<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1996
REGISTRATION NO. 333-06643
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
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 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) NO.)
ORGANIZATION)
</TABLE>
166 Baypointe Parkway, San Jose, CA 95134, Telephone: (408) 468-1800
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
------------------------
DAVID T. MITCHELL
Chief Executive Officer
JTS Corporation
166 Baypointe Parkway, San Jose, CA 95134, (408) 468-1800
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
With Copies to:
<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. ANDREI M. MANOLIU, ESQ.
J. ROBERT SUFFOLETTA, ESQ. MATTHEW W. SONSINI, ESQ.
Wilson Sonsini Goodrich & Rosati, P.C. Cooley Godward Castro Huddleson & Tatum
650 Page Mill Road Five Palo Alto Square
Palo Alto, California 94304 Palo Alto, California 94306
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
The proposed sale will take place upon the merger (the "Merger") of Atari
Corporation, a Nevada Corporation ("Atari"), with and into JTS Corporation (the
"Registrant").
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value... 63,854,718 Shares(1) $5.03125 $312,269,050 $142,376.40(2)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the estimated maximum number of shares of the Common Stock of the
Registrant which may be issued to former stockholders of Atari pursuant to
the Merger described herein.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended, on
the basis of the market value of Atari Common Stock to be received by the
Registrant in the proposed merger, calculated in accordance with Rule 457(f)
on the basis of the average of the high and low sales prices reported for
such securities by the American Stock Exchange on July 11, 1996. Of this
amount, $142,170 was paid in connection with the initial filing of the
Registration Statement on June 22, 1996 with respect to 63,735,718 shares of
Common Stock at a proposed maximum offering price of $6.46875 per share. The
additional amount of the registration fee ($202.40) has been calculated
pursuant to Rule 457 with respect to the additional 119,000 shares to be
registered hereby at the proposed maximum offering price indicated.
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
JTS CORPORATION
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------- --------------------------------------------
<C> <S> <C>
(Information about the Transaction)
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................ Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............. Summary; Risk Factors; Introduction
4. Terms of the Transaction.................... Summary; Introduction; The Proposed Merger
and Related Transactions; Description of
Capital Stock of Atari and JTS; Comparison
of Rights of Stockholders of Atari and JTS
5. Pro Forma Financial Information............. Unaudited Pro Forma Condensed Combined
Financial Information
6. Material Contacts with the Company being
Acquired.................................. The Proposed Merger and Related Transactions
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable
8. Interests of Named Experts and Counsel...... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
(Information about the Registrant)
10. Information with Respect to S-3
Registrants............................... Not Applicable
11. Incorporation of Certain Information by
Reference................................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants............................... Not Applicable
13. Incorporation of Certain Information by
Reference................................. Not Applicable
14. Information with Respect to Registrants
other than S-2 or S-3 Registrants......... Summary; Risk Factors; Introduction; Voting
and Proxies; The Proposed Merger and Related
Transactions; Stock Price and Dividend
Information; Unaudited Pro Forma Condensed
Combined Financial Statements; Information
Regarding JTS Corporation; Description of
Capital Stock of Atari and JTS; Index to
Financial Statements
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
- ------------------------------------------------- --------------------------------------------
<C> <S> <C>
(Information about the Company being Acquired)
15. Information with Respect to S-3 Companies... Summary; Risk Factors; Introduction; Voting
and Proxies; The Proposed Merger and Related
Transactions; Stock Price and Dividend
Information; Unaudited Pro Forma Condensed
Combined Financial Statements; Information
Regarding Atari; Description of Capital
Stock of Atari and JTS; Index to Financial
Statements
16. Information with Respect to S-2 or S-3
Companies................................. Not Applicable
17. Information with Respect to Companies other
than S-2 or S-3 Companies................. Not Applicable
(Voting and Management Information)
18. Information, if Proxies, Consents or
Authorizations are to be Solicited........ Summary; Introduction; Voting and Proxies,
The Proposed Merger and Related
Transactions; Information Regarding Atari
Corporation; Information Regarding JTS
Corporation; Description of Capital Stock
of Atari and JTS.
19. Information, if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer...................... Not Applicable
</TABLE>
<PAGE> 4
ATARI CORPORATION
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 328-0900
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of Atari
Corporation ("Atari") will be held at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari,
on Tuesday, July 30, 1996, at 9:00 a.m.
At the Special Meeting, you will be asked to consider and vote upon the
approval of an Amended and Restated Agreement and Plan of Reorganization dated
as of April 8, 1996 (the "Merger Agreement"), between Atari and JTS Corporation
("JTS") and the merger of Atari with and into JTS (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock and each outstanding option to acquire Atari Common Stock will
become an option to acquire an equal number of shares of JTS Common Stock.
Following consummation of the Merger (assuming no exercise of outstanding
options to purchase Atari Common Stock or JTS Common Stock after June 28, 1996),
Atari stockholders immediately prior to the Merger will hold an aggregate of
63,854,718 shares of JTS Common Stock representing approximately 62% of the
outstanding capital stock of JTS.
Atari's Board of Directors has unanimously approved the Merger and the
Merger Agreement and has determined that they are fair to, and in the best
interests of, Atari and its stockholders. The Board of Directors recommends a
vote FOR the Merger and the Merger Agreement.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken at the Special Meeting and a proxy card. The Joint Proxy
Statement/Prospectus provides more detailed information regarding the proposed
Merger and related matters, includes information about Atari and JTS and
discusses the Board's reasons for recommending the Merger.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE
SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED
AND VOTED AT THE SPECIAL MEETING.
July 15, 1996
Sincerely,
Sam Tramiel
President
<PAGE> 5
ATARI CORPORATION
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CALIFORNIA 94086
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
To the Stockholders of Atari Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Atari Corporation, a Nevada corporation ("Atari"), will be held on
Tuesday, July 30, 1996, at 9:00 a.m. at the offices of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to Atari.
A Proxy Card and Joint Proxy Statement/Prospectus for the Special Meeting
are enclosed.
The Special Meeting is for the purpose of considering and acting upon:
1. A proposal to approve (a) the Amended and Restated Agreement and Plan
of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between
Atari and JTS Corporation, a Delaware corporation ("JTS"), and (b) the merger of
Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger
Agreement, each outstanding share of Atari Common Stock will be converted into
one share of JTS Common Stock, and each outstanding option to acquire Atari
Common Stock will become an option to acquire JTS Common Stock.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Merger is more fully described in, and the Merger Agreement is attached
in its entirety to, the Joint Proxy Statement/Prospectus accompanying this
Notice.
Only stockholders of record at the close of business on June 28, 1996 (the
"Record Date") are entitled to notice of, and to vote at, the Special Meeting or
at any postponement(s) or adjournment(s) thereof.
Approval of the Merger and the Merger Agreement will require the
affirmative vote of the holders of a majority of the shares of Atari Common
Stock outstanding on the Record Date.
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
July 15, 1996
By Order of the Board of Directors
Sam Tramiel
President
<PAGE> 6
JTS CORPORATION
166 BAYPOINTE PARKWAY
SAN JOSE, CALIFORNIA 95134
(408) 468-1800
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of JTS
Corporation ("JTS") will be held at JTS' offices located at 166 Baypointe
Parkway, San Jose, California on Tuesday, July 30, 1996 at 9:00 a.m.
At the Special Meeting, you will be asked to consider and vote upon the
approval of an Amended and Restated Agreement and Plan of Reorganization dated
as of April 8, 1996 (the "Merger Agreement"), between JTS and Atari Corporation
("Atari"), and the merger of Atari with and into JTS (the "Merger").
Pursuant to the Merger Agreement, upon consummation of the Merger, each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock. Following consummation of the Merger (assuming no exercise of
outstanding options to purchase JTS Common Stock or Atari Common Stock after
June 28, 1996), the former stockholders of Atari will hold an aggregate of
63,854,718 shares of JTS Common Stock representing approximately 62% of the
outstanding capital stock of JTS.
JTS' Board of Directors has unanimously approved the Merger and the Merger
Agreement and has determined that they are fair to, and in the best interests
of, JTS and its stockholders. The Board of Directors recommends a vote FOR the
Merger and the Merger Agreement.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken at the Special Meeting and a proxy card. The Joint Proxy
Statement/Prospectus provides more detailed information regarding the proposed
Merger and related matters, includes information about JTS and Atari and
discusses the Board's reasons for recommending the Merger.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES THAT YOU OWN. IN
ORDER TO ENSURE THAT YOUR VOTE WILL BE COUNTED, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON. IF YOU ATTEND THE
SPECIAL MEETING IN PERSON, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
July 15, 1996
Sincerely,
David T. Mitchell
Chief Executive Officer and President
<PAGE> 7
JTS CORPORATION
166 BAYPOINTE PARKWAY
SAN JOSE, CALIFORNIA 95134
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
To the Stockholders of JTS Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of JTS Corporation, a Delaware corporation ("JTS"), will be held on
Tuesday, July 30, 1996, at 9:00 a.m., at JTS' offices located at 166 Baypointe
Parkway, San Jose, California.
The Special Meeting is for the purpose of considering and acting upon:
1. A proposal to approve (a) the Amended and Restated Agreement and Plan
of Reorganization dated as of April 8, 1996 (the "Merger Agreement") between JTS
and Atari Corporation, a Nevada Corporation ("Atari"), and (b) the merger of
Atari with and into JTS (the "Merger"). Pursuant to the terms of the Merger
Agreement, each outstanding share of Atari Common Stock will be converted into
one share of JTS Common Stock, and each outstanding option to acquire Atari
Common Stock will become an option to acquire JTS Common Stock.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Merger is more fully described in, and the Merger Agreement is attached
in its entirety to, the Joint Proxy Statement/Prospectus accompanying this
Notice.
Only stockholders of record of JTS Common Stock and JTS Series A Preferred
Stock at the close of business on June 18, 1996 (the "Record Date") are entitled
to notice of, and to vote at, the Special Meeting, or at any postponement(s) or
adjournment(s) thereof.
Approval of the Merger and the Merger Agreement will require the
affirmative vote of the holders of (a) a majority of the shares of JTS Common
Stock and JTS Series A Preferred Stock outstanding on the Record Date, voting
together, (b) a majority of the shares of JTS Common Stock outstanding on the
JTS Record Date, voting separately as a class, and (c) at least two-thirds of
the shares of JTS Series A Preferred Stock outstanding on the Record Date,
voting separately as a class. If the Merger is consummated, stockholders of JTS
who do not vote in favor of the Merger and the Merger Agreement and who
otherwise comply with Section 262 of the Delaware General Corporation Law or
Chapter 13 of the California General Corporation Law will be entitled to
statutory appraisal or dissenters' rights. See "The Proposed Merger and Related
Transactions -- Appraisal and Dissenters' Rights" and Appendices D-1 and D-2 to
the accompanying Joint Proxy Statement/Prospectus.
IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE
ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND
VOTE IN PERSON.
July 15, 1996
By Order of the Board of Directors
David T. Mitchell
Chief Executive
Officer and President
<PAGE> 8
JTS CORPORATION
PROSPECTUS
------------------------------------
JOINT PROXY STATEMENT
ATARI CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
JTS CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
------------------------------------
This Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") of Atari Corporation ("Atari") and JTS Corporation
("JTS") is being used (a) to solicit proxies on behalf of Atari from holders of
the outstanding Common Stock of Atari (the "Atari Common Stock") in connection
with the Special Meeting of Stockholders of Atari to be held on July 30, 1996
(the "Atari Special Meeting"), and (b) to solicit proxies on behalf of JTS from
holders of the outstanding JTS Common Stock (the "JTS Common Stock") and JTS
Series A Preferred Stock (the "JTS Series A Preferred Stock") in connection with
the Special Meeting of Stockholders of JTS to be held on July 30, 1996 (the "JTS
Special Meeting").
At the meetings referred to above, the stockholders of Atari and JTS will
be asked to consider and vote upon the approval of (a) the Amended and Restated
Agreement and Plan of Reorganization between Atari and JTS dated as of April 8,
1996 (the "Merger Agreement"), a copy of which is attached hereto as Appendix A
and incorporated herein by reference, and (b) the merger of Atari with and into
JTS (the "Merger").
Upon consummation of the Merger, Atari will be merged with and into JTS,
the separate existence of Atari will cease, JTS will remain as the surviving
corporation and all of the rights, privileges, powers, franchises, properties,
assets, liabilities and obligations of Atari will be vested in JTS. At the
effective time of the Merger, each outstanding share of Atari Common Stock will
be converted into one share of JTS Common Stock. See "The Proposed Merger and
Related Transactions--Summary of the Merger Agreement--Manner and Basis of
Converting Atari Common Stock."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
JTS under the Securities Act of 1933, as amended (the "Securities Act"), for the
offering of up to 63,854,718 shares of JTS Common Stock in connection with the
Merger. This prospectus does not cover resales of the JTS Common Stock to be
issued in connection with the Merger and no person is authorized to use this
prospectus in connection with any resale.
The information set forth in this Joint Proxy Statement/Prospectus
regarding Atari has been furnished by Atari and the information set forth in
this Joint Proxy Statement/Prospectus regarding JTS has been furnished by JTS.
This Joint Proxy Statement/Prospectus is being mailed to stockholders of
Atari and JTS on or about July 15, 1996.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS
ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT/PROSPECTUS IN ITS ENTIRETY.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
------------------------------------
NEITHER THIS TRANSACTION NOR THE SECURITIES TO BE ISSUED PURSUANT TO THIS
JOINT PROXY STATEMENT/PROSPECTUS HAVE BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JULY 15, 1996.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
SUMMARY............................................................................. 6
The Parties to the Proposed Merger................................................ 6
Atari Special Meeting of Stockholders............................................. 6
JTS Special Meeting of Stockholders............................................... 7
The Merger........................................................................ 7
Market Price of Common Stock...................................................... 11
Risk Factors...................................................................... 11
Atari Historical Selected Consolidated Financial Data............................. 12
JTS and Moduler Electronics Unaudited Selected Financial Data..................... 13
Atari and JTS Unaudited Selected Pro Forma Combined Financial Data................ 14
Comparative Per Share Data........................................................ 15
RISK FACTORS........................................................................ 16
Risk Factors Related to the Business of Atari..................................... 16
Risk Factors Related to the Business of JTS....................................... 18
Other Risk Factors Related to the Merger.......................................... 25
INTRODUCTION........................................................................ 27
VOTING AND PROXIES.................................................................. 28
Date, Time and Place of Special Stockholder Meetings.............................. 28
Record Date and Outstanding Shares................................................ 28
Voting and Revocability of Proxies................................................ 28
Stockholder Votes Required........................................................ 29
Solicitation of Proxies; Expenses................................................. 30
Appraisal and Dissenters' Rights.................................................. 30
THE PROPOSED MERGER AND RELATED TRANSACTIONS........................................ 31
Background and Board Recommendations.............................................. 31
Summary of the Merger Agreement................................................... 40
Certain Other Items Related to the Merger......................................... 47
Related Transactions.............................................................. 50
Appraisal and Dissenters' Rights.................................................. 51
Certain Federal Income Tax Considerations......................................... 55
STOCK PRICE AND DIVIDEND INFORMATION................................................ 57
JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS.................. 58
JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................... 59
ATARI CORPORATION AND JTS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS.............................................................. 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION AND
PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE QUARTER
ENDED MARCH 31, 1996.............................................................. 69
INFORMATION REGARDING ATARI CORPORATION............................................. 70
Business of Atari................................................................. 70
Selected Consolidated Financial Data of Atari..................................... 75
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Atari............................................................ 76
Management of Atari............................................................... 81
Principal Stockholders of Atari................................................... 82
INFORMATION REGARDING JTS CORPORATION............................................... 84
Business of JTS................................................................... 84
JTS and Moduler Electronics Unaudited Selected Financial Data..................... 93
Management's Discussion and Analysis of Financial Condition and Results of
Operations of JTS.............................................................. 94
Management of JTS................................................................. 98
</TABLE>
2
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Transactions................................................................ 105
Principal Stockholders of JTS....................................................... 108
DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS....................................... 110
Atari Capital Stock............................................................... 110
JTS Capital Stock................................................................. 110
COMPARISON OF RIGHTS OF STOCKHOLDERS OF ATARI AND JTS AND THE COMBINED COMPANY...... 113
LEGAL MATTERS....................................................................... 118
EXPERTS............................................................................. 118
STOCKHOLDER PROPOSALS............................................................... 119
INDEX TO FINANCIAL STATEMENTS....................................................... F-1
APPENDICES
A Amended and Restated Agreement and Plan of Reorganization...................... A-1
B-1 Form of Atari Voting Agreement................................................ B-1-1
B-2 Form of JTS Voting Agreement.................................................. B-2-1
C Montgomery Securities Fairness Opinion......................................... C-1
D-1 Section 262 of the Delaware General Corporation Law........................... D-1-1
D-2 Chapter 13 of the California General Corporation Law.......................... D-2-1
</TABLE>
3
<PAGE> 11
AVAILABLE INFORMATION
Atari is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the Public
Reference Room of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such material may also be obtained
from the Commission at prescribed rates by writing to the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, material filed by Atari can be inspected at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of Atari and JTS to approve the Merger and the Merger
Agreement constitutes an offering of the JTS Common Stock to be issued in
connection with the Merger. Accordingly, JTS has filed with the Commission a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to such offering. This Joint Proxy
Statement/Prospectus constitutes the prospectus of JTS that is filed as part of
the Registration Statement. Other parts of the Registration Statement are
omitted from this Joint Proxy Statement/Prospectus in accordance with the rules
and regulations of the Commission. Copies of the Registration Statement,
including exhibits thereto, may be inspected, without charge, at the offices of
the Commission referred to above, or obtained at prescribed rates from the
Public Reference Section of the Commission at the address set forth above.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SHARES OF JTS COMMON STOCK TO BE ISSUED IN THE MERGER, OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
4
<PAGE> 12
TRADEMARKS
This Joint Proxy Statement/Prospectus contains registered and other
trademarks and tradenames of Atari, JTS and other companies.
------------------
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth below. Reference is made to the particular
discussions set forth under "The Proposed Merger and Related
Transactions -- Forward-Looking Financial Information Provided by JTS,"
"Information Regarding Atari Corporation -- Management's Discussion and Analysis
of Financial Condition and Results of Operations of Atari" and "Information
Regarding JTS Corporation -- Management's Discussion and Analysis of Financial
Condition and Results of Operations of JTS." In connection with forward-looking
statements that appear in these disclosures, stockholders of Atari and JTS
should carefully review the factors set forth in the Joint Proxy
Statement/Prospectus including, but not limited to, those discussed under "Risk
Factors -- Risk Factors Related to the Business of Atari -- Significant
Operating Losses; Disappointing Sales of Jaguar Products," "-- Risk of
Substantial Inventory Write-Downs," "-- Risk of Potential Liabilities,"
"-- Intellectual Property," "-- Competition," "-- Risks of Bridge Loan to JTS,"
"-- Reduction in Voting Control; Loss of Management Control," "-- Risk Factors
Related to the Business of JTS -- Limited Operating History; Working Capital
Deficit; Independent Accountants' Report and Explanatory Paragraph," "-- Need
for Additional Financing," "-- Highly Competitive Market," "-- Uncertainty of
Market Acceptance; Lengthy Sales Cycle," "-- Rapid Technological Change,"
"Recent Significant Appreciation in Price of Atari Common Stock,"
"-- Availability of Components and Materials; Dependence on Suppliers,"
"-- Cyclical Nature of Disk Drive and Computer Industries," "-- Dependence on
Compaq Relationship; Customer Concentration," "-- Reliance on Licensed
Technology," "-- Intellectual Property and Proprietary Rights," "-- Expansion of
Manufacturing Capacity," "-- Production Yields; Product Quality," "-- Management
of Growth," "-- Variability of Operating Results," "-- Dependence on Single
Manufacturing Facility," "Risks of International Sales and Manufacturing,"
"-- Dependence on Key Management Personnel," "-- Other Risk Factors Related to
the Merger," "-- Risks Associated with Fixed Exchange Ratio," "-- Utilization of
Net Operating Losses," "-- Control by Affiliates; Anti-takeover Effects" and
"-- Diversion of Management Attention." Certain statements contained within this
Joint Proxy Statement/Prospectus have been specifically identified as
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. However, the failure to specifically
identify other statements as forward-looking statements shall not be construed
to imply that such statements do not necessarily qualify as such within the
meaning of the applicable Securities Act and Exchange Act provisions.
5
<PAGE> 13
SUMMARY
This Joint Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of Atari Corporation, a Nevada corporation ("Atari"), with and into
JTS Corporation, a Delaware corporation ("JTS"), and certain related matters.
Upon consummation of the Merger, the separate existence of Atari will cease and
JTS will remain as the surviving corporation. Such corporation is sometimes
referred to herein as the "Combined Company." Unless otherwise indicated, all
references herein to Atari include Atari and its subsidiaries, and all
references herein to JTS include JTS and its subsidiaries, including Moduler
Electronics (India) Pvt. Ltd. ("Moduler Electronics").
The following is intended as a summary of the information contained in this
Joint Proxy Statement/Prospectus, is not intended to be a complete statement of
all material features of the proposals to be voted on, and is qualified in its
entirety by the more detailed information appearing elsewhere in this Joint
Proxy Statement/Prospectus and attached Appendices, including the Amended and
Restated Agreement and Plan of Reorganization attached hereto as Appendix A (the
"Merger Agreement") and the forms of Voting Agreement attached hereto as
Appendices B-1 and B-2 (the "Voting Agreements"), all of which are important and
should be carefully reviewed.
In May 1996, the JTS stockholders approved, subject to the closing of the
Merger, (i) an amendment and restatement of the JTS Certificate of Incorporation
to, among other things, increase the authorized shares of JTS Common Stock, and
(ii) an amendment and restatement of the JTS Bylaws. In addition, the holders of
the JTS Series A Preferred Stock elected to convert all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock immediately prior
to the closing of the Merger. Unless otherwise indicated, all information
contained herein reflects the foregoing changes to the Certificate of
Incorporation and Bylaws of JTS and the conversion of all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock.
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth in this Joint Proxy Statement/Prospectus.
THE PARTIES TO THE PROPOSED MERGER
Atari Corporation. Atari markets video game consoles, related software and
peripheral products and multimedia entertainment software for various platforms.
Atari's principal products are its Jaguar 64-bit interactive multimedia
entertainment system, Jaguar software and Jaguar peripherals. Due to
disappointing sales of Jaguar and related products, in late 1995 Atari
significantly downsized its Jaguar operations, and decided to focus its efforts
on selling its inventory of Jaguar and related products and to emphasize its
licensing and development activities related to multimedia entertainment
software for various platforms.
Atari was incorporated in Nevada in May 1984. Atari maintains its executive
offices at 455 South Mathilda Avenue, Sunnyvale, California 94086, and its
telephone number is (408) 328-0900.
JTS Corporation JTS designs, manufactures and markets hard disk drives for
the personal computer industry. JTS has developed two product families of hard
disk drives: the 3-inch form factor Nordic product family for notebook computers
and the 3.5-inch form factor Palladium product family for desktop personal
computers. In addition, JTS is developing a 5.25-inch form factor disk drive for
desktop personal computers.
JTS was incorporated in Delaware in February 1994. JTS maintains its
executive offices at 166 Baypointe Parkway, San Jose, California 95134, and its
telephone number is (408) 468-1800.
ATARI SPECIAL MEETING OF STOCKHOLDERS
Time, Date, and Purpose. The Atari Special Meeting of Stockholders (the
"Atari Special Meeting") will be held at the offices of Wilson Sonsini Goodrich
& Rosati, P.C., 650 Page Mill Road, Palo Alto, California, legal counsel to
Atari, on Tuesday, July 30, 1996 at 9:00 a.m. The purpose of the Atari Special
Meeting is for Atari stockholders to consider and vote upon a proposal to
approve the Merger and the Merger Agreement.
6
<PAGE> 14
Record Date; Stockholder Approval. The record date for stockholders of
Atari entitled to vote at the Atari Special Meeting is June 28, 1996 (the "Atari
Record Date"). Approval of the Merger and the Merger Agreement requires the
affirmative vote of holders of a majority of the shares of Atari Common Stock
outstanding on the Atari Record Date.
JTS SPECIAL MEETING OF STOCKHOLDERS
Time, Date and Purpose. The JTS Special Meeting of Stockholders (the "JTS
Special Meeting") will be held at the offices of JTS located at 166 Baypointe
Parkway, San Jose, California, on Tuesday, July 30, 1996 at 9:00 a.m. The
purpose of the JTS Special Meeting is for JTS Stockholders to consider and vote
upon a proposal to approve the Merger and the Merger Agreement.
Record Date; Stockholder Approval. The record date for stockholders of JTS
entitled to vote at the JTS Special Meeting is June 18, 1996 (the "JTS Record
Date"). Approval of the Merger and the Merger Agreement requires the affirmative
vote of holders of (a) a majority of the shares of JTS Common Stock and JTS
Series A Preferred Stock outstanding on the JTS Record Date, voting together,
(b) a majority of the shares of JTS Common Stock outstanding on the JTS Record
Date, voting separately as a class, and (c) at least two-thirds of the shares of
JTS Series A Preferred Stock outstanding on the JTS Record Date, voting
separately as a class.
THE MERGER
Effect of the Merger. Upon consummation of the Merger, Atari will be
merged with and into JTS, the separate existence of Atari will cease, JTS will
remain as the surviving corporation and all of the rights, privileges, powers,
franchises, properties, assets, liabilities and obligations of Atari will be
vested in JTS. At the Effective Time (as such term is defined below), each
outstanding share of Atari Common Stock will be converted into one share of JTS
Common Stock. See "The Proposed Merger and Related Transactions -- Summary of
the Merger Agreement -- Manner and Basis of Converting Atari Common Stock."
Immediately after giving effect to the Merger, assuming that no
stockholders of JTS perfect appraisal or dissenters' rights and assuming no
exercise of outstanding options to purchase Atari Common Stock or JTS Common
Stock after June 28, 1996, the shares of JTS Common Stock issued in the Merger
upon conversion of the Atari Common Stock will represent approximately 62% of
the outstanding shares of the Combined Company.
If the Merger does not receive all necessary stockholder approvals or the
Merger is not consummated for any other reason, Atari currently intends to
continue operating its business as presently conducted and will focus on its
existing licensing and software development activities. Atari also expects to
evaluate other strategic business opportunities. If the Merger does not receive
all necessary stockholder approvals or the Merger is not consummated for any
other reason, JTS expects to continue to operate its business as currently
planned and to pursue alternative sources of funding to provide necessary
working capital and to permit the expansion of its operations.
Atari Board of Directors. The Board of Directors of Atari has unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is fair to, and in the best interests of Atari and its stockholders. The Atari
Board of Directors unanimously recommends approval of the Merger Agreement and
the Merger by the Atari stockholders. The primary factors considered and relied
upon by the Atari Board of Directors in reaching its recommendation are referred
to in "The Proposed Merger and Related Transactions -- Recommendation of the
Board of Directors of Atari."
JTS Board of Directors. The Board of Directors of JTS has unanimously
approved the Merger Agreement and the Merger and has determined that the Merger
is fair to, and in the best interests of JTS and its stockholders. The JTS Board
of Directors unanimously recommends approval of the Merger Agreement and the
Merger by the JTS stockholders. The primary factors considered and relied upon
by the JTS Board of
7
<PAGE> 15
Directors in reaching its recommendation are referred to in "The Proposed Merger
and Related Transactions -- Recommendation of the Board of Directors of JTS."
Stockholder Votes Required. To approve the Merger, a majority of the
shares of Atari Common Stock must approve the Merger. It is expected that all of
the shares of Atari Common Stock owned by directors and executive officers of
Atari and their affiliates will be voted for approval of the Merger. These
shares constitute approximately 43% of the total number of outstanding shares of
Atari Common Stock. Approval of the Merger also requires the vote of holders of
a majority of the JTS Common Stock and Series A Preferred Stock (voting
together), a majority of the JTS Common Stock (voting separately as a class) and
at least two-thirds of the JTS Series A Preferred Stock (voting separately as a
class). It is expected that all of the shares of JTS Common Stock and Series A
Preferred Stock owned by directors and executive officers of JTS and their
affiliates will be voted for approval of the Merger. These shares constitute
approximately 96% of the total number of JTS Common Stock and 48% of the total
number of JTS Series A Preferred Stock.
Opinion of Montgomery Securities. Montgomery Securities ("Montgomery"),
financial advisor to Atari, has delivered to the Atari Board of Directors its
written opinion, dated February 5, 1996, to the effect that the conversion ratio
of Atari Common Stock into JTS Common Stock is fair to Atari from a financial
point of view, as of that date. Reference is made to the full text of the
opinion, a copy of which is attached hereto as Appendix C. See "The Proposed
Merger and Related Transactions -- Background and Board Recommendations -- Atari
Financial Advisor."
Effective Time. The Merger will be consummated on the date that the
Certificate of Merger is filed with the Nevada Secretary of State and the
Delaware Secretary of State (the "Effective Time"). The Effective Time is
expected to occur as soon as practicable after approval of the Merger and the
Merger Agreement at the Atari and JTS Special Meetings and satisfaction or
waiver of the conditions precedent to the Merger, as set forth in the Merger
Agreement.
Listing of Common Stock. The Atari Common Stock is listed on the American
Stock Exchange under the symbol "ATC." There is no public market for the JTS
Common Stock or the JTS Series A Preferred Stock. Upon consummation of the
Merger, it is expected that the JTS Common Stock will be listed on the American
Stock Exchange under the symbol "JTS", and that the Atari Common Stock will be
delisted from the American Stock Exchange.
Exchange of Shares. Exchange of Atari Common Stock certificates for JTS
Common Stock certificates will be made upon surrender of Atari Common Stock
certificates to Registrar and Transfer Company, Cranford, NJ, as exchange agent.
Atari stockholders will be provided with a letter of transmittal and related
materials for the exchange of their certificates after the Effective Time.
ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE INSTRUCTIONS AND TRANSMITTAL FORMS AFTER COMPLETION OF THE MERGER.
Assumption of Atari Options. Upon consummation of the Merger, each option
to purchase Atari Common Stock then outstanding will be assumed by JTS and will
be converted automatically into an option to purchase the same number of shares
of JTS Common Stock at an exercise price per share equal to the exercise price
per share of the Atari option. The other terms of the Atari options, including
vesting schedules, will remain unchanged.
Registration Statement on Form S-8. Within five days following the closing
of the Merger, JTS will file a Registration Statement on Form S-8 with the
Commission with respect to the shares of JTS Common Stock issuable upon exercise
of the assumed Atari options and JTS options granted or available for grant
under the JTS amended and restated 1995 Stock Option Plan (the "Restated Plan").
Assumption of Atari Debentures. Upon consummation of the Merger, all of
Atari's obligations under its outstanding 5 1/4% convertible subordinated
debentures due April 29, 2002 (the "Atari Debentures") will be assumed by JTS.
The Atari Debentures are presently convertible into Atari Common Stock at a
conversion
8
<PAGE> 16
price of $16.3125 per share, and following the Merger will be convertible into
JTS Common Stock at the same conversion price. The other terms of the Atari
Debentures will remain unchanged.
Conditions to Consummation of the Merger. Consummation of the Merger is
subject to various conditions precedent, including Atari and JTS stockholder
approvals of the Merger and the Merger Agreement, the receipt of certain
consents and approvals from various third parties and governmental agencies,
receipt of opinions of counsel regarding certain legal matters, including
opinions of tax counsel to the effect that the Merger will qualify as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and that stockholders of JTS holding not more than 5% of
the JTS capital stock entitled to vote at the JTS Special Meeting shall be
entitled to exercise appraisal or dissenters' rights. Each of the parties to the
Merger Agreement may, at its option, waive compliance with any condition
precedent to its obligation to consummate the Merger. In the event that a
condition to consummation of the Merger is not satisfied, each party whose
obligation to consummate the Merger is subject to satisfaction of such condition
intends to evaluate whether it would be in the best interests of that party and
its stockholders to waive the condition and consummate the Merger. In the event
that a condition to consummation of the Merger is waived by one of the parties
and applicable law requires that party to resolicit stockholder approval,
stockholder approval will be resolicited prior to consummation. For example,
stockholder approval would be resolicited in the event that such waiver would
result in an alteration or change in (a) the amount or kind of consideration to
be received by the Atari stockholders in exchange for their shares of Atari
Common Stock as a result of the Merger, (b) any term of the Certificate of
Incorporation of JTS to be effected by the Merger or (c) any of the terms and
conditions of the Merger Agreement if such alteration or change would adversely
affect the holders of JTS Common Stock or Atari Common Stock. Neither Atari nor
JTS presently has any intention of waiving any terms or conditions of the Merger
Agreement.
Termination and Amendment of Merger Agreement. The Merger Agreement may be
terminated, notwithstanding its approval by the stockholders of Atari or JTS,
(a) by mutual written agreement of the parties, (b) by Atari if there has been a
breach of any representation, warranty, covenant or agreement in the Merger
Agreement on the part of JTS which has or can reasonably be expected to have a
material adverse effect on JTS and its subsidiaries, taken as a whole, or upon
the occurrence of certain other events, (c) by JTS if there has been a breach of
any representation, warranty, covenant or agreement in the Merger Agreement on
the part of Atari which has or can reasonably be expected to have a material
adverse effect on Atari and its subsidiaries, taken as a whole, or upon the
occurrence of certain other events, or (d) by Atari or JTS if (i) the closing of
the Merger does not occur by July 31, 1996, (ii) there should be a final
nonappealable order of federal or state court preventing consummation of the
Merger, (iii) the JTS or Atari stockholders do not approve the Merger at their
respective stockholders' meetings, or (iv) the Atari Board of Directors shall
have accepted, approved or recommended to the Atari stockholders a superior
acquisition proposal. In addition, the Merger Agreement may be amended by the
mutual consent of the parties at any time prior to the Effective Time, whether
or not the Merger has been approved by the stockholders of Atari or JTS but,
after any such approval, no amendment will be made which by law requires further
approval by such stockholders without such further approval. See "The Proposed
Merger and Related Transactions -- Summary of the Merger Agreement --
Termination, Amendment and Waiver."
Availability of Appraisal and Dissenters' Rights. Under Section 262 of the
Delaware General Corporation Law ("DGCL"), a copy of which is attached hereto as
Appendix D-1, and Chapter 13 of the California General Corporation Law ("CGCL"),
a copy of which is attached hereto as Appendix D-2, stockholders of JTS may,
under certain circumstances and by following prescribed statutory procedures,
have the right to seek appraisal of the "fair value" of such stockholders'
shares. The failure of a stockholder choosing to execute such right to follow
such procedures may result in termination or waiver of appraisal and dissenters'
rights. See "The Proposed Merger and Related Transactions -- Appraisal and
Dissenters' Rights." The obligation of Atari to consummate the Merger is subject
to the condition that the holders of not more than 5% of the JTS capital stock
entitled to vote at the JTS Special Meeting shall have asserted and not
effectively withdrawn or lost the right to obtain the fair value of such
holders' shares pursuant to the applicable provisions of the DGCL and CGCL.
9
<PAGE> 17
The stockholders of Atari are not entitled to statutory appraisal or
dissenters' rights pursuant to the applicable provisions of the Nevada General
Corporation Law ("NGCL").
Resale of JTS Common Stock. The shares of JTS Common Stock to be issued to
former holders of Atari Common Stock in the Merger have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), by a Registration
Statement on Form S-4, of which this Joint Proxy Statement/Prospectus is a part,
thereby allowing such shares of JTS Common Stock to be traded without
restriction under the Securities Act by all such holders not deemed to be
"affiliates" (as such term is defined for purposes of Rule 145 promulgated under
the Securities Act) of Atari prior to the consummation of the Merger. See "The
Proposed Merger and Related Transactions -- Certain Other Items Related to the
Merger -- Resale of JTS Common Stock."
Certain Federal Income Tax Considerations. The obligations of each of
Atari and JTS to consummate the Merger are conditioned upon receipt of opinions
from their respective legal counsel that the Merger will qualify as a
reorganization for federal income tax purposes under Section 368(a) of the Code
and that, accordingly, no gain or loss ordinarily will be recognized by JTS or
Atari nor by Atari stockholders upon their receipt of shares of JTS Common Stock
in exchange for their shares of Atari Common Stock, except to the extent of cash
received for fractional shares, if any. Such legal opinions will be subject to
certain limitations and qualifications and will be based upon certain factual
assumptions and representations. Furthermore, such opinions will not be binding
on the Internal Revenue Service. In view of the complexities of federal income
and other tax laws, each Atari and JTS stockholder should consult with their own
tax advisors as to the specific tax consequences of the Merger, including the
applicable federal, state, local and foreign tax consequences to them of the
Merger in their specific circumstances.
Accounting Treatment. For accounting purposes, the Merger is treated as if
Atari acquired JTS. A new basis of accounting will be established for the assets
and liabilities of JTS. The new basis reflects the allocation of the purchase
price to the JTS assets and liabilities on the basis of their fair values at the
time the proposed transaction was announced. The aggregate purchase price to be
allocated includes the outstanding common stock of JTS, valued using $2.50 per
share which is the representative value of the Atari Common Stock at the time
the proposed transaction was announced, as well as the value of JTS options and
warrants and direct costs of the acquisition. Subsequent to the Merger, the
financial statements of the Combined Company will reflect the combined financial
position, results of operations and cash flows of Atari and JTS based on the new
basis of accounting for JTS and the historic cost basis of Atari. Pro forma
combined condensed financial statements are presented herein giving effect to
the Merger as if the transaction occurred, for purposes of the pro forma
combined financial position of the Combined Company, on March 31, 1996, and for
purposes of the pro forma combined results of operations of the Combined
Company, on the first day of each of the periods presented. The allocation of
the purchase price in the pro forma statements will be revised as updated
information becomes available at the Effective Time. Under the purchase
accounting method, giving effect to the Merger, existing technology and goodwill
in the amount of approximately $22.0 million and $11.7 million, respectively,
are expected to be recognized by the Combined Company. It is anticipated that
the Combined Company will amortize the resulting existing technology and
goodwill over periods of three and seven years, respectively, which will have an
adverse effect on its results of operations. In addition, upon the consummation
of the Merger, in the third quarter of calendar year 1996, the Combined Company
expects to expense approximately $100.0 million of purchased in-process
technology. See "Unaudited Pro Forma Combined Condensed Financial Statements."
Atari Loan to JTS. In connection with the merger, on February 13, 1996,
Atari loaned $25.0 million to JTS pursuant to a Subordinated Secured Convertible
Promissory Note (the "Note") which is secured by substantially all of the assets
of JTS. Interest accrues on the unpaid principal amount of the Note at the rate
of 8.5% per annum. The Note was amended in June 1996 to increase the amount lent
pursuant thereto to $30.0 million. The Note provides that JTS shall repay the
outstanding principal and interest under the Note on September 30, 1996 if the
Merger has not occurred prior to such time. In the event that the Merger
Agreement is terminated, either party may, under certain conditions, elect to
convert the outstanding indebtedness under the Note into shares of JTS Series A
Preferred Stock. The Note is expressly subordinated
10
<PAGE> 18
to outstanding indebtedness in connection with JTS' primary bank loan agreement,
up to an amount of $5.0 million at any given time.
Related Transactions. In connection with the Merger, the parties have
effected or will effect a number of related party transactions, including the
grant of certain stock options by JTS. In addition, pursuant to the Voting
Agreements, certain stockholders of Atari and JTS have agreed to vote the shares
of Atari Common Stock, JTS Common Stock and JTS Series A Preferred Stock held by
them for the approval of the Merger and the Merger Agreement. See "The Proposed
Merger and Related Transactions -- Related Transactions."
Interests of Certain Persons. Certain members of the management of JTS
have certain interests in connection with the Merger that are in addition to the
interests of stockholders of JTS generally. See "The Proposed Merger and Related
Transactions -- Certain Other Items Related to the Merger -- Interests of
Certain Persons in the Merger."
Differences in Rights of Stockholders. Upon consummation of the Merger,
stockholders of Atari will become stockholders of JTS. As a result, their rights
as stockholders, which are now governed by the NGCL and the Articles of
Incorporation and Bylaws of Atari, will be governed by the DGCL and the
Certificate of Incorporation and Bylaws of the Combined Company. Because of
certain differences between the provisions of the NGCL and the Articles of
Incorporation and Bylaws of Atari, on the one hand, and the DGCL and the
Certificate of Incorporation and Bylaws of the Combined Company, on the other
hand, the current rights of the stockholders of Atari will change after the
Merger. See "Comparison of Rights of Stockholders of Atari and JTS."
MARKET PRICE OF COMMON STOCK
Atari Common Stock is traded on the American Stock Exchange under the
symbol "ATC." There is no public market for the JTS Common Stock or the JTS
Series A Preferred Stock. The closing price per share of Atari Common Stock was
$1 7/8 at February 12, 1996, the last day of trading before the announcement of
the Merger, and $5.125 at July 11, 1996, the latest trading day before the
filing of this Joint Proxy Statement/ Prospectus with the Commission.
RISK FACTORS
The consummation of the Merger and the Merger Agreement and an investment
in the shares of JTS Common Stock each involve a high degree of risk. Before
voting on the Merger, stockholders of Atari and JTS should carefully consider
the information set forth in "Risk Factors."
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<PAGE> 19
ATARI HISTORICAL SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data of Atari have
been derived from the historical consolidated financial statements of Atari and
should be read in conjunction with such consolidated financial statements and
notes thereto, included elsewhere herein, with the exception of the Atari
Consolidated Statement of Operations Data prior to fiscal 1993 and the Atari
Consolidated Balance Sheet Data prior to December 31, 1994, which were derived
from historical consolidated financial statements not included herein. The
unaudited quarterly financial data reflects all adjustments (which include only
normal, recurring adjustments), which are, in the opinion of management,
necessary to state fairly the results for the periods presented. The results for
such periods are not necessarily indicative of the results to be expected for
the full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, FISCAL YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues................... $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Cost of revenues................. 6,211 3,846 44,234 35,200 42,768 132,455 189,598
Research and development
expenses....................... 201 1,815 5,410 5,775 4,876 9,171 15,333
Marketing and distribution
expenses....................... 758 2,576 12,726 14,651 8,980 31,125 48,249
General and administrative
expenses....................... 1,251 1,795 5,921 7,169 7,558 16,544 23,495
Restructuring charges............ -- -- -- -- 12,425 17,053 --
Operating loss................... (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683)
Other income (expense), net(1)... 6,343 685 3,507 33,441 (1,631) (4,145) 42,288
Income tax credit................ -- -- -- -- 264 434 54
Income (loss) from continuing
operations..................... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659
Discontinued operations.......... -- -- -- -- -- 9,000 --
Income (loss) before
extraordinary
credit......................... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659
Extraordinary credit............. -- 47 582 -- -- 104 1,960
Net income (loss)................ (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619
Earnings (loss) per common share:
Income (loss) from continuing
operations..................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.44) 0.41
Income (loss) before
extraordinary
credit......................... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)................ (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets...................... $ 55,976 $ 65,126 $113,188 $ 51,388 $109,551 $239,296
Working capital..................... 47,200 55,084 92,670 33,896 75,563 159,831
Total assets........................ 68,406 77,569 131,042 74,833 138,508 253,486
Current liabilities................. 8,776 10,042 20,518 17,492 33,988 79,465
Long-term obligations............... 42,354 42,354 43,454 52,987 53,937 48,492
Shareholders' equity................ 17,276 25,173 67,070 4,354 50,583 125,529
</TABLE>
- ---------------
(1) Includes a gain from the sale of marketable securities of $6.3 million in
1996, a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
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<PAGE> 20
JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA
The following unaudited selected pro forma combined financial data of JTS
and Moduler Electronics presents the pro forma combined financial position and
results of operations of JTS and Moduler Electronics as of and for the year
ended January 28, 1996 and for the three months ended April 28, 1996 and April
30, 1995. These unaudited selected pro forma financial data combine JTS and
Moduler Electronics giving effect to the JTS and Moduler Electronics
combination, which was accounted for as a purchase. The April 28, 1996 balance
sheet reflects the acquisition of Moduler Electronics which took place on April
4, 1996. Intercompany balances and transactions have been eliminated in the
presentation. This financial data should be read in conjunction with the
Unaudited Pro Forma Condensed Combined Financial Statements and related notes
and the historical financial statements and related notes of JTS and Moduler
Electronics which are included elsewhere herein. All amounts are stated in
thousands, except per share amounts.
<TABLE>
<S> <C>
Statement of Operations Data:
Year Ended January 28, 1996 (Pro forma) --
Net revenues........................................................ $ 18,777
Gross margin (deficit).............................................. (14,849)
Research and development............................................ 13,375
Selling, general and administrative expenses........................ 5,777
Operating loss...................................................... (34,001)
Net loss............................................................ (35,170)
Loss per common share(1)............................................ (7.63)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 28, 1996 APRIL 30, 1995
<S> <C> <C>
Quarters ended April 28, 1996 and April 30, 1995 (Pro
forma) --
Total revenues.............................................. $ 17,581 $2,077
Operating loss.............................................. (12,098) (1,203)
Net loss.................................................... (12,820) (1,143)
Net loss per share(1)....................................... (1.47) (.26)
</TABLE>
<TABLE>
<CAPTION>
APRIL 28, 1996 JANUARY 28, 1996
(ACTUAL) (PRO FORMA)
-------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Current assets.......................................... $ 30,474 $ 12,722
Equipment and leasehold improvements, net............... 16,212 14,795
Total assets............................................ 46,871 28,111
Current liabilities..................................... 61,669 30,615
Long-term debt.......................................... 6,381 6,248
Redeemable Series A Preferred Stock..................... 29,697 29,696
Stockholders' deficit................................... (50,876) (38,448)
</TABLE>
- ---------------
(1) Excludes JTS Series A Preferred Stock, warrants and options as their effect
would be antidilutive.
