGE> 10
of Designations) or a waiver thereof from the AMEX, the Company will not issue
any shares of Common Stock or shares of any other series of preferred stock or
other securities convertible into, exchangeable for or otherwise entitling the
holder to acquire shares of Common Stock which would be subject to Section 713
of the rules of AMEX (or any successor or replacement provision thereof) and
which would be integrated with the sale of the Preferred Shares to the Buyer and
the conversion thereof into Common Shares for purposes of Section 713 of the
rules of the AMEX (or any successor or replacement provision thereof).
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
(a) TRANSFER AGENT INSTRUCTIONS. Promptly following the
delivery by the Buyer of the aggregate purchase price for the Preferred Shares
in accordance with Section 1(c) hereof, and prior to the Closing Date, the
Company will irrevocably instruct its transfer agent for the Common Stock (the
"Transfer Agent") to issue certificates for the Common Shares from time to time
(i) upon conversion of the Preferred Shares in such amounts as specified from
time to time to the Transfer Agent in the Notices of Conversion surrendered in
connection with such conversions and referred to in Section 5(b) of this
Agreement, and (2) upon exercise of the Warrants in such amounts as specified
from time to time to the Transfer Agent in the Form of Subscription to be
attached to the Warrants and surrendered in connection with such exercises, in
each case such certificates to bear the restrictive legend specified in Section
4(b) of this Agreement prior to registration of the Common Shares under the 1933
Act, registered in the name of the Buyer or its nominee and in such
denominations to be specified by the Buyer in connection with each conversion of
Preferred Shares or exercise of Warrants, as the case may be. The Company
warrants that no instruction other than (x) such instructions referred to in
this Section 5, (y) stop transfer instructions to give effect to Section 4(a)
hereof prior to registration of the Common Shares under the 1933 Act and (z) the
instructions required by Section 3(m) of the Registration Rights Agreement will
be given by the Company to the Transfer Agent and that the Common Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement. Nothing in this Section 5(a) shall
limit in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of the Securities. If the Buyer provides
the Company with an opinion of counsel reasonably satisfactory in form, scope
and substance to the Company that registration of a resale by the Buyer of any
of the Securities in accordance with clause (1)(B) of Section 4(a) of this
Agreement is not required under the 1933 Act, the Company shall permit the
transfer of such Securities and, in the case of the Common Shares,
-10-
<PAGE> 11
promptly, but in no event later than three days after receipt of such opinion,
instruct the Company's transfer agent to issue upon transfer one or more share
certificates in such name and in such denominations as specified by the Buyer.
The provisions of Section 3(n) of the Registration Rights Agreement shall
supersede this Section 5(a) once said Section 3(n) becomes applicable.
(b) CONVERSION PROCEDURE. In connection with the exercise of
conversion rights relating to the Preferred Shares, the Buyer or any subsequent
holder of the Preferred Shares shall complete, sign and furnish to the Company a
Notice of Conversion in the form attached hereto as ANNEX IV, which shall be
deemed to satisfy all requirements of the Certificate of Designations.
6. STOCK DELIVERY INSTRUCTIONS.
The certificates for the Preferred Shares shall be delivered
by the Company to the Escrow Agent pursuant to Section 1(b) hereof on a delivery
against payment basis at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Preferred
Shares (the "Closing Date") shall be 12:00 noon, New York City time, on the date
which is two New York Stock Exchange trading days after the date on which the
Buyer has deposited the purchase price for the Preferred Shares with the Escrow
Agent in accordance with Section 1(c) hereof, or such other mutually agreed to
time. The closing shall occur on the Closing Date at the offices of the Escrow
Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell
the Preferred Shares to the Buyer pursuant to this Agreement is conditioned
upon:
(a) The receipt and acceptance by the Company of this
Agreement as evidenced by execution of this Agreement by the Company and
delivery of an executed counterpart of this Agreement to the Buyer or its legal
counsel;
(b) Delivery by the Buyer to the Escrow Agent of good funds as
payment in full of an amount equal to the purchase price for the Preferred
Shares in accordance with Section 1(c) hereof;
(c) The accuracy on the Closing Date of the representations
and warranties of the Buyer contained in this Agreement as if made on the
Closing Date and the performance by the
-11-
<PAGE> 12
Buyer on or before the Closing Date of all covenants and agreements of the Buyer
required to be performed on or before the Closing Date; and
(d) The closing under the Portfolio B Subscription Agreement
shall have occurred.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Shares on the Closing Date is conditioned upon:
(a) Delivery by the Company to the Escrow Agent of the
certificates for the Preferred Shares in accordance with this Agreement;
(b) The accuracy on the Closing Date of the representations
and warranties of the Company contained in this Agreement as if made on the
Closing Date and the performance by the Company on or before the Closing Date of
all covenants and agreements of the Company required to be performed on or
before such Closing Date and receipt by the Buyer of a certificate, dated the
Closing Date, of an officer of the Company confirming such matters;
(c) The receipt by the Buyer of confirmation of the filing
with the Secretary of State of the State of Delaware of the Certificate of
Designations in the form attached hereto as ANNEX I;
(d) Receipt by the Buyer on the Closing Date of an opinion of
counsel for the Company, dated the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer, to the effect set forth in ANNEX V
attached hereto; and
(e) The closing under the Portfolio B Subscription Agreement
shall have occurred.
10. GOVERNING LAW; MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
(b) This Agreement may be executed in counterparts and by the
parties hereto on separate counterparts, all of which together shall constitute
one and the same instrument. A facsimile transmission of this Agreement bearing
a signature on behalf of a party hereto shall be legal and binding on such
party.