13
<PAGE> 21
ATARI AND JTS UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth the unaudited selected pro forma combined
financial data for the periods and as of the date indicated which are derived
from the Unaudited Pro Forma Combined Condensed Financial Statements (the "Pro
Forma Financial Statements") which present the pro forma combined condensed
financial position and results of operations of Atari and JTS. The unaudited pro
forma condensed combined balance sheet has been prepared as if the Merger, which
will be accounted for as a purchase of JTS by Atari, was consummated as of March
31, 1996. The unaudited pro forma condensed combined statements of operations
give effect to the Merger as if the acquisition were completed at the beginning
of the periods presented. The Pro Forma Financial Statements combine the
historical results of operations of Atari for the year ended December 31, 1995
with the JTS and Moduler Electronics unaudited pro forma combined results of
operations for the year ended January 28, 1996 and the historical financial
position and results of operations of Atari as of and for the quarter ended
March 31, 1996 with the historical financial position and results of operations
of JTS as of and for the quarter ended April 28, 1996.
The unaudited selected pro forma combined financial data is provided for
illustrative purposes only and is not necessarily indicative of the combined
financial position or combined results of operations that would have been
reported had the Merger occurred on the dates indicated, nor do they represent a
forecast of the combined financial position or results of operations for any
future period. No pro forma adjustments have been included herein which reflect
potential effects of (a) efficiencies which may be obtained by combining Atari
and JTS operations or (b) costs of restructuring, integrating or consolidating
their operations. The unaudited selected pro forma combined financial data
should be read in conjunction with the Pro Forma Financial Statements and
related notes, and the historical financial statements and related notes of
Atari and JTS which are included elsewhere herein. All amounts are stated in
thousands, except for per share amounts.
<TABLE>
<CAPTION>
QUARTER ENDED FISCAL YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
Pro Forma Combined Statement of Operations Data:
Net revenues.................................................. $ 18,853 $33,403
Cost of revenues.............................................. 27,725 86,177
Selling, marketing, general and administrative expenses....... 5,530 26,097
Research and development expenses............................. 7,607 18,785
Operating loss................................................ (22,009) (97,656)
Net loss before extraordinary credit.......................... (22,506) (95,318)
Loss per common share before extraordinary credit............. (0.22) (0.92)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C> <C>
Pro Forma Combined Balance Sheet Data:
Current assets................................................ $ 61,450
Working capital............................................... 14,805
Total assets.................................................. 126,756
Current liabilities........................................... 46,645
Long-term debt................................................ 48,735
Stockholders' equity.......................................... 31,376
</TABLE>
14
<PAGE> 22
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Atari
and pro forma combined per share data giving effect to the JTS and Moduler
Electronics combination and the Atari and JTS Merger as if the combination and
Merger were effective January 1, 1995 for the loss per common share data for the
year ended December 31, 1995 and January 1, 1996 for the loss per common share
data for the quarter ended March 31, 1996, and March 31, 1996 for book value per
common share data using the purchase method of accounting. The pro forma
combined per share data are derived from financial information in the Pro Forma
Financial Statements. The pro forma data are not necessarily indicative of
amounts which would have been achieved had the Merger been consummated at the
beginning of the period presented and should not be construed as representative
of future operations. This data should be read in conjunction with the Pro Forma
Financial Statements and notes thereto included elsewhere herein, and the
separate historical financial statements and notes thereto of Atari, JTS and
Moduler Electronics, also included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED ATARI,
JTS AND JTS AND
ATARI MODULER MODULER
HISTORICAL ELECTRONICS(1) ELECTRONICS(2)
---------- -------------- --------------
<S> <C> <C> <C>
Loss per common share before extraordinary credit for
the year ended December 31, 1995................... $(0.79) $(7.63) $(0.92)
Loss per common share for the quarter ended March 31,
1996............................................... $(0.01) $(1.47) $(0.22)
Book value per common share at March 31, 1996........ $ 0.27 $(5.40) $ 0.30
Tangible book value per common share at
March 31, 1996..................................... $ 0.26 $(5.42) $(0.03)
</TABLE>
- ---------------
(1) For purposes of this table, the period presented for the unaudited pro forma
combined net loss per share of JTS and Moduler Electronics is the fiscal
year ended January 28, 1996 and the quarter ended April 28, 1996 and the
book values are as of April 28, 1996. Outstanding JTS options, warrants and
JTS Series A Preferred Stock are excluded as their effect would be
antidilutive.
(2) The unaudited pro forma combined per share data assumes conversion of all
JTS Series A Preferred Stock outstanding into JTS Common Stock at the
effective date.
15
<PAGE> 23
RISK FACTORS
The following factors should be considered carefully in evaluating the
proposals to be voted on at the Atari Special Meeting and the JTS Special
Meeting. For periods following the Merger, references to the products, business,
results of operations or financial condition of JTS should be considered to
refer to JTS and Atari, unless the context otherwise requires.
RISK FACTORS RELATED TO THE BUSINESS OF ATARI
Significant Operating Losses; Disappointing Sales of Jaguar
Products. Atari has incurred significant operating losses for the past five
fiscal years. Most recently, Atari incurred an operating loss of $53.7 million
for fiscal 1995 and $24.0 million for fiscal 1994. Over the past several years,
Atari has undergone significant change. In 1992 and 1993, Atari significantly
downsized its operations, decided to exit the computer products business and
focused its efforts on its video game business. While restructuring, Atari
developed its 64-bit Jaguar interactive multimedia entertainment system, which
was introduced in the fourth quarter of 1993. For 1995 and 1994, net sales of
Jaguar and related software and accessories were $9.9 million and $29.3 million,
respectively, and were substantially below Atari's expectations. Atari
attributes the poor performance of Jaguar products to a number of factors
including (i) extensive delays in development of software for Jaguar which
resulted in reduced orders due to consumer concern as to when titles for the
platform would be released and how many titles would ultimately be available,
and (ii) the introduction of competing products by Sega Enterprises, Ltd.
("Sega") and Sony Corporation ("Sony") in May 1995 and September 1995,
respectively. Due to disappointing sales and competitive pricing pressures,
Atari reduced the suggested retail price of the Jaguar console from its original
price of $249.99 to its current price of $99.99. As a result of Jaguar price
reductions, the substantial curtailment of sales and marketing activities for
the Jaguar and the substantial curtailment of efforts by Atari and independent
software developers to develop additional software titles for the Jaguar, Atari
expects sales of Jaguar and related products to decline substantially in 1996
and thereafter.
The failure of Jaguar to achieve commercial acceptance has had a severe
financial impact on Atari. In this regard, Atari reported a net loss of $49.6
million for 1995 compared to net income of $9.4 million in 1994, and Atari's net
revenues declined from $38.7 million in 1994 to $14.6 million in 1995.
Accelerated amortization and write-offs of software development costs in the
amount of $16.6 million and inventory write-downs of $12.6 million contributed
significantly to the 1995 loss. The net loss for the first quarter of 1996 was
$800,000 compared to a net loss of $4.4 million for the first quarter of 1995
and Atari's net revenues declined from $4.9 million for the first quarter of
1995 to $1.3 million for the comparable period in 1996. The net loss in the
first quarter of 1996 was impacted by the $6.3 million gain from sale of
marketable securities offset by a $5.0 million inventory write-down in the
quarter. In response to these losses, the number of employees at Atari was
reduced from 101 at December 31, 1994 to 73 at December 31, 1995 and to 31 at
March 31, 1996. In addition to reductions in the Atari workforce, this
downsizing resulted in significant curtailment of research and development and
sales and marketing activities for Jaguar and related products. Accordingly,
Atari has decided to focus its efforts on selling its inventory of Jaguar and
related products and to emphasize its existing licensing and development
activities related to multimedia entertainment software for various platforms.
See "Information Regarding Atari Corporation -- Business of Atari."
Risk of Additional Inventory Write-Downs. From the introduction of Jaguar
in late 1993 through May 1996, Atari sold approximately 135,000 units of Jaguar.
As of December 31, 1995, Atari had approximately 100,000 units of Jaguar in
inventory and the value of Jaguar inventory and related software was
approximately $9.9 million. Due to disappointing sales of Jaguar and increased
competition from products introduced by Sega and Sony, Atari reduced the
suggested retail price of Jaguar to $99.99 and recorded an inventory write-down
of $12.6 million in 1995. Despite the introduction of four additional game
titles in the first quarter of 1996, sales of Jaguar and related software have
remained disappointing due to uncertainty about Atari's commitment to the Jaguar
platform, increased price competition and pending competitive product
introductions. As a result of continued disappointing sales, management revised
estimates and wrote-down inventory by an additional $5.0 million in the first
quarter of 1996. As of the end of May 1996, Atari had approximately 90,000 units
of Jaguar in inventory.
16
<PAGE> 24
Volume sales of Jaguar and related software in 1996 have consisted
primarily of a large order from a new European customer. Atari is also pursuing
wholesale sales channels in the U.S. as well as licensing opportunities. There
can be no assurance that Atari's substantial unsold inventory of Jaguar and
related software can be sold at current or reduced prices, if at all. In
addition, any further decrease in the value of such inventory could result in
additional inventory write-downs by Atari.
Risk of Potential Liabilities. In connection with the restructuring of
Atari's business in 1992 and 1993 and Atari's decision in late 1995 to
significantly downsize its Jaguar operations, Atari has terminated and plans to
terminate numerous contracts and business relationships, including several
related to software development activities. Although Atari does not regard such
contracts or business relationships, either individually or in the aggregate, as
material, the termination of contracts and relationships has, from time to time,
resulted in litigation, diverting management and financial resources. There can
be no assurance that the parties to such contracts will not commence or threaten
to commence litigation related to such contracts. Any such litigation or
threatened litigation would further divert management and financial resources
and could have a material adverse effect on Atari's business, operating results
and financial condition. In addition, Atari holds several properties for sale,
some of which are currently being leased. The ownership and use of such
properties subjects Atari to numerous risks, including risks of environmental
and personal injury liabilities. Although Atari is attempting to sell certain of
such properties, such sales are not expected to eliminate all the risks
associated with Atari's ownership of such properties, including potential
environmental liabilities and ongoing indemnification and other contractual
obligations. At present, Atari has no such indemnification obligations and is
not aware of any such environmental liability.
Intellectual Property. Atari has exclusive use of its "Atari" name and
"Fuji" logo in all areas other than coin-operated arcade video game use. Atari
also has a portfolio of other intellectual properties including patents,
trademarks, and copyrights associated with its video game and computer
businesses. Atari believes its patents, trademarks and other intellectual
property are important assets. As of May 31, 1996, Atari held over 150 patents
in the United States and other jurisdictions which expire from 1996 to 2010 and
had applications pending for three additional patents. There can be no assurance
that any of these patent rights will be upheld in the future or that Atari will
be able to preserve any of its other intellectual property rights. Atari has in
the past received communications from third parties asserting rights to certain
of its intellectual property. Atari has also been involved in several major
lawsuits regarding its intellectual property, including a suit with Nintendo of
America, Inc. and its affiliates ("Nintendo.") which was settled in March 1994
and a suit with Sega which was settled in September 1994. In the event any third
party were to make a valid claim with respect to Atari's intellectual property
and a license were not available on commercially reasonable terms, Atari's
business, financial condition and results of operations would be materially and
adversely affected. Litigation, which has in the past resulted and could in the
future result in substantial costs and diversion of resources, may also be
necessary to enforce Atari's patents or other intellectual property rights or to
defend against third party infringement claims. The occurrence of litigation
relating to patent infringement or other intellectual property matters,
regardless of the outcome, could have a material adverse effect on Atari's
business, financial condition and results of operations.
Competition. The video game business is intensely competitive. Since its
introduction in late 1993, the Jaguar, Atari's principal product, has failed to
achieve broad market acceptance. Atari does not expect that the Jaguar, even at
its substantially reduced price, will ever become a broadly accepted video game
console, or that Jaguar technology will be broadly adopted by software title
developers. The video game industry is also characterized by unpredictable and
rapid shifts in the popularity of certain platforms, by severe price
competition, and by frequent new technology and product introductions. In this
regard, numerous companies have introduced or have developed and are expected to
introduce video game consoles that are or may become competitive with Jaguar. In
addition, an increasing number of entertainment titles are being developed for
or ported to the PC platform. Most of Atari's competitors have greater
experience and expertise in 3D graphics and multimedia technology and have
substantially greater engineering, marketing and financial resources than Atari.
17
<PAGE> 25
Risks of Bridge Loan to JTS. In February 1996, Atari loaned $25.0 million
to JTS in connection with the Merger, and in June 1996 the loan amount was
increased to $30.0 million. The loan is due to be repaid by JTS in September
1996 and is secured by substantially all of the assets of JTS. Atari's security
interest in such assets is junior to existing security interests in favor of a
bank and certain equipment lessors. In the event the Merger is not consummated,
there can be no assurance that Atari's security interest in such assets will
adequately protect Atari in the event JTS is unable to repay the loan. In
addition, the loan is convertible into shares of JTS Series A Preferred Stock at
the option of Atari or JTS upon the occurrence of certain conditions, including
a breach of the Merger Agreement by the other party. In the event such
conversion occurs, Atari would hold a significant percentage of JTS' outstanding
equity securities and would be subject to the numerous risks associated with
JTS' business. There can be no assurance that such securities would be freely
tradeable at the time of conversion, if ever. See "Risk Factors Related to the
Business of JTS."
Reduction in Voting Control; Loss of Management Control. Upon the closing
of the Merger, the stockholders of JTS prior to the Merger will own
approximately 38% of the outstanding voting securities of the Combined Company
(assuming no exercise of options or warrants after June 28, 1996). In addition,
it is anticipated that the executive officers of JTS prior to the Merger will
continue to serve as executive officers of the Combined Company and that none of
the executive officers of Atari prior to the Merger will serve as executive
officers of the Combined Company. Further, the Board of Directors of the
Combined Company will include five current JTS directors and two current Atari
directors. The current JTS officers and directors and their affiliates will own
approximately 23% of the outstanding voting securities of the Combined Company
(assuming no exercise of options or warrants after June 28, 1996). As a result,
such stockholders, acting together, could exert significant influence over
matters requiring approval of the stockholders of the Combined Company. Such
matters include the election of the members of the Combined Company's Board of
Directors, proxy contests, mergers involving the Combined Company, tender offers
or other transactions that could afford stockholders of the Combined Company the
opportunity to realize a premium over the then prevailing market price of the
Common Stock of the Combined Company.
RISK FACTORS RELATED TO THE BUSINESS OF JTS
Limited Operating History; History of Operating Losses; Working Capital
Deficit; Independent Accountants' Report with Explanatory Paragraph. JTS was
incorporated in February 1994 and did not commence production of hard disk
drives until October 1995. JTS experienced operating losses for its fiscal years
ended January 29, 1995 and January 28, 1996 of $5.2 million and $31.6 million,
respectively, which resulted from the substantial costs associated with the
design, development and marketing of new products, the establishment of
manufacturing operations and the development of a supplier base. At January 28,
1996, JTS had a working capital deficit of $15.2 million and a negative net
worth of $38.6 million. JTS has yet to generate significant revenues and cannot
assure that any level of future revenues will be attained or that JTS will
achieve or maintain successful operations in the future. Such factors have
raised substantial doubt about the ability of JTS to continue its operations
without achieving successful future operations or obtaining financing to meet
its working capital needs, neither of which can be assured. The report of
independent public accountants on JTS' financial statements includes an
explanatory paragraph describing uncertainties concerning the ability of JTS to
continue as a going concern. See "Notes to JTS Financial Statements."
Need For Additional Financing; Current Financing Plans. The hard disk
drive business is extremely capital intensive, and JTS anticipates that it will
need significant additional financing resources in the near term for facilities
expansion, capital expenditures, working capital, research and development and
vendor tooling. In this regard, JTS has held discussions with investment banking
firms regarding the possibility of raising additional capital through the
issuance of debt or equity securities. In June 1996, JTS retained an investment
banking firm to advise JTS with respect to the private issuance of between
$50-100 million of 10-year debt securities convertible into JTS Common Stock,
although the terms of such financing have not been established and the marketing
effort for such financing has not yet commenced. Recent comparable transactions
were priced to yield between 5.5-6.5% annually and included conversion premiums
over the market prices of the Common Stock of between 20-25%. JTS intends for
such financing to close as soon as practicable after the closing of the Merger,
and the terms of the debt securities and the amount of the
18
<PAGE> 26
securities offered will not be determined until the closing of the financing, if
any. There can be no assurance that JTS will be able to consummate such
financing on terms acceptable to JTS or at all. As a result, the pro forma
financial statements included in this Joint Proxy Statement/Prospectus do not
reflect such transactions. The issuance of equity or convertible debt
securities, upon conversion, would result in dilution of the voting control of
existing stockholders, could result in dilution to earnings per share and would
provide to the holders of convertible debt securities seniority over the holders
of JTS Common Stock issued in the Merger. There can be no assurance that
additional funding will be available on terms acceptable to JTS or at all. The
failure to fund its capital requirements with additional financing would have a
material adverse effect on JTS' business, operating results and financial
condition. Furthermore, certain equipment and receivables financing as well as
term loans made to JTS and Moduler Electronics are contingent on JTS' ability to
comply with stringent financial covenants. In this regard, Moduler Electronics
did not obtain certain debt and equity capital required under one of its loan
agreements. JTS has informed the lender that it intends to provide such capital
by August 1996. In addition, certain of Moduler Electronics' loan agreements
require the lender's consent to mergers and similar transactions, which could be
interpreted to require the consent of the lending institution to the acquisition
of 90% of the capital stock of Moduler Electronics by JTS. Such consents were
not obtained, but the lending institution has continued to transact business
with Moduler Electronics and JTS since JTS' share acquisition in Moduler
Electronics. JTS believes that such matters regarding the Moduler Electronics
loan agreements will not have a material adverse effect on JTS' business,
operating results or financial condition. There can be no assurance that JTS
will be able to maintain its current financing facilities or obtain additional
financing as needed on acceptable terms or at all. If JTS is unable to obtain
sufficient capital, it would be required to curtail its facilities expansion,
capital expenditures, working capital, research and development and vendor
tooling expenditures, which would materially adversely affect JTS' business,
operating results and financial condition. See "Information Regarding JTS
Corporation -- Management's Discussion and Analysis of Financial Condition and
Results of Operations of JTS -- Liquidity and Capital Resources."
Uncertainty of Market Acceptance; Lengthy Sales Cycle. Since its inception
in February 1994, JTS has primarily engaged in research and development of its
core technology for hard disk drives. JTS' marketing strategy depends
significantly on its ability to establish distribution, licensing, product
development and other strategic relationships with major computer OEMs and on
the willingness and ability of these companies to utilize and to promote JTS'
hard disk drive technology and products. JTS' first commercial product line, the
Palladium family of hard disk drives, was introduced in September 1995 and is
targeted at the desktop personal computer market. JTS' second product line, the
Nordic family of hard disk drives, has been designed for notebook computers. See
"Information Regarding JTS Corporation -- Business of JTS -- Products." There
can be no assurance that any significant market for either product family will
develop. In particular, the Nordic drives use a 3-inch form factor, which JTS
has only recently introduced to the industry. At present, only a limited number
of computer manufacturers are developing or have plans to develop computers that
may accommodate Nordic drives. If additional computer manufacturers do not
modify their existing products or develop new products to accommodate 3-inch
form factor disk drives, sales of Nordic disk drives and, hence, JTS' business,
operating results and financial condition would be materially adversely
affected.
Qualifying hard disk drives for incorporation into a new computer product
requires JTS to work extensively with the customer and the customer's other
suppliers to meet product specifications. Customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with JTS' senior management, before making a purchasing decision.
Accordingly, JTS' products typically have a lengthy sales cycle during which JTS
may expend substantial financial resources and management time and effort with
no assurance that a sale will result.
Highly Competitive Market. The hard disk drive industry is intensely
competitive and dominated by a small number of large companies, including
Quantum Corporation ("Quantum"), Seagate Technology, Inc. ("Seagate"), Western
Digital Corporation ("Western Digital") and Maxtor Corporation ("Maxtor"). In
addition, a number of computer companies, such as Hewlett-Packard Co.
("Hewlett-Packard"), International Business Machines, Inc. ("IBM") and Toshiba
Corporation ("Toshiba"), have in-house or "captive" disk drive manufacturing
operations that produce disk drives for incorporation into their own computers
as well as
19
<PAGE> 27
for sale to other OEMs. Many of JTS' competitors have broader product lines than
JTS, and all have significantly greater financial, technical and marketing
resources. Furthermore, JTS has licensed key 3-inch form factor technology to
Western Digital, a potential competitor in the personal computer disk drive
market that could become a significant supplier of 3-inch form factor disk
drives to Compaq and other OEMs. See "Information Regarding JTS
Corporation -- Business of JTS -- Western Digital Arrangement." There can be no
assurance that JTS will develop and manufacture products on a timely basis with
the quality and features necessary to compete effectively. High volume hard disk
drive users typically will only utilize from two to four suppliers. As a result,
it may be necessary for JTS to displace competitors in many circumstances to
increase its net sales. In addition, JTS faces competition from the
manufacturing operations of its current and potential OEM customers, which could
initiate or increase internal production of hard disk drives and reduce or cease
purchasing from independent hard disk drive suppliers such as JTS. Moreover, the
hard disk drive industry is characterized by price erosion and resulting
pressure on gross margins. JTS expects that hard disk drive prices will continue
to decline in the future and that competitors will offer products which meet or
exceed the performance capabilities of JTS products. Due to such pricing
pressures, JTS' future gross margins will be substantially dependent upon its
ability to control manufacturing costs, improve manufacturing yields and
introduce new products on a timely basis. Any increase in price competition
would have a material adverse effect on JTS' business, operating results and
financial condition. JTS may also experience competition from other forms of
data storage, including optical storage, flash memory and holographic storage.
If JTS' current and prospective customers and end users were to adopt such data
storage products as an alternative to JTS' products, JTS' business, operating
results and financial condition would be adversely affected. See "Information
Regarding JTS Corporation -- Business of JTS -- Competition."
Rapid Technological Change; Short Product Life Cycles; Price Erosion. The
hard disk drive industry is characterized by rapid technological change, short
product life cycles and price erosion. As a result, JTS must continually
anticipate change and adapt its products to meet demand for increased storage
capacity. Although JTS intends to engage in a continuous process of developing
new products and production techniques, there can be no assurance that JTS will
anticipate advances in hard disk drive technology and develop products
incorporating such advances in a timely manner to compete effectively against
its competitors' new products. Due to the rapid technological change and
frequent development of new hard disk drive products, it is common in the
industry for the relative mix of customers and products to change rapidly, even
from quarter to quarter. For example, in the first half of 1996, the demand for
1 gigabyte 3.5-inch form factor hard disk drives decreased dramatically due to
increased availability of and demand for larger capacity disk drives. As a
result, pricing pressure on such disk drives, including those marketed by JTS,
increased and gross margins decreased. Generally, new products have higher
average selling prices than more mature products. Therefore, JTS' ability to
introduce new products in a timely fashion is an important factor in achieving
growth and profitability. In addition, JTS anticipates continued changes in the
requirements of its customers in the computer industry. There can be no
assurance that JTS will be able to develop, manufacture and sell products that
respond adequately to such changes or that future technological innovations will
not reduce demand for hard disk drives. JTS' business, operating results and
financial condition would be materially adversely affected if its development
efforts are not successful, if the technologies that JTS has chosen not to
develop prove to be competitive alternatives or by trends toward technology that
would replace hard disk drives as a storage medium, such as optical storage,
flash memory and holographic storage. As JTS increases its production and
shipment of hard disk drives and expands its product line, JTS' inventory levels
will increase. Due to the rapid rate of change in JTS' business, a large
inventory poses the risk of inventory obsolescence which could have an adverse
effect on JTS' business, operating results and financial condition. In this
regard, JTS anticipates incurring future inventory allowances, the level of
which will depend upon a number of factors, including manufacturing yields, new
product introductions, maturity or obsolescence of product designs, inventory
levels and competitive pressures.
Recent Significant Appreciation in Price of Atari Common Stock. The
closing price per share of Atari Common Stock was $1.875 at February 12, 1996,
the last day of trading before announcement of the agreement between JTS and
Atari to merge the two companies. The price of Atari Common Stock has
appreciated significantly since then, notwithstanding the absence of any
significant publicly available information regarding the financial results or
business operations of JTS or the Combined Company and the absence of any
material positive developments in the financial results or business operations
of Atari. See
20
<PAGE> 28
"Price Range of Common Stock." There can be no assurance that the recent price
appreciation of Atari Common Stock is indicative of the price that will prevail
for the JTS Common Stock following completion of the Merger.
Availability of Components and Materials; Dependence on Suppliers. JTS
relies on a limited number of suppliers for many components and materials used
in its manufacturing processes, including recording disks, head stack components
and integrated circuits. At present, JTS does not have multiple suppliers for
all of its materials and component requirements, and there can be no assurance
that JTS will secure more than one source for all of its requirements in the
future or that its suppliers will be able to meet its requirements on a timely
basis or on acceptable terms. Furthermore, JTS does not have contractual
arrangements with any of its sole source suppliers. In particular, JTS presently
relies on sole source suppliers for controller application specific integrated
circuits ("ASICs"), spindle motors, certain head stack components and disk
media. Delays in the receipt of certain components and materials have occurred
in the past, and there can be no assurance that delays will not occur in the
future or that suppliers will not extend lead times. Moreover, changing
suppliers for certain materials, such as spindle motors, could require
requalification of JTS' products with some or all of its customers.
Requalification could prevent early design-in wins or could prevent or delay
continued participation in hard disk drive programs for which JTS' products have
been qualified. In addition, long lead times are required to obtain many
materials, such as integrated circuits utilized in JTS' printed circuit board
assemblies ("PCBAs"). Regardless of whether these materials are available from
established or new sources of supply, these lead times could impede JTS' ability
to quickly respond to changes in demand and product requirements. Any
limitations on, or delays in, the supply of materials could disrupt JTS'
production volume and could have a material adverse effect on JTS' business,
operating results and financial condition. In this regard, in the fourth quarter
of fiscal 1996, JTS experienced delays in obtaining certain integrated circuits
required in the assembly of PCBAs due to the supplier's production problems,
which resulted in a significant reduction in production volume during such
period. Such production problems were corrected, but there can be no assurance
that production problems of this type or otherwise will not occur again in the
future. Furthermore, a significant increase in the price of one or more of these
components or materials could adversely affect JTS' business, operating results
and financial condition. In addition, there are only a limited number of
providers of hard disk drive manufacturing equipment, such as servo-writers,
burn-in equipment and final test equipment, and ordering additional equipment
for replacement or expansion involves long lead times, which limit the rate and
flexibility of capacity expansion. Failure to obtain such manufacturing
equipment on a timely basis could limit JTS' production of hard disk drives and
adversely affect JTS' business, operating results and financial condition. See
"Information Regarding JTS Corporation -- Business of JTS -- Manufacturing."
Cyclical Nature of Hard Disk Drive and Computer Industries. JTS' operating
results are dependent on the demand for hard disk drives, which in turn depends
on the demand for notebook and desktop personal computers. The hard disk drive
industry is cyclical and has experienced periods of oversupply, resulting in
significantly reduced demand for hard disk drives, as well as pricing pressures
and reduced production levels. The effect of these cycles has been magnified by
computer manufacturers' practice of ordering components, including hard disk
drives, in excess of their needs during periods of rapid growth. In recent
years, the disk drive industry has experienced significant growth, and JTS
intends to expand its capacity based on current and anticipated demand. There
can be no assurance that such growth will continue or that the level of demand
will not decline. A decline in demand for hard disk drives would have a material
adverse effect on JTS' business, operating results and financial condition.
Additionally, in the past some computer manufacturers have experienced
substantial financial difficulties due to the cyclical nature of the computer
industry and other factors. In this regard, certain personal computer
manufacturers have recently announced reductions in anticipated revenue growth.
Any increased price pressure in the personal computer industry could be passed
through to personal computer component suppliers, including manufacturers of
hard disk drives.To date, JTS has not incurred significant bad debt expense.
However, there can be no assurance that JTS will not face difficulty in
collecting receivables or be required to offer more liberal payment terms in the
future, particularly in a period of reduced demand. Any failure to collect or
delay in collecting receivables could have a material adverse effect on JTS'
business, operating results and financial condition.
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Dependence on Compaq Computer Relationship; Customer Concentration. JTS'
strategy to commercialize its products and achieve market acceptance has focused
in large part on the development of distribution, licensing, product development
and other strategic relationships with leading computer companies, other
manufacturers of computer peripherals and recognized distribution organizations.
Through these relationships, JTS seeks to establish its products and
technologies as industry standards. In this regard, JTS has entered into a
Development Agreement with Compaq Computer Corporation ("Compaq") pursuant to
which Compaq has agreed to design JTS' Nordic disk drives into at least one of
Compaq's products and to purchase a minimum number of hard disk drives from JTS
within two years following Compaq's acceptance of the first of such products. In
return, JTS has granted to Compaq certain pricing preferences and agreed to pay
royalties to Compaq on the sales of Nordic disk drives to third parties during
the term of the agreement. Compaq has also been granted a license to use the
Nordic designs to manufacture Nordic drives on a royalty-free basis in the event
that JTS fails to meet the agreed upon production schedule. The Development
Agreement also restricts JTS' ability to sublicense Nordic technology. The
Development Agreement has a five year term, which will automatically be renewed
under certain circumstances and may be terminated by either party only with
cause. In order to provide a second source of JTS' products, JTS has entered
into a Technology Transfer and License Agreement with Western Digital pursuant
to which Western Digital has the right to manufacture and sell Nordic disk
drives to Compaq. If either of these agreements were to terminate prematurely,
JTS' efforts to establish market acceptance of its products and, consequently
its business, operating results and financial condition would be adversely
affected. See "Information Regarding JTS Corporation -- Business of JTS --
Relationship With Compaq" and "-- Western Digital Arrangement." In fiscal 1996,
Olidata S.p.A, Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima
Technology, B.V. accounted for 34%, 12%, 11% and 10%, respectively, of JTS'
total revenue. In the quarter ended April 28, 1996, Peacock Systems GmbH,
Markvision International S.A. and FutureTech accounted for 43%, 18% and 14%,
respectively, of JTS' total revenues. JTS expects that sales to a relatively
small number of OEMs will account for a substantial portion of its net revenues
for the foreseeable future, although the companies that comprise JTS' largest
customers may change from period to period. The loss of, or decline in orders
from, one or more of JTS' key customers would have a material adverse effect on
JTS' business, operating results and financial condition. See "Information
Regarding JTS Corporation -- Business of JTS -- Patents and Licenses."
Reliance on Licensed Technology. JTS currently owns no patents and has
obtained licenses to a substantial portion of the technology used in its hard
disk drives pursuant to license agreements with Pont Peripherals Corporation,
TEAC Corporation and Western Digital. If such license agreements were
prematurely terminated or if JTS were enjoined from relying upon such licenses
due to JTS' alleged or actual breach of such agreements, JTS would be prevented
from manufacturing hard disk drives incorporating technology subject to such
licenses. As a result, JTS' business, operating results and financial condition
would be materially adversely affected. See "Information Regarding JTS
Corporation -- Business of JTS -- Patents and Licenses."
Intellectual Property and Proprietary Rights. Although JTS attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that JTS will be able to
protect its technology adequately or that competitors will not be able to
develop similar technology independently. There can be no assurance that patents
will be issued with respect to JTS' pending patent applications or that any
future patents will be sufficiently broad to protect JTS' technology. There can
be no assurance that any future patent issued to JTS will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection to JTS' products. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate JTS'
products or design around any possible patents issued to JTS in the future. In
addition, the laws of certain foreign countries may not protect JTS'
intellectual property rights to the same extent as do the laws of the United
States.
In recent years, the hard disk drive industry has experienced an increase
in litigation to enforce intellectual property rights. Thus, litigation may be
necessary to enforce any future JTS patents, copyrights or other intellectual
property rights, to protect JTS' trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or claims for indemnification resulting from infringement claims.
Such litigation, even if successful, could result in substantial costs and
diversion of resources and could have a material adverse effect on JTS'
business, operating results and financial condition.
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Alternatively, if any claims are asserted against JTS, JTS may seek to obtain a
license under the third party's intellectual property rights or to seek to
design around such claims. There can be no assurance, however, that a license
will be available on reasonable terms or at all, and it could be expensive and
time consuming or prove impossible for JTS to design around such claims. Any of
such alternatives could materially and adversely affect JTS' business, results
of operations and financial condition.
Expansion of Manufacturing Capacity. JTS' competitive position will depend
substantially on its ability to expand its manufacturing capacity. Accordingly,
JTS is continuing to make significant investments to expand such capacity,
particularly through the acquisition of capital equipment, facilities expansion
and the hiring and training of new personnel. JTS currently plans to add new
production lines at its existing manufacturing facility in Madras, India during
fiscal 1997 that will utilize all available floor space at this facility. There
can be no assurance that JTS will be able to expand such capacity in a timely
manner, that the cost of such expansion will not exceed management's current
estimates, that such capacity will not exceed the demand for JTS products or
that such additional capacity will achieve satisfactory levels of manufacturing
efficiency in a timely manner or at all. In addition, the expansion of
manufacturing capacity will significantly increase JTS' fixed costs. JTS'
profitability will depend on its ability to utilize its manufacturing capacity
in an effective manner, and JTS' inability to fully utilize its capacity would
have a material adverse effect on JTS' business, operating results and financial
condition. See "Information Regarding JTS Corporation -- Business of JTS --
Manufacturing."
Dependence on Single Manufacturing Facility. In fiscal 1996, substantially
all of JTS' manufacturing operations took place at Moduler Electronics in
Madras, India. Because JTS does not currently operate multiple facilities in
different geographic areas, a disruption of JTS' manufacturing operations
resulting from various factors, including sustained process abnormalities, human
error, government interventions or a natural disaster such as fire or flood,
could cause JTS to cease or limit its manufacturing operations and consequently
would have a material adverse effect on JTS' business, operating results and
financial condition.
Risks of International Sales and Manufacturing. In fiscal 1996 and the
three months ended April 30, 1996, substantially all of JTS' net sales consisted
of products sold to customers in Europe, Asia and Latin America, and JTS
anticipates that a substantial percentage of its products will be sold to
customers outside of the United States for the foreseeable future. Furthermore,
JTS expects to conduct substantially all of its manufacturing operations in
India, although JTS may evaluate alternative or additional locations from time
to time. Accordingly, JTS' operating results are subject to the risks of doing
business in a foreign country, including compliance with, or changes in, the law
and regulatory requirements of a foreign country, political instability, local
content rules, taxes, tariffs or other barriers, and transportation delays and
other interruptions. For example, the Indian government has granted JTS a five
year "tax holiday," and its subsidiary, Moduler Electronics, is located in the
Madras Export Processing Zone where it currently enjoys an exemption from Indian
taxes on export profits, although to date JTS has retained only minimal benefits
from such exemption. Such exemption may be terminated at any time for political
or economic reasons, in which event JTS may become subject to significantly
greater taxes on sales of disk drives outside of India at rates currently of up
to 46%. Furthermore, JTS does not have a long-term lease agreement, but rather
occupies the Madras facility pursuant to allotment letters from the Development
Commissioner of the Madras Export Processing Zone. Other benefits associated
with conducting business in India, which historically has experienced
considerable political instability, are subject to the vagaries of the Indian
government and may be withdrawn at any time. Although all of JTS' sales
presently are made in U.S. dollars, there can be no assurance that future
international sales will not be denominated in foreign currencies. Regardless of
whether JTS' sales are denominated in foreign currencies, JTS is, and will
continue to be, subject to risks related to foreign currency fluctuations.
Production Yields; Product Quality. The hard disk drive manufacturing
process is complex, and low production yields may result from a variety of
factors, including the introduction of new products, increased complexity in
product specifications, human error, the introduction of contaminants in the
manufacturing environment, equipment malfunction, use of defective materials and
components and inadequate testing. From time to time, JTS has experienced lower
than anticipated production yields as a result of such factors. Furthermore,
while JTS has implemented procedures to monitor the quality of the materials
received from its suppliers, there can be no assurance that materials will meet
JTS' specifications or that substandard materials will not adversely impact
production yields or cause other production problems. JTS' failure to maintain
high quality production standards or acceptable production yields would result
in loss of customers, delays in
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shipments, increased costs, cancellation of orders and product returns for
rework, any of which could have a material adverse effect on JTS' business,
operating results and financial condition. For example, JTS' cost of sales for
fiscal 1996 included a $4.3 million provision for inventory allowances
principally due to the costs for return of defective products, scrapped material
associated with unrepairable damage caused during the assembly process and
estimates of physical loss of inventory associated with high volume
manufacturing activities.
Variability of Operating Results. JTS' operating results are expected to
be subject to significant quarterly and annual fluctuations based upon a variety
of factors including market acceptance of JTS' products, timing of significant
orders, changes in pricing by JTS or its competitors, the timing of product
announcements by JTS, its customers or its competitors, changes in product mix,
manufacturing yields, order cancellations, modifications and quantity
adjustments and shipment reschedulings, the level of utilization of JTS'
production capacity, increases in production and engineering costs associated
with initial manufacture of new products, changes in the cost of or limitations
on availability of components and materials and customer returns. The impact of
these and other factors on JTS' revenues and operating results in any future
period cannot be predicted with certainty. JTS' expense levels are based, in
large part, on its expectations as to future revenues. Substantial advance
planning and commitment of financial and other resources is necessary for
expansion of manufacturing capacity, while JTS' sales are generally made
pursuant to purchase orders that are subject to cancellation, modification,
quantity reductions or rescheduling without significant penalties. Furthermore,
because the hard disk drive industry is capital intensive and requires a high
level of fixed costs, operating results are extremely sensitive to changes in
volume. Accordingly, if revenue levels do not meet expectations, operating
results and net income, if any, are likely to be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of JTS."
Management of Growth. JTS has recently experienced and may continue to
experience substantial growth in the number of its employees and the scope of
its operations. Such growth would further strain JTS' managerial, financial,
manufacturing and other resources. In addition, in order to manage its growth
effectively, JTS must implement additional operating, financial and management
information systems and hire and train additional personnel. In particular, JTS
must hire and train a significant number of additional personnel to operate the
highly complex capital equipment required by its manufacturing operations. There
can be no assurance that JTS will successfully implement additional systems in a
timely or efficient manner, to hire and properly train a sufficient number of
qualified personnel or to effectively manage such growth, and JTS' failure to do
so could have a material adverse effect on its business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of JTS" and "Information Regarding JTS
Corporation -- Business of JTS -- Employees."
Dependence on Key Management Personnel. JTS' operating results will depend
in significant part upon the continued contributions of its key management and
technical personnel, including Sirjang L. Tandon, its Chairman and Corporate
Technical Strategist, David T. Mitchell, its President and Chief Executive
Officer, Kenneth D. Wing, its Executive Vice President, Research and Development
Quality/Reliability, W. Virginia Walker, its Executive Vice President, Finance
and Administration, Chief Financial Officer and Secretary, and Steven L.
Kaczeus, its Chief Technical Officer, each of whom would be difficult to
replace. See "Information Regarding JTS Corporation -- Management of JTS." JTS
does not have an employment agreement with any of these individuals. The loss of
any of these key personnel could have a material adverse effect on the business,
operating results and financial condition of JTS. In addition, JTS' future
operating results depend in part upon its ability to attract, train, retain and
motivate other qualified management, technical, manufacturing, sales and support
personnel for its operations. Competition for such personnel is intense, and
there can be no assurance that JTS will be successful in attracting or retaining
such personnel. The loss of the services of existing personnel as well as the
failure to recruit additional personnel could materially adversely affect JTS'
business, operating results and financial condition. See "Information Regarding
JTS Corporation -- Business of JTS -- Employees."
Purchase Orders Subject to Cancellation, Modification and
Rescheduling. JTS' sales are generally made pursuant to purchase orders that
are subject to cancellation, modification, quantity reductions or rescheduling
without significant penalties. Changes in forecasts, cancellations, rescheduling
and quantity reductions may result in excess inventory costs, inventory losses
and under-utilization of production capacity and could have a
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material adverse effect on JTS' business, operating results and financial
condition. As a result of the foregoing, JTS' backlog as of any particular date
may not be representative of actual sales for any succeeding period.
Reduction in Voting Control. Upon the closing of the Merger, the Atari
stockholders immediately prior to the Merger will own approximately 62% of the
outstanding voting securities of the Combined Company (assuming no exercise of
options after June 28, 1996). As a result, such stockholders, acting together,
could determine the outcome of matters requiring approval of the stockholders of
the Combined Company. Such matters include the election of the members of the
Combined Company's Board of Directors, proxy contests, mergers involving the
Combined Company, tender offers or other transactions that could afford
stockholders of the Combined Company the opportunity to realize a premium over
the then prevailing market price of the Common Stock of the Combined Company.
Furthermore, following the Merger, members of the Tramiel family will own
approximately 27% of the outstanding voting securities of the Combined Company
(assuming no exercise of options after June 28, 1996). Jack Tramiel will also be
a member of the Combined Company's Board of Directors. As a result, the members
of the Tramiel family, acting together, could exert significant influence over
matters requiring approval of the stockholders of the Combined Company.
OTHER RISK FACTORS RELATED TO THE MERGER
Risks Associated with Fixed Exchange Ratio. All of the material terms of
the Merger, including the one-for-one exchange ratio, were agreed upon when the
initial merger agreement was signed on February 12, 1996. Although the structure
of the transaction was modified as reflected in the Merger Agreement which was
signed on April 8, 1996, such change did not materially modify the economic
terms of the Merger. Since February 12, 1996, there have been ongoing business
developments that have necessarily impacted Atari and JTS. With respect to
Atari, these developments include continued significant operating losses and
decreases in revenues, continued intense competition in the video game industry
and a significant increase in the trading price for the Atari Common Stock. With
respect to JTS, these developments include continued losses, delays in the
schedule for volume shipments of Nordic disk drives, reductions in the targeted
revenues, gross profit and net income for fiscal 1997, JTS' decision to pursue
additional financing as soon as practicable following the Merger and the fact
that Compaq has accepted the JTS Nordic 3-inch disk drive. Notwithstanding these
factors, there is no provision in the Merger Agreement for adjustment prior to
the closing of the Merger of the rate at which the Atari Common Stock will be
exchanged for JTS Common Stock.
Significant Lapse of Time Since Delivery of Montgomery Fairness
Opinion. The opinion of Montgomery Securities that the conversion ratio of
Atari Common Stock into JTS Common Stock was fair to Atari, from a financial
point of view, was delivered to the Atari Board of Directors on February 5, 1996
and is applicable only as of such date. The Atari Board of Directors evaluated
the business developments described above at its meeting on June 21, 1996 and
unanimously affirmed its approval of the Merger. At this meeting, the Atari
Board of Directors also determined not to obtain an updated fairness opinion
from Montgomery with respect to the Merger. As a result of significant changes
in the business of JTS since the date of Montgomery's fairness opinion, Atari
stockholders should not place undue reliance upon the availability of such
opinion.
Utilization of Net Operating Losses. As of December 31, 1995, Atari had
federal net operating losses ("NOLs") and tax credit carryforwards in the amount
of approximately $166.8 million, and as of January 28, 1996, JTS had federal
NOLs of approximately $27.0 million. Under the Internal Revenue Code of 1986, as
amended (the "Code"), certain changes in the ownership or business of a
corporation that has NOLs or tax credit carryforwards will result in the
inability to use or the imposition of significant restrictions on the use of
such NOLs or tax credit carryforwards to offset future income and tax liability
of such corporation, its subsidiaries or its successors. The Merger will
constitute a change in ownership with respect to JTS, and the Merger or
subsequent events may constitute an event with respect to Atari which results in
the imposition of restrictions on the ability of the Combined Company to utilize
NOLs and tax credit carryforwards of Atari or JTS. There can be no assurance
that the Combined Company will be able to utilize all or any NOLs or tax credit
carryforwards of Atari or JTS. The ability of the Combined Company to utilize
Atari's accumulated NOLs and tax carryforwards was a factor considered by the
boards of directors of Atari and JTS in concluding to approve the Merger and the
Merger Agreement and to recommend that the stockholders of Atari and JTS approve
the Merger and the Merger Agreement. See "The Proposed Merger and Related
Transactions --
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Background and Board Recommendations -- Recommendation of the Board of Directors
of Atari" and "--Recommendation of the Board of Directors of JTS."
Control by Affiliates; Anti-takeover Effects. Upon completion of the
Merger, directors, officers and holders of 10% or more of the outstanding JTS
Common Stock will own approximately 35% of the outstanding shares of the
Combined Company (assuming no exercise of options or warrants after June 28,
1996). As a result, these affiliates of the Combined Company, acting together,
will have the ability to exert significant influence over the election of
directors and other corporate actions affecting the Combined Company. Certain
provisions of the Certificate of Incorporation and Bylaws of the Combined
Company and certain provisions of the DGCL, including Section 203 thereof, may
also discourage certain transactions involving a change in control of the
Combined Company. In addition to the foregoing, the ability of the Board of
Directors of the Combined Company to issue additional "blank check" preferred
stock without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Combined Company. See
"Information Regarding Atari Corporation -- Principal Stockholders of Atari,"
"Information Regarding JTS Corporation -- Principal Stockholders of JTS" and
"Description of Capital Stock of Atari and JTS."
Shares Eligible for Future Sale. Sales of substantial amounts of JTS
Common Stock in the public market after the consummation of the Merger could
adversely affect prevailing market prices. Following the Merger, the Combined
Company will have approximately 102,814,954 shares of Common Stock outstanding
(assuming no exercise of options or warrants after June 28, 1996). All of the
63,854,718 shares of JTS Common Stock to be issued to the former stockholders of
Atari in the Merger will be eligible for sale in the public market upon the
closing of the Merger. Of such shares, approximately 23,950,000 shares held by
affiliates of Atari will be subject to volume and other restrictions under Rule
145 of the Securities Act. In addition, 90 days following the consummation of
the Merger, approximately 3,900,000 shares of JTS Common Stock will become
eligible for sale in the public market pursuant to Rule 701 under the Securities
Act. In addition, in February and August 1997, approximately 16,200,000 shares
and 12,500,000 shares of JTS Common Stock, respectively, will become eligible
for sale in the public market pursuant to Rule 144 of the Securities Act upon
expiration of the two-year holding periods from the dates such shares were
issued.
In addition, the holders of approximately 42,500,000 shares of JTS Common
Stock outstanding as of the closing of the Merger will be entitled to certain
rights with respect to registration of such shares under the Securities Act. JTS
also intends to register for sale on a Form S-8 Registration Statement under the
Securities Act an aggregate of approximately 8,985,000 shares of JTS Common
Stock reserved for issuance under JTS' Restated Plan, 500,000 shares of JTS
Common Stock reserved for issuance under JTS' Non-Employee Directors' Plan, and
approximately 900,000 shares of JTS Common Stock reserved for issuance pursuant
to the exercise of options granted under Atari's 1986 Stock Option Plan which
will be assumed by JTS in the Merger. Former stockholders of JTS have not
previously had the opportunity to sell their shares in the public market.
Substantial sales of JTS Common Stock after the Merger could have a negative
impact on the market price and liquidity of the JTS Common Stock.
Diversion of Management Attention. Following the Merger, Atari and JTS
will operate as separate divisions of the Combined Company and the current
management of JTS will serve as the management of the Combined Company. The
Combined Company's management is expected to devote substantially all of its
time to the affairs of JTS following the Merger. If the management of the
Combined Company were unable to effectively manage the separate businesses, the
operating results and financial condition of the Combined Company could be
materially adversely affected.
No Prior Market; Liquidity; Stock Price Volatility. Prior to the Merger
there was no public market for JTS' capital stock. Although it is expected that
the JTS Common Stock will be listed on the American Stock Exchange upon the
closing of the Merger, there can be no assurance that an active public market
for the JTS Common Stock will develop or be sustained. The trading price of the
JTS Common Stock could be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by JTS or its competitors, general
conditions in the hard disk drive, computer or video game industries, changes in
earnings estimates or recommendations by analysts, or other events or factors.
In addition, the public stock markets have experienced extreme price and trading
volume volatility in recent months. This volatility has significantly affected
the market prices of securities of many technology companies for reasons
frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the JTS
Common Stock.
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INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation by Atari and JTS of proxies to be voted at the Atari Special
Meeting and the JTS Special Meeting, respectively. This Joint Proxy
Statement/Prospectus is being mailed to stockholders of Atari and JTS on or
about July 15, 1996.
The purpose of the Atari and JTS Special Meetings is to consider and vote
upon a proposal to approve the Merger and the Merger Agreement. Upon
consummation of the Merger, Atari will be merged with and into JTS, the separate
existence of Atari will cease, JTS will remain as the surviving corporation and
all of the rights, privileges, powers, franchises, properties, assets,
liabilities and obligations of Atari will be vested in JTS. At the Effective
Time (as such term is defined below), each outstanding share of Atari Common
Stock will be converted into one share of JTS Common Stock and each outstanding
option to purchase Atari Common Stock will become an option to purchase JTS
Common Stock.
Based on the number of shares of outstanding Atari Common Stock, JTS Common
Stock and JTS Series A Preferred Stock as of June 28, 1996 (assuming no exercise
of outstanding options after such date), immediately after consummation of the
Merger (assuming the conversion of all outstanding shares of JTS Series A
Preferred Stock into shares of JTS Common Stock and that none of the holders of
JTS Common Stock or JTS Series A Preferred Stock perfects appraisal or
dissenters' rights), a total of 102,814,954 shares of JTS Common Stock would be
issued and outstanding, of which 63,854,718 shares, or 62%, would represent
shares issued in the Merger upon conversion of Atari Common Stock.
THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS HAVE UNANIMOUSLY
DETERMINED THAT THE MERGER AND THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, ITS RESPECTIVE CORPORATION AND ITS RESPECTIVE STOCKHOLDERS.
THE BOARDS OF DIRECTORS OF EACH OF ATARI AND JTS UNANIMOUSLY RECOMMEND THAT
THE STOCKHOLDERS OF ITS RESPECTIVE CORPORATION APPROVE THE MERGER AND THE MERGER
AGREEMENT.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
JTS under the Securities Act for the offering of JTS Common Stock in connection
with the Merger. This Joint Proxy Statement/Prospectus does not cover resales of
the securities of JTS to be received in connection with the Merger and no person
is authorized to use this prospectus in connection with any resale.
The principal offices of Atari are located at 455 South Mathilda Avenue,
Sunnyvale, California 94086, and its telephone number is (408) 328-0900. The
principal offices of JTS are located at 166 Baypointe Parkway, San Jose,
California 95134, and its telephone number is (408) 468-1800.
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VOTING AND PROXIES
DATE, TIME AND PLACE OF SPECIAL STOCKHOLDER MEETINGS
Atari. The Atari Special Meeting will be held at the offices of Wilson
Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California,
legal counsel to Atari, on July 30, 1996 at 9:00 a.m.
JTS. The JTS Special Meeting will be held at JTS's offices at 166
Baypointe Parkway, San Jose, California 95134, on July 30, 1996 at 9:00 a.m.
RECORD DATE AND OUTSTANDING SHARES
Atari. Stockholders of record of Atari Common Stock at the close of
business on June 28, 1996 (the "Atari Record Date") are entitled to notice of
and to vote at the Atari Special Meeting. At the Atari Record Date, there were
approximately 2,375 holders of record of Atari Common Stock and 63,854,718
shares of Atari Common Stock were issued and outstanding. Except for the
stockholders identified below under "Information Regarding Atari Corporation --
Principal Stockholders of Atari," there were no persons known to the management
of Atari to be the beneficial owners of more than 5% of the outstanding shares
of Atari Common Stock.
JTS. Stockholders of record of JTS Common Stock and JTS Series A Preferred
Stock at the close of business on June 18, 1996 (the "JTS Record Date") are
entitled to notice of and to vote at the JTS Special Meeting. At the JTS Record
Date, there were 20 holders of record of JTS Common Stock and 54 holders of
record of JTS Series A Preferred Stock and 9,263,866 shares of JTS Common Stock
and 29,696,370 shares of JTS Series A Preferred Stock were issued and
outstanding. Except for the stockholders identified below under "Information
Regarding JTS Corporation -- Principal Stockholders of JTS," there were no
persons known to the management of JTS to be the beneficial owners of more than
5% of the outstanding shares of any class of JTS capital stock.
VOTING AND REVOCABILITY OF PROXIES
All properly executed proxies that are not revoked will be voted at the
respective Atari and JTS Special Meetings and any postponement or adjournment
thereof, in accordance with the instructions contained therein. Proxies
containing no instructions regarding the proposals specified in the form of
proxy will be voted for approval of the Merger and the Merger Agreement at the
Atari and JTS Special Meetings, as the case may be. Each record holder of Atari
Common Stock as of the Atari Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders at the Atari Special Meeting. Each
record holder of JTS Common Stock and JTS Series A Preferred Stock as of the JTS
Record Date is entitled to cast one vote per share, exercisable in person or by
properly executed proxy, on each matter properly submitted for the vote of the
stockholders at the JTS Special Meeting.
If an executed proxy card is returned and a stockholder has abstained from
voting on any matter, the shares represented by such proxy will be considered
present at the applicable special meeting for purposes of determining a quorum
and for purposes of calculating the vote, but will not be considered to have
been voted in favor as to such matter. In the case of the Atari Special Meeting,
if an executed proxy is returned by a broker holding shares in street name which
indicates that the broker does not have discretionary authority as to certain
shares to vote on one or more matters, such shares will be considered
represented at the Atari Special Meeting for purposes of determining a quorum,
but will not be considered to be represented at the Atari Special Meeting for
purposes of calculating the vote with respect to such matter ("broker
non-votes"). Because approval of the Merger and the Merger Agreement requires,
in the case of Atari, the affirmative vote of a majority of the total number of
outstanding shares of Atari Common Stock entitled to vote at the Atari Special
Meeting, and in the case of JTS, the affirmative vote of a majority of the total
number of outstanding shares of JTS Common Stock and JTS Series A Preferred
Stock (voting together) and at least two thirds of the total number of
outstanding shares of JTS Series A Preferred Stock (voting as a separate class)
entitled to
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vote at the JTS Special Meeting, abstentions and, in the case of Atari, broker
non-votes, will have the same effect as a vote against the proposal. If an
executed proxy card is returned and a stockholder has voted against the
proposal, the shares represented by such proxy will also be deemed to have voted
against a resolution to postpone or adjourn the meeting.
The presence of a stockholder at the applicable special meeting for which
such stockholder has executed a proxy will not automatically revoke such
stockholder's proxy. A stockholder may, however, revoke a proxy at any time
prior to its exercise by filing a written notice of revocation with, or by
delivering a duly executed proxy bearing a later date to, the Corporate
Secretary at the address of the principal executive offices of the company to
which such proxy relates, or by attending the special meeting to which such
proxy relates and voting in person.
STOCKHOLDER VOTES REQUIRED
Atari. The presence, in person or by proxy, of a majority of the shares of
Atari Common Stock outstanding on the Atari Record Date is necessary to
constitute a quorum at the Atari Special Meeting. Approval of the Merger and the
Merger Agreement requires the affirmative vote of holders of a majority of the
shares of Atari Common Stock outstanding on the Atari Record Date.
It is expected that all of the 23,453,129 shares of Atari Common Stock
(excluding shares subject to stock options) beneficially owned by directors and
executive officers of Atari and their affiliates at the Atari Record Date (37%
of the total number of outstanding shares of Atari Common Stock) will be voted
for approval of the Merger and the Merger Agreement. As of the Atari Record
Date, JTS and its directors and executive officers and their affiliates
beneficially owned no shares of Atari Common Stock (excluding shares of Atari
Common Stock subject to the Voting Agreements). See "Information Regarding Atari
- -- Principal Stockholders of Atari."
JTS. The presence, in person or by proxy, of a majority of the shares of
JTS Common Stock and JTS Series A Preferred Stock outstanding on the JTS Record
Date is necessary to constitute a quorum at the JTS Special Meeting. Approval of
the Merger and the Merger Agreement requires the affirmative vote of holders of
(a) a majority of the shares of JTS Common Stock and JTS Series A Preferred
Stock outstanding on the JTS Record Date, voting together, (b) a majority of the
shares of JTS Common Stock outstanding on the JTS Record Date, voting separately
as a class, and (c) at least two thirds of the shares of JTS Series A Preferred
Stock outstanding on the JTS Record Date, voting separately as a class.
It is expected that all of the 9,074,791 shares of JTS Common Stock
(excluding shares subject to stock options) and 14,122,107 shares of JTS Series
A Preferred Stock beneficially owned by directors and executive officers of JTS
and their affiliates at the JTS Record Date (96% of the total number of
outstanding shares of JTS Common Stock and 48% of the total number of
outstanding shares of JTS Series A Preferred Stock) will be voted for approval
of the Merger and the Merger Agreement. As of the JTS Record Date, Atari and its
directors and executive officers and their affiliates beneficially owned no
shares of JTS Common Stock or JTS Series A Preferred Stock (except for shares of
JTS capital stock subject to the Voting Agreements). See "Information Regarding
JTS Corporation -- Principal Stockholders of JTS."
Voting Agreements. Pursuant to the Voting Agreements, certain stockholders
of Atari and JTS have agreed to vote all shares held by them in favor of the
Merger and the Merger Agreement. Specifically, holders of approximately 43% of
the shares of Atari Common Stock, 91% of the shares of JTS Common Stock and 70%
of the shares of JTS Series A Preferred Stock entitled to vote at the respective
stockholder meetings have entered into Voting Agreements and irrevocable
proxies. As a result, it is expected that the Merger and the Merger Agreement
will be approved by the holders of a majority of the shares of Atari Common
Stock outstanding on the Atari Record Date and by the holders of a majority of
the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding on
the JTS Record Date (voting together), a majority of the shares of JTS Common
Stock outstanding on the JTS Record Date (voting as a separate class) and at
least two-thirds of the shares of JTS Series A Preferred outstanding on the JTS
Record Date (voting as a separate class). See "The Proposed Merger and Related
Transactions -- Related Transactions -- Voting Agreements."
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SOLICITATION OF PROXIES; EXPENSES
Atari and JTS will equally bear the costs of solicitation of proxies from
their stockholders, all printing and mailing costs in connection with the
preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and
JTS stockholders, all Commission filing fees with respect to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, and all
costs of qualifying the shares of JTS Common Stock under state blue sky laws. In
addition to solicitation by mail, the directors, officers and employees of Atari
and JTS may solicit proxies from stockholders by telephone, telegram or letter
or in person, but will not be specially compensated for such activities.
Brokers, nominees, fiduciaries and other custodians have been requested to
forward solicitation material to the beneficial owners of Atari Common Stock
held of record by them. Such custodians will be reimbursed by Atari for their
reasonable expenses incurred in that connection. If the Merger is consummated,
all costs and expenses incurred in connection with the Merger not previously
paid will be paid by the Combined Company.
APPRAISAL AND DISSENTERS' RIGHTS
Stockholders of record of JTS Common Stock and JTS Series A Preferred Stock
may under certain circumstances and by following procedures prescribed by
Section 262 of the DGCL or Chapter 13 of the CGCL, exercise either appraisal or
dissenters' rights and receive cash for their respective shares of capital stock
of JTS. The failure of any dissenting stockholder of JTS to follow the
appropriate procedures may result in the termination or waiver of such rights.
See "The Proposed Merger and Related Transactions -- Appraisal and Dissenters'
Rights."
The stockholders of Atari are not entitled to appraisal or dissenters'
rights under the NGCL.
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THE PROPOSED MERGER AND RELATED TRANSACTIONS
BACKGROUND AND BOARD RECOMMENDATIONS
BACKGROUND OF THE MERGER
By the second half of 1995, Atari and its Board of Directors recognized
that despite the significant financial resources that had been devoted to the
Jaguar product, it was unlikely that Jaguar would ever become a broadly accepted
video game console or that Jaguar technology would be broadly adopted by
software title developers. As a result, at its meeting on October 13, 1995, the
Atari Board of Directors determined to substantially reduce the resources
devoted to the Jaguar and related products, and to change Atari's strategic
focus by devoting its resources to PC software publishing and strategic
opportunities. In particular, the Atari Board of Directors directed management
to focus on evaluating strategic opportunities for Atari including potential
investments and acquisitions.
As part of Atari's efforts to pursue strategic opportunities, during the
fourth quarter of 1995, Atari management contacted various individuals and
investment advisors with respect to potential strategic investments or
acquisitions. These efforts resulted in Atari's evaluation of several strategic
opportunities, including a potential investment in or merger with an
entertainment software company, a video game software company, a computer video
game peripherals company and a potential investment or merger with JTS.
Since its inception in February 1994, JTS has continually sought to
identify new sources of financing to support the expansion of its manufacturing
facilities, capital expenditures and research and development activities. In
late 1995, JTS recognized the need for a significant infusion of capital within
the next three to four months to fund the growth of JTS' operations.
Accordingly, at a meeting held on October 30, 1995, the JTS Board of Directors
instructed members of management to explore various financing sources, including
the private placement of equity securities to one or more institutional
investors.
In early November 1995, Sam Tramiel contacted JTS to set up a meeting with
Sirjang L. "Jugi" Tandon, the Chairman of JTS, and David T. Mitchell, JTS'
President and Chief Executive Officer, to discuss possible strategic
opportunities between the companies. On November 16, 1995, Sam Tramiel and Mr.
Tandon met at the Las Vegas airport following the Comdex show. At the meeting,
Mr. Tandon stated that JTS was pursuing additional sources of financing, and Sam
Tramiel indicated that Atari was evaluating various strategic opportunities,
including potential investments and acquisitions. A follow-up meeting was
scheduled for early December to further discuss a possible investment in JTS by
Atari.
At a meeting held on November 29, 1995, the JTS Board of Directors
instructed Messrs. Tandon and Mitchell to accelerate their efforts to identify
new sources of financing. In this regard, JTS initiated discussions with two
investment banks (one of which was Montgomery) in December 1995 to explore the
possibility of a private placement to institutional investors which would result
in a substantial infusion of capital to JTS.
On December 14, 1995, Jack Tramiel and Sam Tramiel met with Messrs. Tandon
and Mitchell at JTS. At this meeting, the parties discussed a potential
investment by Atari in JTS and the possibility that Jack Tramiel would become a
director of JTS. Later that day, the Executive Committee of the Atari Board of
Directors (consisting of Jack Tramiel, Sam Tramiel and August J. Liguori) held a
special meeting to discuss the proposed transaction with JTS. At the meeting,
the Atari Executive Committee directed Mr. Liguori, Atari's former Chief
Financial Officer, to contact JTS to initiate due diligence.
On December 22, 1995, Mr. Liguori met with Mr. Mitchell and W. Virginia
Walker, JTS' Chief Financial Officer, at JTS to conduct an initial due diligence
review of JTS' business and financial condition.
On January 4, 1996, the Executive Committee of the Atari Board of Directors
held a special meeting to discuss Mr. Liguori's due diligence investigation of
JTS. At this meeting, the Atari Executive Committee authorized Jack Tramiel to
continue discussions with JTS regarding a potential investment or other
strategic business relationship between Atari and JTS and instructed Mr. Liguori
to continue due diligence activities. The Atari Executive Committee also
instructed Jack Tramiel to contact the other members of the Atari Board to
update them on the potential business opportunity involving JTS.
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On January 8, 1996, Jack Tramiel, Sam Tramiel and Mr. Mitchell met at Jack
Tramiel's home to further discuss a possible strategic transaction between Atari
and JTS. At this meeting, the parties considered a significant investment by
Atari in JTS and a merger of Atari and JTS. Mr. Mitchell indicated that JTS
would be interested in securing a bridge loan from Atari if a merger agreement
were signed. The parties also generally discussed that, if a merger were to
occur, the consideration would be common stock of the acquiring company and the
exchange ratio would be one-for-one.
On January 9, 1996, the JTS Board of Directors held a telephonic meeting at
which a possible investment by or merger with Atari was discussed. At the
meeting, the merits of such a transaction, including the general terms of a
possible merger, were considered and the JTS Board instructed members of
management to initiate a due diligence review of Atari. In addition, the JTS
Board agreed to retain the law firm of Cooley Godward Castro Huddleson & Tatum
("Cooley Godward") to assist in the evaluation of a possible business
combination with Atari.
On January 10, 1996, Mr. Mitchell and Ms. Walker met with Jack Tramiel and
Mr. Liguori at Atari to conduct a due diligence review of Atari. From January 11
through January 16, Ms. Walker and Mr. Liguori had numerous meetings and phone
calls and exchanged due diligence information and materials.
On January 17, 1996, a meeting was held at JTS to discuss the proposed
transaction. Present at the meeting were Jack Tramiel, Sam Tramiel and Mr.
Liguori of Atari and Mr. Tandon, Mr. Mitchell and Ms. Walker of JTS. Also
present were representatives from Wilson Sonsini Goodrich & Rosati, P.C.,
counsel to Atari, and a representative of Cooley Godward. At the meeting, there
was substantial discussion regarding a proposed merger of Atari and JTS. The
meeting focused on the business opportunities, business risks and financial
positions of Atari and JTS. The parties first discussed the general terms of the
proposed merger including that the Combined Company would be managed by the
current members of JTS management, that at the time the merger agreement was
signed Atari would extend to JTS a $25.0 million bridge loan, that the bridge
loan would be convertible into JTS Series A Preferred Stock, and that JTS would
issue warrants to Atari in connection with the bridge loan if the merger were
not consummated. The parties further discussed the proposed one-for-one exchange
ratio for the Atari Common Stock, JTS Common Stock and JTS Series A Preferred
Stock. The proposal to issue common stock of the surviving company in exchange
for the outstanding stock of the corporation to be acquired was based upon a
number of factors, including tax considerations, the preservation of the
surviving company's working capital and the desire to give the JTS and Atari
stockholders an opportunity to participate as equity holders in the surviving
company. The proposed one-for-one exchange ratio of JTS and Atari stock, as
well, was based upon numerous factors, including the valuation assigned to JTS
in its most recent round of preferred stock financing the financial forecasts of
JTS furnished to Atari, the due diligence review of the two companies, the
relative ownership interests of the JTS and Atari stockholders in the surviving
company and the historic and current trading prices of Atari Common Stock. At
the end of the meeting, Atari and JTS agreed to present the proposed transaction
to their respective boards of directors. Following the meeting, the Executive
Committee of the Atari Board of Directors met separately and considered the
advisability of obtaining a fairness opinion from an investment banking firm
with respect to the proposed merger, and Sam Tramiel was instructed to initiate
discussions with respect to obtaining such an opinion.
On January 19, 1996, Mr. Mitchell, Ms. Walker and representatives of Cooley
Godward reported to the JTS Board of Directors on the status of the negotiations
with Atari and the preliminary results of the JTS due diligence review of Atari.
The JTS Board discussed in substantial detail the merits and the risks of a
possible business combination with Atari, as well as the alternative sources of
financing then available to the company. Following discussion, the JTS Board of
Directors instructed management to continue to pursue all financing
alternatives, including a private equity placement and a possible transaction
with Atari.
Between January 20 and January 29, 1996, Atari's and JTS' management and
legal counsel continued their negotiations and due diligence reviews of the two
companies. In addition, counsel for Atari and JTS began preparation of a merger
agreement and bridge loan financing documentation.
On January 30, 1996, the JTS Board of Directors met to consider the results
of management's further due diligence review of Atari and the merits of a merger
between the two companies. The JTS Board discussed the
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terms of the proposed merger with representatives of Cooley Godward and reviewed
a draft of the merger agreement. In particular, the JTS Board considered the
possibility of obtaining bridge financing from Atari, the condition of Atari's
business and the JTS stockholders' interest in the combined company. The JTS
Board also discussed with management the status of a possible private equity
placement to meet the company's immediate capital requirements. The JTS Board
noted, among other factors, that a private equity placement would require three
months or longer to complete and that a business combination with Atari
represented an immediate source of financing. After further discussion, the JTS
Board of Directors unanimously approved the principal terms of the merger and
authorized management and Cooley Godward to proceed with the finalization of the
merger agreement and bridge loan documentation substantially on the terms
discussed by the JTS Board. A more detailed discussion of certain matters
considered by the JTS Board of Directors at this meeting is included under the
caption "-- Recommendation of the Board of Directors of JTS."
On January 30, 1996, JTS notified Montgomery that it was no longer
considering a private placement to institutional investors and that it was
engaged in merger discussions with Atari, and introduced Montgomery to Atari.
Atari informed Montgomery that it wished to retain Montgomery to render a
fairness opinion, and negotiations commenced between Atari and Montgomery
regarding the terms of that engagement. On January 31, 1996, Atari and
Montgomery entered into a written engagement letter, the terms of which are
summarized below under "-- Opinion of Montgomery Securities."
On February 1, 1996, the Atari Board of Directors held a telephonic meeting
to discuss the terms of the proposed merger with JTS. At the meeting, Jack
Tramiel, Sam Tramiel and Mr. Liguori reviewed with the Board the proposed terms
of the merger which had been discussed with JTS on January 17. Mr. Liguori also
presented the results of Atari's due diligence investigation of JTS. At the
meeting, the Atari Board instructed Jack Tramiel to proceed with merger
negotiations and due diligence pending further deliberations by the Atari Board.
On February 5, 1996, the Atari Board of Directors met at Atari's offices
beginning at 1:00 p.m. Present were the Atari directors, representatives of
Wilson Sonsini Goodrich & Rosati, P.C., legal counsel to Atari, and
representatives from Montgomery, Atari's financial advisor. The Atari Board
reviewed the status of the negotiations regarding the proposed merger of Atari
and JTS. In particular, the Board considered the one-for-one exchange ratio,
closing conditions and termination provisions. Mr. Liguori also reported on the
results of Atari's due diligence investigation of JTS. At the meeting,
Montgomery presented the results of its review of the transaction and delivered
its oral and written opinion that the conversion ratio of Atari Common Stock
into JTS Common Stock is fair to Atari from a financial point of view, as of
February 5, 1996. Following the Montgomery presentation, the Board conducted
substantial deliberations regarding the proposed transaction including the
future prospects for Atari's business and the risks and prospects associated
with the JTS business. At the end of the meeting, the Atari Board instructed Mr.
Liguori to conduct further due diligence with respect to JTS' transaction with
Moduler Electronics and other matters. The Board deferred a final decision on
the merger pending the results of Mr. Liguori's additional due diligence. The
meeting was adjourned at 7:00 p.m. on February 5 and continued for several hours
on the morning of February 6.
As the merger discussions continued, it became apparent that JTS'
acquisition of Moduler Electronics would not be completed prior to the signing
of the Merger Agreement. Accordingly, JTS agreed that the closing of JTS'
acquisition of Moduler Electronics would be a condition to Atari's obligation to
close the Merger. JTS also agreed not to effect the acquisition of Moduler
Electronics without the consent of Atari. Subsequent to the signing of the
merger agreement, JTS and Moduler Electronics negotiated the final documentation
related to the terms of their merger. As part of Atari's due diligence, Atari
was provided copies of the interim and definitive acquisition agreements.
From February 5, 1996 to February 12, 1996, Jack Tramiel, Sam Tramiel and
Mr. Liguori held a series of telephonic conversations and meetings with Mr.
Tandon, Mr. Mitchell and Ms. Walker regarding the proposed transaction and due
diligence matters. There were also numerous telephone calls among Jack Tramiel,
Sam Tramiel, Michael Rosenberg (an Atari director) and Leonard Schreiber (an
Atari director) regarding the proposed transaction and the results of the
ongoing due diligence review. Similarly, JTS
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management held a number of informal meetings with certain JTS Board members to
discuss the results the ongoing due diligence review.
On February 12, 1996, the Atari Board of Directors held two telephonic
meetings to discuss the final terms of the merger agreement and the additional
due diligence materials. Prior to the meeting, each member of the Board had been
provided with a draft of the proposed merger agreement and related documents,
including disclosure schedules provided by Atari and JTS. Based on such
information and further discussions, the Atari Board of Directors unanimously
approved the merger agreement and the transactions contemplated thereby.
The merger agreement and related documents were executed by the parties on
February 12, 1996, and a press release was issued on February 13, 1996.
On April 8, 1996, JTS and Atari amended and restated the merger agreement
to modify the legal structure of the Merger from a consolidation of JTS and
Atari into a newly-formed Delaware corporation to a merger of Atari with and
into JTS, with JTS as the surviving company. This change in the legal structure
of the Merger did not materially modify the economic terms of the merger. The
merger agreement, as so amended and restated, is attached hereto as Annex A.
On June 21, 1996, the Atari Board of Directors met to review the status of
the Merger. Jack Tramiel, who had attended recent JTS Board meetings, updated
the other members of the Board on the business prospects of JTS including the
financial targets discussed at the JTS Board meeting on June 18, 1996 and the
recent acceptance by Compaq of the Nordic 3-inch disk drive. See
"-- Forward-Looking Financial Information Provided by JTS." Based on such
information and further discussions, the Atari Board of Directors unanimously
affirmed its approval of the Merger.
In June 1996, JTS and Atari amended the bridge loan documents to increase
the amount lent pursuant thereto to $30.0 million.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF ATARI
The Atari Board of Directors has determined that the Merger is fair to, and
in the best interests of, Atari and Atari's stockholders and unanimously
recommends that the Atari stockholders vote in favor of approval of the Merger
and the Merger Agreement.
The Atari Board held a series of meetings at which a business combination
with or an investment in JTS was discussed. Individual members of the Board were
updated from time to time on developments. In reaching its conclusion to approve
the Merger and the Merger Agreement and to recommend that the stockholders
approve the Merger and the Merger Agreement, the Atari Board considered a number
of factors, including, without limitation, the following:
- The level of working capital required to support Atari's future business
which was significantly downsized in late 1995 and early 1996 as Atari
focused on licensing and software development activities.
- The future prospects for Atari's financial performance, taking into
consideration the substantial decrease in net sales from 1994 to 1995 and
the substantial operating losses sustained in the past several years
among other things.
- The prospects of the business of JTS, based partly upon financial
forecasts, including cash flow, gross margin and unit shipment
projections, and related assumptions of JTS provided by JTS management.
- The intense competition in the video game industry.
- The significant equity position that the former stockholders of Atari
would have in the Combined Company.
- The risks associated with the businesses of Atari and JTS.
- The treatment of the Merger as a tax-free reorganization under Section
368(a) of the Code.
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- The opinion of Montgomery that the conversion ratio of Atari Common
Stock into JTS Common Stock is fair to Atari, from a financial point of
view, as of February 5, 1996.
- The anticipated ability of the Combined Company to utilize Atari's
accumulated NOLs and tax carryforwards (although the Board of Directors
did not assign material value to the NOLs and tax carryforwards due to
the inherent limitations on the survival of such carryovers and the
complexity of applicable tax laws).
- The results of the due diligence review of JTS by management of Atari,
Deloitte & Touche LLP and Wilson, Sonsini, Goodrich & Rosati, P.C.,
counsel to Atari.
The Atari Board did not attempt to prioritize the foregoing factors in any
manner.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF JTS
The JTS Board of Directors has determined that the Merger is fair to, and
in the best interests of, JTS and JTS' stockholders and unanimously recommends
that the JTS stockholders vote in favor of approval of the Merger and the Merger
Agreement.
The JTS Board of Directors held a series of formal and informal meetings in
January and February 1996 at which a business combination with Atari was
discussed. During this period, an extensive financial and legal due diligence
review of Atari was conducted by members of JTS management and accountants and
legal counsel retained by JTS. Individual members of the JTS Board of Directors
were updated regularly on developments and certain members of the Board
participated actively in negotiations and discussions with Atari and the due
diligence review of Atari. In reaching its conclusion to approve the Merger and
the Merger Agreement and to recommend that the stockholders approve the Merger
and the Merger Agreement, the JTS Board considered a number of factors,
including, without limitation, the following:
- JTS' need for working capital to maintain and expand its manufacturing
operations and research and development activities and the immediate and
significant source of capital to fund such operations and activities that
the merger with Atari would provide.
- The availability to JTS of alternative sources of capital and the time
required to obtain such capital.
- The benefits to the stockholders of JTS resulting from the expected
trading market for JTS Common Stock following the Merger, which would
provide a means of liquidity for such stockholders' stock.
- The opportunity for JTS stockholders to continue to participate in the
potential growth of JTS.
- The diminished equity position that the former stockholders of JTS will
have in the Combined Company.
- The risks associated with the businesses of Atari and JTS.
- The treatment of the Merger as a tax-free reorganization under section
368(a) of the Code.
- The anticipated ability of the Combined Company to utilize Atari's
accumulated NOLs and tax carryforwards (although the Board of Directors
did not assign material value to the NOLs and tax carryforwards due to
the inherent limitations on the survival of such carryovers and the
complexity of applicable tax laws).
- The results of the due diligence review of Atari by management of JTS
and Cooley Godward, counsel to JTS.
The JTS Board did not attempt to prioritize the foregoing factors in any
manner.
OPINION OF MONTGOMERY SECURITIES
Pursuant to an engagement letter dated January 31, 1996, Atari retained
Montgomery to render an opinion with respect to the fairness from a financial
point of view of the consideration to be paid by Atari in connection with the
acquisition of JTS. Montgomery is a nationally recognized firm and, as part of
its investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with merger transactions and other
types of acquisitions, negotiated underwritings, secondary
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distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Atari selected Montgomery to render
a fairness opinion on the basis of Montgomery's experience and expertise in
transactions similar to the Merger and its reputation in the computer
peripherals and investment communities.
On February 5, 1996, Montgomery delivered its oral and written opinion that
the conversion ratio of Atari Common Stock into JTS Common Stock was fair to
Atari, from a financial point of view, as of that date. The amount of such
consideration was determined pursuant to negotiations between Atari and JTS and
not pursuant to recommendations of Montgomery. No limitations were imposed by
Atari on Montgomery with respect to the investigations made or procedures
followed in rendering its opinion.
THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO ATARI IS ATTACHED HERETO
AS APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF
MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF THE OPINION. MONTGOMERY'S OPINION IS DIRECTED TO THE ATARI BOARD OF DIRECTORS
AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF ATARI OR JTS AS
TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. IN FURNISHING
ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF
THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, OR THAT ITS OPINION CONSTITUTES
A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES ACT,
AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF MONTGOMERY'S WRITTEN
OPINION.
In connection with its opinion, Montgomery, among other things: (i)
reviewed certain publicly available financial and other data with respect to
Atari, including the consolidated financial statements for recent years and
interim periods to September 30, 1995, and certain other relevant financial and
operating data relating to Atari and JTS made available to Montgomery from
published sources and from the internal records of Atari and JTS, including the
consolidated financial statements of JTS for recent years and interim periods to
November 30, 1995; (ii) reviewed the February 2, 1996 draft of the Merger
Agreement provided to Montgomery by Atari; (iii) reviewed certain historical
market prices and trading volumes of Atari Common Stock as reported on the
American Stock Exchange; (iv) compared Atari and JTS from a financial point of
view with certain other companies in the computer peripherals industry that
Montgomery deemed to be relevant; (v) considered the financial terms, to the
extent publicly available, of selected recent business combinations of companies
in the computer peripherals industry that Montgomery deemed to be comparable, in
whole or in part, to the Merger; (vi) reviewed and discussed with
representatives of the management of Atari and JTS certain information of a
business and financial nature regarding Atari and JTS, furnished to Montgomery
by them, including the number of shares to be issued by JTS in connection with
the acquisition of Moduler Electronics; (vii) reviewed and discussed with
representatives of the management of Atari and JTS financial forecasts,
including cash flow, gross margin and unit shipment projections, and related
assumptions of JTS, provided to Montgomery by JTS management, which forecasts
and assumptions included the estimated contribution of Moduler Electronics to
JTS' financial performance; (viii) made inquiries regarding and discussed the
Merger and the draft of the Merger Agreement and other matters related thereto
with Atari's counsel; and (ix) performed such other analyses and examinations as
Montgomery deemed appropriate.
In connection with its review, Montgomery assumed and relied upon the
accuracy and completeness of the foregoing information and did not assume any
responsibility for independent verification of such information. With respect to
the financial forecasts provided to it as described above, Montgomery assumed
for purposes of its opinion that such forecasts had been reasonably prepared on
bases reflecting the best available estimates and judgments of the management of
JTS at the time of preparation as to the future financial performance of JTS,
and, except as described below, that they provided a reasonable basis upon which
Montgomery could form its opinion. For purposes of its opinion and with the
agreement of management of Atari, Montgomery adjusted the financial forecasts
for JTS provided to Montgomery by the management of JTS to reflect more
conservative assumptions regarding future results of operations. Such forecasts
were based upon numerous variables and assumptions that are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such forecasts. Montgomery has assumed no liability for
such forecasts. Montgomery also assumed that there had been no material changes
in Atari's or JTS' assets, financial condition, results of
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operations, business or prospects since the respective dates of their last
financial statements made available to Montgomery, and that there had occurred
no material changes in the terms of JTS' proposed acquisition of Moduler
Electronics. Montgomery relied on advice of counsel and independent accountants
to Atari as to all legal and financial reporting matters with respect to Atari,
the Merger and the draft of the Merger Agreement. In addition, Montgomery did
not assume responsibility for making an independent evaluation, appraisal or
physical inspection of the assets or individual properties of Atari or JTS, nor
was Montgomery furnished with any such appraisals. Finally, Montgomery's opinion
is based on economic, monetary and market and other conditions as in effect on,
and the information made available to Montgomery as of, February 5, 1996.
Montgomery further assumed, with the consent of Atari's management, that
the Merger would be consummated in accordance with the terms described in the
draft of the Merger Agreement without any amendments thereto, and without waiver
by Atari or JTS of any of the conditions to their respective obligations
thereunder.
Set forth below is a brief summary of the report presented by Montgomery to
Atari's Board of Directors on February 5, 1996 in connection with its opinion.
Discounted Cash Flow Analysis. Montgomery applied a discounted cash flow
analysis to JTS financial forecasts for 1996, 1997 and 1998, prepared by JTS's
management and provided to Montgomery, and for 1999 and 2000, prepared by
Montgomery using assumptions more conservative than those underlying the JTS
management forecasts. JTS did not provide Montgomery with any financial
forecasts for periods beyond 1998. As described above, with Atari's consent
Montgomery adjusted the forecasts prepared by JTS management, and the extensions
thereof prepared by Montgomery, to reflect more conservative assumptions
regarding future results of operations. In conducting its review, Montgomery
adjusted JTS' financial projections by reducing JTS' forecasted revenues and
earnings before interest and taxes ("EBIT") by approximately 45% and 68%,
respectively. The unadjusted forecasts are referred to as the "Base Case
Forecasts," and the Base Case Forecasts as so adjusted by Montgomery are
referred to as the "Alternative Case Forecasts."
In conducting its discounted cash flow analysis, Montgomery first
calculated the estimated future streams of free cash flows that JTS would
produce through the year 2000. Montgomery then estimated JTS's aggregate value
at the end of 2000 by applying multiples ranging from 7.0x to 8.0x to JTS'
estimated EBIT in 2000. Finally, Montgomery discounted such cash flow streams
and aggregate values to present values using discount rates ranging from 25.0%
to 35.0%, chosen to reflect different assumptions regarding Atari's cost of
capital, and reduced such present values by JTS' net debt as of December 31,
1995. This analysis indicated an imputed equity value (defined as aggregate
value minus net debt) of JTS of between $449.3 million and $725.9 million based
on the Base Case Forecasts, and of between $106.1 million an $192.5 million
based on the Alternative Case Forecasts. By contrast, the consideration to be
provided by Atari in the Merger, based on the Exchange Ratio and the February 2,
1996 closing sale price of Atari Common Stock on the American Stock Exchange of
$2.00 per share, equals approximately $75.7 million.
Comparable Company Analysis. Using public and other available information,
Montgomery calculated the imputed equity value of JTS based on the multiples of
estimated 1996 revenue, EBIT and net income at which three publicly traded disk
drive companies were trading on February 2, 1996. The February 2, 1996 stock
prices of the comparable companies reflected the following median multiples:
0.3x estimated 1996 revenues; 4.8x estimated 1996 EBIT; and 8.5x estimated 1996
net income. Montgomery applied the foregoing median multiples to the analogous
forecasted 1996 statistics for JTS, made applicable adjustments to reflect JTS'
net debt (defined as debt minus cash) at December 31, 1995, narrowed the
resulting range of data to exclude valuations that Montgomery deemed to be
unrealistically high, and applied a private company illiquidity discount to the
resulting totals. This analysis indicated an imputed equity value of JTS of
between $70.0 million and $175.0 million based on the Base Case Forecasts, and
of between $49.0 million and $105.0 million based on the Alternative Case
Forecasts. By contrast, the consideration to be provided by Atari in the Merger,
based on the Exchange Ratio and the February 2, 1996 closing sale price of Atari
Common Stock on the American Stock Exchange of $2.00 per share, equals
approximately $75.7 million.
Comparable Transactions Analysis. Montgomery reviewed the consideration
paid in the following twelve acquisitions of comparable disk drive and other
computer storage companies that were announced since
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1989 (target/acquiror): Micropolis (disk drive business)/Singapore Technologies
Industrial; Maxtor/Hyundai Electronics Industries (two separate transactions);
Conner Peripherals Inc./Seagate; Digital Equipment Corporation (disk drive
business)/Quantum; Sunward Technologies Inc./Read-Rite Corporation; Archive
Corporation/Conner Peripherals Inc.; Dastek Inc./Komag Inc.; MiniScribe
Corporation (assets)/Maxtor; Cipher Data Products Inc./Archive Corporation;
Imprimis Technology Inc./Seagate; and Irwin Magnetic Systems Inc./Cipher Data
Products Inc. Montgomery analyzed the consideration paid in such transactions as
a multiple of the target companies' revenue, EBIT and net income for the latest
twelve months ("LTM"). Such analysis yielded median multiplies of 0.5x LTM
revenue, 17.6x LTM EBIT and 18.4x LTM net income. Montgomery applied the
foregoing median multiples to the analogous forecasted 1996 statistics for JTS
and made applicable adjustments to reflect JTS' net debt at December 31, 1995.
The foregoing process yielded a range of imputed equity values of JTS as of
December 31, 1996. Montgomery then discounted that range to present values using
a discount rate of 40%, a rate generally considered to reflect the standard
venture capital return hurdle, and narrowed the resulting range of data to
exclude valuations that Montgomery deemed to be unrealistically high. This
analysis indicated an imputed equity value of JTS of between $150.0 million and
$300.0 million based on the Base Case Forecasts, and of between $100.0 million
and $250.0 million based on the Alternative Case Forecasts. By contrast, the
consideration to be provided by Atari in the Merger, based on the Exchange Ratio
and the February 2, 1996 closing sale price of Atari Common Stock on the
American Stock Exchange of $2.00 per share, equals approximately $75.7 million.
No other company or transaction used in the comparable transactions
analysis as a comparison is identical to JTS or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather, it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value of the companies to which JTS and the
Merger are being compared.
Contribution Analysis. Montgomery compared the percentage interest in the
Combined Company that will be held by present stockholders of Atari and JTS
immediately following the Merger -- approximately 62% and 38%, respectively --
to the relative contributions of the two companies to various operating
statistics of the merged entity. Montgomery compared Atari's revenues for the
twelve months ended September 30, 1995 (the last date for which revenue
statistics for Atari were available) to JTS's revenues for the twelve months
ended January 15, 1996, which comparison indicated a relative contribution of
approximately 66% and 34%, respectively, for Atari and JTS. Montgomery also
compared Atari's estimated 1996 revenues (which Montgomery assumed would be
equal to Atari's revenues for the twelve months ended September 30, 1995) to
JTS' backlog of approximately $25.2 million as of January 15, 1996, to JTS's
1996 run rate revenues (defined as JTS' actual revenues for January 1 through
15, 1996, which equaled approximately $3.1 million, on an annualized basis) and
to JTS's forecasted 1996 revenues (based on the Base Case Forecasts). Such
comparisons indicated relative contributions of approximately 52% and 48%, 26%
and 74%, and 6% and 94%, respectively, for Atari and JTS.
The summary set forth above does not purport to be a complete description
of the presentation by Montgomery to Atari or of the analyses performed by
Montgomery. The preparation of a fairness opinion necessarily is not susceptible
to partial analysis or summary description. Montgomery believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses and of the factors considered, without
considering all analyses and factors, would create an incomplete view of the
process underlying the analyses set forth in its presentation to Atari. In
addition, Montgomery may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Montgomery's view
of the actual value of JTS. Although Montgomery did not consider any of the
foregoing analyses in isolation for purposes of rendering its opinion,
Montgomery does not believe that any of such analyses is inconsistent with its
opinion.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Atari and JTS. The
analyses performed by Montgomery are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
those suggested by such analyses.
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Such analyses were prepared solely as part of Montgomery's analysis of the
fairness of the Merger to Atari and were provided to Atari in connection with
the delivery of Montgomery's opinion. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at any time in the future.
Montgomery used in its analyses various projections of future performance
prepared by the managements of Atari and JTS. The projections are based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those set forth in such projections.
As described above, Montgomery's opinion and presentation to Atari were
among the many factors taken into consideration by Atari in making its
determination to approve, and to recommend that its stockholders approve, the
Merger.
Pursuant to a letter agreement dated January 31, 1996 (the "Engagement
Letter"), Atari engaged Montgomery to render an opinion with respect to the
fairness from a financial point of view of the consideration to be paid by Atari
in connection with the acquisition of JTS. The Engagement Letter provides for
Atari to pay Montgomery a fee of $325,000, which was paid upon delivery of
Montgomery's opinion. The fee is not conditioned on the outcome of Montgomery's
opinion or whether or not such opinion was deemed to be favorable for any
party's purposes. The Engagement Letter also calls for Atari to reimburse
Montgomery for its reasonable out-of-pocket expenses. Pursuant to a separate
letter agreement, Atari has agreed to indemnify Montgomery, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws.
Montgomery has not performed investment banking services for JTS, except
that Montgomery was contacted in connection with a potential private placement
of JTS securities.
The Atari Board of Directors does not intend to obtain an updated fairness
opinion with respect to the Merger.
FORWARD-LOOKING FINANCIAL INFORMATION PROVIDED BY JTS*
As a matter of course, JTS does not intend to publicly disclose
forward-looking financial information. Nevertheless, in connection with the due
diligence review of JTS' business, the Atari Board of Directors and Montgomery
reviewed preliminary financial targets furnished by JTS in January 1996. Such
financial targets indicated revenues of $445 million, gross profit of $100
million and net income of $53 million for fiscal 1997. These financial targets
were based on certain assumptions including assumptions that JTS would develop
and introduce new products on a timely basis, that Indian bank funding would be
available on a timely basis for facility expansion at Moduler Electronics, that
the notebook computer systems designed to accept the Nordic disk drive would be
released within a certain time frame, that competitive conditions within the
disk drive industry would not undergo material adverse change, that the market
for computer systems, storage upgrades to computer systems and multimedia
applications, such as digital video and video on demand and hence the market for
hard disk drives, would remain strong, and that there would be no material
adverse change in JTS' operations or business. Such assumptions involve
judgments with respect to, among other things, future economic conditions,
financial market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of JTS.
In June 1996, JTS management provided to the Boards of Directors of Atari
and JTS updated preliminary financial targets for JTS, based on the assumption
that the Merger would be consummated in June 1996. Such financial targets for
JTS indicated revenues of $238 million, gross profit of $31 million and a net
loss of $12 million for fiscal 1997. The decline in targeted revenues and gross
profit and the increase in net
- ---------------
* The statements contained in this section regarding JTS' financial targets
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and are subject to the
safe harbors created thereby.
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loss in the June 1996 targets compared to the January 1996 targets resulted
primarily from delays in the scheduled releases of notebook computers which
would incorporate JTS' Nordic drives. JTS' manufacturing schedule was changed to
reflect this delay in expected shipments of its Nordic products. As a result of
the delay in production and sales of Nordic disk drives, Palladium disk drives,
on which JTS earns a lower gross margin than Nordic drives, are expected to
comprise a greater proportion of total revenues for fiscal 1997. Accordingly,
JTS' targeted gross margin decreased from January 1996 to June 1996.
Additionally, expected funding from an Indian bank, for facilities expansion and
capital equipment for Moduler Electronics was delayed three months resulting in
a decrease in targeted production capacity. The net loss in the June 1996
updated preliminary financial targets does not include expenses associated with
the Merger, including a write-off of approximately $100 million of purchased
in-process research and development in addition to goodwill amortization, Atari
general and administrative expenses and interest expense related to the Atari
convertible debentures.