-12-
<PAGE> 13
(c) The headings, captions and footers of this Agreement are
for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in
writing signed by the party to be charged with enforcement.
(f) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) Any notices required or permitted to be given under the
terms of this Agreement shall be sent by mail or delivered personally (which
shall include telephone line facsimile transmission) or by courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt,
if delivered personally or by courier, in the case of the Company addressed to
the Company at its address shown in the introductory paragraph of this Agreement
(facsimile number (408) 468-1619) or, in the case of the Buyer, at its address
shown on the signature page of this Agreement, with a copy to Genesee
Investments, 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332
(facsimile number 206-462-4645) or such other address as a party shall have
provided by notice to the other party in accordance with this provision. The
Buyer hereby designates as its address for any notice required or permitted to
be given to the Buyer pursuant to the Certificate of Designations the address
shown on the signature page of this agreement, with a copy to: GFL Advantage
Fund Limited, c/o Genesee Investments, 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332 (facsimile number 206-462-4645), until the Buyer
shall designate another address for such purpose.
(h) The Buyer shall have the right to assign it rights and
obligations under this Agreement with respect to the purchase of all or any
portion of the Preferred Shares to another investment fund, provided such
assignee, by written instrument duly executed by such assignee, assumes all
obligations of the Buyer hereunder with respect to the purchase of the portion
of the Preferred Shares
-13-
<PAGE> 14
so assigned and makes the same representations and warranties with respect
thereto as the Buyer makes in this Agreement, whereupon the Buyer shall be
relieved of any further obligations, responsibilities and liabilities with
respect to the purchase of all or the portion of the Preferred Shares the
obligation for the purchase of which has been so assigned. In the case of any
such assignment, the Company shall agree in writing with such assignee to make
available to such assignee the benefits of the Registration Rights Agreement
with respect to the Common Shares issuable on conversion of the Preferred Shares
with respect to which the purchase under this Agreement has been so assigned.
(i) The respective representations, warranties, covenants and
agreements of the Buyer and the Company contained in this Agreement or made by
or on behalf of them, respectively, pursuant to this Agreement shall survive the
delivery of payment for the Preferred Shares and shall remain in full force and
effect regardless of any investigation made by or on behalf of them or any
person controlling or advising any of them.
(j) This Agreement and its Annexes set forth the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, whether written or oral,
with respect thereto.
(k) The Buyer shall have the right to terminate this Agreement
by giving notice at any time at or prior to the Closing Date if:
(1) the Company shall have failed, refused, or been unable at
or prior to the date of such termination of this Agreement to perform
any of its obligations hereunder;
(2) any other condition of the Buyer's obligations hereunder
is not fulfilled; or
(3) the closing shall not have occurred on a Closing Date on
or before November 8, 1996, other than by reason of a breach of this
Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer.
-14-
<PAGE> 15
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer or one of its officers thereunto duly authorized as of the date set
forth below.
NUMBER OF SHARES: 12,500
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $12,500,000.00
NAME OF BUYER: GFL ADVANTAGE FUND LIMITED
SIGNATURE ____________________________
Title: _______________________________
Date: _______________________________
Address: c/o CITCO
Kaya Flamboyan 9
CuraHao, Netherlands Antilles
This Agreement has been accepted as of the date set forth below.
JTS CORPORATION
By: ________________________
Title: _____________________
Date: _____________________
-15-
<PAGE> 16
Exhibit A--Schedule of Initial Investors
<TABLE>
<CAPTION>
No. of Purchase Total
Name and Address Series B Preferred Shares Price Purchase Price
- ---------------- ------------------------- -------- --------------
<S> <C> <C> <C>
Genesee Fund Limited- 2,500 $1,000 $ 2,500,000
Portfolio B
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
GFL Advantage Fund Limited 12,500 $1,000 $12,500,000
c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
</TABLE>
<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
San Jose, California
November 29, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of JTS Corporation on Form
S-1 of our report dated March 1, 1996 (April 8, 1996 as to Note 16) on the
consolidated financial statements of Atari Corporation and subsidiaries as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
November 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> FEB-02-1997 JAN-28-1996
<PERIOD-START> JAN-29-1996 JAN-30-1995
<PERIOD-END> JUL-28-1996 JAN-28-1996
<EXCHANGE-RATE> 1 1
<CASH> 684 547
<SECURITIES> 0 0
<RECEIVABLES> 11,352 2,016
<ALLOWANCES> 1,011 730
<INVENTORY> 12,761 2,093
<CURRENT-ASSETS> 911 240
<PP&E> 20,760 10,774
<DEPRECIATION> 3,930 2,831
<TOTAL-ASSETS> 41,695 19,813
<CURRENT-LIABILITIES> 75,882 27,116
<BONDS> 0 0
29,697 27,785
0 0
<COMMON> 0 0
<OTHER-SE> (72,310) (38,573)
<TOTAL-LIABILITY-AND-EQUITY> 41,695 19,813
<SALES> 33,764 13,502
<TOTAL-REVENUES> 33,764 18,777
<CGS> 45,249 28,548
<TOTAL-COSTS> 45,249 50,588
<OTHER-EXPENSES> 21,837 32
<LOSS-PROVISION> 281 726
<INTEREST-EXPENSE> 1,790 589
<INCOME-PRETAX> (34,804) (33,050)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (34,804) (33,050)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (34,804) (33,050)
<EPS-PRIMARY> (3.69) (7.17)
<EPS-DILUTED> (3.69) (7.17)
</TABLE>