While JTS believes that the assumptions underlying the preliminary
financial targets are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the forward-looking financial
information will prove to be accurate. In addition, as disclosed elsewhere in
this Joint Proxy Statement/Prospectus under "Risk Factors," the business and
operations of JTS are subject to substantial risks which increase the
uncertainty inherent in such preliminary financial targets. Any of the factors
disclosed under "Risk Factors" could cause the actual revenues, operating income
and net income of JTS to differ materially from the preliminary financial
targets described above. Accordingly, for these reasons it is expected that
there will be differences between the actual and targeted results, and actual
results may be materially higher or lower than those indicated above.
In light of the significant uncertainties inherent in forward-looking
financial information of any kind, the inclusion of such information herein
should not be regarded as a representation by JTS, Atari or any other person
that the preliminary financial targets will be achieved. Investors are cautioned
that these preliminary financial targets should not be regarded as fact and
should not be relied upon as an accurate representation of future results.
Further, the preliminary financial targets furnished by JTS were not prepared
with a view to public disclosure or in compliance with the established
guidelines concerning financial projections promulgated by the American
Institute of Certified Public Accountants. In addition, such preliminary
financial targets do not purport to present operations in accordance with
generally accepted accounting principles and have not been audited, compiled or
otherwise examined by Arthur Andersen LLP, JTS' independent auditors, or by any
other independent auditor. Accordingly, neither Arthur Andersen LLP nor any
other independent auditor assumes any responsibility for the preliminary
financial targets disclosed herein. The preliminary financial targets are being
presented solely because they were furnished to the Atari Board of Directors and
Montgomery, and they should not be interpreted as suggesting that the Atari
Board or Montgomery relied solely upon such targets or placed any particular
emphasis upon such targets in evaluating any proposed transaction. JTS has
advised Atari and Montgomery that its preliminary financial targets were
prepared solely for internal use and capital budgeting and other management
decisions, and are subjective in many respects and thus susceptible to
interpretations and periodic revision based on actual experience and business
developments. JTS does not intend publicly to update or otherwise publicly to
revise the preliminary financial targets disclosed above to reflect
circumstances existing after the date of their preparation.
SUMMARY OF THE MERGER AGREEMENT
The detailed terms of, and conditions to, the Merger and certain related
transactions are contained in the Merger Agreement, a copy of which is attached
hereto as Appendix A. The statements made in this Joint Proxy
Statement/Prospectus with respect to the terms of the Merger and such related
transactions are qualified in their entirety by reference to the more complete
information set forth in the Merger Agreement.
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EFFECTIVE TIME
The Merger will become effective at such time as the Certificate of Merger
has been duly filed with the Secretary of State of the State of Nevada in
accordance with the NGCL and with the Secretary of State of the State of
Delaware in accordance with the DGCL, or at such later time as is specified in
the Certificate of Merger (the "Effective Time"). See "-- Conditions to the
Merger." It is anticipated that, if the Merger and the Merger Agreement are
approved at the respective stockholder meetings of Atari and JTS and all other
conditions to the Merger have been fulfilled or waived, the Effective Time will
occur as soon as practicable following the approval of the Merger and the Merger
Agreement by the stockholders of Atari and JTS.
MANNER AND BASIS OF CONVERTING ATARI COMMON STOCK
Conversion of Atari Stock. At the Effective Time, each outstanding share
of Atari Common Stock will be automatically converted into one share of JTS
Common Stock. Shares of Atari Common Stock held as treasury stock and shares of
Atari Common Stock held directly or indirectly by JTS shall not be converted
into JTS Common Stock.
Based on the number of shares of Atari Common Stock, JTS Common Stock and
JTS Series A Preferred Stock outstanding as of June 18, 1996, immediately after
consummation of the Merger (assuming the conversion of all outstanding shares of
JTS Series A Preferred Stock into shares of JTS Common Stock and that none of
the holders of JTS Common Stock or JTS Series A Preferred Stock perfect
appraisal or dissenters' rights), a total of 102,814,954 shares of JTS Common
Stock would be issued and outstanding, of which 63,854,718 shares, or 62%, would
represent shares issued in the Merger upon conversion of Atari Common Stock.
Fractional Shares. No fractional shares of JTS Common Stock will be
issued as a result of the Merger. In lieu thereof, each holder of Atari Common
Stock shall receive cash (without interest) in an amount equal to the fraction
of a share of JTS Common Stock otherwise issuable to such holder multiplied by
the last sale price per share of Atari Common Stock for the trading day
preceding the date of the Effective Time as reported in The Wall Street Journal.
Exchange of Certificates. Registrar and Transfer Company, Cranford, NJ has
been designated to act as Exchange Agent for the purpose of exchanging Atari
Common Stock certificates for JTS Common Stock certificates. As promptly as
practicable after the Effective Time, instructions will be mailed to all holders
of Atari Common Stock regarding treatment of their stock certificates. After the
Effective Time, there will be no further registration of transfers of Atari
Common Stock.
Upon the surrender of a certificate representing shares of Atari Common
Stock to the Exchange Agent, together with a duly executed letter of
transmittal, the holder of such certificate will be entitled to receive in
exchange therefor the number of shares of JTS Common Stock to which the holder
of Atari Common Stock is entitled pursuant to the provisions of the Merger
Agreement. Until outstanding certificates formerly representing shares of Atari
Common Stock are properly surrendered to the Exchange Agent, no dividend or
distribution payable to holders of record of JTS Common Stock shall be paid to
any holder of such outstanding certificates, but upon surrender of such
outstanding certificates by such holder there shall be paid to such holder the
amount of any dividends or distributions (without interest) theretofore paid
with respect to such whole shares of JTS Common Stock, but not paid to such
holder, and which dividends or distributions had a record date occurring on or
subsequent to the Effective Time.
Until a certificate representing shares of Atari Common Stock has been
surrendered to the Exchange Agent, each such certificate shall be deemed at any
time after the Effective Time to represent the right to receive upon such
surrender the number of shares of JTS Common Stock to which the stockholder is
entitled under the Merger Agreement.
ATARI STOCKHOLDERS SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES UNTIL THEY
RECEIVE INSTRUCTIONS TO DO SO AFTER COMPLETION OF THE MERGER.
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REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties by
each of the parties to the effect that, subject to certain exceptions, among
other things: (a) such party is duly organized and in good standing, and has the
requisite corporate power to own its properties and carry on its business; (b)
each subsidiary of JTS and each significant subsidiary of Atari has been duly
organized and is in good standing, and all issued and outstanding capital stock
of such subsidiary is owned by its respective parent company; (c) such party has
a certain number of authorized shares, issued and outstanding shares, and shares
reserved for issuance; (d) such party has all requisite corporate power and
authority to enter into the Merger Agreement and to consummate the Merger, the
execution and delivery of the Merger Agreement has been duly authorized, and the
Merger Agreement constitutes the valid and binding obligation of such party; (e)
the execution, delivery and consummation of the Merger will not conflict with
such party's Certificate of Incorporation or Bylaws, or violate any material
agreement or law to which such party or its assets are bound; (f) the financial
statements of such party have been prepared in accordance with generally
accepted accounting principles and fairly present its financial condition,
results of operations and cash flows; (g) such party has operated its business
in the ordinary course consistent with past practice since certain dates
(January 28, 1996, in the case of JTS, and December 31, 1995, in the case of
Atari (respectively, such party's "Balance Sheet Date")), and, since such
Balance Sheet Date, there have been no actions or events that have materially
adversely affected such party; (h) such party has no material obligations or
liabilities other than those adequately provided for in such party's balance
sheet as of the Balance Sheet Date, or those incurred in the ordinary course of
business; (i) there is no litigation pending or, to the best of such party's
knowledge threatened against such party that, if determined or resolved
adversely, would have a material adverse effect on such party; (j) there is no
agreement or order binding upon such party which has or could have the effect of
prohibiting or impairing such party's business; (k) such party has obtained each
governmental license or permit required for the operation of such party's
business; (l) such party has good and marketable title to all of its properties
and assets reflected in its balance sheet or acquired after such party's Balance
Sheet Date, except for such liens as do not materially impair such party's
business or are reflected on such party's balance sheet; (m) such party owns
certain intellectual property, has no knowledge of material unauthorized use,
disclosure infringement or misappropriation of any such intellectual property,
and has not entered into any agreement to indemnify any other person against a
charge of infringement of such intellectual property; (n) to the knowledge of
such party, no hazardous material is present on such party's property and such
party has materially complied with certain laws and regulations relating to such
hazardous materials; (o) such party has timely filed all required tax returns or
statements, and such party has provided adequate accruals in its financial
statements for any taxes not yet paid; (p) such party has complied with the
provisions of the Employment Retirement Income Security Act of 1974, as amended,
with respect to each "employee benefit plan" maintained by it; (q) execution of
the Merger Agreement will not result in extraordinary payments to or the
acceleration of benefits to such party's employees; (r) such party is in
material compliance with applicable laws and regulations regarding employment,
discrimination, and other terms and conditions of employment, and such party has
no pending or, to its knowledge threatened material controversy with any of its
employees.
In addition to the foregoing mutual representations and warranties, Atari
has made certain representations and warranties to JTS to the effect that: (a)
Atari has furnished to JTS copies of each report, registration statement, proxy
statement and other document filed with the Commission by Atari since January 1,
1993, such reports as of the dates they were filed do not contain an untrue
statement or omit to state a material fact, and such reports complied in all
material respects, when filed, with the then applicable requirements of the
Commission and (b) Atari has obtained an opinion from Montgomery Securities to
the effect that the Merger is fair, from a financial point of view, to Atari.
The foregoing summary of the various representations and warranties is
qualified in its entirety by the full text of the representations and warranties
of Atari and JTS set forth in Articles III and IV of the Merger Agreement
attached to the Joint Proxy Statement/Prospectus as Appendix A.
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CONDUCT OF BUSINESS PRIOR TO THE MERGER
Under the terms of the Merger Agreement, and for the period from the date
of the Merger Agreement and continuing until the earlier of the termination of
the Merger Agreement or the Effective Time of the Merger, each of Atari and JTS
has agreed (except to the extent expressly contemplated by the Merger Agreement
or as consented to in writing by the other), to carry on its and its
subsidiaries' business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay and to cause its
subsidiaries to pay debts and taxes when due subject to good faith disputes over
such debts or taxes and to pay or perform other obligations when due. Each of
Atari and JTS has also agreed to promptly notify the other of any event or
occurrence not in the ordinary course of its or its subsidiaries' business, and
of any event which could have a material adverse effect on it and its
subsidiaries, taken as a whole. In addition, each of Atari and JTS has agreed
that it will not, among other things, do, cause or permit any of the following,
or allow, cause or permit any of its subsidiaries to do, cause or permit any of
the following, without the prior written consent of the other: (a) cause or
permit any amendments to its Certificate of Incorporation or Bylaws; (b) issue,
deliver or sell or authorize or propose the issuance, delivery or sale of, or
purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or, options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities, other than the issuance
of shares of its Common Stock pursuant to the exercise of stock options,
warrants or other rights therefor outstanding as of the date of the Merger
Agreement (provided, however, that JTS may, in the ordinary course of business
consistent with past practice, grant options to purchase up to 250,000 shares of
Common Stock under its 1995 Stock Option Plan, and that Atari may issue
securities under certain existing benefit plans); (c) declare or pay any
dividends on or make any other distributions (whether in cash, stock or
property) in respect of any of its capital stock, or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of shares
in connection with any termination of service to it or its subsidiaries; (d)
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner, any business or
any corporation or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to its and its parent's/subsidiaries' business, taken as a whole;
(e) other than in the ordinary course of business, make or change any material
election in respect of taxes, adopt or change any accounting method in respect
of taxes, file any material return or any amendment to a material return, enter
into any closing agreement, settle any claim or assessment in respect of taxes,
or consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of taxes; (f) accelerate, amend or change the
period of exercisability of options, warrants or other rights granted under its
employee stock plans or authorize cash payments in exchange for any options,
warrants or other rights granted under any of such plans; or (g) take, or agree
in writing or otherwise to take, any of the actions described in (a) through (f)
above, or any action which would make any of its representations or warranties
contained in the Merger Agreement untrue or incorrect or prevent it from
performing or cause it not to perform its covenants thereunder.
In addition, under the terms of the Merger Agreement, each of Atari and JTS
has agreed that, during the period from the date of the Merger Agreement and
continuing until the earlier of the termination of the Merger Agreement or the
Effective Time, and except as expressly contemplated by the Merger Agreement, it
will not, among other things, do, cause or permit any of the following, or allow
cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of the other party: (a) enter into
any material contract or commitment, or violate, amend or otherwise modify or
waive any of the terms of any of its material contracts, other than in the
ordinary course of business consistent with past practice; (b) transfer to any
person or entity any rights to its intellectual property other than in the
ordinary course of business consistent with past practice; (c) sell, lease,
license or otherwise dispose of or encumber any of its properties or assets
which are material, individually or in the aggregate, to its and its
subsidiaries' business, taken as a whole, except in the ordinary course of
business consistent with past practice; (d) incur any indebtedness for borrowed
money (except amounts borrowed under such party's existing revolving credit line
or drawdowns of existing credit facilities for working capital or construction
purposes only) or guarantee
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any such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others; (e) revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business and other than as
disclosed in such party's disclosure schedule; (f) pay, discharge or satisfy in
an amount in excess of $50,000 in any one case or $250,000 in the aggregate, any
claim, liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of business,
other than the payment, discharge or satisfaction of liabilities reflected or
reserved against in such party's financial statements; (g) terminate or waive
any right of substantial value, other than in the ordinary course of business;
(h) adopt or amend any employee benefit or stock purchase or option plan; (i)
commence a lawsuit other than (i) for the routine collection of bills, (ii) in
such cases where it in good faith determines that failure to commence suit would
result in the material impairment of a valuable aspect of its business, provided
that it consults with the other party prior to the filing of such a suit, or
(iii) for a breach of the Merger Agreement; (j) take, or agree in writing or
otherwise to take, any of the actions described in (a) through (i) above, or any
action which would make any of its representations or warranties contained in
the Merger Agreement untrue or incorrect or prevent it from performing or cause
it not to perform its covenants thereunder. In addition, Atari has agreed that,
during the period from the date of the Merger Agreement and continuing until the
earlier of the termination of the Merger Agreement or the Effective Time, it
shall not, without the prior written consent of JTS, make any capital
expenditures, capital additions or capital improvements except in the ordinary
course of business and consistent with past practice, and in any event not to
exceed $25,000 per quarter.
Each of the parties has further agreed that from and after the date of the
Merger Agreement until the earlier of the effective time of the Merger or the
termination of the Merger Agreement in accordance with its terms, it will not,
directly or indirectly (i) solicit, initiate discuss or engage in negotiations
with any person (whether such negotiations are initiated by such party or
otherwise) or take any other action intended or designed to facilitate the
efforts of any person, other than the other party, relating to the possible
acquisition of such party or any of its subsidiaries (whether by way of merger,
purchase of capital stock, purchase of assets of otherwise) or any material
portion of its or their capital stock or assets (with any such efforts by any
such person, including a firm proposal to make such an acquisition, being
referred to as an "Acquisition Proposal"), (ii) provide non-public information
with respect to such party or any of its subsidiaries to any person relating to
a possible Acquisition Proposal by any person, other than the other party, (iii)
enter into an agreement with any person, other than the other party, providing
for a possible Acquisition Proposal, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Acquisition Proposal
by any person other than the other party. If either party receives any
unsolicited offer or proposal to enter into negotiations relating to an
Acquisition Proposal, such party shall immediately notify the other party
thereof, including information as to the identity of the party making any such
offer and the specific terms of such offer. Each party agrees that the issuance
of an injunction or other equitable remedy is an appropriate remedy for any
breach of such agreements.
Notwithstanding the foregoing, nothing contained in the Merger Agreement
prevents the Board of Directors of Atari (or its agents pursuant to its
instructions) from taking any of the following actions: (i) informing any third
party of the foregoing conditions or providing a copy of the Merger Agreement
(other than the JTS Disclosure Schedule) to any third party and (ii)
considering, negotiating, approving and recommending to the stockholders of
Atari an unsolicited, bona fide, written Acquisition Proposal which the Board of
Directors of Atari determines in good faith (after consultation with its
financial advisors and after consultation with outside counsel as to whether the
Board of Directors is required to do so in order to discharge properly its
fiduciary duties to stockholders under applicable law) would result in a
transaction more favorable to Atari's stockholders from a financial point of
view than the Merger (a "Superior Atari Proposal"). However, in the event Atari
were to accept a Superior Atari Proposal, JTS would be entitled to convert the
Atari loan into shares of JTS Series A Preferred Stock.
ADDITIONAL AGREEMENTS
Each of Atari and JTS shall afford the other with reasonable access prior
to the Effective Time to (a) all of such party's properties, books, contracts,
commitments and records and (b) all other information
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concerning the business, properties and personnel of such party as the other
party may reasonably request. Each party shall promptly apply for or otherwise
seek, and use its best efforts to obtain, all consents and approvals required to
be obtained by it for the consummation of the Merger, and shall use its best
efforts to obtain all necessary consents, waivers and approvals under any of its
material contracts in connection with the Merger for the assignment thereof.
Each person or entity who holds one percent (1%) or more of the outstanding
shares of JTS capital stock and each person or entity who holds more than five
percent (5%) of the outstanding shares of Atari capital stock shall execute and
deliver a "continuity of interest certificate" (the "Continuity of Interest
Certificate") prior to the Closing. The Continuity of Interest Certificate shall
contain certain representations relating to such stockholders' intention to sell
or dispose of their respective holdings of Atari or JTS capital stock. The
Combined Company shall be entitled to place appropriate legends on the
certificates evidencing any JTS Common Stock to be received by such persons or
entities pursuant to the terms of the Merger Agreement. Such legends shall refer
to, among other things, restrictions on disposition of JTS Common Stock pursuant
to Rule 145 under the Securities Act.
Certain stockholders of Atari and JTS, prior to the execution of the Merger
Agreement, executed and delivered a Voting Agreement pursuant to which such
stockholders agreed to: (a) refrain from selling or otherwise disposing of any
shares of Atari or JTS capital stock, as applicable, prior to the Effective Time
or the date of termination of the Merger Agreement; (b) vote such shares in
favor of the Merger Agreement, the Merger and any matter that could reasonably
be expected to facilitate the Merger; and (c) deliver to Atari or JTS, as
applicable, an irrevocable proxy to vote such shares in favor of the Merger
Agreement and the Merger.
At the Effective Time, each outstanding option to purchase shares of Atari
Common Stock under the Atari Stock Option Plan, whether vested or unvested, will
be assumed by JTS. Each such option so assumed by JTS under the Merger Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the Atari Stock Option Plan.
After the Effective Time, JTS shall (to the extent not prohibited by law)
indemnify and hold harmless, and pay in advance expenses, costs, damages,
settlements and fees to each director or officer of Atari serving as such as of
the date of the Merger Agreement as provided under Nevada law or the Articles of
Incorporation or Bylaws of Atari, or any indemnification agreement to which
Atari and such officer or director is a party, in each case as in effect at the
date of the Merger Agreement, which provisions shall survive the Merger and
shall continue in full force and effect after the Effective Time.
BOARD OF DIRECTORS AND OFFICERS FOLLOWING MERGER
At the Effective Time, the directors of the Combined Company will be
Sirjang L. Tandon, David T. Mitchell, Alain L. Azan, Jean D. Deleage, Roger W.
Johnson, Lip-Bu Tan, Jack Tramiel and Michael Rosenberg. Messrs. Tandon,
Mitchell, Azan, Deleage, Johnson and Tan are currently directors of JTS, and
Messrs. Tramiel and Rosenberg are currently directors of Atari. The executive
officers of JTS immediately prior to the effective time will be the executive
officers of the Combined Company. The parties have also agreed that Jack Tramiel
or a person designated by Jack Tramiel shall be a member of each committee of
the Board of Directors of the Combined Company.
CONDITIONS TO THE MERGER
Each party's respective obligation to effect the Merger is subject to,
among other things, the approval of the Merger Agreement and the Merger by the
requisite votes of the stockholders of Atari and JTS, the Commission having
declared this Joint Proxy Statement/Prospectus effective, and the satisfaction
prior to the Effective Time of the Merger of the additional following
conditions: (a) the absence of any injunction or other legal action or
regulatory restraint or prohibition preventing the consummation of the Merger or
rendering the consummation of the Merger illegal; (b) all government approvals,
waivers and consents, if any, necessary for consummation of or in connection
with the Merger and the several transactions contemplated thereby, including
such approvals, waivers and consents as may be required under the Securities
Act, under state Blue Sky laws, and under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR
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Act") having been received; (c) Atari and JTS having received substantially
identical written opinions of their respective counsel to the effect that, based
upon certain representations and assumptions and subject to certain
qualifications, the Merger will constitute a tax-free reorganization; (d) the
JTS Common Stock shall have been approved for listing on the Nasdaq National
Market or the American Stock Exchange; (e) no more than five percent (5%) of the
shareholders of JTS shall have exercised appraisal or dissenter's rights with
respect to the Merger; (f) certain significant stockholders of each party shall
have executed Continuity of Interest Certificates; and (g) JTS shall have
assumed the Atari Debentures.
The obligations of JTS to effect the Merger are subject to, among other
things, the satisfaction prior to the Effective Time of the Merger of the
following conditions, unless waived by JTS: (a) the representations and
warranties of Atari in the Merger Agreement shall be true and correct in all
respects on and as of the Effective Time as though such representations and
warranties were made on and as of such time, except to the extent that the
failure of such representations and warranties to be true and accurate in such
respects has not had and could not reasonably be expected to have a material
adverse effect on Atari and its subsidiaries; (b) Atari shall have performed and
complied in all respects with all covenants, obligations and conditions of the
Merger Agreement required to be so performed and complied with, except to the
extent that the failure to so perform and comply has not had and could not
reasonably be expected to have a material adverse effect on Atari and its
subsidiaries; (c) JTS shall have received a certificate executed on behalf of
Atari by its President and its Chief Financial Officer to the effect that, as of
the Effective Time, (i) all representations and warranties made by Atari under
the Merger Agreement are true and complete and (ii) all covenants, obligations
and conditions of the Merger Agreement to be performed by Atari have been so
performed; (d) JTS shall have been furnished with evidence satisfactory to it of
the consent or approval of third parties whose consent or approval shall be
required in connection with the merger; (e) the absence of any injunction or
other legal action or restraint limiting or restricting JTS's conduct or
operation of the business of Atari and its subsidiaries following the Merger
shall be in effect; (f) JTS shall have received a legal opinion as to certain
matters from Wilson Sonsini Goodrich & Rosati, P.C., counsel to Atari; (f) there
shall not have occurred any material adverse change in the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations, results of operations or prospects of Atari and its
subsidiaries, taken as a whole.
The obligations of Atari to effect the Merger are subject to, among other
things, the satisfaction prior to the Effective Time of the following
conditions, unless waived by Atari: (a) the representations and warranties of
JTS in the Merger Agreement shall be true and correct in all respects on and as
of the effective time of the Merger as though such representations and
warranties were made on and as of such time, except to the extent that the
failure of such representations and warranties to be true and accurate in such
respects has not had and could not reasonably be expected to have a material
adverse effect on JTS and its subsidiaries; (b) JTS shall have performed and
complied in all respects with all covenants, obligations and conditions of the
Merger Agreement required to be performed and complied with by it as of the
effective time of the Merger, except to the extent that the failure to so
perform or comply has not had and could not reasonably be expected to have a
material adverse effect on JTS and its subsidiaries; (c) Atari shall have
received a certificate executed on behalf of JTS by its Chief Executive Officer
and its Chief Financial Officer to the effect that, as of the Effective Time,
(i) all representations and warranties made by JTS under the Merger Agreement
are true and complete and (ii) all covenants, obligations and conditions of the
Merger Agreement to be performed by JTS have been so performed; (d) Atari shall
have been furnished with evidence satisfactory to it of the consent or approval
of third parties whose consent or approval shall be required in connection with
the Merger; (e) the absence of any injunction or other legal action or restraint
limiting or restricting JTS' conduct or operation of the business of Atari and
its subsidiaries following the Merger shall be in effect; (f) Atari shall have
received a legal opinion as to certain matters from Cooley Godward Castro
Huddleson & Tatum, counsel to JTS; (g) there shall not have occurred any
material adverse change in the condition (financial or otherwise), properties,
assets (including intangible assets), liabilities, business, operations, results
of operations or prospects of JTS and its subsidiaries, taken as a whole; (h)
the outstanding shares of JTS Series A Preferred Stock shall have converted into
shares of JTS Common Stock; and (i) that certain Right of First Refusal and
Co-Sale Agreement between JTS and certain stockholders of JTS shall have been
terminated.
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As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, (i) JTS will file certificates of
merger with the Secretary of State of Delaware and the Recorder of the County in
which the registered office of JTS is located and (ii) Atari will file a
certificate of merger with the Secretary of State of Nevada. The Merger will
become effective upon such filings.
TERMINATION, AMENDMENT AND WAIVER
The Merger Agreement may be terminated by mutual written agreement of Atari
and JTS, or by either Atari or JTS, if (a) as a result of a breach by the other
party of a representation, warranty, covenant or agreement set forth in the
Merger Agreement which has or can reasonably be expected to have a material
adverse effect on such other party which breach is not cured within five days
after written notice from the other (except that no cure period is provided for
a breach which by its nature cannot be cured), or (b) there shall be any final
action taken, or any statute, rule, regulation or order enacted which would
prohibit JTS' ownership or operation of all or a material portion of the
business of Atari, or which compels JTS or Atari to dispose of or otherwise
relinquish all or a material portion of either such party's assets.
The Merger Agreement may be terminated by any party if (a) the required
approvals of the stockholders of JTS and Atari are not obtained at the
respective stockholder meetings, (b) the closing of the Merger has not occurred
on or before July 31,1996, (c) there is a final, non-appealable order of a
federal or state court in effect preventing consummation of the Merger, or (d)
if the Atari Board of Directors accepts, approves or recommends a Superior Atari
Proposal to the Atari stockholders.
The Merger Agreement may be amended by Atari or JTS at any time before or
after approval by the Atari stockholders or the JTS stockholders, provided that
an amendment made subsequent to the adoption of the Merger Agreement by the
stockholders of JTS and Atari, shall not (a) alter or change the amount or kind
of consideration to be received on conversion of the Atari Common Stock, (b)
alter or change any term of the Certificate of Incorporation of JTS to be
effected by the Merger or (c) alter or change any of the terms and conditions of
the Merger Agreement if such alteration or change would adversely affect the
holders of JTS Common Stock, JTS Series A Preferred Stock or Atari Common Stock.
At any time prior to the Effective Time any party to the Merger Agreement
may (a) extend the time for performance of any obligation of the other parties,
(b) waive any inaccuracies in the representations and warranties made to such
party in the Merger Agreement or any document delivered in connection therewith
and (c) waive compliance with any of the agreements or conditions for the
benefit of such party contained in the Merger Agreement.
MERGER EXPENSES
Atari and JTS will equally bear the costs of solicitation of proxies from
their stockholders, all printing and mailing costs in connection with the
preparation and mailing of this Joint Proxy Statement/Prospectus to Atari and
JTS stockholders, all Commission filing fees with respect to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part, and all
costs of qualifying the shares of JTS Common Stock under state blue sky laws. In
addition to solicitation by mail, the directors, officers and employees of Atari
and JTS may solicit proxies from stockholders by telephone, telegram or letter
or in person, but will not be specially compensated for such activities.
Brokers, nominees, fiduciaries and other custodians have been requested to
forward solicitation material to the beneficial owners of Atari Common Stock
held of record by them. Such custodians will be reimbursed by Atari for their
reasonable expenses incurred in that connection. If the Merger is consummated,
all costs and expenses incurred in connection with the Merger not previously
paid will be paid by the Combined Company.
CERTAIN OTHER ITEMS RELATED TO THE MERGER
ACCOUNTING TREATMENT
For accounting purposes, the Merger is treated as if Atari acquired JTS. A
new basis of accounting will be established for the assets and liabilities of
JTS. The new basis reflects the allocation of the purchase price
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to the JTS assets and liabilities on the basis of their fair values at the time
the proposed transaction was announced. The aggregate purchase price to be
allocated includes the outstanding common stock of JTS, valued using $2.50 per
share which is the representative value of the Atari Common Stock at the time
the proposed transaction was announced, as well as the value of JTS options and
warrants and direct costs of the acquisition. Subsequent to the Merger, the
financial statements of the Combined Company will reflect the combined financial
position, results of operations and cash flows of Atari and JTS based on the new
basis of accounting for JTS and the historic cost basis of Atari. Pro forma
combined condensed financial statements are presented herein giving effect to
the Merger as if the transaction occurred, for purposes of the pro forma
combined financial position of the Combined Company, on March 31, 1996, and for
purposes of the pro forma combined results of operations of the Combined
Company, on the first day of each of the periods presented. The allocation of
the purchase price in the pro forma statements was based on an independent
analysis of the tangible and intangible assets of JTS, which will be revised as
updated information becomes available at the Effective Time. Under the purchase
accounting method, giving effect to the Merger, existing technology and goodwill
in the amount of approximately $22.0 million and $11.7 million, respectively,
are expected to be recognized by the Combined Company. It is anticipated that
the Combined Company will amortize the resulting existing technology and
goodwill over periods of three and seven years, respectively, which will have an
adverse effect on its results of operations. In addition, upon the consummation
of the Merger, in the third quarter of calendar year 1996, the Combined Company
expects to expense approximately $100.0 million of purchased in-process
technology. See "Unaudited Pro Forma Combined Condensed Financial Statements."
RESALE OF JTS COMMON STOCK
The shares of JTS Common Stock to be issued to holders of Atari Common
Stock in the Merger have been registered under the Securities Act by a
registration statement, of which this Joint Proxy Statement/Prospectus is a
part, thereby allowing such shares of JTS Common Stock to be traded without
restriction under the Securities Act by all such holders, except that such
holders who are "affiliates" (as such term is defined for purposes of Rule 145
promulgated under the Securities Act) of Atari will be subject to restrictions
on transferability as provided in Rule 145.
Notwithstanding the Merger, certain shares of JTS Common Stock will
continue to be subject to contractual restrictions on transfer, rights of
repurchase and other provisions (and corresponding restrictive legends on
certificates issued representing such shares), if any, to the same extent as
were applicable immediately prior to the Effective Time, all as set forth in the
restricted stock purchase agreements entered into by the holders of such shares
of JTS Common Stock upon the purchase of such shares by such holder and any
restrictive legends set forth on any certificates representing such shares. See
"Information Regarding JTS Corporation -- Management of JTS -- Executive
Compensation."
CERTIFICATE OF INCORPORATION AND BYLAWS OF COMBINED COMPANY
Upon consummation of the Merger, the Certificate of Incorporation and the
Bylaws of JTS will be amended and restated as approved by the JTS stockholders
in May 1996, and such documents will be the Certificate of Incorporation and the
Bylaws of the Combined Company. See "Comparison of Rights of Stockholders of
Atari and JTS."
ASSUMPTION OF ATARI OPTIONS
Upon consummation of the Merger, each option to purchase Atari Common Stock
then outstanding will be assumed by JTS and will be converted automatically into
an option to purchase the same number of shares of JTS Common Stock at an
exercise price per share equal to the exercise price per share of the Atari
option. The other terms of the Atari options, including vesting schedules, will
remain unchanged.
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ASSUMPTION OF ATARI DEBENTURES
Upon consummation of the Merger, all of Atari's obligations under its
outstanding 5 1/4% convertible subordinated debentures due April 29, 2002 (the
"Atari Debentures") will be assumed by JTS. The Atari Debentures are presently
convertible into Atari Common Stock at a conversion price of $16.3125 per share
and, following the Merger, will be convertible into JTS Common Stock at the same
conversion price. The other terms of the Atari Debentures will remain unchanged.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of June 28, 1996, members of the Board of Directors and executive
officers of Atari beneficially owned approximately 23,952,129 shares (37%) of
the outstanding Common Stock of Atari. As of the same date, members of the Board
of Directors and executive officers of JTS beneficially owned approximately
9,075,000 shares (96%) of the outstanding JTS Common Stock and approximately
14,120,000 shares (48%) of the outstanding JTS Series A Preferred Stock.
Following the consummation of the Merger, the executive officers and the members
of the Board of Directors of the Combined Company will beneficially own
approximately 35,740,000 shares (35%) of the outstanding Common Stock of the
Combined Company. See "-- Summary of the Merger Agreement -- Board of Directors
and Officers Following the Merger," "Information Regarding Atari Corporation --
Principal Stockholders of Atari" and "Information Regarding JTS Corporation --
Principal Stockholders of JTS."
Mr. David T. Mitchell, Chief Executive Officer, President and a director of
JTS, Mr. Kenneth D. Wing, Executive Vice President, Research and Development
Quality/Reliability of JTS, and Ms. W. Virginia Walker, Executive Vice
President, Finance and Administration and Chief Financial Officer of JTS, have
purchased 2,000,000 shares, 300,000 shares and 250,000 shares of restricted JTS
Common Stock, respectively, pursuant to restricted stock purchase agreements.
Each of the agreements provides that such shares of JTS Common Stock shall fully
vest over a four year period; provided, however, such shares of JTS Common Stock
shall immediately vest in the event that there occurs a change of control of JTS
and, within three years thereafter, the holder of such JTS Common Stock is
reassigned to a lesser position, terminated without cause or relocated. The
Merger constitutes a change of control under such restricted stock purchase
agreements.
In March 1996, Mr. Mitchell and Mr. Sirjang L. Tandon, JTS' Chairman of the
Board and Corporate Technical Strategist, each purchased 1,000,000 shares of JTS
Common Stock at a purchase price of $1.00 per share. All of such shares are
subject to a right of repurchase at cost in favor of JTS, which repurchase
option lapses as to all such shares after five years of service with JTS;
provided, however, that with respect to each individual, JTS' right of
repurchase will lapse at the rate of one-eighth of the total shares purchased in
September 1996 and as to 1/48th of the total shares purchased per month
thereafter if the Merger closes. In addition, at the discretion of JTS' Board of
Directors, the right of repurchase with respect to Mr. Mitchell's 1,000,000
shares of JTS Common Stock may be caused to lapse as to all such shares at any
time.
GOVERNMENTAL AND REGULATORY APPROVALS
Under the provisions of the HSR Act, certain acquisitions of voting
securities may not be consummated unless certain information has been filed with
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and the applicable waiting
period under the HSR Act has expired or been terminated. Neither Atari nor JTS
is required to file HSR forms under the HSR Act in connection with the Merger,
except to the extent that the acquisition of JTS Common Stock by certain Atari
stockholders in connection with the Merger may separately be subject to the
premerger notification and waiting period requirements of the HSR Act. All
necessary filings have been made and the applicable waiting period has
terminated with respect to such filings.
At any time before or after the Effective Time, and notwithstanding the
termination of the HSR Act waiting period, the Antitrust Division, the FTC or a
private person could seek under the antitrust laws, among other things, to
enjoin the Merger or to cause Atari or JTS to divest itself, in whole or in
part, of a portion of its business, or the Combined Company to divest itself, in
whole or in part, of any of the businesses of Atari or
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JTS. There can be no assurance that a challenge to the Merger will not be made
or that, if such a challenge is made, Atari and JTS will prevail.
Other than the waiting period under the HSR Act, Atari and JTS are aware of
no governmental or regulatory approvals required for consummation of the Merger,
other than compliance with the federal securities laws and applicable securities
laws of the various states.
RELATED TRANSACTIONS
ATARI LOAN TO JTS
On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a
Subordinated Secured Convertible Promissory Note (the "Note") which is secured
by substantially all of the assets of JTS. Interest accrues on the unpaid
principal amount of the Note at the rate of 8.5% per annum. The Note was amended
in June 1996 to increase the amount lent pursuant thereto to $30.0 million. The
Note provides that JTS shall repay the outstanding principal and interest under
the Note on September 30, 1996 if the Merger has not occurred prior to such
time. The Note is expressly subordinated to outstanding indebtedness in
connection with JTS' primary bank loan agreement, up to an amount of $5.0
million at any one time. In addition, Atari's security interest in JTS' assets
is junior to security interests previously obtained by a bank and certain
equipment lessors. The amount of the senior obligations was approximately $9.1
million at January 28, 1996. In addition, the Note provides that JTS may incur
(a) indebtedness to trade creditors in the ordinary course of business, (b)
contingent obligations consisting of guarantees of the obligations of vendors
and suppliers of JTS in respect to transactions entered into in the ordinary
course of business, (c) indebtedness with respect to capital lease obligations
and indebtedness secured by certain permitted liens, (d) other indebtedness, not
exceeding $1.0 million in the aggregate at any time, and (e) obligations with
respect to extensions, renewals or refinancings of any of the items in (a)-(d),
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon JTS.
Under the terms of the Note, the occurrence of any of the following shall
constitute an event of default entitling Atari to declare immediately due and
payable all outstanding obligations under the Note: (a) failure by JTS to pay
when due any principal or interest payment required under the Note; (b) failure
by JTS to observe or perform its agreements regarding prohibitions on certain
transactions and on the use of proceeds from the Note; (c) breach of any
representation or warranty made in connection with the Note or the Merger
Agreement; (d) default by JTS under certain existing loan obligations, the
effect of which is to cause indebtedness of JTS in the amount of $250,000 or
more to become due prior to its stated date of maturity; (e) involuntary or
voluntary bankruptcy proceedings with respect to JTS; (f) a final judgment or
order for the payment of money in excess of $250,000 being rendered against JTS
in which such judgment or order remains undischarged for a period of 30 days; or
(g) the uncured breach by JTS with respect to certain other obligations
specified in the Note.
In the event that the Merger Agreement is terminated, either party may,
under certain conditions, elect to convert the outstanding indebtedness under
the Note into shares of JTS Series A Preferred Stock in an amount determined by
dividing the aggregate amount of the indebtedness to be converted by the
"Conversion Price" then in effect. The initial Conversion Price is $1.00 per
share, subject to adjustments for stock splits and similar events. Atari may
effect a conversion upon (a) a mutual written consent of JTS and Atari, (b) a
breach of any representation, warranty or agreement in the Merger Agreement by
JTS, provided that Atari has not materially breached its obligations under the
Merger Agreement at such time, (c) the failure of the parties to consummate the
Merger by July 31, 1996, or (d) failure by JTS' stockholders to approve the
Merger. JTS may effect a conversion of the outstanding indebtedness under the
Note in the event that (x) Atari breaches any representation, warranty or
agreement contained in the Merger Agreement, provided that JTS has not
materially breached its obligations under the Merger Agreement at such time, (y)
Atari's stockholders do not approve the Merger, or (z) the Atari Board of
Directors shall have accepted, approved or recommended to the Atari Stockholders
a Superior Atari Proposal.
In the event that either Atari or JTS elects to convert at least $5.0
million of indebtedness outstanding under the Note into shares of JTS Series A
Preferred, JTS shall be obligated to issue to Atari warrants to
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purchase shares of JTS Series A Preferred Stock. Pursuant to the terms of the
Note, JTS shall, upon the conversion of such outstanding indebtedness, be
obligated to issue a warrant to purchase up to 9,375,000 shares of JTS Series A
Preferred. Each warrant to be issued by JTS pursuant to the Note shall have an
exercise price of $2.00 per share, subject to adjustment on certain events, and
a term of five years. The shares of JTS Series A Preferred issuable upon
exercise of any warrants issued pursuant to the Note shall be entitled to
registration rights on parity with the existing registration rights held by the
holders of JTS Series A Preferred Stock.
VOTING AGREEMENTS
In connection with the Merger, certain stockholders of Atari and JTS have
entered into Voting Agreements. The terms of such Voting Agreements provide (i)
that such stockholders will not transfer (except as may be specifically required
by court order), sell, exchange, pledge (except in connection with a bona fide
loan transaction) or otherwise dispose of or encumber their shares of Atari
Common Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may
be, beneficially owned by them, or any new shares of such stock they may
acquire, at any time prior to the effective time or earlier termination of the
Merger, and (ii) that such stockholders will vote all shares of Atari Common
Stock, JTS Common Stock or JTS Series A Preferred Stock, as the case may be,
beneficially owned by them in favor of the approval of the Merger Agreement and
the Merger. Such voting agreements are accompanied by irrevocable proxies
whereby the stockholders of Atari provide to JTS, and the stockholders of JTS
provide to Atari, the right to vote their shares on the proposals relating to
the Merger Agreement and the Merger at the Atari Special Meeting and JTS Special
Meeting, respectively. Holders of approximately 43% of the shares of Atari
Common Stock, 91% of the shares of JTS Common Stock and 70% of the shares of JTS
Series A Preferred Stock entitled to vote at the respective stockholder meetings
have entered into such Voting Agreements and irrevocable proxies.
APPRAISAL AND DISSENTERS' RIGHTS
GENERAL
Stockholders of JTS who do not vote in favor of the Merger may, under
certain circumstances and by following the procedures prescribed by the DGCL,
exercise appraisal rights and receive cash for their shares of JTS Common Stock
and JTS Series A Preferred Stock. Alternatively, although JTS is a Delaware
corporation and is therefore subject to DGCL, the CGCL provides that JTS may be
subject to California law with respect to dissenters' rights. Accordingly,
pursuant to Chapter 13 of the CGCL, stockholders of JTS who do not vote in favor
of the Merger and who comply with the requirements of the CGCL will have a right
to demand payment for, and appraisal of the "fair value" of, their shares
("Dissenting Shares"). Although a dissenting stockholder may choose to proceed
under one or both of the states' statutes, the dissenting stockholder must
specify which statute the stockholder is proceeding under and must follow the
appropriate procedures under either the DGCL or the CGCL or suffer termination
or waiver of such rights.
DELAWARE APPRAISAL RIGHTS
If the Merger is consummated, dissenting holders of JTS Common Stock and
JTS Series A Preferred Stock may be entitled to have the "fair value" (exclusive
of any element of value arising from the accomplishment or expectation of the
Merger) of their shares immediately prior to the Effective Time paid to them by
complying with the provisions of Section 262 of the DGCL.
The following is a brief summary of Section 262, which sets forth the
procedures for dissenting from the Merger and demanding statutory appraisal
rights. This summary does not purport to be a complete statement of the
provisions of the Delaware Law relating to the rights of JTS stockholders to an
appraisal of the value of their shares and is qualified in its entirety by
reference to Section 262, the full text of which is attached hereto as Appendix
D. Failure to follow these procedures exactly could result in the loss of
appraisal rights (if available). This Joint Proxy Statement/Prospectus
constitutes notice to holders of JTS Common Stock and JTS Series A Preferred
Stock concerning the availability of appraisal rights under Section 262.
Under Section 262, a stockholder of record wishing to assert appraisal
rights must hold the shares of stock on the date of making a demand for
appraisal rights with respect to such shares and must continuously hold
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<PAGE> 59
such shares through the Effective Time. Stockholders who desire to exercise
their appraisal rights (if available) must satisfy all of the conditions of
Section 262. A written demand for appraisal of shares must be filed with JTS
before the taking of the vote on the Merger. This written demand for appraisal
of shares must be in addition to and separate from any proxy vote abstaining
from or voting against the Merger. Any such abstention or vote against the
Merger will not constitute a demand for appraisal within the meaning of Section
262.
Stockholders electing to exercise their appraisal rights (if available)
under Section 262 must not vote for approval of the Merger. If a stockholder
returns a signed proxy but does not specify a vote against approval of the
merger or a direction to abstain, the proxy will be voted for approval of the
Merger, which will have the effect of waiving that stockholder's appraisal
rights (if available).
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the share
certificate. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, this demand must be executed by or for the
fiduciary. If the shares are owned by or for more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, he is acting as agent for the record owner. A person
having a beneficial interest in JTS Common Stock or JTS Series A Preferred Stock
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below and
in a timely manner to perfect whatever appraisal rights the beneficial owner may
have.
A record owner, such as a broker, who holds JTS Common Stock or JTS Series
A Preferred Stock as a nominee for others may exercise his or her right of
appraisal with respect to the shares for all or less than all of the beneficial
owners of shares as to which he or she is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly mentioned, the demand will be presumed to
cover all shares outstanding in the name of such record owner.
A JTS stockholder who elects to exercise appraisal rights (if available)
should mail or deliver his or her written demand to JTS at its address at 166
Baypointe Parkway, San Jose, California 95134, Attention: W. Virginia Walker,
Corporate Secretary. The written demand for appraisal should specify the
stockholder's name and mailing address, and that the stockholder is thereby
demanding appraisal of his or her JTS stock. If appraisal rights are available
in connection with the Merger, within ten days after the Effective Time, JTS
must provide notice of the Effective Time to all of its stockholders who have
complied with Section 262 and have not voted for approval of the Merger.
Within 120 days after the Effective Time, any stockholder who has satisfied
the requirements of Section 262 may deliver to JTS a written demand for a
statement listing the aggregate number of shares not voted in favor of the
merger and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares.
Within 120 days after the Effective Time (but not thereafter), either JTS
or any stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court of Chancery (the "Court") demanding a
determination of the fair value of the dissenting shares. If no petition for
appraisal is filed with the Court within 120 days after the Effective Time,
stockholders' rights to appraisal (if available) will cease and stockholders
will be entitled to receive shares of JTS Common Stock as provided in the Merger
Agreement. Any stockholder who desires a petition to be filed is advised to file
it on a timely basis. JTS has no present intention to file such a petition if
demand for appraisal is made.
Upon the filing of any petition by a stockholder in accordance with Section
262, service of a copy will be made upon JTS, which will, within 20 days after
service, file in the office of the Register in Chancery in which the petition
was filed, a duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom agreements
as to the value of their shares have not been reached by JTS.
If a petition for an appraisal is filed in a timely fashion, after a
hearing on the petition, the Court will determine which stockholders are
entitled to appraisal rights and will appraise the shares owned by these
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<PAGE> 60
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be fair value. In determining fair value, the Court is to take
into account all relevant factors.
JTS stockholders considering seeking appraisal of their shares should note
that the fair value of their shares determined under Section 262 could be more,
the same or less than the consideration they would receive pursuant to the
Merger Agreement if they did not seek appraisal of their shares. The costs of
the appraisal proceeding may be determined by the Court and taxed against the
parties as the Court deems equitable in the circumstances.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, after the Effective Time, be entitled to vote for any purpose the
shares subject to demand or to receive payment of dividends or other
distributions on such shares, except for dividends or distributions payable to
stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger Agreement. After this period, a stockholder may
withdraw his or her demand for appraisal and receive payment for his or her
shares as provided in the Merger Agreement only with the consent of JTS. No
petition demanding appraisal may be dismissed without approval of the Court.
Pursuant to the Merger Agreement, JTS will give Atari prompt notice of any
demands received by JTS, and Atari will have the right to participate in all
negotiations and proceedings with respect to the demands. JTS will not, except
with the prior written consent of Atari, make any payment with respect to, or
settle or offer to settle, any such demands.
Cash received pursuant to the exercise of appraisal rights may be subject
to federal or state income tax. See "-- Certain Federal Income Tax
Considerations."
The foregoing summary of the applicable provisions of Section 262 is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to such Section, the full text of which is attached as
Appendix D-1 to this Joint Proxy Statement/Prospectus.
CALIFORNIA DISSENTERS' RIGHTS
By virtue of Section 2115 of the CGCL, if holders of JTS Common Stock and
JTS Series A Preferred Stock exercise dissenters' rights in connection with the
Merger under Chapter 13 of the CGCL ("Chapter 13"), any shares of JTS Common
Stock and JTS Series A Preferred Stock as to which such dissenters' rights are
exercised will be converted into the right to receive such consideration as may
be determined to be due with respect to such Dissenting Shares pursuant to the
laws of the State of California.
The following summary of the provisions of Chapter 13 is not intended to be
a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Chapter 13, a copy of which is attached hereto as
Appendix D-2 and is incorporated herein by reference.
If the Merger is approved by the required vote of JTS' stockholders, each
holder of shares of JTS Common Stock and JTS Series A Preferred Stock who does
not vote in favor of the Merger and who follows the procedures set forth in
Chapter 13 will be entitled to have shares of JTS Common Stock and JTS Series A
Preferred Stock purchased by JTS for cash at their fair market value. Abstention
of the stockholder from voting will not waive the stockholders' dissenter's
rights. Voting against the proposed Merger will not constitute the written
demand on the corporation for purchase of the Dissenting Shares as required
under Chapter 13. The fair market value of shares of JTS Common Stock and JTS
Series A Preferred Stock will be determined as of the day before the first
announcement of the terms of the proposed Merger, excluding any appreciation or
depreciation in consequence of the proposed Merger and therefore valuing the
shares of JTS Common Stock and Series A Preferred Stock as if the Merger had not
occurred.
Within ten days after approval of the Merger by JTS' stockholders, JTS must
mail a notice of such approval (the "Approval Notice") to all stockholders who
have not voted in favor of the Merger, together with
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<PAGE> 61
a statement of the price determined by JTS to represent the fair market value of
the applicable Dissenting Shares, a brief description of the procedures to be
followed in order for the stockholder to pursue dissenters' rights, and a copy
of Sections 1300-1304 of Chapter 13. The statement of price by JTS constitutes
an offer by JTS to purchase all Dissenting Shares at the stated amount.
A stockholder of JTS electing to exercise dissenters' rights must, within
thirty days after the date on which the Approval Notice is mailed to such
stockholder, mail or deliver the written demand to JTS stating that such holder
is demanding purchase of his or her shares of JTS Common Stock and/or JTS Series
A Preferred Stock, stating the number of shares which JTS must purchase, what
the stockholder claims to be the fair market value of such shares and enclosing
the share certificates for endorsement by JTS. The statement of fair market
value constitutes an offer by the stockholder to sell the shares at such price.
A dissenting stockholder may not withdraw a demand for payment unless JTS
consents to it.
If JTS and the stockholder agree that the shares are Dissenting Shares and
agree upon the price of the shares, JTS must pay the stockholder the agreed upon
price plus interest thereon at the legal rate from the date of the agreement on
Dissenting Shares within thirty days from the later of (i) the date of the
agreement on Dissenting Shares, or (ii) the date all contractual conditions to
the Merger are satisfied.
If JTS denies that the shares are Dissenting Shares, or if JTS and the
stockholder fail to agree upon the fair market value of shares of capital stock,
then within six months after the date the Approval Notice was mailed to
stockholders, any stockholder who has made a valid written purchase demand and
who has not voted in favor of approval and adoption of the Merger may file a
complaint in California superior court requesting a determination as to whether
the shares are Dissenting Shares or as to the fair market value of such holder's
shares of JTS Common Stock and/or JTS Series A Preferred Stock, or both.
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<PAGE> 62
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
consequences of the exchange of shares of Atari capital stock for JTS capital
stock pursuant to the Merger. This summary is based upon opinions of counsel
(the "Tax Opinions") delivered by Wilson Sonsini Goodrich & Rosati, P.C. and
Cooley Godward Castro Huddleson & Tatum (collectively "Counsel") that the Merger
will constitute a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (a "Reorganization").
Atari and JTS stockholders should be aware that this discussion does not
deal with all federal income tax considerations that may be relevant to
particular stockholders of Atari and JTS in light of their particular
circumstances, such as stockholders who are banks, insurance companies,
tax-exempt organizations, dealers in securities, foreign persons or who do not
hold their Atari or JTS capital stock as capital assets or who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of the Merger under foreign, state or local tax
laws or the tax consequences of transactions effectuated prior or subsequent to
or concurrently with the Merger (whether or not such transactions are in
connection with the Merger), including, without limitation, transactions in
which Atari capital stock is acquired or JTS capital stock is disposed of.
ACCORDINGLY, ATARI AND JTS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Subject to the limitations and qualifications referred to herein, Counsel
is of the opinion that the Merger will qualify as a Reorganization which will
result in the following federal income tax consequences:
(a) No gain or loss will be recognized by holders of Atari capital stock
solely upon their receipt of JTS capital stock solely in exchange for Atari
capital stock in the Merger (except to the extent of cash received in lieu of a
fractional share of JTS capital stock).
(b) The aggregate tax basis of the JTS capital stock received by Atari
stockholders in the Merger will be the same as the aggregate tax basis of Atari
capital stock surrendered in exchange therefor less the tax basis, if any,
allocated to fractional share interests.
(c) The holding period of the JTS capital stock received in the Merger will
include the period for which the Atari capital stock surrendered in exchange
therefor was held, provided that the Atari capital stock is held as a capital
asset at the time of the Merger.
(d) Cash payments received by holders of Atari capital stock in lieu of a
fractional share will be treated as if a fractional share of JTS capital stock
had been issued in the Merger and then redeemed by JTS. A stockholder of Atari
receiving such cash will generally recognize gain or loss upon such payment,
equal to the difference (if any) between such stockholder's basis in the
fractional share and the amount of cash received.
(e) A shareholder who exercises appraisal or dissenters' rights with
respect to a share of JTS capital stock and who receives payment for such stock
in cash should generally recognize capital gain or loss (if such share was held
as a capital asset at the time of the Merger) measured by the difference between
the shareholder's basis in such share and the amount of cash received, provided
that such payment is neither essentially equivalent to a dividend nor has the
effect of a distribution of a dividend (a "Dividend Equivalent Transaction"). A
sale of capital stock of JTS pursuant to an exercise of appraisal or dissenters'
rights will generally not be a Dividend Equivalent Transaction if, as a result
of such exercise, the shareholder exercising dissenters' rights and all parties
related to such Shareholder own no shares of JTS Stock (either actually or
constructively with the meaning of Section 318 of the Code) after the Merger.
If, however, a stockholder's sale for cash of JTS capital stock pursuant to an
exercise of appraisal or dissenters' rights is a Dividend Equivalent
Transaction, then such shareholder will generally recognize income for federal
income tax purposes in an amount up to the entire amount of cash so received.
(f) Neither JTS nor Atari will recognize material amounts of gain solely as
a result of the Merger.
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No ruling has been or will be obtained from the Internal Revenue Service
(the "IRS") in connection with the Merger. Atari and JTS stockholders should be
aware that the Tax Opinions do not bind the IRS and that the IRS is therefore
not precluded from successfully asserting a contrary opinion. The Tax Opinions
are also subject to certain limitations and qualifications, they are based upon
certain factual assumptions, and are subject to the truth and accuracy of
certain representations made by Atari and JTS. Of particular importance are
certain representations relating to the Code's "continuity of shareholder
interest" and "continuity of business enterprise" requirements.
To satisfy the continuity of shareholder interest requirement, Atari
shareholders must not, pursuant to a plan or intent existing at or prior to the
Merger, dispose of or transfer so much of either (i) their Atari capital stock
in anticipation of the Merger or (ii) the JTS capital stock to be received in
the Merger (collectively, "Planned Dispositions"), such that Atari shareholders,
as a group, would no longer have a significant equity interest in the Atari
business being conducted by JTS after the Merger. Atari shareholders will
generally be regarded as having a significant equity interest as long as the
number of shares of JTS capital stock received in the Merger less the number of
shares subject to Planned Dispositions (if any) represents, in the aggregate, a
substantial portion of the entire consideration received by the Atari
shareholders in the Merger. To satisfy the continuity of business enterprise
requirement, JTS must either (i) continue the historic business conducted by
Atari or (ii) use a significant portion of the historic business assets of Atari
in a business.
A successful IRS challenge to the Reorganization status of the Merger would
result in the Merger being treated as a taxable sale of Atari's assets.
Additionally, a successful IRS challenge to such Reorganization status would
result in Atari stockholders recognizing taxable gain or loss with respect to
each share of Atari capital stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
Effective Time, of the JTS capital stock received in exchange therefor. In such
event, a stockholder's aggregate basis in the JTS capital stock so received
would equal its fair market value and the holding period for such stock would
begin the day after the Effective Time.
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<PAGE> 64
STOCK PRICE AND DIVIDEND INFORMATION
ATARI
Atari's Common Stock has traded on the American Stock Exchange under the
symbol "ATC" since November 7, 1986. As of the close of business on June 28,
1996, 63,854,718 shares of Atari Common Stock were outstanding and no shares of
Preferred Stock were outstanding. As of that date, there were approximately
2,375 stockholders of record of Atari Common Stock. The following table sets
forth the high and low sale prices of Atari's Common Stock for the periods
indicated as reported on the consolidated transaction system.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
FISCAL YEAR 1996
Second Quarter (through July 12, 1996)......................... $ 9 $ 3 5/8
First Quarter.................................................. 4 1/8 1 5/8
FISCAL YEAR 1995
Fourth Quarter................................................. $ 3 5/16 $ 1 1/8
Third Quarter.................................................. 3 5/8 2 9/16
Second Quarter................................................. 3 1/8 2 1/2
First Quarter.................................................. 4 1/4 2 3/4
FISCAL YEAR 1994
Fourth Quarter................................................. $ 7 3/8 $ 3 9/16
Third Quarter.................................................. 7 3/4 2 7/8
Second Quarter................................................. 6 5/8 2 7/8
First Quarter.................................................. 8 1/8 5 5/8
</TABLE>
Atari has never paid cash dividends on its Common Stock and does not
anticipate a change in this practice in the foreseeable future.
JTS
JTS is a privately held company, and there is no public trading market for
its stock. As of the close of business on June 18, 1996, 9,263,866 shares of JTS
Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued
and outstanding. There are a total of 54 holders of record of JTS Series A
Preferred Stock and 20 holders of record of JTS Common Stock. After the Closing,
the JTS Common Stock is expected to be publicly traded on the American Stock
Exchange under the symbol "JTS". No cash dividend has ever been paid on any
class of JTS capital stock.
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JTS' ACQUISITION OF THE DISK DRIVE DIVISION OF MODULER ELECTRONICS
Moduler Electronics is located in Madras, India and was founded in 1986 by
members of the family of Sirjang L. Tandon, JTS' Chairman and Corporate
Technical Strategist, as a contract manufacturer of power supplies for computers
and hard disk drive subassemblies. In December 1994, Moduler Electronics
received Indian government approval to manufacture hard disk drives. At
approximately the same time, Moduler Electronics discontinued production of hard
disk drive subassemblies for customers other than JTS. In March 1995, JTS
entered into a verbal agreement to acquire the hard disk drive division of
Moduler Electronics for 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase 500,000 shares of JTS Common Stock at an exercise price of
$.25 per share. JTS subsequently assumed operational and management control of
certain portions of the hard disk drive business of Moduler Electronics. The
verbal agreement contemplated that prior to JTS' acquisition, Moduler
Electronics would divest itself of certain voice coil assembly and other
operations not directly involved in its hard disk drive business.
In April 1996, following Moduler Electronics' divestiture of its voice coil
business and businesses unrelated to its hard disk drive operations, JTS
purchased 90% of the outstanding capital stock of Moduler Electronics in
consideration for 1,911,673 shares of JTS Series A Preferred Stock and a warrant
to purchase 750,000 shares of JTS Common Stock at an exercise price of $.25 per
share. The warrant is immediately exercisable as to 500,000 shares of JTS Common
Stock and becomes exercisable with respect to the remaining 250,000 shares when
certain borrowings and credit facilities in the amount of $29 million become
available to Moduler Electronics. The 250,000 share portion of the warrant
related to the credit facilities of Moduler Electronics will be valued and
recorded as additional interest expense over the term of the borrowings, if and
when such portion of the warrant becomes exercisable.
In connection with the acquisition of the hard disk drive business of
Moduler Electronics, JTS agreed not to compete in the head stack manufacturing
business within India for a period of five years, provided that JTS may
manufacture head stacks for its internal requirements. In return, the former
owners of Moduler Electronics agreed not to compete in the disk drive
manufacturing business within India for a period of five years. In addition, JTS
granted certain registration rights with respect to the shares of JTS capital
stock issued in the acquisition. JTS has a right of first refusal to purchase
the remaining 10% equity interest in Moduler Electronics at 10% of the net book
value of Moduler Electronics at the time of the purchase.
Since JTS began hard disk drive production in early 1995, JTS has conducted
substantially all of its manufacturing operations at the Moduler Electronics
facility. As of April 26, 1996, Moduler Electronics employed 1,760 individuals.
The Madras facility presently occupies 85,000 square feet in a single building,
4,000 square feet of which are designated a "clean room" environment. At this
facility, JTS is adding production lines and expanding its clean room
environment. JTS believes that locating its manufacturing operations in India
represents an important element of its manufacturing strategy due to the local
availability of a high-quality, low-cost technical labor pool. See "Information
Regarding JTS Corporation -- Business of JTS -- Manufacturing."
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JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the Merger of JTS and Moduler Electronics which was consummated
on April 4, 1996 and will be accounted for as a purchase. The accompanying pro
forma combined condensed balance sheet as of January 28, 1996 assumes that the
acquisition of Moduler Electronics by JTS took place on that date and combines
JTS' and Moduler Electronics' balance sheets as of January 28, 1996. The
accompanying pro forma combined condensed statement of operations for the year
ended January 28, 1996 assumes that the acquisition took place as of the
beginning of fiscal 1996, and combines JTS' and Moduler Electronics' statements
of operations for the year ended January 28, 1996. The pro forma combined
condensed statements of operations do not include the effect of any nonrecurring
charges directly attributable to the acquisition.
In March 1995, JTS agreed to acquire the hard disk drive division of
Moduler Electronics and subsequently assumed operational and management control
of certain portions of the hard disk drive business of Moduler Electronics. The
purchase price included 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase JTS Common Stock at an exercise price of $0.25 per share in
exchange for 90% of the outstanding capital stock of Moduler Electronics. Actual
statements of the companies will be combined after the consummation date with no
retroactive restatements. The accompanying pro forma combined condensed
financial statements should be read in conjunction with JTS' and Moduler
Electronics' historical financial statements and related notes thereto.
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JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JANUARY 28, 1996
------------------------------------------------------
HISTORICAL
HISTORICAL MODULER PRO FORMA PRO FORMA
JTS ELECTRONICS ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and restricted cash.... $ 547 $ 868 $ 1,415
Trade and other receivable.................... 2,098 -- 2,098
Receivable from Moduler Electronics........... 6,892 -- $(6,892)(a) --
Receivable from related parties............... -- -- 380(a) 380
Inventories................................... 2,093 5,983 8,076
Prepaid and other current assets.............. 240 513 753
------- ------ -------
Total current assets.................. 11,870 7,364 12,722
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET....... 7,943 5,603 1,249(b) 14,795
GOODWILL........................................ -- -- 594(b) 594
------- ------ -------
$ 19,813 $ 12,967 $ 28,111
======= ====== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit and short-term
borrowing.................................. $ 4,323 $ 6,085 $ 10,408
Note payable to stockholder................... 1,000 -- 1,000
Accounts payable --
Trade...................................... 7,226 6,268 13,494
Moduler Electronics........................ 9,546 -- (5,734)(a) --
(3,812)(b)
Related parties............................ -- 1,168 (778)(a) 390
Accrued liabilities........................... 3,501 197 3,698
Current portion of capitalized lease
obligations
and long-term debt......................... 1,520 105 1,625
------- ------ -------
Total current liabilities............. 27,116 13,823 30,615
LONG-TERM LIABILITIES........................... 3,485 2,763 6,248
------- ------ -------
Total Liabilities..................... 30,601 16,586 36,863
REDEEMABLE SERIES A PREFERRED STOCK............. 27,785 -- 1,911(b) 29,696
STOCKHOLDERS' DEFICIT:
Common stock.................................. -- -- --
Warrant for common stock...................... -- -- 125(b) 125
Additional paid-in capital.................... 6,004 -- 6,004
Deferred compensation......................... (4,320) -- (4,320)
Notes receivable from stockholders............ (623) -- (623)
Accumulated deficit........................... (39,634) (39,634)
Liabilities in excess of assets............... -- (3,619) 3,619(b) --
======
------- -------
Total stockholders' deficit........... (38,573) (38,448)
------- -------
$ 19,813 $ 28,111
======= =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
60
<PAGE> 68
JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JANUARY 28, 1996
----------------------------------------------------------
HISTORICAL
HISTORICAL MODULER PRO FORMA PRO FORMA
JTS ELECTRONICS ADJUSTMENTS COMBINED
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Product sales.............................. $ 13,502 $15,580 $ (15,580)(c) $ 13,502
Technology license revenue................. 5,275 -- 5,275
------- ------ -------
18,777 15,580 18,777
COST OF PRODUCT SALES........................ 28,548 19,160 (15,580)(c) 33,626
------- ------ -------
(599)(e)
2,097(e)
GROSS MARGIN (DEFICIT)....................... (9,771) (3,580) (14,849)
OPERATING EXPENSES:
Research and development................... 13,375 -- 13,375
Selling, general and administrative........ 5,579 -- 198(d) 5,777
Manufacturing start-up costs............... 3,812 -- (3,812)(f) --
------- ------ -------
22,766 -- 19,152
------- ------ -------
OPERATING LOSS............................... (32,537) (3,580) (34,001)
OTHER INCOME (EXPENSE):
Interest income............................ 108 141 249
Interest expense........................... (589) (464) (1,053)
Other, net................................. (32) (333) (365)
------- ------ -------
NET LOSS..................................... $ (33,050) $(4,236) $ (35,170)
======= ====== =======
NET LOSS PER COMMON SHARE.................... $ (7.17) $ (7.63)
======= =======
SHARES USED IN COMPUTING NET LOSS PER
SHARE...................................... 4,611 (g) 4,611
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
61
<PAGE> 69
JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. PURCHASE PRICE ALLOCATION
The purchase price of the acquisition of Moduler Electronics is computed as
follows (in thousands):
<TABLE>
<S> <C>
Preferred stock..................................... $1,911
Warrants............................................ 125
-------
$2,036
=======
</TABLE>
The preferred stock is valued at $1.00 per share, such number of shares and
the value per share were agreed to in March 1995. The price per preferred
share was identical to the price per preferred share received by the
Company in cash sales to unrelated parties in February and September 1995.
The warrant to purchase 500,000 shares of common stock at $.25 was valued
at $125,000 and reflects the higher value of the preferred stock relative
to the common stock. Subsequent to the March 1995 agreement to purchase
Moduler Electronics, JTS assumed operational and management control of
certain portions of the Disk Drive Unit and funded certain of the start-up
losses. Accordingly, JTS expensed 90% of the Unit's loss in its historical
financial statements.
The purchase price is expected to be allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets acquired........................... $ 6,628
Property acquired................................. 6,292
Liabilities assumed............................... (11,478)
Goodwill.......................................... 594
-------
$ 2,036
=======
</TABLE>
NOTE 2. PRO FORMA ADJUSTMENTS
Certain pro forma adjustments have been made to the accompanying pro forma
combined condensed balance sheet and statement of operations as described below:
(a) Eliminates intercompany receivable and payable balances.
(b) Reflects the acquisition of 90% ownership of Moduler Electronics for
1,911,673 shares of JTS Series A Preferred Stock valued at $1.00 per
share and a warrant to purchase 500,000 shares of JTS Common Stock
valued at $125,000.
(c) Eliminates intercompany sales.
(d) Reflects the amortization of goodwill on a straight-line basis over
three years.
(e) Reflects the depreciation of the step-up of fixed assets.
(f) Eliminates 90% of loss of Moduler Electronics' start-up costs.
(g) Pro forma weighted average common shares do not include common stock
equivalents as inclusion of these shares would be anti-dilutive.
62
<PAGE> 70
ATARI CORPORATION AND JTS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the proposed merger of Atari and JTS. The merger is subject to
shareholder and regulatory approval and other conditions. The unaudited pro
forma condensed combined balance sheet has been prepared as if the acquisition,
which will be accounted for as a purchase of JTS by Atari, was consummated as of
March 31, 1996. Such pro forma balance sheet combines Atari's balance sheet as
of March 31, 1996 and the balance sheet of JTS as of April 28, 1996. Although
the business combination will result in Atari merging into the JTS legal entity,
the substance of the transaction is that Atari, a public company with
substantially greater operating history and net worth, will own approximately
62% of the combined equity at the date of the acquisition.
The aggregate purchase price of $112.3 million has been allocated to the
acquired assets and liabilities of JTS. Included in the pro forma purchase price
are the approximately 40 million shares of outstanding common stock of JTS,
assuming conversion of all outstanding preferred stock of JTS, the value of the
assumed JTS options and warrants of $11.1 million and the estimated direct
transaction costs. The common stock, options and warrants were valued using
$2.50 per share which is the representative value of Atari stock at the time the
proposed transaction was announced. The fair value of JTS assets and liabilities
will be revised as updated information becomes available at the Effective Time.
Such preliminary appraisal allocated $119.0 million to purchased technology,
$97.0 million of which represented in-process research and development. The
$97.0 million will be expensed upon the closing of the Merger as the technology
had not yet reached technological feasibility and does not have alternative
future uses.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1995 give effect to the proposed merger as if the
acquisition was completed at the beginning of the year and combines Atari's
statement of operations as of December 31, 1995 with the pro forma combined
statement of operations for JTS and Moduler Electronics for the year ended
January 28, 1996. The unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1996 give effect to the proposed
merger as if the acquisition was completed at the beginning of the quarter and
combines Atari's statement of operations as of March 31, 1996 with the JTS pro
forma statement of operations for the quarter ended April 28, 1996. Such
statements do not include the effect of the approximately $97.0 million
nonrecurring charge for in-process research and development, as such charges
will be included in the consolidated statement of operations in the third
calendar quarter of 1996. Such statements also exclude Atari's extraordinary
gain generated from the Atari Debentures extinguished in 1995 and the $6.3
million gain on sale of marketable securities in the first quarter of 1996.
This method of combining historical financial statements for the
preparation of the pro forma condensed combined statements is for presentation
only. Actual statements of operations of the companies will be combined from the
closing date of the acquisition with no retroactive restatements. The unaudited
pro forma condensed combined financial statements are provided for illustrative
purposes only and is not necessarily indicative of the combined financial
position or combined results of operations that would have been reported had the
Merger occurred on the dates indicated, nor do they represent a forecast of the
combined financial position or results of operations for any future period. The
unaudited pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements and accompanying notes for
Atari, JTS and Moduler Electronics.
63
<PAGE> 71
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ATARI JTS
MARCH 31, APRIL 28, PRO FORMA PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents........................ $ 23,748 $ 5,116 $ 28,864
Accounts receivable......................... 601 9,608 10,209
Other receivables........................... -- 1,182 1,182
Inventories................................. 5,526 12,983 18,509
Subordinated secured convertible note....... 25,000 -- (25,000)(k) --
Other current assets........................ 1,101 1,585 2,686
--------- -------- ---------
Total current assets..................... 55,976 30,474 61,450
GAME SOFTWARE DEVELOPMENT
COSTS....................................... 861 -- 861
EQUIPMENT AND TOOLING......................... 577 16,212 2,970(d) 19,759
REAL ESTATE HELD FOR SALE..................... 10,468 -- 10,468
INTANGIBLE & OTHER ASSETS..................... 524 -- 21,980(d) 22,504
GOODWILL...................................... -- 185 (185)(c) 11,714
11,714(d)
--------- -------- ---------
TOTAL.................................... $ 68,406 $ 46,871 $ 126,756
========= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings............................. $ -- $ 10,277 $ 10,277
Notes payable to stockholders............... -- 1,965 1,965
Subordinated secured convertible note....... -- 25,000 (25,000)(k) --
Accounts payable............................ 3,295 18,240 1,200(i) 22,735
Accrued liabilities......................... 5,481 4,536 10,017
Current portion of long-term obligations.... -- 1,651 1,651
--------- -------- ---------
Total current liabilities................ 8,776 61,669 46,645
LONG-TERM OBLIGATIONS......................... 42,354 6,381 48,735
REDEEMABLE PREFERRED STOCK.................... -- 29,697 (29,697)(c) --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock................................ 637 -- 400(a) 1,037
Additional paid-in capital.................. 196,272 8,088 103,105(a,c) 307,465
Deferred compensation....................... -- (3,990) 3,990(c) --
Common stock warrants....................... -- 125 1,985(b) 2,110
Notes receivable from sale of common
stock.................................... -- (2,610) (2,610)
Accumulated translation adjustments......... (730) (730)
Accumulated deficit......................... (178,903) (52,489) 52,489(c) (275,896)
(96,993)(e)
--------- -------- ---------
Total shareholders' equity (deficit)..... 17,276 (50,876) 31,376
--------- -------- ---------
TOTAL............................... $ 68,406 $ 46,871 $ 126,756
========= ======== =========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
64
<PAGE> 72
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ATARI JTS
QUARTER ENDED QUARTER ENDED PRO FORMA PRO FORMA
MARCH 31, 1996 APRIL 28, 1996 ADJUSTMENTS COMBINED
-------------- ------------------- ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES............................ $ 1,272 $ 17,581 $ 18,853
COST AND EXPENSES: 1,832(f)
Cost of revenues and inventory
write-downs........................ 6,211 19,434 248(h) 27,725
Research and development.............. 201 7,406 7,607
Sales, marketing, general and
administrative..................... 2,009 3,103 418(g) 5,530
-------- -------- --------
Total operating expenses........... 8,421 29,943 40,862
OPERATING LOSS.......................... (7,149) (12,362) (22,009)
Gain on sale of marketable
securities......................... 6,347 -- (6,347)(1) --
Other income (expense)................ 233 (56) 177
Interest income....................... 332 105 437
Interest expense...................... (569) (542) (1,111)
-------- -------- --------
Loss before income taxes........... (806) (12,855) (22,506)
Income tax credit....................... -- -- --
-------- -------- --------
NET LOSS................................ $ (806) $ (12,855) (22,506)
======== ======== ========
LOSS PER COMMON SHARE................... $ (0.01) $ (1.47) $ (0.22)
Number of shares used in computation.... 63,701 8,732 (j) 103,701
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
65
<PAGE> 73
ATARI AND JTS
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED JTS AND
ATARI MODULER ELECTRONICS
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
DEC. 31, 1995 JAN. 28, 1996 ADJUSTMENTS COMBINED
------------- ------------------- ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES............................. $ 14,626 $ 18,777 $ 33,403
COST AND EXPENSES: 7,327(f)
Cost of revenues....................... 44,234 33,626 990(h) 86,177
Research and development............... 5,410 13,375 18,785
Sales, marketing, general and
administrative...................... 18,647 5,777 1,673(g) 26,097
-------- -------- --------
Total operating expenses............ 68,291 52,778 131,059
OPERATING LOSS........................... (53,665) (34,001) (97,656)
Other income (expense)................. 2,683 (365) 2,318
Interest income........................ 3,133 249 3,382
Interest expense....................... (2,309) (1,053) (3,362)
-------- -------- --------
Loss before income taxes............ (50,158) (35,170) (95,318)
Income tax credit........................ -- -- --
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) (95,318)
======== ======== ========
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) $ (0.92)
Number of shares used in computation..... 63,697 4,611 (j) 103,697
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
66
<PAGE> 74
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ATARI AND JTS
NOTE 1 -- PURCHASE PRICE
The purchase price of the acquisition of JTS is computed as follows:
<TABLE>
<S> <C>
Warrants and employee stock options............................ $ 11,093,000
Common stock to be issued...................................... 100,000,000
Direct transaction costs....................................... 1,200,000
------------
TOTAL..................................................... $ 112,293,000
============
</TABLE>
The JTS common stock, options and warrants were valued using $2.50 per
share which is the representative value of Atari stock at the time the proposed
transaction was announced.
The purchase price is expected to be allocated as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 30,474,000
Equipment and tooling.......................................... 19,182,000
In-process technology.......................................... 96,993,000
Existing technology............................................ 21,980,000
Liabilities assumed............................................ (68,050,000)
Goodwill....................................................... 11,714,000
------------
TOTAL..................................................... $112,293,000
============
</TABLE>
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited pro
forma condensed combined financial statements:
(a) -- Reflects the value of all outstanding JTS common stock and the fair
value of JTS options.
(b) -- Reflects the fair value of JTS common stock warrants.
(c) -- Reflects elimination of JTS common and preferred stock, deferred
compensation, goodwill and shareholders' deficit.
(d) -- Reflects allocation of purchase price to acquired equipment,
existing technology and goodwill.
(e) -- Reflects a one-time charge for purchased in-process technology.
(f) -- Reflects amortization of purchased existing technology on a
straight-line basis over three years.
(g) -- Reflects amortization of goodwill on a straight-line basis over
seven years.
(h) -- Reflects depreciation of the step-up of equipment on a straight-line
basis over three years.
(i) -- Reflects accrual of direct transaction costs.
(j) -- Reflects the outstanding common stock of JTS assuming the
conversion of outstanding preferred stock of JTS excluding the
impact of stock options and warrants which are antidilutive.
(k) -- Reflects elimination of note between Atari and JTS.
(l) -- Reflects elimination of nonrecurring gain on sale of a marketable
security.
No deferred tax adjustments is made as the deferred tax assets, consisting
primarily of net operating loss carryforwards, exceed the deferred tax
liabilities and the excess of the deferred tax assets over the deferred tax
liabilities is offset by a valuation allowance due to the uncertainty
surrounding the realization.
67
<PAGE> 75
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ATARI AND JTS (CONTINUED)
NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT
The allocation of the purchase price among identifiable intangible assets
was based on a preliminary independent appraisal of the fair value of those
assets. The fair value of JTS assets and liabilities will be revised as updated
information become available at the Effective Time. Such preliminary appraisal
allocated $97.0 million to purchased in-process research and development. The
$97.0 million will be expensed in the third calendar quarter upon closing as the
technology had not yet reached technological feasibility and does not have
alternative future uses. The unaudited pro forma condensed combined statements
of operations do not include this one-time charge for purchased in-process
technology as it represents a material nonrecurring charge in accordance with
the rules for the preparation of pro forma financial statements.
NOTE 4 -- DEFERRED COMPENSATION
Upon the closing of the merger, JTS will record a one-time expense charge
of approximately $4.3 million of deferred compensation which it is currently
amortizing. Such expense has not been recorded in the accompanying pro forma
financial statements.
68
<PAGE> 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA COMBINED FINANCIAL CONDITION
AND PRO FORMA COMBINED RESULTS OF OPERATIONS OF THE COMBINED COMPANY FOR THE
QUARTER ENDED MARCH 31, 1996
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Atari and JTS and the introduction to the pro forma financial statements on page
59. The pro forma combined results are not necessarily indicative of what would
have occurred had the acquisition actually been made at the beginning of each of
the respective periods presented or of future operations of the Combined
Company.
The net loss on a pro forma basis for the Combined Company was $22.5
million on net revenues of $18.9 million. The Combined Company expects sales of
Atari's Jaguar and related products to decline substantially in 1996 and
thereafter as a result of Atari's decision to focus its efforts on selling its
inventory of Jaguar and related products and to emphasize its existing licensing
and development activities related to multimedia entertainment software. The
Combined Company is expected to focus a substantial portion of its resources on
the disk drive portion of its business which is expected to represent a
substantial portion of the operations of the Combined Company. Sales of disk
drives in the Combined Company are expected to increase during 1996 with the
initiation of shipments of the Nordic 3-inch disk drives to Compaq late in the
second quarter and the introduction of additional disk drive products with
higher performance characteristics and increased capacities beyond JTS' current
1.6 gigabyte product.* There can be no assurance that the Combined Company will
be successful in the production and shipment of these products.
The Combined Company anticipates that it will have a five year period
during which it will not pay taxes on its operations in India. Further, the
Combined Company's operations in India are in a tax exempt facility. These tax
benefits, to the extent the Combined Company is able to generate profitable
operations to utilize them, will provide the Combined Company with a lower tax
rate than would otherwise be the case. No assurance can be given, however, that
the Combined Company will achieve profitable operations in India or be able to
utilize these tax benefits or achieve a lower tax rate.
Upon consummation of the Merger, the subordinated convertible note due from
JTS to Atari will be canceled. The unaudited pro forma Combined Balance Sheets
reflect cash and cash equivalents of $28.9 million and working capital of $14.8
million. The Combined Company will need significant additional financing
resources over the next several years for facilities expansion, capital
expenditures, working capital, research and development and vendor tooling. In
order for the Combined Company to accelerate or increase planned expenditures or
to the extent orders do not materialize as currently projected, additional
capital will be required. Furthermore, certain equipment and receivable
financing as well as existing term loans in place are contingent on compliance
with stringent financial covenants. The Combined Company will pursue equity
and/or debt financing in the near future to meet its funding requirements. The
issuance of equity or convertible debt securities would result in dilution of
the voting control of existing stockholders of the Combined Company and could
result in dilution to earnings per share. The issuance of debt securities would
provide to the holders of those securities seniority over the holders of JTS
Common Stock issued in the Merger. There can be no assurance that the Combined
Company will be able to maintain its current financing facilities or obtain
additional financing as needed on acceptable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
JTS."
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
69
<PAGE> 77
INFORMATION REGARDING ATARI CORPORATION
BUSINESS OF ATARI
Atari was incorporated under the laws of Nevada in May 1984. From 1984 to
1992, Atari designed, manufactured and marketed proprietary personal computers
and video games and related software. Over the past several years, Atari has
undergone significant change. In 1992 and 1993, Atari significantly downsized
operations, decided to exit the computer business and focused on its video game
business. As a result, revenues from computer products as a percentage of total
revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales
of entertainment systems and related software and peripheral products and the
receipt of royalties represented the balance of revenues in each such year.
These actions resulted in significant restructuring charges for closed
operations and write-downs of computer and certain video game inventories in
1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that Jaguar would ever become a broadly accepted video game console or
that Jaguar technology would be broadly adopted by software title developers. As
a result, Atari decided to significantly downsize its Jaguar operations. This
downsizing resulted in significant reductions in Atari's workforce, and
significant curtailment of research and development and sales and marketing
activities for Jaguar and related products. Accordingly, Atari decided to focus
its efforts on selling its inventory of Jaguar and related products and to
emphasize its existing licensing and development activities related to
multimedia entertainment software for various platforms. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices. Despite the
introduction of four additional game titles in the first quarter of 1996, sales
of Jaguar and related software have remained disappointing due to uncertainty
about Atari's commitment to the Jaguar platform, increased price competition and
pending competitive product introductions. As a result of continued
disappointing sales, management revised estimates and wrote-down inventory by an
additional $5.0 million in the first quarter of 1996. As of the end of May 1996,
Atari had approximately 90,000 units of Jaguar in inventory.
PRODUCTS
Atari's principal products are described below:
Jaguar Entertainment System. Atari introduced its 64-bit Jaguar
interactive multimedia entertainment system in late November 1993 into selected
markets. During 1994, Atari rolled out a nationwide program and commenced
initial shipments into Europe. From its launch through the end of 1994, Jaguar's
suggested retail price was $249.99. As a result of competition and cost
reductions, during the first quarter of 1995, Atari reduced the retail price of
Jaguar to $149.99. The current retail price of Jaguar is $99.99. Despite its
substantially lower retail price, sales of Jaguar continue to be disappointing.
Volume sales of Jaguar and related software in 1996 have consisted primarily of
a large order from a new European customer. Atari is also pursuing wholesale
sales channels in the U.S. as well as licensing opportunities. There can be no
assurance that Atari's substantial unsold inventory of Jaguar and related
software can be sold at current or reduced
70
<PAGE> 78
prices, if at all. In addition, any further decrease in the value of such
inventory could result in additional inventory write-downs by Atari.
The Jaguar is a 64-bit interactive multimedia system that incorporates two
proprietary chips developed by Atari which are specialized for multimedia
entertainment. The proprietary chips include four processors (graphics
processing unit, object processor, blitter and digital signal processor) and a
standard Motorola 68000 microprocessor. The computational speed of the system is
approximately 44 MIPS and the bus bandwidth is 106.4 megabytes per second. The
video features include 24-bit graphics with up to 16.8 million colors and a 3-D
engine which can render 3-D shaded or texture mapped polygons in real time. The
sound system is based on a high-speed custom digital signal processor dedicated
to audio. The audio is 16-bit compact disk ("CD") quality from cartridge-based
software, and can be processed from simultaneous sources of audio data. This
allows for very realistic sounds in the software, including human voices.
Through the use of a compression technology customized by Atari (called
"JAGPEG"), software developers can compress data to the point that a 100-megabit
game can fit into a 16-megabit ROM cartridge. This allows for more exciting
experiences both visually and in game play due to the vast amount of data
available.
Jaguar Software Titles. From 1994 through 1995, Atari developed titles for
the Jaguar primarily under contract with third party software developers. To
date, Atari has published approximately 45 software titles for the Jaguar. These
titles include an array of licensed and nonlicensed titles, some of which
utilize 3-D graphics, high speed animation, 16.8 million colors, full motion
video, motion capture techniques and 16-bit stereo sound. Atari's software
library includes titles which are cartridge based (ROM chips) and CD based.
Since 1995, the development of titles for Jaguar has been curtailed
substantially and Atari is currently developing a very limited number of titles
which it expects to publish in either cartridge or CD format. In addition to
Atari's software development efforts, in 1994 and 1995 Atari licensed
independent software vendors ("ISVs") to develop and publish titles for the
Jaguar. Atari is not aware of any current development of Jaguar titles by ISVs
and does not expect any such development in the foreseeable future.
Jaguar Peripherals. Atari offers a CD-ROM peripheral for the Jaguar that
enables software end users to have full motion video clips and more complex
games than are available on cartridges. Publishers can take advantage of lower
media cost and quicker turnaround on orders with CD-ROM software as compared to
a ROM cartridge. The CD-ROM peripheral is a double speed player that can play
Jaguar video games, regular audio CD's and CD + G (graphics). The suggested
retail price of the CD-ROM peripheral is $149.99. The success of the CD-ROM
peripheral is substantially dependent on the size of the installed base of
cartridge-based Jaguar consoles.
PC Software. As a result of Atari's investment in game design, art and
programming for its Jaguar software, Atari has ported certain of its Jaguar
titles to the IBM PC compatible platform. Atari intends to publish and/or
license these titles in 1996. In this regard, Atari commenced shipment of the PC
CD-ROM version of Tempest 2000 in Europe during the first quarter of 1996.
Library of Titles. In 1996, Atari plans to increase its efforts to license
titles from its game library to third party publishers. Atari has over 100
titles in its game library, including the following:
<TABLE>
<S> <C> <C> <C> <C>
Asteroids Combat Iron Soldier RealSport Baseball Tempest
Battlezone Crystal Castles Major Havoc RealSport Football Warbird
Bentley Bear Earthworld Millipede Space War Warlords
Breakout Food Fight Missile Command Star Raiders Yar's Revenge
Centipede Pong
</TABLE>
COMPETITION
The video game business is intensely competitive. Since its introduction in
late 1993, Jaguar has failed to achieve broad market acceptance. Atari does not
expect that Jaguar, even at its substantially reduced price, will ever become a
broadly accepted video game console, or that Jaguar technology will be broadly
adopted by software title developers. The video game industry is also
characterized by unpredictable and rapid shifts in the popularity of certain
platforms, by severe price competition, and by frequent new technology and
product
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<PAGE> 79
introductions. In this regard, numerous companies have introduced or have
developed and are expected to introduce video game consoles that are or may
become competitive with Jaguar. In addition, an increasing number of
entertainment titles are being developed for or ported to the PC platform. Most
of Atari's competitors have greater experience and expertise in 3D graphics and
multimedia technology and have substantially greater engineering, marketing and
financial resources than Atari. Jaguar presently competes with products offered
by the following companies:
- Nintendo commenced development, in collaboration with Silicon Graphics,
Inc., of the Nintendo 64 player, expected to be released in Autumn 1996
in the United States. Nintendo also sells the 16 bit Super NES at a
retail price of $99.95.
- Sega commenced shipment of the Sega Saturn in the United States in May
1995 with a current retail price of $299.00. Sega also sells the 16 bit
Genesis at a retail price of $99.95.
- Sony released the Sony PlayStation in the United States in late 1995 with
a current retail price of $299.00.
- The 3DO Company licenses the 3DO Interactive Multiplayer System console
architecture for retail sale worldwide.
MARKETING AND DISTRIBUTION
Atari distributes its products domestically through various independent
channels. Jaguar is sold primarily through national retailers, consumer
electronic specialty stores and distributors of electronic products. European
sales are conducted from Atari's European headquarters in London, U.K. Jaguar
and Atari's PC titles are sold in European markets through substantially the
same channels of distribution as those in the United States. Net sales outside
North America for fiscal years 1995, 1994 and 1993 constituted approximately
44%, 40% and 75%, respectively, of total net revenues. No single customer
accounted for 10% or more of total net revenues for the years ended December 31,
1995, 1994 or 1993.
RESEARCH AND DEVELOPMENT
Most of Atari's products, including Jaguar, were developed by its internal
engineering and software groups as well as independent software developers under
contract with Atari. Atari's research and development expenses totaled $5.4
million, $5.8 million and $4.9 million in 1995, 1994, and 1993, respectively.
Atari has significantly downsized its research and development efforts and
currently has five employees dedicated to such efforts. As a result, Atari
expects its research and development expenses to decline substantially in 1996.*
Atari's current development efforts are dedicated to developing a limited
number of Jaguar software titles and porting certain existing Jaguar titles to
the PC platform. As part of this development process, Atari has agreements with
third parties to develop and/or license properties. Under these agreements,
Atari will make payments to these parties as either development fees and/or
advance royalties, and is obligated to make certain minimum royalty guarantees
on future sales. There can be no assurance that all payments for development
fees and/or advance royalties will be recoverable through future sales of
products.
MANUFACTURING
Atari has placed no manufacturing orders for the Jaguar console since
mid-1995. Based on current and expected sales and inventory levels, Atari does
not intend to pursue additional Jaguar manufacturing. The Jaguar console unit
was assembled in the United States by a third-party subcontractor under a
manufacturing arrangement. The agreement may be canceled by either party with 90
days' notice. Jaguar software products
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
72
<PAGE> 80
and accessories are manufactured by several suppliers and are assembled by
subcontractors. Atari believes that it could readily replace these sources of
supply and assembly, if necessary.
INTELLECTUAL PROPERTY RIGHTS
Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas
other than coin-operated arcade video game use. Atari also has a portfolio of
other intellectual properties including patents, trademarks, and copyrights
associated with its video game and computer businesses. Atari believes its
patents, trademarks and other intellectual property are important assets. As of
December 31, 1995, Atari held over 150 patents in the United States and other
jurisdictions which expire from 1996 to 2010 and had applications pending for
three additional patents. There can be no assurance that any of these patent
rights will be upheld in the future or that Atari will be able to preserve any
of its other intellectual property rights. Atari has in the past received
communications from third parties asserting rights to certain of its
intellectual property. Atari has also been involved in several major lawsuits
regarding its intellectual property, including a suit with Nintendo which was
settled in March 1994 and a suit with Sega which was settled in September 1994.
In the event any third party were to make a valid claim with respect to Atari's
intellectual property and a license were not available on commercially
reasonable terms, Atari's business, financial condition and results of
operations would be materially and adversely affected. Litigation, which has in
the past and could in the future result in substantial costs and diversion of
resources, may also be necessary to enforce Atari's patents or other
intellectual property rights or to defend against third-party infringement
claims. The occurrence of litigation relating to patent infringement or other
intellectual property matters, regardless of the outcome, could have a material
adverse effect on Atari's business, financial condition and results of
operations.
BACKLOG
Orders are usually placed by purchasers on an as-needed basis, are
sometimes cancelable before shipment, and are usually filled from inventory
shortly after receipt. Atari currently has a substantial inventory of finished
products and product components for which there are no orders. Although Atari is
taking steps to realize revenue from such inventory, Atari recognized
substantial inventory write-downs in 1995 and the first quarter of 1996 and
there can be no assurance that additional write-downs will not be required.
EMPLOYEES
Due to disappointing sales of Jaguar and related products, Atari reduced
its workforce from 101 persons at December 31, 1994 to 73 persons at December
31, 1995 and 31 persons at March 31, 1996. Atari had 22 employees at June 19,
1996, including 15 in the United States and seven outside the United States.
None of the employees are represented by a labor union. Atari considers its
employee relations to be good.
PROPERTIES
Atari leases its 7,200 square feet headquarters facility in Sunnyvale,
California under a lease which expires in 2001. Atari also leases a 20,200
square feet warehouse facility in Santa Clara, California, a 33,600 square feet
international sales facility in Slough, England and a 19,400 square feet vacant
facility in Viannen, Holland. Atari also holds certain properties in Southern
California and Texas for sale. Some of these properties are currently being
leased by Atari. These properties are reported as real estate held for sale in
the Atari Consolidated Financial Statements. See Note 7 of Notes to Atari
Consolidated Financial Statements.
LEGAL PROCEEDINGS
Atari is a defendant in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara by Citizen America
Corporation, a former supplier, in February 1994 seeking damages of
approximately $900,000 for alleged breach of contract and related claims. Atari
believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is a defendant and counter claimant in a civil action for alleged
breach of contract brought in U.S. District Court for the Northern District of
New York, case number 95 Civ. 1945, by Tradewell, Inc., a New
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York corporation, seeking specific performance for release of goods having a
value of $1.6 million. Atari has counterclaimed seeking specific performance for
the purchase of media or, alternatively, damages in the amount of $3.3 million.
As a result of a partial settlement, Atari now seeks damages of approximately
$1.5 million. Atari believes this action will have no material adverse effect on
its business, financial condition or results of operations.*
Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara brought against Philips
Laser Magnetic Storage ("Philips") for breach of contract and breach of implied
covenant of good faith and fair dealing arising out of Philips' failure to
deliver goods to Atari. Philips has filed a counterclaim seeking damages in
excess of $3.0 million. Atari believes this action will have no material adverse
effect on its business, financial condition or results of operations.*
Atari is a plaintiff in a civil action brought in the Superior Court of the
State of California in and for the County of Santa Clara and removed to the
United States District Court, Northern District of California brought against
Probe Entertainment Limited for breach of contract and related claims.
Counterclaims have been filed against Atari for alleged breach of contract.
Atari believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is not aware of any other pending legal proceedings against Atari and
its consolidated subsidiaries other than routine litigation incidental to their
normal business.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE> 82
SELECTED CONSOLIDATED FINANCIAL DATA OF ATARI
The following selected consolidated financial data of Atari have been
derived from the historical consolidated financial statements of Atari, included
elsewhere herein, with the exception of the Atari Consolidated Statement of
Operations Data prior to fiscal 1993 and the Atari Consolidated Balance Sheet
Data prior to December 31, 1994 which were derived from historical consolidated
financial statements not included herein. The information set forth below should
be read in conjunction with Atari's Consolidated Financial Statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations of Atari. The unaudited quarterly financial data reflect
all adjustments (which include only normal, recurring adjustments), which are,
in the opinion of management, necessary to state fairly the results for the
periods presented. The results for such periods are not necessarily indicative
of the results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............ $ 1,272 $ 4,874 $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Operating loss............ (7,149) (5,158) (53,665) (24,047) (47,499) (79,008) (18,683)
Income (loss) from
continuing
operations(1).......... (806) (4,473) (50,158) 9,394 (48,866) (82,719) 23,659
Income (loss) before
extraordinary credit... (806) (4,473) (50,158) 9,394 (48,866) (73,719) 23,659
Net income (loss)......... (806) (4,426) (49,576) 9,394 (48,866) (73,615) 25,619
Per common share data:
Income (loss) from
continuing
operations............. $ (0.01) $ (0.07) $ (0.79) $ 0.16 $ (0.85) $ (1.44) $ 0.41
Income (loss) before
extraordinary credit... (0.01) (0.07) (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)......... (0.01) (0.07) (0.78) 0.16 (0.85) (1.28) 0.44
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Current assets..................... $ 55,976 $65,126 $113,188 $51,388 $109,551 $239,296
Working capital.................... 47,200 55,084 92,670 33,896 75,563 159,831
Total assets....................... 68,406 77,569 131,042 74,833 138,508 253,486
Current liabilities................ 8,776 10,042 20,518 17,492 33,988 79,465
Long-term obligations.............. 42,354 42,354 43,454 52,987 53,937 48,492
Shareholder's equity............... 17,276 25,173 67,070 4,354 50,583 125,529
</TABLE>
- ---------------
(1) Includes a gain from the sale of marketable securities of $6.3 million in
1996, a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
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<PAGE> 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ATARI
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors -- Risk Factors Related
to the Business of Atari" and elsewhere in this Joint Proxy
Statement/Prospectus.
Over the past several years, Atari has undergone significant change. In
1992 and 1993, Atari significantly downsized operations, decided to exit the
computer business and focused on its video game business. As a result, revenues
from computer products as a percentage of total revenues declined from 67% in
1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and
related software and peripheral products and the receipt of royalties
represented the balance of revenues in each such year. These actions resulted in
significant restructuring charges for closed operations and write-downs of
computer and certain video game inventories in 1992 and 1993.
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995 as Atari continued to invest
heavily in Jaguar game development, entered into arrangements to publish certain
licensed titles and reduced the retail price for its Jaguar console unit. Atari
attributes the poor performance of Jaguar to a number of factors including (i)
extensive delays in development of software for the Jaguar which resulted in
reduced orders due to consumer concern as to when titles for the platform would
be released and how many titles would ultimately be available, and (ii) the
introduction of competing products by Sega and Sony in May 1995 and September
1995, respectively.
By late 1995, Atari recognized that despite the significant commitment of
financial resources that were devoted to the Jaguar and related products, it was
unlikely that Jaguar would ever become a broadly accepted video game console or
that Jaguar technology would be broadly adopted by software title developers. As
a result, Atari decided to significantly downsize its Jaguar operations. This
downsizing resulted in significant reductions in Atari's workforce, and
significant curtailment of research and development and sales and marketing
activities for Jaguar and related products. Accordingly, Atari decided to focus
its efforts on selling its inventory of Jaguar and related products and to
emphasize its existing licensing and development activities related to
multimedia entertainment software for various platforms. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices. Despite the
introduction of four additional game titles in the first quarter of 1996, sales
of Jaguar and related software have remained disappointing due to uncertainty
about Atari's commitment to the Jaguar platform, increased price competition and
pending competitive product introductions. As a result of continued
disappointing sales, management revised estimates and wrote-down inventory by an
additional $5.0 million in the first quarter of 1996. As of the end of May 1996,
Atari had approximately 90,000 units of Jaguar in inventory.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 were $14.6 million compared to $38.7 million for
1994. Sales of Jaguar and related products represented 68% and 76% of total
revenues for 1995 and 1994, respectively, and sales of other products and
royalties represented the balance of revenues in each such year. The reduction
in revenues was primarily the result of lower unit volumes of Jaguar products
and lower average selling prices of Jaguar and certain of its software titles.
In the first quarter of 1995, Atari reduced the suggested retail price of Jaguar
from its original price of $249.99 to $149.99. The current suggested retail
price of Jaguar is $99.99. As a result of the Jaguar price reductions, the
substantial curtailment of sales and marketing activities for Jaguar and the
substantial curtailment of efforts by Atari and independent software developers
to develop additional software
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<PAGE> 84
titles for Jaguar, Atari expects sales of Jaguar and related products to decline
substantially in 1996 and thereafter.*
Cost of revenues for 1995 was $44.2 million compared to $35.2 million for
1994. Included in cost of revenues for 1995 were accelerated amortization and
write-offs of capitalized game software development costs of $16.6 million and
inventory write-downs of $12.6 million primarily relating to Jaguar products. As
a result of these charges and lower selling prices for Jaguar products and
provisions for returns and allowances and price protection, gross margin for the
year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or
9.2% of revenues. Included in cost of revenues for 1994 were write-downs of
inventory of $3.6 million and amortization and the write-off of capitalized game
software development costs of $1.5 million. As of December 31, 1995, Atari had
approximately 100,000 units of the Jaguar console in inventory and there can be
no assurance that substantial additional write-downs will not be necessary.
Research and development expenses for 1995 were $5.4 million compared to
$5.8 million for 1994. During 1995 and 1994, a significant number of Atari
employees and consultants were devoted to developing hardware and software for
the Jaguar, and Atari contracted with third-party software developers to develop
Jaguar software titles. As a result of Jaguar's poor sales performance, in the
third and fourth quarters of 1995, Atari accelerated its amortization of
contracted software development which resulted in charges in those quarters of
$6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994,
Atari had capitalized software development costs of $758,000 and $5.1 million,
respectively. In the fourth quarter of 1995, Atari eliminated its internal
Jaguar development teams and other development staff as titles for Jaguar were
completed. As a result, Atari expects research and development expenses will be
substantially lower for the foreseeable future.*
Marketing and distribution expenses for 1995 were $12.7 million compared to
$14.7 million for 1994. Such costs included television and print media,
promotions and other activities to promote Jaguar. Due to the substantial
curtailment of the Jaguar marketing program, Atari expects these expenses will
be substantially lower for the foreseeable future.*
General and administrative expenses for 1995 were $5.9 million compared to
$7.2 million for 1994. The decrease in such expenses was primarily a result of
staff reductions, reduced legal fees and other operating costs. Due to the
substantial reduction in general and administrative personnel in 1995 and the
first quarter of 1996, Atari expects these expenses will be substantially lower
for the foreseeable future.*
Atari experienced a gain on foreign currency exchange of $13,000 for 1995
compared to a gain of $1.2 million for 1994. These changes were a result of
lower foreign asset exposure and a greater percentage of sales made in U.S.
dollars which further reduced exposure to foreign currency transaction
fluctuations.
In 1994, Atari received $2.2 million in connection with the settlement of
litigation between Atari, Atari Games Corporation and Nintendo. In 1994, Atari
also reached an agreement with Sega, which resulted in a gain of $29.8 million,
after contingent legal fees, and the sale of 4,705,883 shares of Atari Common
Stock to Sega at $8.50 per share for an aggregate of $40.0 million.
During 1995, Atari sold a portion of its holdings in Dixon PLC, a retailer
in England, and realized a gain of $2.4 million, of which $1.8 million was
realized in the fourth quarter of 1995. In the first quarter of 1996, Atari sold
the remaining portion of its holdings and realized a gain of $6.1 million. The
1995 gain of $2.4 million together with other income items resulted in a total
other income of $2.7 million compared to $484,000 for 1994.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE> 85
For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Debentures. In 1995, Atari repurchased a portion of the Atari
Debentures and realized a gain of $582,000. As of December 31, 1995, the
outstanding balance of these debentures was $42.4 million.
Interest income for 1995 and 1994 was $3.1 million and $2.0 million,
respectively. The increase in interest income was primarily attributable to
higher average cash balances in 1995.
As a result of Atari's operating losses, there was no provision for income
taxes in 1995. See Note 11 to the Atari Consolidated Financial Statements.
As a result of the factors discussed above, Atari reported a net loss for
1995 of $49.6 million compared to net income of $9.4 million in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues for 1994 were $38.7 million compared to $29.1 million for
1993. The increased revenues were primarily a result of Atari's national rollout
of the Jaguar and related products. Sales of Jaguar products represented 76% of
revenues in 1994 compared to 13% of revenues in 1993. Jaguar was introduced in
selected markets in late 1993, and approximately 100,000 units were sold by the
end of 1994 at a suggested retail price of $249.99. Sales of Atari's proprietary
personal computers and certain discontinued video game products represented 24%
of revenues for 1994 compared to 87% of revenues for 1993.
Gross margin for 1994 was $3.5 million, or 9.2% of revenues, compared to a
gross loss of $13.7 million for 1993. Included in cost of revenues are inventory
write-downs of $3.6 million and $18.1 million for 1994 and 1993, respectively,
and a write-off of capitalized game software development costs of $804,000 in
1994. These write-downs of proprietary personal computers and video game
products to estimated realizable values were made concurrently with the
introduction and change in marketing focus to Jaguar products.
Research and development expenses for 1994 were $5.8 million compared to
$4.9 million for 1993. The increase resulted from increased expenditures for the
Jaguar product line.
Marketing and distribution expenses for 1994 were $14.7 million compared to
$9.0 million for 1993. The increase in expenditures was primarily the result of
the national rollout in 1994 of the Jaguar. Such costs included television and
print media promotions and other activities.
General and administrative expenses for 1994 were $7.2 million compared to
$7.6 million for 1993. The marginally lower general and administrative expenses
were primarily due to Atari's restructuring program in 1993. During 1993, Atari
made provisions for restructuring totaling $12.4 million, which included closing
many of Atari's operations in Europe, Asia and Australia, including, but not
limited to, severance payments, rental commitments and other closure costs.
For 1994, Atari experienced a gain on foreign currency exchange of $1.2
million compared to a loss on exchange of $2.2 million in 1993. This change was
a result of fluctuation in exchange rates, a lower foreign asset exposure and a
greater percentage of sales made in U.S. dollars, thereby further reducing
exposure to foreign currency transaction fluctuations.
For each of 1994 and 1993, interest expense was approximately $2.3 million
on the Atari Debentures.
Atari utilized net operating loss carryforwards and, as a result, there was
no provision for income taxes in 1994.
As a result of the factors discussed above, Atari reported net income for
1994 of $9.4 million compared to a net loss of $48.9 million in 1993.
QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995
Total revenues for the first quarter of 1996 were $1.3 million compared to
$4.9 million for the first quarter 1995, a reduction of $3.6 million. Sales of
Jaguar and related products represented 41% and 72% of total revenues for the
first quarter of 1996 and 1995, respectively, and sales of other products and
royalties represented the balance of revenues in each such year. The reduction
in revenues was primarily the result of lower unit volumes of Jaguar products
and lower average selling prices of Jaguar and certain of its software
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<PAGE> 86
titles. As a result of the Jaguar price reductions and the substantial
curtailment of sales and marketing activities for Jaguar, Atari expects sales of
Jaguar and related products to decline substantially in 1996 and thereafter.
Cost of revenues for the first quarter of 1996 was $1.2 million compared to
$3.8 million for the first quarter of 1995. The reduction in cost of revenues is
consistent with the reduction in revenues.
In the first quarter of 1996, the Company wrote-down inventory by $5.0
million relating to Jaguar products. These write-downs resulted from
management's revised estimates of sales resulting from continued disappointing
sales of Jaguar. Despite the introduction of four additional game titles in the
first quarter of 1996, sales of Jaguar and related products have remained
disappointing due to uncertainty about Atari's commitment to the Jaguar
platform, increased price competition and pending competitive product
introductions. Atari is pursuing alternative sales channels and licensing
opportunities. Atari expects the market to remain highly competitive throughout
the year.
Research and development expenses were $200,000 for the first quarter of
1996 compared to $1.8 million for the first quarter of 1995. The substantial
decline is due to the elimination of the Company's internal Jaguar development
team and other development staff in the fourth quarter of 1995. As of March 31,
1996, Atari had capitalized $900,000 of development cost associated with certain
CD titles.
Marketing and distribution expenses were $800,000 for the first quarter of
1996 compared to $2.6 million for the first quarter of 1995. The reduction was
due to the curtailment of marketing activities for the Jaguar.
General and administrative expenses for the first quarter of 1996, were
$1.3 million compared to $1.8 million for the first quarter of 1995. The
decrease in such expenses was primarily the result of staff reductions, reduced
rent and other reductions in operating costs.
Other Income (Expense), net for the first quarter of 1996 was $290,000
compared to $200,000 for the first quarter of 1995. Gains on sales of marketable
securities were $6.3 million for the first quarter of 1996 compared to $107,000
for the first quarter of 1995. The 1996 gain represented the sale of the
remaining portion of Atari's holdings in Dixon PLC, a retailer in England.
During the 1995 quarter Atari repurchased a portion of its 5 1/4% Convertible
Subordinated Debentures and recorded an extraordinary credit of $47,250.
Interest income for the first quarter of 1996 was $300,000 compared to $1.0
million for the first quarter of 1995, reflecting Atari's significantly lower
cash balances during the first quarter of 1996. Interest expenses for the 1996
and 1995 quarters were $600,000 which represents interest due on Atari's 5 1/4%
Convertible Subordinated Debentures. In April 1996, Atari made an annual payment
of interest on its bonds that totaled $2.2 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Atari held cash and marketable securities of $50.6
million compared to $81.0 million at December 31, 1994. The decrease in cash and
marketable securities was primarily the result of operating losses incurred
during 1995.
During 1995, Atari sold a portion of its holding in Dixon PLC., a U.K.
retailer, and realized a gain on the sale of these securities in the amount of
$2.4 million. In the first quarter of 1996, Atari sold its remaining interest in
Dixon PLC. and realized a gain of $6.3 million. As of December 31, 1995, Atari's
balance sheet reflected an unrealized gain on marketable securities of $7.1
million.
As of March 31, 1996 , Atari held cash and marketable securities of $23.7
million compared to $50.6 million as of December 31, 1995 for a reduction of
$26.9 million.
In connection with the Merger, on February 13, 1996, Atari extended a
bridge loan to JTS in the amount of $25.0 million. In event the Merger is not
consummated, the bridge loan can be converted into shares of JTS Series A
Preferred Stock at the option of Atari or JTS, subject to certain conditions.
See "The Proposed Merger and Related Transactions -- Related
Transactions -- Atari Loan to JTS."
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<PAGE> 87
As of March 31, 1996, Atari had $42.4 million of its 5 1/4% convertible
subordinated debentures due April 29, 2002 outstanding. The market value of the
Atari Debentures was approximately $31.0 million at May 29, 1996. The Atari
Debentures may be redeemed at Atari's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into Atari Common
Stock at $16.3125 per share. A default with respect to other indebtedness of
Atari in an aggregate amount exceeding $5 million would result in an event of
default whereby the Atari Debentures would be due and payable immediately.
Atari believes its existing cash balances are sufficient to meet its
requirements at least for the next 12 months.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of Atari" and
elsewhere in this Joint Proxy Statement/Prospectus.
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<PAGE> 88
MANAGEMENT OF ATARI
EXECUTIVE OFFICERS AND DIRECTORS
Following the Merger, Atari and JTS have agreed that Jack Tramiel, Chairman
of the Board of Directors of Atari, and Michael Rosenberg, a member of Atari's
Board of Directors, will serve as members of the Board of Directors of the
Combined Company. In addition, Atari and JTS have agreed that Jack Tramiel or a
person designated by him shall serve as a member of each committee of the Board
of Directors of the Combined Company. None of the executive officers of Atari
prior to the Merger will serve as executive officers of the Combined Company.
The following table lists the names, ages and positions held by all
directors and executive officers of Atari as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH ATARI
------------------------------- ----------------------------------------------
<S> <C> <C>
Jack Tramiel 67 Chairman of the Board
Sam Tramiel 45 Director, President, Chief Executive Officer
and Chief Financial Officer
Leonard I. Schreiber 81 Director
Michael Rosenberg 68 Director
August J. Liguori 44 Director
Laurence M. Scott, Jr. 50 Vice President, Manufacturing and Operations
Leonard Tramiel 41 Vice President, Advanced Software Development
</TABLE>
JACK TRAMIEL and a group of associates purchased the assets and liabilities
of Atari from Warner Communications in May 1984 and Mr. Tramiel has served as
Chairman of Atari's Board of Directors since such time. Mr. Tramiel served as
Atari's Chief Executive Officer from May 1984 through May 1988.
SAM TRAMIEL has served as President and as a member of the Board of
Directors of Atari since June 1984, as Chief Executive Officer of Atari since
May 1988 and as Chief Financial Officer of Atari since March 1996.
LEONARD I. SCHREIBER has served as a member of the Board of Directors of
Atari since May 1984. Mr. Schreiber was a partner of Schreiber & McBride, a
private law firm, from 1980 to 1995.
MICHAEL ROSENBERG has served as a member of the Board of Directors of Atari
since May 1987. Mr. Rosenberg has served as Chief Executive Officer of Ross &
Roberts, Inc., a plastics company, since September 1987. Mr. Rosenberg is a
Certified Public Accountant.
AUGUST J. LIGUORI has served as a member of the Board of Directors of Atari
since 1992. Since March 1996, Mr. Liguori has served as Vice President, Finance
of Marvel Entertainment Group, Inc. From October 1986 to February 1996, Mr.
Liguori served in several positions with Atari, including Vice President and
General Manager of Atari U.S. Corp., an Atari subsidiary, from October 1986 to
October 1989, Vice President of Atari Corporation from October 1989 to October
1990, and Vice President, Finance, Treasurer and Chief Financial Officer from
October 1990 to February 1996.
LAURENCE M. SCOTT, JR. has served as Vice President, Manufacturing and
Operations of Atari since 1992. Prior to joining Atari, Mr. Scott served as
President of Radofin Electronics (FE) Ltd., a contract manufacturing firm, from
1978 to 1991.
LEONARD TRAMIEL has served Vice President, Advanced Software Development of
Atari since March 1991. Mr. Tramiel served as Vice President, Software
Development of Atari from July 1984 to March 1991.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Executive officers
of Atari are appointed by and serve at the discretion of the Atari Board of
Directors. Jack Tramiel is the father of Sam Tramiel and Leonard Tramiel.
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<PAGE> 89
COMPENSATION OF DIRECTORS
Each of the non-employee directors of Atari, including Mr. Rosenberg,
receives $500 for each meeting of the Atari Board of Directors which such
individual attends. In 1995, each non-employee director received an option to
purchase 20,000 shares of Atari Common Stock pursuant to Atari's 1986 Stock
Option Plan, as amended. Such options have an exercise price of $2.69 and vest
over a period of five years.
PRINCIPAL STOCKHOLDERS OF ATARI
The following table sets forth information, as of June 28, 1996, with
respect to beneficial ownership of Atari Common Stock owned by (a) each person
(or group of affiliated persons) known by Atari to be the beneficial owners of
more than 5% of Atari's Common Stock, (b) each of Atari's directors, (c) each of
Atari's executive officers and (d) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES PERCENT NUMBER OF SHARES OF PERCENT OF SHARES OF
BENEFICIALLY BENEFICIALLY THE COMBINED THE COMBINED
NAME OF BENEFICIAL OWNER OWNED OWNED(1) COMPANY COMPANY(2)
- -------------------------------------- ------------ ------------ ------------------- --------------------
<S> <C> <C> <C> <C>
Jack Tramiel(3)....................... 12,494,616 19.6% 12,494,616 12.2%
455 South Mathilda Avenue
Sunnyvale, California 94086
Time Warner, Inc.(4).................. 8,600,000 13.5 8,600,000 8.4
75 Rockefeller Plaza
New York, New York 10019
Sam Tramiel(5)........................ 5,662,567 8.8 5,662,567 5.5
455 South Mathilda Avenue
Sunnyvale, California 94086
Leonard Tramiel(6).................... 5,263,946 8.2 5,263,946 5.1
455 South Mathilda Avenue
Sunnyvale, California 94086
Sega Holdings USA Inc ................ 4,705,883 7.4 4,705,883 4.6
303 Twin Dolphin Drive, Suite 200
Redwood City, California 94065
Garry Tramiel(7)...................... 4,055,000 6.3 4,055,000 3.9
455 South Mathilda Avenue
Sunnyvale, California 94086
August J. Liguori(8).................. 262,000 * 262,000 *
Michael Rosenberg(9).................. 45,000 * 45,000 *
Leonard I. Schreiber(10).............. 214,000 * 214,000 *
Laurence M. Scott, Jr.(11)............ 10,000 * 10,000 *
All directors and executive officers 23,952,129 37.3 23,952,129 23.3
as a group (seven persons)(12)......
</TABLE>
- ---------------
* Less than 1%
(1) Based on 63,854,718 shares of Atari Common Stock outstanding as of June 28,
1996.
(2) Based on (i) 63,854,718 shares of Atari Common Stock outstanding as of June
28, 1996 (assuming no exercise of outstanding options after such date) and
(ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,263,866 shares
of JTS Common Stock outstanding as of June 18, 1996 (assuming no exercise
of outstanding options and warrants after such date).
(3) Includes 11,597,315 shares held by Jack Tramiel's wife. Also includes
155,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
benefit of Mr. Tramiel's minor grandchildren. Also includes 4,000 shares
subject to options.
(4) Includes 7,100,000 shares held by Warner Communications Investors, Inc.,
1,500,000 shares held by Warner Communications, Inc.
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<PAGE> 90
(5) Includes 352,062 shares held by Sam Tramiel as custodian on behalf of his
children, 8,100 shares held by Mr. Tramiel's wife and an aggregate of
97,416 shares held by Mr. Tramiel's minor children. Also includes 225,000
shares subject to options.
(6) Includes 40,000 shares held by Leonard Tramiel's wife and 10,000 shares
held by Mr. Tramiel's minor children. Also includes 55,000 shares subject
to options.
(7) Includes 55,000 shares subject to options.
(8) Includes 165,000 shares subject to options.
(9) Includes 20,000 shares subject to options.
(10) Includes 20,000 shares subject to options.
(11) Represents shares subject to options.
(12) Includes 499,000 shares subject to options.
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<PAGE> 91
INFORMATION REGARDING JTS CORPORATION
BUSINESS OF JTS
JTS was founded as a Delaware corporation in February 1994 to design,
manufacture and market hard disk drives for use in notebook computers and
desktop personal computers. JTS has developed two product families of hard disk
drives: the Nordic product family for notebook computers, which includes disk
drives with 3-inch form factors and two or three recording disks; and the
Palladium product family for desktop personal computers, which includes disk
drives with 3.5-inch form factors and two or three recording disks. JTS is also
developing a family of 5.25-inch form factor disk drives for the desktop
personal computer market. JTS markets and sells its products to original
equipment manufacturers ("OEMs") for incorporation into their notebook and
desktop computer systems and subsystems. JTS acquired several technical
personnel and rights to certain key technology utilized in JTS' disk drives in
connection with bankruptcy proceedings involving Kalok Corporation in February
1994. All JTS disk drives are currently manufactured at JTS' subsidiary, Moduler
Electronics, located in Madras, India.
INDUSTRY BACKGROUND
The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Hewlett-Packard,
Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations
that produce disk drives for incorporation into their own computers as well as
for sale to other OEMs. In 1995, the top six disk drive vendors accounted for
approximately 88% of the unit market share.
In 1995, approximately 89 million hard disk drives were shipped,
representing a 30% increase over the prior year. Approximately 70 million, or
77%, of the hard disk drives shipped in 1995 were sold as part of desktop
personal computers, and approximately 11 million, or 12%, were sold as part of
notebook computers. In 1995, Seagate, Quantum and Western Digital controlled
approximately 61% of the desktop hard disk drive market share, and IBM and
Toshiba controlled approximately 70% of the notebook hard disk drive market
share.
All hard disk drives used in notebook and desktop personal computers
incorporate the same basic technology. One or more rigid disks are attached to a
spin motor assembly which rotates the disks at a constant speed within a sealed,
contamination-free enclosure. Typically, both surfaces of each disk are coated
with a thin layer of magnetic material. Magnetic heads record and retrieve data
from discrete magnetic domains located on pre-formatted concentric tracks in the
magnetic layers of the rotating disks. An actuator positions the head over the
proper track upon instructions from the drive's electronic circuitry. Most disk
drives are "intelligent" disk drives which incorporate an embedded ASIC
controller to manage communications with the computer.
The size of a hard disk drive is referred to as the drive's "form factor"
or "footprint." At present, the vast majority of personal desktop and notebook
computers incorporate disk drives with either 3.5-inch or 2.5-inch form factors.
The size of the form factor determines the size of the recording disk and,
hence, dictates the recording capacity of the disk drive. Disk drives with
smaller form factors must incorporate more disks and, as a result, more heads to
offer the same recording capacity as larger form factor drives. Therefore,
because heads and disks are the most expensive components in the hard disk
drive, larger form factor disk drives are relatively less expensive to
manufacture than smaller form factor drives with comparable recording
capacities. As a result, 3.5-inch drives are better suited for desktop personal
computers, which are not subject to the size constraints of notebook computers.
In contrast, 2.5 inch drives, because of their reduced size as well as power
conservation features and lightweight design, presently dominate the notebook
computer market.
In recent years, the computer industry has witnessed the emergence of
several trends that JTS believes will continue to drive demand for innovative
disk drive products. First, new data- and image-intensive applications are
generating increased demand for greater storage capacity and performance at a
lower cost for both business and home computer users. JTS believes that this
trend will continue as more applications are developed that enable individuals
to easily access, store and manipulate digital information and as computers
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<PAGE> 92
become a more common home appliance. At the same time, a significant percentage
of personal computing is occurring on mobile devices, such as notebook
computers, which represented approximately 15% of all personal computers sold in
1995. Third, the personal computer industry is migrating towards lower profile
computing devices, both in the desktop and notebook arenas. The pressure to
shrink the dimensions, increase the capacities and lower the costs of personal
computers has presented manufacturers, especially notebook designers, with a
substantial and ongoing technical challenge.
JTS STRATEGY
JTS' objective is to become a leading supplier of hard disk drives to the
notebook and desktop computer markets. JTS' strategy to achieve this objective
includes the following key elements:
- Establish 3-inch form factor technology for notebook computers. JTS
has developed a family of 3-inch form factor disk drives, the Nordic
product family, for use in notebook computers as an alternative to 2.5-inch
drives, the current industry standard. JTS Nordic disk drives are similar
to 2.5-inch drives in terms of weight and power consumption but have a
modestly larger footprint, although the low-profile design of the 3-inch
drive results in its total volume being the same as the 2.5-inch drive. The
disks used in JTS' 3-inch drives have 82% greater recording surface area
per drive than disks used in 2.5-inch drives, and, therefore, greater
storage capacities can be achieved at the same areal densities (megabytes
per square inch) as 2.5-inch drives. JTS began shipment of Nordic drives in
the second calendar quarter of 1996. Nordic drives are expected to be
offered at prices that are competitive with the prices of 2.5-inch drives.*
- Develop innovative disk drives for desktop personal computers. JTS
has developed a 3.5-inch family of disk drives, the Palladium family, for
desktop personal computers. Like the Nordic family of disk drives, the
Palladium family is characterized by a low-profile, fully-encapsulated
design and a simplified, highly-integrated platform approach. JTS began
volume production and shipment of Palladium drives in September 1995 and is
presently shipping Palladium drives with capacities of 1.0 and 1.6
gigabytes. JTS is also developing a family of 5.25-inch form factor disk
drives for the desktop market with many of the same design features as JTS'
Nordic and Palladium drives, but with significantly greater recording
capacities.
- Achieve low product cost structure. All of JTS' manufacturing
operations and some of its design operations take place in Madras, India,
which offers a low-cost and well-trained labor force. In order to
capitalize upon the low-cost labor base in India, JTS has adopted a
manufacturing strategy of selective vertical integration. For example, JTS
is presently vertically integrated in the manufacture of particularly
labor-intensive components such as head stacks. JTS' disk drive products
also share a significant amount of common componentry, thereby reducing
manufacturing and development costs.
- Form strategic alliances with key participants in the computer
industry. JTS has entered into a Development Agreement and Purchase
Agreement with Compaq pursuant to which Compaq has agreed to design at
least one of JTS' disk drives into Compaq's products and to purchase a
minimum number of disk drives subject to certain conditions. JTS intends to
establish similar arrangements with other major computer OEMs and notebook
computer manufacturers. In addition, JTS has entered into a Technology
Transfer and License Agreement with Western Digital, which provides for the
cross-licensing of JTS' and Western Digital's 3-inch disk drive technology
and licenses Western Digital to act as a second source of 3-inch drives to
Compaq.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 93
PRODUCTS
JTS' disk drives are characterized by the following design features:
- Low Profile Design. JTS' hard disk drives have a lower profile than
competing hard disk drives with comparable form factors and recording
capacities. The low profile design is accomplished by a high level of
electronic integration that allows for the printed circuit board assembly
("PCBA") to be placed in a small corner of the drive in the same plane as
the recording disks (this design is known as "board in the plane of the
media" packaging). Most competing drives place the PCBA under the drive
mechanics which significantly increases the height of the drive.
- Simplified and Highly-Integrated Platform Approach. JTS' product
families share a simplified, highly-integrated platform approach
characterized by a reduced number of components. JTS believes that its
PCBAs have the fewest components in the industry because of a
highly-integrated ASIC controller. JTS believes this simplified platform
approach combined with common technology among its product families
facilitates the introduction of new technology and utilizes research
personnel in a more efficient manner, thereby reducing development costs.
- Fully-Encapsulated Design. JTS disk drives are fully-encapsulated
with no exposed PCBA and contain either a standard fixed drive connector or
optional multi-insertion connector. The encapsulated design eliminates the
possibility of damage to the PCBA due to electrostatic discharge and
improves the electromagnetic interference immunity of the drive.
- Common Componentry. The Nordic and Palladium product families share
a substantial percentage of common electronic componentry which facilitates
the simultaneous development of products for the notebook and desktop
computer markets and reduces time to market for JTS products. For example,
JTS' product families share spindle motors, certain head stack components
and controller ASICs.
Nordic Product Family
JTS' Nordic product family is designed for notebook computers. Nordic
drives measure 90mm wide, the same width as a floppy diskette, and are
classified as 3-inch drives. The Nordic drives incorporate low-profile
architecture, measuring 10.5mm high for the two disk version and 12.5mm for the
three disk version. Nordic drive capacities presently range from 640 to 810
megabytes for the two disk version and 1.2 gigabytes for the three disk version.
The 10.5mm and 12.5mm Nordic drives are significantly thinner than the 17mm or
19mm high 2.5-inch drives, while the surface area of the recording disk in a
Nordic drive is 82% greater than a 2.5-inch disk. The greater surface area of
the disk media used in the Nordic drives allows for greater recording capacity
using the same areal densities. At the same time, the Nordic drives consume
approximately the same amount of power as 2.5-inch drives, making them well
suited for battery operated applications.
The Nordic product family is being developed in conjunction with Western
Digital, which has entered into a Technology Transfer and License Agreement with
JTS obligating Western Digital to make milestone payments and to share
advancements in 3-inch technology and licensing Western Digital to serve as a
second source of Nordic products to Compaq. In addition, JTS has entered into a
Development Agreement with Compaq which committed Compaq to partially fund
Nordic development costs and obligated Compaq to purchase a minimum number of
disk drives over a two year period. Shipments to Compaq of Nordic disk drives
commenced in the second calendar quarter of 1996. Volume shipments of Nordic
drives to Compaq are expected to commence in the third quarter of fiscal 1997.*
See "-- Relationship with Compaq" and "-- Western Digital Arrangement."
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 94
Palladium Product Family
Palladium disk drives are 3.5-inch form factor drives designed for desktop
personal computers. The Palladium product family includes two and three disk
versions with capacities presently ranging from 540 megabytes to 1.6 gigabytes.
The Palladium drives incorporate low-profile architecture similar to Nordic
drives, measuring 1/2-inch in height compared to competing drives that typically
measure 1-inch in height. The low profile design allows two disk drives to be
configured into the same space required for one competing 3.5-inch drive. JTS
began volume production and shipments of Palladium drives in September 1995.
5.25-inch Family of Hard Disk Drives
JTS is developing a family of 5.25-inch form factor hard disk drives for
desktop personal computers. The 5.25-inch drives will initially include three
disks and have a capacity of 3.5 gigabytes. The 5.25-inch drives are being
designed to meet the increased data storage demands of advanced multimedia
applications. Like the Nordic and Palladium drives, the 5.25-inch drives will
have a low-profile, fully-encapsulated design and a simplified,
highly-integrated platform approach. JTS expects to begin volume production and
shipment of 5.25-inch drives in the fourth quarter of fiscal 1997.*
RELATIONSHIP WITH COMPAQ
In June 1994, JTS entered into a Development Agreement with Compaq pursuant
to which the two companies established a plan for the development of JTS' Nordic
family of disk drives. Pursuant to the terms of the Development Agreement,
Compaq has paid $500,000 to JTS for product development expenses. In addition,
JTS has granted to Compaq certain pricing preferences and agreed to pay
royalties to Compaq on sales of Nordic disk drives to third parties during the
term of the agreement. Compaq has been granted a license to use the Nordic
designs to manufacture Nordic drives on a royalty-free basis in the event JTS
fails to meet the agreed upon production schedule. The Development Agreement
also restricts JTS' ability to sublicense Nordic technology. The Development
Agreement has a five year term, which will automatically be renewed under
certain circumstances and may be terminated by either party only with cause. JTS
and Compaq have also entered into a Purchase Agreement related to future
purchases by Compaq of Nordic drives. See "-- Patents and Licenses."
WESTERN DIGITAL ARRANGEMENT
In February 1995, JTS entered into a Technology Transfer and License
Agreement with Western Digital. Under the terms of the agreement, Western
Digital obtained manufacturing and marketing rights to JTS' 3-inch hard disk
drive products. In return, Western Digital is obligated to make payments to JTS
totalling $6.0 million upon the achievement of certain development milestones
and is licensed to act as a second source of Nordic drives to Compaq. As of
January 28, 1996, Western Digital had made milestone payments to JTS in an
aggregate amount of $5.3 million. In February 1995, Western Digital also made a
$4.1 million equity investment in JTS as part of the transaction. The parties
have reciprocal, royalty-free, cross-license agreements for future 3-inch drive
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch disk drive technology. Under certain circumstances,
the Technology Transfer and License Agreement restricts JTS from sublicensing
Nordic technology until 1998. See "-- Patents and Licenses."
MANUFACTURING
JTS' manufacturing strategy is to be a low-cost producer of hard disk
drives for the notebook and desktop personal computer markets. All of JTS'
manufacturing operations are currently conducted at its subsidiary,
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 95
Moduler Electronics, located in Madras, India, which JTS acquired in April 1996.
See "JTS' Acquisition of the Disk Drive Division of Moduler Electronics." As of
April 26, 1996, 1,760 individuals were employed at Moduler Electronics. The
Madras facility presently occupies 85,000 square feet in a single building,
4,000 square feet of which are designated a "clean room" environment. At this
facility, JTS is adding production lines and expanding its clean room
environment. JTS believes that locating its manufacturing operations in India is
an important element of its low-cost manufacturing strategy due to the
availability of a high-quality, low-cost technical labor pool. In 1995, JTS was
granted a five year "tax holiday" with respect to sales of JTS' products in and
outside of India. In addition, Moduler Electronics is located in the Madras
export processing zone and, therefore, enjoys a tax exemption with respect to
profits generated from sales outside of India. Such exemption may be terminated
at any time, in which event JTS would become subject to significantly greater
taxes on sales of disk drives outside of India. Other benefits associated with
conducting business in India, which historically has experienced considerable
political instability, are subject to the vagaries of the Indian government, and
may be withdrawn at any time.
The manufacture of high-capacity hard disk drives is a complex process,
requiring a "clean room" environment, the assembly of precision components
within narrow tolerances and extensive testing to ensure reliability. JTS'
manufacturing process is performed in three stages: subassembly, final assembly
and final test. The subassembly group builds mechanical subassemblies and flex
cables and modifies PCBAs. Printed circuit board assembly is performed by
outside vendors. The final assembly group assembles all subassemblies and
components into the mechanical head/disk assembly ("HDA"), writes servo
information, and performs preliminary testing. To avoid contamination by dust
and other particles which may impair the functioning of the disk drive, most
assembly takes place under controlled "clean room" conditions. The final test
group connects PCBAs to HDAs, burns-in completed drives and performs final
tests.
The principal components used in JTS' manufacturing process are disks,
heads and PCBAs. JTS has two qualified sources for PCBAs and is in the process
of qualifying second sources for disks and heads. JTS' Indian subsidiary imports
approximately 85% of the componentry used in the manufacture of its disk drives
from outside of India. In the past, JTS has experienced delays in obtaining
certain integrated circuits required in the assembly of PCBAs, and there can be
no assurance that such delays, or difficulties in obtaining those or other
components, will not occur in the future. JTS' inability to obtain essential
components or to qualify additional sources as necessary, if prolonged, could
have a material adverse effect on JTS' business, operating results and financial
condition. In the second quarter of 1996, JTS was advised that its sole supplier
of certain head stack components intends to decrease production and ultimately
discontinue manufacturing of such components, and, therefore, JTS will be
required to secure a new supply arrangement with another manufacturer of such
components.
JTS has developed a comprehensive quality assurance program. All
significant electrical and mechanical parts received from outside sources are
inspected or tested, normally on a sample basis, and testing and burn-in of
certain components and subassemblies occurs during assembly. In addition, JTS
performs several in-process quality checks and inspections, both in the PCBA and
HDA processes, and a final drive-level quality check prior to packaging.
Additional performance and reliability testing is done on a sample basis from
each week's production units in order to monitor quality levels and provide
corrective action to the factory processes. JTS generally warrants its products
against defects in design, materials and workmanship for three years. JTS
maintains in-house service facilities for refurbishment or repair of its
products in Madras, India.
Due to the common componentry of the Nordic and Palladium disk drives, JTS
believes that it enjoys considerable flexibility in managing inventory levels
and meeting its customers' production requirements. In addition, JTS believes
that common componentry reduces the amount of scrap materials generated in the
manufacturing process and facilitates the training of operators in producing new
products, thus reducing production costs.
JTS' longer-term manufacturing strategy calls for selective vertical
integration to reduce JTS' manufacturing costs. At present, JTS is vertically
integrated in certain labor intensive components, such as head stacks, thereby
capitalizing on the low-cost labor base in India. JTS also believes that its
proprietary controller ASIC is less expensive and more easily upgradeable than
commercially available integrated circuits.
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RESEARCH AND DEVELOPMENT
JTS operates in an industry characterized by rapid technological change and
short product life cycles. As a result, JTS' success will depend upon its
ability to develop new products, successfully introduce these products to the
market and ramp up production to meet customer demand. Accordingly, JTS is
committed to timely development of new products and the continuing evaluation of
new technologies. JTS' research and development efforts are presently
concentrated on broadening its existing 3.5- and 3-inch product lines and
introducing new generations of products with increased capacity and improved
performance at a lower cost. In this regard, JTS is presently designing various
high performance features, such as MR heads, new ASIC/channel technology and
advanced head lifters, into each of its hard disk drive product families. In
June 1996, JTS entered into a Heads of Agreement with Headway Corporation
("Headway"), a joint venture between Hewlett-Packard and Komag Corporation,
pursuant to which Headway has agreed to act as the exclusive supplier of MR
heads for JTS' future products.
JTS expects to begin shipment of Palladium drives with recording capacities
of up to 2.5 gigabytes and Nordic drives with recording capacities of up to 2.0
gigabytes in the fourth quarter of fiscal 1997.* In addition, JTS is developing
a family of 5.25-inch disk drives for the desktop personal computer market. JTS
expects to begin shipment of 5.25-inch drives in the fourth quarter of fiscal
1997.* For the fiscal years ended January 31, 1995 and 1996, JTS' research and
development expenses totalled approximately $3.7 million and $13.4 million,
respectively. As of January 28, 1996, JTS employed 137 individuals in
engineering support and research and development.
SALES AND MARKETING
JTS sells its products through its direct sales force operating in the
United States, Europe and Asia. In addition, JTS' hard disk drives are sold into
the Latin American markets by FutureTech International, Inc. ("Futuretech"), a
products distributor. JTS presently has a sales office in Taiwan that employs
three individuals. The Taiwan sales office markets the JTS Nordic disk drives to
local notebook computer manufacturers and works closely with the manufacturers
to design JTS' disk drives into their products. In addition, JTS has independent
sales representatives located in Japan, Germany and South Africa who market JTS'
Nordic disk drives to notebook computer manufacturers. JTS employs two sales
representatives in the United States who market JTS' 3.5-inch disk drives to
OEMs. International sales accounted for 81% of revenues in fiscal 1996. See
"Notes to JTS Financial Statements."
A limited number of customers account for a significant percentage of JTS'
total revenue. In fiscal 1996, Olidata S.p.A., Connexe Peripherals, Ltd., Liuski
International, Inc. and Aashima Technology, B.V. accounted for 34%, 12%, 11% and
10%, respectively, of JTS' total revenue. In the quarter ended April 28, 1996,
Peacock Systems GmbH, Markvision International S.A. and FutureTech accounted for
43%, 18% and 14%, respectively, of JTS' total revenue. JTS expects that sales to
a relatively small number of OEMs will account for a substantial portion of its
net revenues for the foreseeable future, although the companies that comprise
JTS' largest customers may change from period to period. In particular, based on
existing contracts with FutureTech and Compaq, JTS expects that revenues from
these companies will account for a substantial percentage of JTS' revenues in
the foreseeable future. The loss of, or decline in orders from, one or more of
JTS' key customers would have a material adverse effect on JTS' business,
operating results and financial condition.
PATENTS AND LICENSES
JTS holds no patents and has licensed in a substantial portion of the
technology used in its hard disk drives pursuant to license agreements with Pont
Peripherals Corporation, formerly DZU Corporation ("Pont"), TEAC Corporation
("TEAC") and Western Digital. If such license agreements were prematurely
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 97
terminated or if JTS were enjoined from relying upon such licenses due to JTS'
alleged or actual breach of such agreements, JTS would be prevented from
manufacturing disk drives incorporating technology subject to such licenses. As
a result, JTS' business, operating results and financial condition would be
materially adversely affected. JTS has filed three United States patents
applications. Although JTS believes that patent protection could offer
significant value, the rapidly changing technology of the computer industry
makes JTS' future success dependent primarily upon the technical competence and
creative skills of its personnel rather than on patent protection.
A license with respect to certain key technology employed in JTS' Nordic
disk drives was granted to JTS by TEAC pursuant to a license agreement dated
February 4, 1994 (the "TEAC Agreement"). The TEAC Agreement also includes a
cross-license with respect to Nordic technology developed jointly by TEAC and
JTS, which will be owned jointly by the two companies, and granted certain
rights to TEAC with respect to Nordic technology developed independently by JTS,
which will be owned solely by JTS. Under the TEAC Agreement, JTS is obligated
under certain circumstances to make royalty payments to TEAC in connection with
the sale of future generation disk drives incorporating Nordic technology that
is jointly developed by JTS and TEAC or independently developed by TEAC. JTS is
not obligated to make royalty payments with respect to developments to Nordic
technology made independently by JTS, but JTS is obligated to license such
developments to TEAC on a royalty-free basis. The TEAC Agreement restricts JTS'
ability to sublicense certain technology licensed to JTS. TEAC originally
acquired its rights in certain Nordic disk drive technology pursuant to the
Agreed Order Compromising Controversies dated February 4, 1994 (the "Order")
governing the distribution of the assets of Kalok Corporation. The Order imposes
certain restrictions on JTS' right to sublicense, manufacture and sell certain
disk drive technology of Kalok Corporation that was transferred to both TEAC and
Pont pursuant to the Order.
In June 1994, JTS entered into a Development Agreement with Compaq which
imposes certain restrictions on JTS' ability to sublicense Nordic technology to
third parties. In addition, the Development Agreement imposes a royalty
obligation upon JTS with respect to the sale of Nordic disk drives to third
parties during the term of the agreement. Moreover, Compaq has a right of first
refusal with respect to all production of Nordic drives until June 1997 and a
right of first refusal to license and/or acquire future JTS technologies and
products during the term of the agreement. JTS has also granted certain
non-exclusive manufacturing and marketing rights with respect to certain Nordic
technology and developments thereto within the term of the Development
Agreement. See "-- Relationship with Compaq."
In January 1995, JTS and Pont entered into a cross-licensing agreement (the
"Pont Agreement") pursuant to which JTS granted to Pont a royalty-free,
nonexclusive, perpetual license to use certain JTS and jointly-developed hard
disk drive technology, to make developments to such technology and to
manufacture and sell in certain territories hard disk drives incorporating such
technology. In return, Pont granted to JTS a royalty-free, nonexclusive,
perpetual license to use certain Pont and jointly-developed hard disk drive
technology, to make developments to such technology and to manufacture and sell
in certain territories hard disk drives incorporating such technology. In
addition, Pont was obligated to make certain royalty payments to JTS for a
limited period of time with respect to the sale of hard disk drives
incorporating certain JTS technology.
In February 1995, the TEAC Agreement, the Order, the Pont Agreement and the
Compaq Development Agreement were each amended to permit the license and
sublicense by JTS to Western Digital of certain rights in Nordic disk drive
technology. In addition, the amendment to the TEAC Agreement provides that JTS
will pay certain royalties to TEAC, under certain circumstances, upon the sale
of Nordic drives for a limited period of time. The Pont Agreement was also
amended to expand the territories in which JTS may manufacture and sell hard
disk drives incorporating technology subject to the agreement. JTS and Western
Digital concurrently entered into a Technology Transfer and License Agreement
pursuant to which Western Digital obtained certain manufacturing and marketing
rights to Nordic disk drive technology. The parties have reciprocal,
royalty-free, cross-license agreements for future Nordic technology
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch hard disk drive technology. See "-- Western Digital
Arrangement."
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COMPETITION
The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Hewlett-Packard,
Toshiba and IBM, have in-house or "captive" disk drive manufacturing operations
that produce disk drives for incorporation into their own computers as well as
for sale to other OEMs. JTS believes that competition in the disk drive industry
is based primarily upon time to market, product availability, performance,
product capacity and price. JTS believes that it competes favorably with respect
to each of these factors. Many of JTS' competitors have broader product lines
than JTS, and all have significantly greater financial, technical and marketing
resources. There can be no assurance that JTS will be able to develop and
manufacture products on a timely basis with the quality and features necessary
in order to be competitive. High volume disk drive users typically utilize from
two to four suppliers but desire to limit the number of sources. As a result, it
may be necessary for JTS to displace competitors in many circumstances in order
to increase its net sales. In addition, JTS faces competition from the
manufacturing operations of its current and potential OEM customers, which could
initiate or increase internal production and reduce or cease purchasing from
independent disk drive suppliers such as JTS. Moreover, the hard disk drive
industry is characterized by intense price competition. If other disk
manufacturers add significant capacity or demand for disk drives decreases, the
resulting pricing pressures could adversely affect JTS' business, operating
results and financial condition. JTS has experienced pricing pressures in the
past, and there can be no assurance that JTS will not experience increased price
competition in the future. Any increase in price competition could have a
material adverse effect on JTS' business, operating results and financial
condition. If JTS' current and prospective customers and end users were to adopt
alternative data storage products, including optical storage, flash memory and
holographic storage, JTS' business, operating results and financial condition
could be adversely affected.
BACKLOG
JTS' sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, quantity reductions or rescheduling without
significant penalties. Changes in forecasts, cancellations, rescheduling and
quantity reductions may result in excess inventory costs, inventory losses and
under-utilization of production capacity and may have a material adverse effect
on JTS' business, operating results and financial condition. As a result of the
foregoing, JTS' backlog as of any particular date may not be representative of
actual sales for any succeeding period.
EMPLOYEES
As of April 26, 1996, JTS had 1,936 full-time employees, of whom 158 were
located in San Jose, California, 1,760 were located in Madras, India, 13 were
located in Singapore and five were located in Taipei, Taiwan. Of the full-time
employees, 1,490 are engaged in manufacturing, 12 in marketing, sales and
service, 108 in product development and 18 in administration and finance.
The market for well-trained employees with disk drive industry experience
is intensely competitive. JTS believes that its future success will depend on
its ability to continue to attract and retain a team of highly motivated and
skilled individuals. None of JTS' employees is represented by a labor
organization. JTS believes that its employee relations are good.
PROPERTIES
JTS presently leases facilities in San Jose, California, Madras, India,
Singapore and Taipei, Taiwan. JTS' executive and administrative headquarters are
located in a 52,000 square foot building in San Jose. The lease on this facility
expires in July 2000, and has an option to renew for four years, subject to
certain restrictions.
The Madras facility comprises approximately 85,000 square feet and is used
for all of JTS' manufacturing operations. JTS does not presently lease the
Madras facility, but rather occupies the facility pursuant to allotment letters
from the Development Commissioner of the Madras Export Processing Zone. Such
allotment letters authorize JTS to occupy the premises indefinitely so long as
the space is used in the
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reasonable conduct of JTS' business and rents are paid in a timely fashion. JTS
currently intends to increase the size of the Madras facility by 65,000 square
feet by the end of fiscal 1997.*
The Singapore office comprises approximately 1,500 square feet and is used
for JTS' purchasing operations in Southeast Asia. The lease for this facility
expires in October 1997.
The Taiwan sales office has approximately 1,144 square feet and is used for
JTS' marketing and sales operations in Taiwan. The lease for this facility
expires in July 1997.
LEGAL PROCEEDINGS
JTS has been served with a complaint filed in the Superior Court of the
State of California in and for the County of Santa Clara by Venture Lending &
Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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JTS AND MODULER ELECTRONICS UNAUDITED SELECTED FINANCIAL DATA
The following unaudited selected pro forma combined financial data of JTS
and Moduler Electronics presents the pro forma combined financial position and
results of operations of JTS and Moduler Electronics as of and for the year
ended January 28, 1996 and for the three months ended April 28, 1996 and April
30, 1995. This unaudited selected pro forma financial data combine JTS and
Moduler Electronics and give effect to the JTS and Moduler Electronics
combination, which was accounted for as a purchase. The April 28, 1996 balance
sheet reflects the acquisition of Moduler Electronics which took place on April
4, 1996. Intercompany balances and transactions have been eliminated in the
presentation. This data should be read in conjunction with the Unaudited Pro
Forma Financial Statements and related notes, and the historical financial
statements and related notes of JTS and Moduler Electronics which are included
elsewhere herein. All amounts are stated in thousands, except per share amounts.
<TABLE>
<S> <C> <C>
Statement of Operations Data:
Year Ended January 28, 1996 (Pro forma)
Net revenues................................................ $ 18,777
Gross margin (deficit)...................................... (14,849)
Research and development.................................... 13,375
Selling, general and administrative expenses................ 5,777
Operating loss.............................................. (34,001)
Net loss.................................................... (35,170)
Loss per common share(1).................................... (7.63)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 28, 1996 APRIL 30, 1995
---------------- --------------
<S> <C> <C>
Quarter ended April 28, 1996 and April 30, 1995 (Pro forma)
Total revenues.............................................. $ 17,581 $ 2,077
Operating loss.............................................. (12,098) (1,203)
Net loss.................................................... (12,820) (1,143)
Net loss per share(1)....................................... (1.47) (.26)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28,
1996
APRIL 28, 1996 --------------
---------------- (PRO FORMA)
(ACTUAL)
<S> <C> <C>
Balance Sheet Data:
Current assets.............................................. $ 30,474 $ 12,722
Equipment and leasehold improvements, net................... 16,212 14,795
Total assets................................................ 46,871 28,111
Current liabilities......................................... 61,669 30,615
Long-term debt.............................................. 6,381 6,248
Redeemable Series A Preferred Stock......................... 29,697 29,696
Stockholders' deficit....................................... (50,876) (38,448)
</TABLE>
- ---------------
(1) Excludes JTS Series A Preferred Stock, warrants and options as their effect
would be antidilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF JTS
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping hard disk drives. From October 1995
through January 1996, JTS shipped 98,000 Palladium disk drives in 540 megabyte,
850 megabyte and 1 gigabyte configurations primarily to customers in the United
States and Europe. During the second quarter of calendar year 1996, JTS began
shipment of Nordic disk drives to Compaq under a volume purchase agreement.
There can be no assurance that JTS will be successful in the production and
shipment of these products.
Since its inception, JTS has incurred significant losses which have
resulted from the substantial costs associated with the design, development and
marketing of new products, the establishment of manufacturing operations and the
development of a supplier base. JTS' ability to achieve successful operations
will depend upon a number of factors, including market acceptance of JTS'
products, the introduction of new products in a timely and cost-effective
manner, and the volume production of disk drives at acceptable manufacturing
yields. In addition, JTS will need significant additional financing resources
over the next several years for facilities expansion, capital expenditures,
working capital, research and development and vendor tooling. There can be no
assurance that JTS will achieve successful operations.
All of JTS' products are manufactured in Madras, India by its Moduler
Electronics subsidiary. In March 1995, JTS entered into a verbal agreement to
acquire Moduler Electronics and subsequently assumed operational and management
control of certain aspects of Moduler Electronics' disk drive business. In April
1996, JTS acquired 90% of Moduler Electronics and, accordingly, the Pro Forma
Combined Condensed Financial Statements of JTS and Moduler Electronics are the
bases for the following discussion and analysis.
PRO FORMA YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
For the fiscal year ended January 28, 1996, JTS' pro forma results reflect
a net loss of $35.2 million, compared to a net loss of $4.8 million for JTS in
fiscal 1995.
Total pro forma revenues for fiscal 1996 were $18.8 million and consisted
of product sales and license revenues. Net product sales for fiscal 1996 were
$13.5 million as JTS initiated product shipments to customers in October 1995.
License revenues for fiscal 1996 were $5.3 million as JTS achieved certain
development milestones under its Technology Transfer and License Agreement with
Western Digital which was executed in February 1995. Of total revenues, 81% were
derived from European customers and 19% were derived from customers in the
United States. During fiscal 1996, JTS' product sales were concentrated among
several key customers with Olidata Spa, Connexe Peripherals, Ltd., Liuski
International, Inc. and Aashima Technology B.V. accounting for 34%, 12%, 11% and
10% of total product sales, respectively. JTS had no revenues in fiscal 1995.
Pro forma gross margin for fiscal 1996 was a deficit of $14.8 million. The
deficit resulted principally from costs and expenses due to low manufacturing
yields and high per unit costs associated with the start-up of manufacturing
operations. Cost of product sales for fiscal 1996 also included a $4.3 million
provision for inventory allowances. The principal reasons for these allowances
include approximately $3.6 million for obsolete and unsaleable inventory,
approximately $345,000 for the costs of repairing defective products and a
reserve of approximately $500,000 for various other allowances. JTS anticipates
incurring future inventory allowances, the level of which will depend upon a
number of factors including manufacturing yields, new product introductions,
maturity or obsolescence of product designs, inventory levels and competitive
pressures.*
The hard disk drive industry has been characterized by ongoing rapid price
erosion and resulting pressure on gross margins. JTS expects that hard disk
drive prices will continue to decline in the future and that
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 102
competitors will offer products which meet or exceed the performance
capabilities of JTS products. Due to such pricing pressures, JTS' future gross
margin will be substantially dependent upon its ability to control manufacturing
costs, improve manufacturing yields and introduce new products on a timely
basis.*
Research and development expenses for fiscal 1996 were $13.4 million
compared to $3.7 million for fiscal 1995. The increase is primarily attributable
to salaries and benefits resulting from the significant increase in staffing
required for product design and the development of manufacturing processes.
Specifically, during fiscal 1996, the number of employees in research and
development increased by 112 to a total of 137 employees at the end of fiscal
1996. In addition, expenses for supplies, materials and other costs associated
with design and pilot production of new products were approximately $5.0 million
in fiscal 1996 compared to approximately $1.5 million in fiscal 1995. JTS
expects that research and development expenses will continue to increase
throughout fiscal 1997 in absolute dollars but that such expenses will decline
as a percent of sales.*
Selling, general and administrative expenses for fiscal 1996 were $5.8
million compared to $1.5 million for fiscal 1995. The major components of these
expenses are salaries and benefits of administrative and marketing and sales
employees, facility costs and professional fees. The growth in these expenses in
fiscal 1996 was required to support the expansion of JTS' operations and the
commencement of marketing and sales efforts. Included in 1996 is a non-cash
charge of $930,000 of amortization of deferred compensation related to the
issuance of common stock to certain officers (see Note 7 to JTS Financial
Statements). JTS expects that selling, general and administrative expenses will
increase throughout fiscal 1997 in absolute dollars but that such expenses will
decline as a percentage of sales.*
QUARTER ENDED APRIL 28, 1996 COMPARED TO QUARTER ENDED APRIL 30, 1995
Revenue for the first quarter of fiscal 1997 was $17.6 million compared to
$2.0 million for the first quarter of fiscal 1996. Revenue for the current
quarter was comprised primarily of sales of the Company's 850 megabyte and 1
gigabyte Palladium 3 1/2-inch disk drives. Minimal product revenues were
recorded in the first quarter of fiscal 1996, as the Company initiated volume
shipments of disk drives in October 1995. However, JTS earned $2.0 million of
technology license revenue during the first quarter of fiscal 1997 as a result
of achieving certain development milestones under the Technology Transfer and
License Agreement with Western Digital. JTS' management expects revenues from
its 850 megabyte drives to be nominal for the rest of the fiscal year and sales
from its 1 gigabyte products to decline in the near future.* JTS recently began
shipment of its 1.6 gigabyte drives, the sales of which are expected to increase
in the near future.* During the second fiscal quarter, the Company will begin
shipment of Nordic 3-inch disk drives to Compaq Computer Corporation under a
volume purchase agreement.* There can be no assurance that product sales will
materialize as expected.
The gross margin for the first quarter of fiscal 1997 was a deficit of $1.8
million compared to a margin of $2.0 million for the first quarter in fiscal
1996. The $3.8 million increase in the gross margin deficit is attributable to
high unit costs associated with the ramp-up of volume production of disk drives.
In order for JTS to realize positive gross margins in the future, the Company
will have to control manufacturing costs, further improve manufacturing yields
and successfully introduce new products on a timely basis.
Research and development expenses were $7.4 million for the first quarter
of fiscal year 1997 compared to $1.7 million for the first quarter of fiscal
year 1996 as a result of a significant increase in the number of employees in
research and development required to meet demand for timely product design. JTS
expects that research and development expenses will continue to increase
throughout fiscal 1997 in absolute dollars but that such expenses will decline
as a percentage of sales.
Selling, general and administrative expenses for the first quarter of
fiscal 1997 were $3.1 million compared to $700,000 for the first quarter of
fiscal 1996. The increase resulted from the expansion of JTS' operations and the
commencement of marketing and sales efforts. Also included is a non-cash charge
of
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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<PAGE> 103
$330,000 related to the amortization of deferred compensation. JTS expects that
selling, general and administrative expenses will increase throughout fiscal
1997 in absolute dollars but that such expenses will decline as a percentage of
sales.
LIQUIDITY AND CAPITAL RESOURCES
As of January 28, 1996, JTS had cash and cash equivalents of $1.4 million.
Of this amount, $380,000 on deposit in India was restricted for use by JTS for a
90 day period beginning on January 28, 1996. On a pro-forma basis, at January
28, 1996, JTS had a working capital deficit of $17.9 million, which included
short term borrowings of $10.4 million. The short term borrowings were used to
finance working capital requirements, and included $4.3 million outstanding
under a bank line of credit and $6.1 million outstanding under bank lines of
credit in India.
Since inception, JTS has acquired approximately $11.0 million in capital
equipment, furniture and fixtures and leasehold improvements. Long term debt
associated with capital acquisitions amounted to approximately $7.9 million at
January 28, 1996. JTS currently expects that approximately $22 million will be
required during calendar year 1996 for capital equipment, tooling and leasehold
improvements, primarily in India.* As of January 28, 1996, JTS had no material
commitments related to such expenditures.
On February 13, 1996, Atari loaned $25.0 million to JTS pursuant to a
Subordinated Secured Convertible Promissory Note (the "Note") which is secured
by substantially all of the assets of JTS. Interest accrues on the unpaid
principal amount of the Note at the rate of 8.5% per annum. The Note provides
that JTS shall repay the outstanding principal and interest under the Note on
September 30, 1996 if the Merger has not occurred prior to such time. In the
event that the Merger Agreement is terminated, either party may, under certain
conditions, elect to convert the outstanding indebtedness under the Note into
shares of JTS Series A Preferred Stock. The Note is expressly subordinated to
outstanding indebtedness in connection with JTS' primary bank loan agreement, up
to an amount of $5.0 million at any one time. In addition, at January 28, 1996,
JTS had approximately $400,000 of unused lines of credit and approximately
$600,000 of letter of credit facilities available from three banks in India. In
March 1996, Moduler Electronics received approval from another Indian bank for a
$10 million term loan to finance capital equipment purchases. See "The Proposed
Merger and Related Transactions -- Related Transactions -- Atari Loan to JTS."
Since its inception, JTS has incurred significant losses which have
resulted from the substantial costs associated with the design, development and
marketing of new products, the establishment of manufacturing operations and the
development of a supplier base. At January 28, 1996, JTS had a working capital
deficit of $17.9 million and a negative net worth of $38.4 million. JTS has yet
to generate significant revenues and cannot assure that any level of future
revenues will be attained or that JTS will achieve or maintain successful
operations in the future. Such factors have raised substantial doubt about the
ability of JTS to continue its operations without achieving successful future
operations or obtaining financing to meet its working capital needs, neither of
which can be assured. The report of independent public accountants on JTS'
financial statements includes an explanatory paragraph describing uncertainties
concerning the ability of JTS to continue as a going concern. See "Notes to JTS
Financial Statements." JTS believes that it will be able to fund operations for
the next 12 months from a combination of funds made available as a result of the
Merger, funds available under its credit facilities, cash flow from operations
and existing cash balances.*
At April 28, 1996, JTS' consolidated balance sheets reflected cash and cash
equivalents of $5.1 million compared to $1.4 million at January 28, 1996. Of the
$5.1 million, approximately $400,000 on deposit in Indian banks was restricted
for use by JTS until certain obligations related to letters of credit are
settled. JTS had a working capital deficit of $31.2 million at quarter end,
which included short term borrowings from Atari of $25 million and $10.3 million
outstanding under bank lines of credit.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including those set forth
in "Risk Factors -- Risk Factors Related to the Business of JTS" and elsewhere
in this Joint Proxy Statement/Prospectus.
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The hard disk drive business is extremely capital intensive, and JTS
anticipates that it will need significant additional financing resources in the
near term for facilities expansion, capital expenditures, working capital,
research and development and vendor tooling. In this regard, JTS has held
discussions with investment banking firms regarding the possibility of raising
additional capital through the issuance of debt or equity securities. In June
1996, JTS retained an investment banking firm to advise JTS with respect to the
private issuance of between $50-100 million of 10-year debt securities
convertible into JTS Common Stock, although the terms of such financing have not
been established and the marketing effort for such financing has not yet
commenced. Recent comparable transactions were priced to yield between 5.5-6.5%
annually and included conversion premiums over the market prices of the Common
Stock of between 20-25%. JTS intends for such financing to close as soon as
practicable after the closing of the Merger and the terms of the debt securities
and the amount of the securities offered will not be determined until the
closing of the financing, if any. There can be no assurance that JTS will be
able to consummate such financing on terms acceptable to JTS or at all. As a
result, the pro forma financial statements included in this Joint Proxy
Statement/ Prospectus do not reflect such transactions. The issuance of equity
or convertible debt securities, upon conversion, would result in dilution of the
voting control of existing stockholders, could result in dilution to earnings
per share and would provide to the holders of convertible debt securities
seniority over the holders of JTS Common Stock issued in the Merger. There can
be no assurance that additional funding will be available on terms acceptable to
JTS or at all. The failure to fund its capital requirements with additional
financing would have a material adverse effect on JTS' business, operating
results and financial condition. Furthermore, certain equipment and receivables
financing as well as term loans made to JTS and Moduler Electronics are
contingent on JTS' ability to comply with stringent financial covenants. In this
regard, Moduler Electronics did not obtain certain debt and equity capital
required under one of its loan agreements. JTS has informed the lender that it
intends to provide such capital by August 1996. In addition, certain of Moduler
Electronics' loan agreements require the lender's consent to mergers and similar
transactions, which could be interpreted to require the consent of the lending
institution to the acquisition of 90% of the capital stock of Moduler
Electronics by JTS. Such consents were not obtained, but the lending institution
has continued to transact business with Moduler Electronics and JTS since JTS'
share acquisition in Moduler Electronics. JTS believes that such matters
regarding the Moduler Electronics loan agreements will not have a material
adverse effect on JTS' business, operating results or financial condition. There
can be no assurance that JTS will be able to maintain its current financing
facilities or obtain additional financing as needed on acceptable terms or at
all. If JTS is unable to obtain sufficient capital, it would be required to
curtail its facilities expansion, capital expenditures, working capital,
research and development and vendor tooling expenditures, which would materially
adversely affect JTS' business, operating results and financial condition.
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MANAGEMENT OF JTS
The following individuals are expected to serve as directors, executive
officers or significant employees of the Combined Company following the Merger.
Their positions at JTS and their ages as of March 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------- ---- ---------------------------------------------
<S> <C> <C>
David T. Mitchell 54 Chief Executive Officer, President and
Director
Sirjang L. Tandon 54 Chairman of the Board of Directors and
Corporate Technical Strategist
Kenneth D. Wing 48 Executive Vice President, Research &
Development Quality/Reliability
W. Virginia Walker 51 Executive Vice President, Finance and
Administration, Chief Financial Officer and
Secretary
Amit Chokshi 41 Executive Vice President, Worldwide
Operations and Managing Director of India
Operations
Steven L. Kaczeus 61 Chief Technical Officer
Alain L. Azan 47 Director
Jean D. Deleage 55 Director
Roger W. Johnson 61 Director
Lip-Bu Tan 36 Director
</TABLE>
MR. DAVID T. MITCHELL joined JTS in May 1995 as Chief Executive Officer and
President and is a member of the Board of Directors of JTS. Prior to joining
JTS, he served as President, Chief Operating Officer and a director of Conner
Peripherals, Inc. commencing in October 1992. Prior to that time, Mr. Mitchell
co-founded Seagate, where he served as President, Chief Operating Officer and
director.
MR. SIRJANG L. TANDON founded JTS in February 1994 and served as its
Chairman of the Board of Directors, Chief Executive Officer and President from
inception until May 1995. Since such time, he has served as Chairman of the
Board of Directors and Corporate Technical Strategist. Prior to founding JTS,
Mr. Tandon founded and was Chief Executive Officer of Tandon Corporation, a
personal computer manufacturing firm. Tandon Corporation filed a petition under
the Federal bankruptcy laws in 1993.
MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President,
Research & Development Quality/Reliability. Prior to joining JTS, Mr. Wing
worked for 14 years at Seagate. During his tenure at Seagate, Mr. Wing served in
several capacities, including Vice President of Process Engineering, Vice
President of Quality, Vice President of Manufacturing Operations and Vice
President of Worldwide Automation. He holds a Bachelor of Science degree in
Science and Engineering and a Master of Science in Mechanical Engineering from
the University of Michigan.
MS. W. VIRGINIA WALKER joined JTS in November 1995 as Executive Vice
President, Finance and Administration, Chief Financial Officer and Secretary.
Prior to joining JTS, Ms. Walker served as Vice President of Finance and Chief
Financial Officer of Scios Inc. from 1985 to 1992 and as Vice President, Finance
and Administration and Chief Financial Officer of Scios Inc. and Scios Nova Inc.
Prior to 1985, Ms. Walker served as Controller for Intersil Inc., a manufacturer
of integrated circuits and at that time a subsidiary of General Electric
Company.
MR. AMIT CHOKSHI joined JTS in June 1995 as Executive Vice President,
Worldwide Operations and Managing Director of India Operations. Prior to joining
JTS, Mr. Chokshi co-founded Dastek Corporation, a hard disk drive manufacturing
company, where he served as Vice President of Marketing/Sales and Operations
until December 1994. Mr. Chokshi has a Bachelor of Science degree in Statistical
Mathematics from Gujarat University, India.
MR. STEVEN L. KACZEUS joined JTS in February 1994 as Chief Technical
Officer. Prior to joining JTS, he founded Kalok Corporation in 1987 and served
in various technical and management positions, most recently as Chairman of the
Board of Directors and Chief Technical Officer. Kalok Corporation filed a
petition under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master
of Science and Bachelor of Science
98
<PAGE> 106
in Mechanical Engineering from the University of Bridgeport and University of
Budapest, Hungary, respectively.
MR. ALAIN L. AZAN became a director of JTS in 1995. In 1985, he joined the
Sofinnova group in France as a charged d'affaires. In 1987, Mr. Azan was
assigned to Sofinnova's United States subsidiary, Sofinnova Inc. Currently, Mr.
Azan serves as Managing General Partner for Sofinnova Ventures Funds I, II and
III. Mr. Azan holds degrees in Sciences Humaines et Economiques from Marseille,
International Trade from C.E.C.E. and Management from INSEAD.
MR. JEAN D. DELEAGE became a director of JTS in 1995. He has served as a
Managing General Partner of Burr, Egan, Deleage & Co., a venture capital firm,
since its formation in 1979. In 1976, he formed Sofinnova, Inc. (the U.S.
subsidiary of Sofinnova). Mr. Deleage holds a Master of Science in Electrical
Engineering from Ecole Superieure d'Electricite and a Ph.D. in Economics from
the Sorbonne. In 1993, he was awarded the Legion of Honor from the French
government in recognition of his career accomplishments. Mr. Deleage is also a
director of DepoTech Corporation and OraVex, Inc.
MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as
Administrator of the United States General Services Administration ("GSA") from
July 1993 to March 1996. From 1984 to 1993, Mr. Johnson served as Chairman of
the Board and Chief Executive Officer of Western Digital. Mr. Johnson received a
Bachelor of Business Administration from Clarkson University and a Master of
Business Administration in Industrial Management from the University of
Massachusetts.
MR. LIP-BU TAN became a director of JTS in 1995. He has served as General
Partner of the Walden Group, a venture capital firm, since 1985. He is also the
founder and Chairman of Walden International Investment Group in Asia. Mr. Tan
received a Bachelor of Science degree from Nanyang University, Singapore, a
Master of Science in Nuclear Engineering from the Massachusetts Institute of
Technology and a Master of Business Administration from the University of San
Francisco, where he served on the Advisory Council and the Board of Trustees.
Mr. Tan is also a director of Creative Technology Ltd. and Premisys
Communications, Inc.
All directors hold office until the next annual meeting of stockholders at
which their term expires and until their successors have been duly elected and
qualified. Executive officers of JTS are appointed by and serve at the
discretion of the Board of Directors of JTS. There are no family relationships
among any of the directors, officers or key employees of JTS.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMBINED COMPANY
JTS does not presently have an Audit Committee. Effective upon the closing
of the Merger, the Audit Committee of the Combined Company's Board of Directors
will consist of Messrs. Jack Tramiel, Michael Rosenberg and Alain L. Azan. The
Audit Committee will make recommendations to the Board regarding the selection
of independent auditors, review the results and scope of audits and other
services provided by JTS' independent auditors, and review and evaluate JTS'
internal audit and control functions.
JTS does not presently have a Compensation Committee. Effective upon the
closing of the Merger, the Compensation Committee of the Combined Company's
Board of Directors will consist of Messrs. Jack Tramiel, Lip-Bu Tan and Jean D.
Deleage. The Compensation Committee will make recommendations concerning
salaries and incentive compensation, award stock options to employees and
consultants under the Combined Company's stock option plans and otherwise
determine compensation levels and perform such other functions regarding
compensation as the Board may delegate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, JTS had no Compensation Committee. Each of the members
of the JTS Board of Directors during fiscal 1996 participated in deliberations
concerning executive officer compensation. David T. Mitchell, a member of JTS'
Board of Directors, has served as Chief Executive Officer and President of JTS
since May 1995. Mr. Sirjang L. Tandon, Chairman of JTS' Board of Directors,
served as Chief Executive Officer and President of JTS from February 1994 to May
1995.
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<PAGE> 107
DIRECTOR COMPENSATION
The members of JTS' Board of Directors do not currently receive any cash
compensation from JTS for their services as members of the Board of Directors or
any committee thereof. Roger W. Johnson, a director of JTS, provides consulting
services to JTS pursuant to a two-year agreement which compensates Mr. Johnson
in the amount of $2,000 per month. Mr. Johnson's consulting agreement expires in
April 1998.
In March 1996, the JTS Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of JTS Common Stock to non-employee directors of JTS
("Non-Employee Directors"). The maximum number of shares of JTS Common Stock
that may be issued pursuant to options granted under the Directors' Plan is
500,000. Pursuant to the terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Board and any former Atari
director appointed to the JTS Board of Directors in connection with the Merger)
who is elected to the JTS Board for the first time after adoption of the
Directors' Plan and each other Non-Employee Director (other than a compensated
Chairman of the Board) who is reelected to the JTS Board at or after the 1998
stockholders' meeting will automatically be granted an option to purchase 50,000
shares of Common Stock on the date of his or her election or reelection to the
Board. Thereafter, each Non-Employee Director (other than a compensated Chairman
of the Board) will automatically be granted an option to purchase an additional
50,000 shares of Common Stock under the Directors' Plan on the date any and all
previous options or stock purchases by such person either under the Directors'
Plan or otherwise become fully vested, as discussed below. Neither directors of
JTS serving on the date the Directors' Plan was adopted nor former directors of
Atari appointed to the JTS Board in connection with the Merger have received
option grants under the Directors' Plan or will receive any such grants in
connection with the Merger, and such individuals are not eligible to receive
such grants until the 1998 stockholders' meeting.
Outstanding options under the Directors' Plan will vest in two equal annual
installments measured from the date of grant. The exercise price of options
granted under the Directors' Plan shall equal the fair market value of the
Common Stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date of grant.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate in March 2006, unless earlier terminated by the
Board.
In the event of the dissolution, liquidation or sale of substantially all
of the assets of JTS, a specified form of merger, consolidation or
reorganization involving JTS or an acquisition transaction resulting in the
change of control of the voting power of JTS' voting securities, options
outstanding under the Plan will automatically become fully vested and will
terminate if not exercised prior to such event.
100
<PAGE> 108
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to or earned by JTS'
Chief Executive Officer and JTS' four other most highly compensated executive
officers (together, the "JTS Named Executive Officers") for services rendered to
JTS during the fiscal year ended January 28, 1996 ("fiscal 1996"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
------------------------------
SECURITIES
RESTRICTED STOCK UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS($) (1) OPTIONS(#)
---------------------------------- -------- -------- ---------------- -----------
<S> <C> <C> <C> <C>
David T. Mitchell (2)............. $168,427 -- -- --
President and Chief Executive
Officer
Sirjang L. Tandon (3)............. 184,615 -- -- --
Chairman of the Board of
Directors
and Corporate Technical
Strategist
Kenneth D. Wing (4)............... 126,752 $82,625 -- 100,000
Executive Vice President,
Research & Development
Quality/Reliability
Amit Chokshi (5).................. 104,327 -- -- --
Executive Vice President,
Worldwide
Operations and Managing
Director of India Operations
Steven L. Kaczeus................. 192,308 -- -- 242,500
Chief Technical Officer
David B. Pearce (6)............... 206,192 -- -- 8,750
Former executive officer
</TABLE>
- ---------------
(1) Mr. Mitchell, Mr. Wing and Mr. Pearce purchased 2,000,000, 300,000 and
450,000 shares of restricted Common Stock of JTS, respectively, during
fiscal 1996 at a per share price of $0.25. The dollar value to the
purchasers of each such purchase, net of the consideration paid by the
purchasers, was zero on the date of each such purchase. No dividends have
been paid or are expected to be paid with respect to the JTS Common Stock
purchased by such individuals.
(2) Mr. Mitchell became Chief Executive Officer of JTS in May 1995. Mr. Mitchell
purchased 2,000,000 shares of restricted JTS Common Stock in fiscal 1996 at
a price of $0.25 per share, 250,000 shares of which were immediately vested.
The remaining 1,750,000 shares are subject to a right of repurchase by JTS
which began lapsing as to 1/48th of such shares monthly commencing on
January 5, 1996.
(3) Mr. Tandon served as Chief Executive Officer of JTS from February 1994 to
May 1995.
(4) Mr. Wing became Executive Vice President, Research & Development
Quality/Reliability of JTS in July 1995. Mr. Wing purchased 300,000 shares
of JTS Common Stock in fiscal 1996 at a price of $0.25 per share. Such
shares are subject to a right of repurchase by JTS which began lapsing as to
one-eighth of such shares in January 1996 and as to 1/48th of such shares
monthly thereafter. Includes forgiveness of $80,000 of loan principal and
accrued interest as specified in Mr. Wing's employment agreement. See
"Employment Agreement."
(5) Mr. Chokshi became Executive Vice President, World of JTS in June 1995.
(6) Mr. Pearce purchased 450,000 shares of restricted JTS Common Stock in fiscal
1996 at a price of $0.25 per share, 253,125 shares of which were immediately
vested. The remaining 196,875 shares were subject to a right of repurchase
by JTS which began lapsing as to 1/42nd of such shares monthly commencing on
January 15, 1996. Mr. Pearce's employment with JTS terminated in March 1996,
at which time an aggregate of 257,873 shares of his JTS Common Stock had
vested.
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<PAGE> 109
EMPLOYMENT AGREEMENT
In June 1995, Kenneth D. Wing, Executive Vice President, Research &
Development Quality/Reliability of JTS, entered into an employment agreement
with JTS which provides for an annual base salary of $225,000, eligibility for
annual bonuses and a severance package that, under certain circumstances,
provides that Mr. Wing will continue to receive his base salary until June 1997
in the event he is terminated prior to such time. In addition, the employment
agreement provides for a $160,000 loan which was forgiven as to 50% of principal
and interest accrued thereon in January 1996 and shall be forgiven as to the
remainder in January 1997, provided Mr. Wing's employment with JTS continues
through such time.
STOCK OPTION PLAN
In April 1996, JTS amended and restated its 1995 Stock Option Plan (the
"1995 Plan"), which was adopted in March 1995. Under the 1995 Plan, as amended
and restated (the "Restated Plan"), an aggregate of 9,000,000 shares of JTS
Common Stock have been reserved for issuance upon exercise of options granted to
employees, officers and directors of and consultants to JTS. As of June 18,
1996, options to purchase 3,937,313 shares of JTS Common Stock had been granted
under the Restated Plan. The Restated Plan will terminate in February 2006,
unless sooner terminated by the Board of Directors of JTS.
The Restated Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Code and nonstatutory stock
options. The Board of Directors has determined that, following the Merger, the
Compensation Committee will administer the Restated Plan. The Board of Directors
has also established a Non-Officer Stock Option Committee, consisting of David
T. Mitchell, JTS' President, Chief Executive Officer and a director, with
authority to grant stock options to persons who are not at the time of the grant
of the options subject to Section 16 of the Exchange Act. As used herein with
respect to the Restated Plan, the JTS Board refers to the Compensation
Committee, the Non-Officer Stock Option Committee as well as to the Board of
Directors of JTS. The JTS Board has the authority to select the persons to whom
grants are to be made, to designate the number of shares to be covered by each
option, to establish vesting schedules, to specify the type of consideration to
be paid upon exercise and, subject to certain restrictions, to specify other
terms of the options. The maximum term of options granted under the Restated
Plan is ten years. Options granted under the Restated Plan generally are
nontransferable and generally expire three months after the termination of an
optionee's employment, directorship or consulting relationship with JTS. In
general, if an optionee becomes permanently disabled or dies while employed or
retained by JTS, such person's options generally may be exercised up to 12
months after his or her disability and generally up to 18 months after his or
her death.
The exercise price of incentive stock options granted under the Restated
Plan must equal at least the fair market value of JTS' Common Stock on the date
of grant. The exercise price of nonstatutory stock options granted under the
Restated Plan must equal at least 85% of the fair market value of JTS' Common
Stock on the date of grant. The exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant and the terms
of these options cannot exceed five years. Options under the Restated Plan
typically become exercisable over four years, as to one-eighth of the shares
subject to such options six months after the date of grant and as to 1/48th of
such shares each month thereafter.
The Restated Plan and options outstanding thereunder will be appropriately
adjusted as to the class and the maximum number of shares subject to the
Restated Plan and the class, number of shares and price per share of stock
subject to such outstanding options in the event of stock splits, stock
dividends, recapitalizations and similar events. Under the Restated Plan, the
JTS Board of Directors has discretion in connection with a merger, consolidation
or liquidation involving JTS to provide that outstanding options shall be
terminated or shall be assumed or otherwise continued or to provide for the
accelerated vesting of outstanding options.
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<PAGE> 110
401(K) PLAN
In January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving
Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively
bargained employees and employees who are nonresident aliens with no United
States source income. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) plan permits, but does not require,
matching contributions and profit sharing contributions to the Plan by JTS on
behalf of all participants. JTS has not made any such contributions to date. The
401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by JTS to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn, and
contributions by JTS, if any, are deductible by JTS.
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under the 1995 Plan to each JTS Named Executive Officer during fiscal
1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIALLY
PERCENTAGE REALIZABLE VALUE AT
OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(3)
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) YEAR(%)(2) ($/SH) DATE 5%($) 10%($)
- --------------------------------------- ------------ ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David T. Mitchell -- -- -- -- -- --
Sirjang L. Tandon -- -- -- -- -- --
Kenneth D. Wing 100,000 2.5% $ 0.25 11/29/2005 $15,750 $39,750
Amit Chokshi -- -- -- -- -- --
Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 38,194 96,394
David B. Pearce 8,750 0.02 0.25 6/7/2005 1,378 3,478
</TABLE>
- ---------------
(1) Under the 1995 Plan, options granted to employees vest at the rate of
one-eighth at the end of six months and an additional 1/48 per month until
all options have become vested at the end of four years' service. In the
event an option was granted to an existing employee of JTS (rather than a
newly-hired employee), such option shall vest at the rate described above
based on the grant date of such option.
(2) Based on total grants of options to purchase 3,996,674 shares of JTS Common
Stock.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate
compounded annually for the entire term of the option and the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.
103
<PAGE> 111
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
January 28, 1996 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of January 28, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL FISCAL
ACQUIRED YEAR-END(#)(1) YEAR-END($)(1)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ----------- ----------------- --------------
<S> <C> <C> <C> <C>
David T. Mitchell -- -- -- --
Sirjang L. Tandon -- -- -- --
Kenneth D. Wing -- -- 0/100,000 0/0
Amit Chokshi -- -- -- --
Steven L. Kaczeus -- -- 125,313/117,187 0/0
David B. Pearce -- -- 8,750/0 0/0
</TABLE>
- ---------------
(1) Fair market value of JTS' Common Stock at January 28, 1996 ($0.25), minus
the exercise price of the options ($0.25), multiplied by the number of
shares underlying the options.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the DGCL, JTS' Certificate of Incorporation provides that
no director of JTS will be personally liable to JTS or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to JTS or to its
stockholders, (ii) for acts or omissions not made in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit. In addition, JTS' Bylaws
provide that any director or executive officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to JTS will be indemnified to the fullest extent permitted by the
DGCL.
JTS has entered into indemnification agreements with each of its directors
and executive officers under which JTS has agreed to indemnify each of them
against expenses and losses incurred for claims brought against them by reason
of their being a director or officer of JTS, and JTS maintains directors' and
officers' liability insurance.
There is no pending litigation or proceeding involving a director or
officer of JTS as to which indemnification is being sought, nor is JTS aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
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<PAGE> 112
CERTAIN TRANSACTIONS
Since JTS' inception in February 1994, JTS has maintained significant
business relationships with Moduler Electronics, Tantec Magnetics, Inc., a
California corporation ("Tantec"), and Maazda Travel, Inc. ("Maazda"). Mr.
Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, or members
of his immediate family, directly or indirectly own controlling equity interests
in each of Moduler Electronics, Tantec and Maazda. In fiscal 1996, Moduler
Electronics provided subassembly and final assembly manufacturing services to
JTS for which JTS had made aggregate payments to Moduler Electronics of
approximately $13.0 million, and JTS has provided certain equipment on
consignment to Moduler Electronics with an aggregate value of approximately $4.4
million. Tantec has provided certain hard disk drive component parts, test
equipment and services to JTS for which JTS had made aggregate payments to
Tantec of approximately $366,000 and $295,000 in fiscal 1995 and 1996,
respectively, and JTS sold certain hard disk drives to Tantec with an aggregate
value of approximately $653,000 in fiscal 1996. During fiscal 1996, JTS made
aggregate payments to Maazda, JTS' principal travel agent, of approximately
$100,000.
From February 1994 to February 1995, JTS received bridge loans aggregating
approximately $2.9 million from certain significant JTS stockholders evidenced
by secured convertible notes (the "First Financing Notes"). The First Financing
Notes accrued interest at a rate of 8.5% per annum. All of the First Financing
Notes were canceled and the principal outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with the JTS Series A
Preferred Stock financing in February 1995 (the "First Series A Financing"). JTS
sold an aggregate of 16,200,000 shares of JTS Series A Preferred Stock in the
First Series A Financing for a purchase price of $1.00 per share in exchange for
cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred in
the First Series A Financing included the following:
<TABLE>
<CAPTION>
SHARES OF JTS AMOUNT OF
SERIES A PREFERRED CASH INDEBTEDNESS
PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($)
-------------------------------- ------------------ ---------------- ------------
<S> <C> <C> <C>
Entities affiliated with Burr,
Egan, Deleage & Co.(1)........ 2,500,000 $1,673,374 $826,626
Entities affiliated with
Sofinnova Management,
L.P.(2) ...................... 1,000,000 709,349 290,651
Advanced Technology Ventures
III(3)........................ 1,000,000 709,350 290,650
Brentwood Associates VI,
L.P.(4)....................... 1,650,000 1,170,427 479,573
Western Digital(5).............. 4,100,000 3,300,000 800,000
Steven L. Kaczeus(6)............ 223,511 -- 223,511
</TABLE>
- ---------------
(1) Jean D. Deleage, a director of JTS, is Managing General Partner of Burr,
Egan, Deleage & Co. ("Burr Egan").
(2) Alain L. Azan, a director of JTS, is a Managing General Partner of three
funds affiliated with Sofinova Management, L.P. ("Sofinnova").
(3) Entities affiliated with Advanced Technology Ventures III own more than 5%
of the outstanding shares of JTS Series A Preferred Stock.
(4) Brentwood Associates VI, L.P. owns more than 5% of the outstanding shares of
JTS Series A Preferred Stock.
(5) Western Digital, a second source manufacturer for JTS, owns more than 5% of
the outstanding shares of JTS Series A Preferred Stock.
(6) Steven L. Kaczeus is the Chief Technical Officer of JTS.
In connection with the First Series A Financing and pursuant to that
certain Debt Cancellation Agreement, dated as of February 3, 1995, by and among
JTS, Tantec and Mr. Tandon, JTS issued 2,202,227 shares of JTS Series A
Preferred Stock to Tantec in exchange for the cancellation of $2,202,227 of
indebtedness owed by JTS to Tantec.
105
<PAGE> 113
In June 1995, JTS received bridge loans aggregating approximately $2.75
million from certain significant JTS stockholders, evidenced by secured
convertible notes (the "Second Financing Notes"). The Second Financing Notes
accrued interest at a rate of 8% per annum. All of the Second Financing Notes
were canceled and the principal amount outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with a JTS Series A
Preferred Stock financing in August 1995 (the "Second Series A Financing"). JTS
sold an aggregate of 12,496,370 shares of JTS Series A Preferred Stock in the
Second Series A Financing for a purchase price of $1.00 per share in exchange
for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred
in the Second Series A Financing included the following:
<TABLE>
<CAPTION>
SHARES OF JTS AMOUNT OF
SERIES A PREFERRED CASH INDEBTEDNESS
PURCHASER(S) PURCHASED(#) CONSIDERATION($) CANCELED($)
-------------------------------- ------------------ ---------------- ------------
<S> <C> <C> <C>
Entities affiliated with the
Walden Group of Venture
Capital Funds(1).............. 3,000,000 $3,000,000 --
Entities affiliated with
Advanced Technology
Ventures...................... 2,826,424 2,576,424 $ 250,000
Entities affiliated with Burr
Egan.......................... 1,437,500 437,500 1,000,000
David T. Mitchell(2)............ 1,010,196 -- 1,010,196
Brentwood Associates VI, L.P.... 952,083 448,750 503,333
Entities affiliated with
Sofinnova..................... 500,000 500,000 --
Steven L. Kaczeus............... 37,000 37,000 --
</TABLE>
- ---------------
(1) Lip-Bu Tan, a director of JTS, is a General Partner of the Walden Group.
(2) David T. Mitchell is the President, Chief Executive Officer and a member of
the Board of Directors of JTS.
In July 1995, JTS loaned $160,000 to Kenneth D. Wing, Executive Vice
President, Research & Development Quality/Reliability, pursuant to the terms of
Mr. Wing's employment agreement. Of such loan amount, $80,000 of principal (and
interest accrued thereon) were forgiven on January 1, 1996, and, subject to Mr.
Wing's continued employment with JTS, any remaining amounts owed under such loan
will be forgiven on January 1, 1997. See "Management of JTS -- Employment
Agreement."
During fiscal 1996, in connection with the Technology Transfer and
Licensing Agreement between JTS and Western Digital, JTS provided certain hard
disk drive components to Western Digital, a principal stockholder of JTS, with
an aggregate value of approximately $358,000. In addition, JTS received
aggregate milestone payments of approximately $5.3 million from Western Digital
in fiscal 1996. See "Business of JTS -- Western Digital Arrangement."
In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D.
Wing, Virginia Walker, JTS' Executive Vice President, Finance and Administration
and Chief Financial Officer, and David B. Pearce in connection with the purchase
by such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and
450,000 shares of JTS Common Stock, respectively, at a purchase price of $0.25
per share. Each purchaser executed a restricted stock purchase agreement (each,
a "Restricted Stock Purchase Agreement") granting JTS a right of repurchase as
to such shares in the event the purchasers' employment with JTS terminates. With
respect to Mr. Mitchell, 250,000 shares of the JTS Common Stock purchased were
immediately vested, and JTS' repurchase right lapses monthly with respect to the
remainder of such shares at the rate of 1/48th per month. With respect to the
shares purchased by Mr. Wing, JTS' repurchase right lapsed as to one-eighth of
such shares in January 1996 and as to 1/48th of such shares monthly thereafter.
With respect to the shares purchased by Ms. Walker, JTS' repurchase right lapsed
as to one-eighth of such shares in May 1996 and as to 1/48th of such shares
monthly thereafter. With respect to the shares purchased by Mr. Pearce, 253,125
shares of the JTS Common Stock purchased were immediately vested and 14,063
additional shares had vested at the time Mr. Pearce's employment with JTS
terminated. In March 1996, JTS repurchased 182,812 shares of JTS Common Stock
from Mr. Pearce. In addition, the Restricted Stock Purchase Agreements provide
that JTS' repurchase right shall lapse entirely upon certain events following a
change in control of JTS. See "The
106
<PAGE> 114
Proposed Merger and Related Transactions -- Certain Other Items Related to the
Merger -- Interests of Certain Persons in the Merger."
From January 1996 to April 1996, JTS received an aggregate of approximately
$2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"),
from certain significant stockholders of JTS. The Bridge Notes are due and
payable on July 15, 1996 and accrue interest at a rate of 10% per annum.
Individuals and entities to whom Bridge Notes were issued include the following:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
STOCKHOLDER(S) OF BRIDGE NOTE($)
------------------------------------------------------------ ------------------
<S> <C>
Tantec...................................................... $1,000,000
Entities affiliated with Burr Egan.......................... 260,000
Entities affiliated with Advanced Technology Ventures....... 260,000
Entities affiliated with the Walden Group of Venture Capital 200,000
Funds.....................................................
Brentwood Associates VI, L.P. .............................. 185,000
Entities affiliated with Sofinnova.......................... 99,900
</TABLE>
In April 1996, JTS acquired a 90% interest in Moduler Electronics in
exchange for issuing 1,911,673 shares of JTS Series A Preferred Stock and a
warrant to purchase 750,000 shares of JTS Common Stock at an exercise price of
$0.25 per share to Lunenburg S.A., an affiliate of Sirjang L. Tandon. Such
warrant is immediately exercisable as to 500,000 shares and becomes exercisable
as to 250,000 shares when certain credit facilities in India are made available
to Moduler Electronics in the amount of at least $29 million. See "JTS
Acquisition of Disk Drive Division of Moduler Electronics."
A family member of Sirjang Lal Tandon, JTS' Chairman and Corporate
Technical Strategist, has guaranteed the secured short term borrowings and
secured long term loans of Modular Electronics furnished by certain Indian
banks. See Notes 4 and 5 to the Financial Statements to the Hard Disk Drive
Division of Modular Electronics (India) Private Ltd.
JTS believes that all of the transactions set forth above were made on
terms no less favorable to JTS than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between JTS and its
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the JTS Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of Directors,
and have been and will be on terms no less favorable to JTS than could be
obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS OF JTS
The following table sets forth certain information regarding beneficial
ownership of JTS Common Stock and JTS Series A Preferred Stock as of June 18,
1996 by (a) each person (or group of affiliated persons) known to JTS to
beneficially own more than 5% of the outstanding shares of JTS Common Stock or
more than 5% of the outstanding shares of JTS Series A Preferred Stock, (b) each
of the directors and executive officers of JTS who will be a director or
executive officer of the Combined Company, and (c) all of JTS directors and
executive officers who will be directors and executive officers of the Combined
Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ALL SHARES
COMMON STOCK(2) PREFERRED STOCK(2) PERCENT SHARES OF OF THE
----------------------- ------------------------ OF ALL THE COMBINED
NUMBER PERCENT OF NUMBER PERCENT OF JTS CAPITAL COMBINED COMPANY
BENEFICIAL OWNER(1) OF SHARES CLASS(%)(3) OF SHARES CLASS(%)(3) STOCK(%) COMPANY (%)(3)
- --------------------------------- --------- ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Tantec Magnetics, Lunenburg
S.A. and the Tandon Family
Partnership(4)................. 5,350,000 57.6% 4,613,900 15.5% 25.6% 9,963,900 9.7%
Sirjang L. Tandon
c/o JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Western Digital Corporation...... -- -- 4,100,000 13.8 10.5 4,100,000 4.0
8105 Irving Center Drive
Irvine, CA 92718
David T. Mitchell................ 3,000,000 32.3 1,010,196 3.4 10.3 4,010,196 3.9
c/o JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Entities affiliated with
Burr, Egan, Deleage & Co.(5)... -- -- 3,937,500 13.3 10.1 3,937,500 3.8
Jean D. Deleage
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Entities affiliated with
Advanced Technology
Ventures(6).................... -- -- 3,826,424 12.9 9.8 3,826,424 3.7
485 Ramona Street, Suite 200
Palo Alto, CA 94301
Entities Affiliated with
the Walden Group of Venture
Capital Funds(7)............... -- -- 3,000,000 10.1 7.7 3,000,000 2.9
Lip-Bu Tan
750 Battery Street, Suite 700
San Francisco, CA 94111
Brentwood Associates VI, L.P..... -- -- 2,602,083 8.8 6.7 2,602,083 2.5
11150 Santa Monica Blvd.
#1200
Los Angeles, CA 90025
Entities Affiliated with
Sofinnova Management,
L.P.(8)........................ -- -- 1,500,000 5.1 3.9 1,500,000 1.5
Alain L. Azan
One Market Plaza
Stewart Tower, Suite 2630
San Francisco, CA 94105
Steven L. Kaczeus(9)............. 158,125 1.7 260,511 * 1.1 409,261 *
Kenneth D. Wing(10).............. 316,666 3.4 -- -- * 316,666 *
David B. Pearce.................. 275,937 3.0 -- -- * 275,937 *
Amit Chokshi..................... -- -- -- -- -- -- --
Roger W. Johnson................. -- -- -- -- -- -- --
All current directors and
executive 9,074,791 96.1 14,122,107 47.6 59.3 23,196,898 22.5
officers as a group (10
persons)(11)
</TABLE>
- ---------------
* Less than 1%
(1) Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of JTS Common Stock and JTS
Series A Preferred Stock shown as beneficially owned by them.
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<PAGE> 116
(2) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding, including for purposes of computing the percentage of the
person holding such option, but not for purposes of computing the
percentage of any other holder.
(3) Based on (i) 63,854,718 shares of Atari Common Stock outstanding as of June
28, 1996 (assuming no exercise of outstanding options after such date) and
(ii) 29,696,370 shares of JTS Series A Preferred Stock and 9,263,866 shares
of JTS Common Stock outstanding as of June 18, 1996 (assuming no exercise
of outstanding options and warrants after such date).
(4) Preferred Stock includes 2,702,227 shares and 1,911,673 shares of JTS
Series A Preferred Stock held by Tantec Magnetics, Inc. and Lunenburg S.A.,
respectively. Sirjang L. Tandon, a director of JTS, is an executive officer
of Tantec Magnetics, Inc. and may have shared voting power over the shares
held by Lunenburg S.A. Common Stock includes 4,350,000 shares of JTS Common
Stock held by the Tandon Family Partnership. Mr. Tandon is a general
partner of the Tandon Family Partnership. Includes 1,000,000 shares of JTS
Common Stock over which Mr. Tandon has voting power, but which are subject
to a right of repurchase by JTS until fully vested. Mr. Tandon disclaims
beneficial ownership of the shares held by Tantec Magnetics, Lunenburg S.A.
and the Tandon Family Partnership except to the extent of his proportionate
partnership and shareholder interests therein.
(5) Preferred Stock includes 3,896,550 shares and 40,950 shares of JTS Series A
Preferred Stock held by Alta V Limited Partnership and Customs House
Partners, respectively. Jean Deleage, a director of JTS, is Vice President
of Burr, Egan, Deleage & Co. which is a general partner of Alta V
Management Partners, L.P., a general partner of Alta V Limited Partnership,
and Customs House Partners. He has voting and investment power with respect
to such shares. Mr. Deleage disclaims beneficial ownership of such shares
except to the extent of his proportionate partnership interests therein.
(6) Preferred Stock includes 2,250,000 shares and 1,576,424 shares of JTS
Series A Preferred Stock held by Advanced Technology Ventures IV and
Advanced Technology Ventures III, respectively.
(7) Preferred Stock includes 700,000; 600,000; 500,000; 300,000; 200,000;
200,000; 200,000; 200,000 and 100,000 shares of JTS Series A Preferred
Stock held by Walden Capital Partners II, L.P.; International Venture
Capital Investment Corporation; Walden Investors; BI Walden Ventures Kedua
Sdn Bhd; Seed Ventures II Limited; OWW Pacrim Investments Ltd.; OCBC,
Wearnes & Walden Investments (Singapore) Ltd.; Walden Ventures and Walden
Technology Ventures II, L.P., respectively. Lip-Bu Tan, a director of JTS,
has voting power and investment power with respect to the shares held by
each of the foregoing investment funds, except Walden Ventures. Mr. Tan
disclaims beneficial ownership of such shares except to the extent of his
proportionate interests in such entities.
(8) Preferred Stock includes 800,000 shares and 700,000 shares of JTS Series A
Preferred Stock held by C.V. Sofinnova Ventures Partners III and C.V.
Sofinnova Ventures Partners II, respectively. Alain Azan, a director of
JTS, is a general partner of Sofinnova Management, L.P., the general
partner of C.V. Sofinnova Ventures Partners II and C.V. Sofinnova Ventures
Partners III and has voting and investment power with respect to such
shares. Mr. Azan disclaims beneficial ownership of such shares except to
the extent of his proportionate partnership interest therein.
(9) Includes options to purchase 158,125 shares of JTS Common Stock that are
exercisable within 60 days of June 18, 1996.
(10) Includes options to purchase 16,666 shares of JTS Common Stock that are
exercisable within 60 days of June 18, 1996.
(11) Includes 8,900,000 shares of JTS Common Stock and 14,122,107 shares of JTS
Preferred Stock held by executive officers and entities affiliated with
certain directors and includes options to purchase 174,791 shares of JTS
Common Stock by executive officers that are exercisable within 60 days of
June 18, 1996. See footnotes (4)-(10).
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<PAGE> 117
DESCRIPTION OF CAPITAL STOCK OF ATARI AND JTS
The following descriptions of the capital stock of Atari and JTS are
qualified by reference to Atari's Articles of Incorporation and JTS' Certificate
of Incorporation and any amendments thereto. Copies of these are included as
exhibits to the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part.
ATARI CAPITAL STOCK
General. The authorized capital stock of Atari consists of 100,000,000
shares of Common Stock, $.01 par value per share, and 10,000,000 of undesignated
Preferred Stock, $.01 par value per share. As of close of business on June 28,
1996, 63,854,718 shares of Atari Common Stock were issued and outstanding and no
shares of Preferred Stock were issued and outstanding.
At the Effective Time of the Merger, each share of Atari Common Stock
issued and outstanding immediately prior to the Effective Time will be canceled
and extinguished and be converted automatically into the right to receive one
share of JTS Common Stock.
Common Stock. Holders of Atari Common Stock are entitled to one vote per
share on matters to be voted upon by the stockholders and are not entitled to
cumulative voting in the election of directors. Subject to any preferences
granted to holders of Atari Preferred Stock or of any other senior equity,
holders of Atari Common Stock are entitled to receive dividends when, as and if
declared by the Atari Board of Directors, and to share ratably in the assets of
Atari legally available for distribution to its stockholders in the event of
liquidation, dissolution and winding up of Atari. Holders of Atari Common Stock
have no preemptive, subscription, redemption or conversion rights with respect
to Atari Common Stock. All outstanding shares of Atari Common Stock are validly
issued, fully paid and nonassessable.
Preferred Stock. Atari has 10,000,000 shares of undesignated preferred
stock authorized, none of which are issued and outstanding. The Atari Board of
Directors has the authority to issue the undesignated preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of undesignated preferred
stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders.
Convertible Subordinated Debentures. As of March 31, 1996, Atari had $42.4
million of 5 1/4% convertible subordinated debentures due April 29, 2002
outstanding. The market value of these debentures was approximately $29.3
million at June 18, 1996. The debentures may be redeemed at Atari's option, upon
payment of a premium. The debentures, at the option of the holders, are
convertible into common stock at $16.3125 per share. At March 31, 1996,
2,596,414 shares of Atari Common Stock were reserved for issuance upon
conversion of the outstanding debentures. A default with respect to other
indebtedness of Atari in an aggregate amount exceeding $5 million would result
in an event of default whereby the outstanding debentures would be due and
payable immediately.
Registrar and Transfer Agent. The registrar and transfer agent for Atari
Common Stock is the Registrar and Transfer Company.
JTS CAPITAL STOCK
Prior to the Merger, the authorized capital stock of JTS consists of
90,000,000 shares of JTS Common Stock, $.000001 par value per share, and
70,000,000 shares of Preferred Stock, $.000001 par value per share, all of which
is designated Series A Preferred Stock.
JTS is a privately held company; there is no public trading market for its
stock. As of the close of business on June 18, 1996, 9,263,866 shares of JTS
Common Stock and 29,696,370 shares of JTS Series A Preferred Stock were issued
and outstanding. There are a total of 54 holders of record of JTS Series A
Preferred Stock and 20 holders of record of JTS Common Stock.
Preferred Stock Rights. The principal rights, privileges and preferences
of the issued and outstanding shares of JTS Series A Preferred Stock are as set
forth below.
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<PAGE> 118
Dividends. Holders of JTS Series A Preferred Stock are entitled to
dividend preferences when, as and if declared by the JTS Board, at an annual
rate of $.09 per share. All dividends are cumulative. JTS may not pay cash
dividends on JTS Common Stock while there are any declared but unpaid cash
dividends on any shares of JTS Series A Preferred Stock.
Liquidation. In the event of any liquidation, dissolution or winding up of
JTS (which, upon the election of the holders of a majority of the Series A
Preferred Stock, would include the Merger), holders of the JTS Series A
Preferred Stock are entitled to receive, prior and in preference to any
distribution of any assets of JTS to the holders of JTS Common Stock, $1.00 per
share plus all accrued and unpaid dividends. After the holders of JTS Series A
Preferred Stock have received the full amount of their liquidation preference,
the holders of JTS Common Stock and JTS Series A Preferred Stock (on an
as-converted basis) are entitled to receive all remaining assets of JTS
available for distribution pro rata based on the number of shares of JTS Common
Stock held or, after conversion of JTS Series A Preferred Stock, that would be
held by each such holder; provided, however, if the holders of JTS Series A
Preferred Stock, exclusive of any unpaid cumulative dividends, would receive at
least an aggregate of $5.00 per share of Series A Preferred Stock, then the
holders of Series A Preferred Stock shall not be entitled to the $1.00 per share
preference over the holders of JTS Common Stock.
Redemption. Holders of JTS Series A Preferred Stock are entitled to
certain mandatory redemption rights. Upon the election of a majority of the
holders of JTS Series A Preferred Stock and provided JTS has funds legally
available to do so, JTS shall redeem one-third, one-half and the remainder of
all of the outstanding shares of Series A Preferred Stock on February 7, 2000,
February 7, 2001 and February 7, 2002, respectively.
Voting Rights. Subject to the protective provisions described above and
except as otherwise required by law, the holders of JTS Common Stock and JTS
Series A Preferred Stock are entitled to notice of any stockholders' meeting and
to vote together as a single class upon any matter submitted to the stockholders
for a vote on the following basis:
(a) Common Vote. Each share of Common Stock issued and outstanding has one
vote.
(b) Preferred Vote. Each holder of JTS Series A Preferred Stock has a
number of votes equal to the number of full shares of JTS Common Stock into
which such JTS Preferred Stock is then convertible. Each share of JTS Series A
Preferred Stock is presently convertible into one share of JTS Common Stock.
Protective Provisions. JTS must obtain the approval of at least two-thirds
of the outstanding shares of JTS Series A Preferred Stock to (i) create a new
class of stock with rights equal to or superior to the rights of Series A
Preferred Stock; (ii) sell, lease or convey all or substantially all of JTS'
property or business; (iii) amend JTS' Certificate of Incorporation if such
alters the rights of the Series A Preferred Stock; (iv) increase the authorized
number of shares of JTS Preferred or Common Stock; (v) undertake a
reorganization, merger, or consolidation in which the holders of JTS voting
stock will hold less than 50% of the voting stock of the successor entity; (vi)
pay or declare a dividend other than in Common Stock to the holders of Common
Stock; or (vii) repurchase JTS securities other than from employees or
consultants of JTS when their employment ends.
All of the outstanding shares of JTS Common Stock and JTS Series A
Preferred Stock are validly issued, fully paid and nonassessable.
Upon consummation of the Merger, the holders of JTS Series A Preferred
Stock will become holders of JTS Common Stock and, consequently, will no longer
be entitled to certain rights and privileges described above. In addition,
certain other rights and privileges of JTS stockholders will change as a result
of the Merger. Upon completion of the Merger, the percentage ownership of the
Combined Company by each former JTS stockholder will be significantly less than
his, her or its current percentage ownership of JTS. Accordingly, former JTS
stockholders will have a significantly smaller voting influence over the affairs
of the Combined Company than they currently enjoy over the affairs of JTS. "See
Risk Factors -- Risk Factors Related to the Business of JTS -- Reduction in
Voting Control." Moreover, certain contractual rights presently possessed by
holders of JTS Series A Preferred Stock will cease to exist after the Merger.
Finally,
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<PAGE> 119
the statutory protections available to JTS stockholders under Section 2115 of
the CGCL will no longer exist. See "Comparison of Rights of Stockholders of
Atari and JTS -- Application of the General Corporation Law of California to
Delaware Corporations."
CERTIFICATE OF INCORPORATION AND BYLAWS OF THE COMBINED COMPANY
The authorized capital stock of the Combined Company shall consist of
150,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of undesignated, "blank check" preferred stock, $.001 par value per
share. The Board of Directors of the Combined Company will have the authority to
issue the undesignated preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued shares of undesignated preferred stock and to fix the number of
shares constituting any series and the designations of such series, without any
further vote or action by the stockholders.
The Combined Company's Certificate of Incorporation will provide that all
stockholder actions must be effected at a duly called meeting and may not be
effected by written consent. In addition, the Combined Company's Certificate of
Incorporation and Bylaws will provide that only the Chairman of the Board of
Directors, the Chief Executive Officer or the Board of Directors pursuant to a
resolution adopted by at least two directors will be permitted to call a special
meeting of stockholders. These and other provisions, including the creation of
"blank check" preferred stock, could discourage potential acquisition proposals
and could delay or prevent a change in control of the Combined Company. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Combined Company. These
provisions are designed to reduce the vulnerability of the Combined Company to
an unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Combined Company's shares and, as a consequence, they also may
inhibit fluctuations in the market price of the Combined Company's shares that
could result from actual or rumored takeover attempts. Such provisions also may
have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Other Risk Factors Related to the Merger -- Control by
Affiliates; Anti-takeover Effects."
DELAWARE TAKEOVER STATUTE
The Combined Company will be subject to Section 203 of the Delaware General
Corporation Law ("DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the time that such
stockholder became an interested stockholder, unless: (i) prior to such time,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation by
the interested stockholder; or
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(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation. In general, Section 203 defines an interested stockholder as
any entity or person owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF ATARI AND JTS AND THE COMBINED COMPANY
The rights of Atari stockholders are governed by its Articles of
Incorporation and any amendments thereto (the "Atari Articles"), Atari's Bylaws
and any amendments thereto (the "Atari Bylaws") and the laws of the State of
Nevada. The rights of JTS stockholders are governed by its Certificate of
Incorporation and any amendments thereto (the "JTS Certificate"), JTS' Bylaws
and any amendments thereto (the "JTS Bylaws") and the DGCL. After the Effective
Time, the rights of Atari and JTS stockholders who become stockholders of the
Combined Company will be governed by the Certificate and Bylaws of the Combined
Company and the DGCL.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
The discussion below primarily addresses the differences between the DGCL
and general corporation law of Nevada. However, Section 2115 of the CGCL makes
substantial portions of the CGCL applicable, with limited exceptions, to a
foreign corporation with ("Section 2115") more than half of its outstanding
stock held of record by persons having addresses in California and more than
half of its business conducted in the state (as measured by factors based on a
corporation's levels of property, payroll and sales determined for California
franchise tax purposes), irrespective of the corporation's state of
incorporation. Although JTS is incorporated in Delaware, it is subject to
Section 2115. The statutory provisions of the CGCL to which JTS is subject
include but are not limited to provisions governing a director's standard of
care in performing the duties of a director, a stockholder's right to vote
cumulatively in any election of directors, a director's or stockholder's right
to inspect corporate records, indemnification requirements concerning directors,
officers and others and the corporate requirements to effectuate corporate
reorganizations (including mergers and acquisitions). Section 2115 also invokes
the application of Chapter 13 of the CGCL to the Merger with respect to JTS
stockholders who elect to exercise dissenters' rights. Upon completion of the
Merger, the statutory protections available to JTS stockholders pursuant to
Section 2115 will no longer apply.
COMPARISON OF THE RIGHTS OF ATARI AND JTS STOCKHOLDERS AND STOCKHOLDERS OF THE
COMBINED COMPANY
The following is a summary of material differences between the rights of
Atari and JTS stockholders under their respective charter documents, the
Combined Company's charter documents and applicable state laws.
Cumulative Voting. Under Delaware and Nevada law, cumulative voting in the
election of directors is not mandatory. Elimination of cumulative voting limits
the ability of minority stockholders to obtain representation on the board of
directors. The JTS Certificate provides for cumulative voting in elections of
Directors. The Atari Articles and Bylaws do not provide for cumulative voting in
elections of Directors. The Certificate and Bylaws of the Combined Company do
not provide for cumulative voting in elections of Directors. To the extent that
Section 2115 would render California law applicable to JTS, cumulative voting in
the election of directors would be required.
Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder
Business and Nominees. The Atari Bylaws provide that special meetings of
stockholders may be called by the Board of Directors, the Chairman of the Board
or the President. The JTS Bylaws provide that special meetings of stockholders
may be called by the Board of Directors or a committee of the Board. The Bylaws
of the Combined Company provide that special meetings of stockholders may be
called by the Chairman of the Board of Directors, the Chief Executive Officer or
the Board of Directors pursuant to a resolution adopted by at least two
directors.
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Under Delaware and Nevada law, a special meeting of stockholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the bylaws.
Any limitation on the ability to call special stockholder meetings could
make it more difficult for stockholders to initiate action that is opposed by
the board of directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the board of directors
with respect to unsolicited takeover bids.
Size of the Board of Directors. Delaware and Nevada law each permit the
board of directors alone to change the authorized number, or the range, of
directors by amendment to the bylaws, unless the directors are not authorized to
amend the bylaws or the number of directors is fixed in the certificate of
incorporation (in which case a change in the number of directors may be made
only by amendment to the certificate of incorporation following approval of such
change by the stockholders). The Atari Bylaws provide for a range of directors
between five and seven, until changed by an amendment to the Atari Articles or
by stockholder vote. However, the number of directors cannot be less than five
if the votes against the action or the votes not consenting to the action are
equal or are greater than 16 2/3% of the outstanding shares. The exact number of
directors shall be fixed by the Board or by stockholder resolution. The current
number of directors on the Atari Board is six. The JTS Certificate and Bylaws
authorize the JTS Board of Directors to determine the number of directors on the
JTS Board of Directors. The current number of directors on the JTS Board is six.
The Certificate of the Combined Company provides that number of directors on the
Board of Directors of the Combined Company shall be determined exclusively by
resolutions of the Board of the Combined Company.
Classified Board of Directors. A classified board is one to which a certain
number, but not all, of the directors are elected on a rotating basis each year.
Delaware and Nevada law permit, but do not require, a classified board of
directors, with staggered terms under which one-half or one-third of the
directors are elected for terms of two or three years, respectively. This method
of electing directors may make changes in the composition of the board of
directors, and thus a potential change in control of a corporation, a lengthier
and more difficult process. The charter documents of Atari, JTS and the Combined
Company do not provide for a classified board of directors. The establishment of
a classified board following the Merger would require the approval of the
stockholders of the Combined Company. To the extent that Section 2115 would
render California law applicable to JTS, directors must be elected annually,
unless the corporation is listed on the Nasdaq National Market and has at least
800 stockholders or is listed on certain public exchanges.
Removal of Directors. Under Nevada law, unless the articles of
incorporation provide for cumulative voting or a larger percentage of voting
stock required to do so, any director may be removed from office by the vote of
stockholders representing not less than two-thirds of the voting power of the
class or series of stock of the corporation entitled to elect such director. The
Atari Bylaws do not provide for cumulative voting. The Atari Bylaws allow the
Board to remove any director declared of unsound mind by court order or
convicted of a felony. Otherwise, a two-thirds vote of outstanding shares is
needed to remove a director.
Under Delaware law, a director of a corporation that does not have a
classified board of directors or cumulative voting may be removed with or
without cause with the approval of a majority of the outstanding shares entitled
to vote. In the case of a Delaware corporation having cumulative voting, if less
than the entire board is to be removed, a director may not be removed without
cause if the number of votes cast against such removal would be sufficient to
elect the director under cumulative voting. A director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. To the extent that Section 2115
would render California law applicable to JTS, any directors or the entire board
of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; provided, however, no
director may be removed (unless the entire board is removed) if the number of
shares voted against removal would be sufficient to elect the director under
applicable cumulative voting rules. The JTS Certificate provides for cumulative
voting. The Certificate of the Combined Company does not provide for cumulative
voting. The Certificate and Bylaws of the Combined Company allow removal of a
director, subject to the rights of preferred stock holders, (i) with cause by a
majority of the outstanding shares or (ii) without cause by two-thirds of the
outstanding shares.
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<PAGE> 122
Filling Vacancies on the Board of Directors. Under Nevada law, unless a
Corporation's articles of incorporation provide otherwise, any vacancy on the
board of directors, including one created by removal of a director or an
increase in the number of authorized directors, may be filled by the majority of
the remaining directors, even if such number constitutes less than a quorum. The
Atari Articles so provide. The Atari Bylaws also provide for vacancies filled by
directors. Stockholders may fill the vacancy if the directors fail to do so.
Under Delaware law, vacancies and newly created directorships may be filled by a
majority of the directors then in office (even though less than a quorum) unless
otherwise provided in the certificate of incorporation or bylaws (and unless the
certificate of incorporation directs that a particular class is to elect such
director, in which case any other directors elected by such class, or a sole
remaining director, shall fill such vacancy). In addition Delaware law permits a
ten percent (10%) stockholder to order an election to fill a director vacancy.
The JTS Bylaws allow a vacancy to be filled by a majority of the remaining
members of the Board of Directors, although the majority is less than a quorum
or by a plurality of stockholder votes. The Bylaws of the Combined Company
provide that a director vacancy shall only be filled by a majority of the
remaining directors, even though less than a quorum.
Interested Director Transactions. Under both Nevada and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under Nevada and Delaware law.
Under Nevada and Delaware law, either the stockholders or the disinterested
members of the board of directors must approve any such contract or transaction
after full disclosure of the material facts, and in the case of board approval
the contract or transaction must also be fair to the corporation, or the
contract or transaction must have been just and reasonable or fair as to the
corporation at the time it was authorized or approved. If board approval is
sought, the contract or transaction must be approved by a majority vote of a
quorum of the directors, without counting the vote of any interested directors
(except that interested directors may be counted for purposes of establishing a
quorum). The JTS Bylaws reiterate Delaware corporate law regarding interested
director transactions. The Articles and Bylaws of Atari and the Certificate and
Bylaws of the Combined Company contain no special provision regarding such
transactions.
Loans to Officers and Employees. Under Nevada law, any transaction
(including any loan or guaranty) to or for the benefit of a director or officer
of the corporation or its parent is permitted (unless otherwise provided for in
the corporation's articles of incorporation) provided a disinterested majority
of the board of directors or stockholders, after full and fair disclosure of the
material terms of such transaction, approve such transaction, or if such
transaction is fair to the corporation at the time it is authorized or approved.
Under Delaware law, a corporation may make loans to, guarantee the obligations
of or otherwise assist its officers or other employees and those of its
subsidiaries (including directors who are also officers or employees) when such
action, in the judgment of the directors, may reasonably be expected to benefit
the corporation. Pursuant to the Bylaws of the Combined Company and in
accordance with Delaware law, the Combined Company may make loans to, guarantee
the obligations of or otherwise assist its officers or other employees and those
of its subsidiaries (including directors who are also officers or employees)
when such action, in the judgment of the Board of the Combined Company, may
reasonably be expected to benefit the corporation. The Articles and Bylaws of
Atari and the Certificate and Bylaws of JTS contain no special provision
regarding such transactions.
Indemnification and Limitation of Liability. Nevada and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit
corporations to adopt a provision in their charters eliminating the liability of
a director to the corporation or its stockholders for monetary damages for
breach of the director's fiduciary duty of care. There are nonetheless certain
differences between the laws of the two states with respect to indemnification
and limitation of liability.
Atari's Articles indemnify directors to the fullest extent permissible
under Nevada law. Atari's Bylaws further provide for indemnification for Atari's
agents and authorize the Board of Directors to purchase and maintain insurance.
Similar to Delaware law, Nevada law does not permit the elimination of monetary
liability
115
<PAGE> 123
where such liability is based on intentional misconduct, fraud, knowing
violation of law or payments or distributions in violation of law. In addition,
Nevada law departs from Delaware law insofar as Nevada law (i) permits a broader
array of insurance or other financial arrangements between a company and its
directors, and (ii) allows a provision in the corporation's bylaws or articles
of incorporation which mandates indemnification rather than leaving that
decision to the board of directors.
The Certificates of JTS and the Combined Company eliminate the liability of
directors and officers to the fullest extent permissible under Delaware law, as
such law exists currently or as it may be amended in the future. Under Delaware
law, such provision may not eliminate or limit director monetary liability for
(a) breaches of the director's duty of loyalty to the corporation or its
stockholders; (b) acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law; (c) the payment of unlawful dividends
or unlawful stock repurchases or redemptions under DGCL Section 174; or (d)
transactions in which the director received an improper personal benefit. Such
limitation of liability provisions also may not limit a director's liability for
violation of, or otherwise relieve JTS, the Combined Company or the directors of
either of them from the necessity of complying with, federal or state securities
laws, or affect the availability of non-monetary remedies such as injunctive
relief or rescission.
The Bylaws of JTS and the Combined Company state that indemnification for
JTS' or the Combined Company's agents will be as set forth in the DGCL. However,
JTS may modify the extent of such indemnification by individual contracts with
its directors and executive officers. In addition, the DGCL provides that the
indemnification provided by statute shall not be deemed exclusive of any other
rights under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. The Bylaws of JTS and the Combined Company track this
provision of Delaware law.
JTS has entered into indemnification agreements with its officers and
directors. Upon consummation of the Merger, such agreements will become binding
on the Combined Company. It is expected that the Combined Company will enter in
similar agreements with Jack Tramiel and Michael Rosenberg.
Delaware law generally permits indemnification of expenses incurred in the
defense or settlement of a derivative or third-party action, provided there is a
determination by a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in or (in contrast to Nevada law) not opposed to the best interests of the
corporation (or in the case of a criminal proceeding, if the accused had no
reasonable cause to believe the conduct was unlawful). Without court approval,
however, no indemnification may be made in respect of any derivative action in
which such person is adjudged liable for negligence or misconduct in the
performance of his duty to the corporation.
The Certificate of the Combined Company limits director liability to the
Combined Company or its stockholders for monetary damages arising out of a
director's breach of his duty of care. The duty of care refers to the fiduciary
duty of a director to exercise sufficient diligence and care in considering a
transaction or causing the corporation to take or refuse to take corporate
action. The Certificate of the Combined Company, however, does not eliminate the
duty of care; it only eliminates monetary damage awards occasioned by a breach
of such duty. Thus, after the Merger, a breach of the duty of care would remain
a valid basis for a suit seeking to prevent a proposed transaction from
occurring. After the transaction has occurred, however, the stockholders would
not have a claim against directors for monetary damages based on the breach of
the duty of care, even if that breach involved gross negligence on the part of
the directors.
Reorganizations, Asset Sales and Mergers. Both Nevada and Delaware law
generally require that a majority of the stockholders of the acquiring and
target corporations approve statutory mergers. Delaware law does not require a
stockholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if (a) the
merger agreement does not amend the existing certificate of incorporation, (b)
each share of the surviving corporation outstanding before the merger is an
identical out standing or treasury share after the merger, and (c) the number of
shares to be issued by the surviving corporation in the merger does not exceed
20% of the shares outstanding immediately prior to the merger. Nevada law
contains a substantially similar exception to its voting requirements for the
surviving corporation in a reorganization. To the extent Section 2115 would
render California law applicable to JTS,
116
<PAGE> 124
stockholder approval of each constituent corporation in a statutory merger and
any parent corporation is required, except (i) corporations which will own (or
where stockholders will own), equity securities (other than warrants) possessing
more than 5/6 of the voting power of the surviving corporation or (ii) parent
corporations, not subject to Section 2115, incorporated under the laws of other
states not requiring such approval.
Both Nevada and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by the board of
directors and a majority of the voting shares of the corporation transferring
such assets.
If required by the articles of incorporation, Nevada law requires that
mergers, reorganizations, certain sales of assets and similar transactions be
approved by a majority vote of each class of shares outstanding and/or a larger
percentage vote than a simple majority of the voting shares. The Atari Articles
do not require such approval. By contrast, Delaware law generally does not
require class voting, except in certain transactions involving an amendment to
the certificate of incorporation which adversely affects a specific class of
shares. To the extent Section 2115 would render California law applicable to
JTS, a majority vote of each class of shares outstanding and/or a larger
percentage vote than a simple majority would be required to approve certain
mergers, reorganizations, sales of assets or similar transactions. JTS'
Certificate provides for special voting rights of JTS' Series A Preferred Stock.
The following actions must be approved by at least 2/3 of holders of outstanding
JTS Series A Preferred Stock: (1) creation of a new class of stock on par or
superior in rights to the Series A Preferred Stock; (2) selling, leasing or
otherwise disposing of all or most of JTS's property; (3) an amendment of the
JTS Certificate if such amendment would alter the rights of the JTS Series A
Preferred Stock; (4) increasing the authorized number of shares of JTS Series A
Preferred or JTS Common Stock; (5) a transaction involving a reorganization,
consolidation or merger in which the holders of JTS voting stock hold less than
50% of the voting stock of the successor entity; (6) payment or declaration by
any dividend other than in Common Stock to the holders of Common Stock; or (7)
repurchase of securities other than from employees or consultants terminating
their employment or consulting relationship with JTS.
Should JTS authorize and issue shares of a new class of capital stock, the
holders thereof would vote with the holders of the previously outstanding
capital stock on proposals not adversely affecting a particular class. In such
event the holders of the previously outstanding capital stock, if in the
minority, would be unable to control the outcome of a vote, and, if in the
majority, would be able to control the outcome of such a vote.
Elimination of Actions by Written Consent of Stockholders. Under Nevada and
Delaware law, stockholders may execute an action by written consent in lieu of a
stockholder meeting. Nevada and Delaware law permit a corporation to eliminate
such actions by written consent in its charter or bylaws. The Bylaws of Atari
and JTS provide for action of the stockholders without a meeting including
written consent. The Certificate of the Combined Company does not permit action
by written consent of stockholders.
Dividends and Repurchases of Shares. Nevada law dispenses with the concepts
of par value of shares as well as statutory definitions of capital, surplus and
the like. The concepts of par value, capital and surplus are retained under
Delaware law.
Nevada law prohibits a distribution (including dividends, purchases,
redemptions or other acquisition of shares, distributions of indebtedness or
otherwise) if, after giving effect to the distribution, (1) the corporation
would not be able to pay its debts as they become due in the usual course of
business or (2) except as provided in the articles of incorporation, the
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation. To the extent that
Section 2115 would render California law applicable to JTS,
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<PAGE> 125
distributions (including dividends and redemptions of shares) are permitted if
the corporation's assets-to-liabilities ratios are sufficient under CGCL Section
500.
Appraisal or Dissenters' Rights. Under both Nevada and Delaware law, a
stockholder of a corporation participating in certain major corporate
transactions may, under varying circumstances, be entitled to appraisal or
dissenters' rights pursuant to which such stockholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under
Delaware law, such dissenters' rights are not available (a) with respect to the
sale, lease or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation
whose shares are either listed on a national securities exchange or are held of
record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or held of record by more than 2,000
holders, plus cash in lieu of fractional shares, or (c) to stockholders of a
corporation surviving a merger if no vote of the stockholders of the surviving
corporation is required to approve the merger because the merger agreement does
not amend the existing certificate of incorporation, each share of the surviving
corporation outstanding prior to the merger is an identical outstanding or
treasury share after the merger, and the number of shares to be issued in the
merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the merger and if certain other conditions are
met. See "The Proposed Merger and Related Transactions -- Appraisal and
Dissenters' Rights -- Delaware Appraisal Rights."
Under Nevada law, dissenters' rights are not available in a merger or share
exchange if the shares held by the stockholders prior to the share exchange or
merger were either listed on a national securities exchange or held by at least
2,000 stockholders of record unless the articles of incorporation of the
corporation provide otherwise or the stockholders are required to accept under
the plan of merger share exchange anything other than cash or shares of the
surviving corporation or shares that are listed on a national securities
exchange, or a combination of these. Because Atari Common Stock is listed on a
national securities exchange and because the Atari Articles do not provide
otherwise, Atari stockholders may not exercise dissenters' rights with respect
to the Merger.
To the extent that Section 2115 would render California law applicable to
JTS, stockholders who dissent from a merger may also be entitled to dissenters'
rights under the CGCL. See "The Proposed Merger and Related
Transactions -- Appraisal and Dissenters' Rights -- California Dissenters'
Rights."
The foregoing discussion of material differences between the rights of
Atari and JTS stockholders under their respective charter documents and
applicable state laws is only a summary of certain provisions and does not
purport to be a complete description of such differences. The discussion is
qualified in its entirety by reference to the Nevada, Delaware and California
General Corporation Laws, the respective common law in Nevada, Delaware and
California and the full text of the Certificate of Incorporation and any
amendments thereto and the Bylaws and any amendment thereto of Atari and JTS.
LEGAL MATTERS
The validity of the JTS Common Stock issuable in the Merger, the federal
income tax consequences in connection with the Merger and certain other matters
relating to the Merger will be passed upon for JTS by Cooley Godward Castro
Huddleson & Tatum. The federal income tax consequences in connection with the
Merger and certain other matters relating to the Merger will be passed upon for
Atari by Wilson Sonsini Goodrich & Rosati, P.C. As of June 18, 1996, one member
of Wilson Sonsini Goodrich & Rosati, P.C., investment partnerships of which such
individual is a partner and a trust for which such individual serves as trustee,
beneficially owned 84,000 shares of JTS Series A Preferred Stock.
EXPERTS
The consolidated financial statements of Atari Corporation as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Joint Proxy Statement/Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
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<PAGE> 126
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of JTS Corporation, Inc and The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited included in this Joint
Proxy Statement/Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, to the extent and for the periods indicated in their
reports, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to said reports which include
an explanatory paragraph describing uncertainties concerning the ability of the
Company to continue as a going concern discussed in Note 1 to the financial
statements.
STOCKHOLDER PROPOSALS
In the event the Merger is not consummated for any reason, Atari expects to
hold an annual meeting in 1997. To be eligible for inclusion in Atari's proxy
solicitation materials for its annual stockholder meeting to be held in 1997,
any stockholder proposal to be considered at such meeting must have been
received at Atari's principal executive offices, 455 South Mathilda Avenue,
Sunnyvale, California 94086, no later than January 20, 1997. Any such proposal
is subject to the requirements of the proxy rules adopted under the Exchange
Act.
119
<PAGE> 127
ATARI CORPORATION, JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ATARI CORPORATION
Report of Deloitte & Touche LLP....................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and
1993................................................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1994, and 1993...................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Unaudited Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995...... F-15
Unaudited Consolidated Statements of Operations for the Quarters Ended March 31, 1996
and March 31, 1995.................................................................. F-16
Unaudited Consolidated Statements of Cash Flows for the Quarters Ended March 31, 1996
and March 31, 1995.................................................................. F-17
Unaudited Notes to Consolidated Financial Statements.................................. F-18
JTS CORPORATION
Report of Arthur Andersen LLP......................................................... F-19
Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-20
Statements of Operations for the 52 weeks ended January 28, 1996 and for the period
from inception (February 3, 1994) to January 29, 1995............................... F-21
Statements of Stockholders' Deficit from inception (February 3, 1994) to
January 28, 1995.................................................................... F-22
Statements of Cash Flows for the 52 weeks ended January 28, 1996 and for the period
from inception (February 3, 1994) to January 29, 1995............................... F-23
Notes to Financial Statements......................................................... F-24
Unaudited Condensed Consolidated Balance Sheets as of April 28, 1996 and January 28,
1996................................................................................ F-33
Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended April
28, 1996 and April 30, 1995......................................................... F-34
Unaudited Consolidated Statements of Cash Flows for the Quarters Ended April 28, 1996
and April 30, 1995.................................................................. F-35
Unaudited Notes to Consolidated Financial Statements.................................. F-36
THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
Report of Arthur Andersen LLP......................................................... F-37
Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-38
Statement of Revenues and Expenses for the period from February 1, 1995 to January 28,
1996................................................................................ F-39
Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-40
Notes to Financial Statements......................................................... F-41
</TABLE>
F-1
<PAGE> 128
REPORT OF DELOITTE & TOUCHE LLP
To the Shareholders and Board of Directors
of Atari Corporation:
We have audited the accompanying consolidated balance sheets of Atari
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Atari Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 1996
(April 8, 1996 as to Note 16)
F-2
<PAGE> 129
ATARI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $700 and $4,450 held as restricted
balances in 1995 and 1994)...................................... $ 28,941 $ 22,592
Marketable securities.............................................. 21,649 58,432
Accounts receivable (less allowances for returns and doubtful
accounts:
1995, $4,221; 1994, $1,957)..................................... 2,468 9,262
Inventories........................................................ 10,934 18,185
Other current assets............................................... 1,134 4,717
--------- ---------
Total current assets....................................... 65,126 113,188
GAME SOFTWARE DEVELOPMENT COSTS -- Net............................... 758 5,145
EQUIPMENT AND TOOLING -- Net......................................... 671 1,315
REAL ESTATE HELD FOR SALE............................................ 10,468 10,741
OTHER ASSETS......................................................... 546 653
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................... $ 4,954 $ 15,341
Accrued liabilities................................................ 5,088 5,177
--------- ---------
Total current liabilities.................................. 10,042 20,518
--------- ---------
LONG-TERM OBLIGATIONS................................................ 42,354 43,454
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -- authorized, 10,000,000 shares;
none outstanding................................................ -- --
Common stock, $.01 par value -- authorized, 100,000,000 shares;
outstanding: 1995, 63,687,118 shares; 1994, 63,648,535 shares... 637 636
Additional paid-in capital......................................... 196,209 196,138
Unrealized net gain on marketable securities....................... 7,088 542
Accumulated translation adjustments................................ (663) (1,724)
Accumulated deficit................................................ (178,098) (128,522)
--------- ---------
Total shareholders' equity...................................... 25,173 67,070
--------- ---------
TOTAL...................................................... $ 77,569 $ 131,042
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 130
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUES................................................... $ 14,626 $ 38,748 $ 29,108
COST AND EXPENSES:
Cost of revenues......................................... 44,234 35,200 42,768
Research and development................................. 5,410 5,775 4,876
Marketing and distribution............................... 12,726 14,651 8,980
General and administrative............................... 5,921 7,169 7,558
Restructuring charges.................................... -- -- 12,425
-------- -------- --------
Total operating expenses......................... 68,291 62,795 76,607
-------- -------- --------
OPERATING LOSS............................................. (53,665) (24,047) (47,499)
Settlements of patent litigation........................... -- 32,062 --
Exchange gain (loss)....................................... 13 1,184 (2,234)
Other income............................................... 2,670 484 854
Interest income............................................ 3,133 2,015 2,039
Interest expense........................................... (2,309) (2,304) (2,290)
-------- -------- --------
Income (loss) before income taxes................ (50,158) 9,394 (49,130)
Income tax credit.......................................... -- -- 264
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT.................. (50,158) 9,394 (48,866)
Extraordinary credit -- gain on extinguishment of 5 1/4%
convertible subordinated debentures...................... 582 -- --
-------- -------- --------
NET INCOME (LOSS).......................................... $(49,576) $ 9,394 $(48,866)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary credit................ $ (0.79) $ 0.16 $ (0.85)
Net income (loss)........................................ $ (0.78) $ 0.16 $ (0.85)
Number of shares used in computations.................... 63,697 58,962 57,148
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 131
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE UNREALIZED
FROM NET GAIN
COMMON STOCK ADDITIONAL SALE OF ACCUMULATED ON
----------------- PAID-IN COMMON TRANSLATION MARKETABLE ACCUMULATED
SHARES AMOUNT CAPITAL STOCK ADJUSTMENTS SECURITIES DEFICIT TOTAL
------ ------ ---------- ---------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY
1, 1993.......... 57,137 $571 $142,315 $(19) $(3,234) $ -- $ (89,050) $ 50,583
Stock options
exercised........ 89 1 191 192
Common stock
repurchased...... (11) (9) 9 --
Collection of notes
receivable....... 7 7
Translation
adjustments...... 2,438 2,438
Net loss........... (48,866) (48,866)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1993......... 57,215 572 142,497 (3) (796) -- (137,916) 4,354
Sale of common
stock............ 6,277 63 53,270 53,333
Stock options
exercised........ 157 1 371 372
Collection of notes
receivable....... 3 3
Translation
adjustments...... (928) (928)
Unrealized net gain
on marketable
securities....... 542 542
Net income......... 9,394 9,394
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1994......... 63,649 636 196,138 -- (1,724) 542 (128,522) 67,070
Stock options
exercised........ 82 1 109 110
Stock
repurchased...... (44) (38) (38)
Translation
adjustments...... 1,061 1,061
Unrealized net gain
on marketable
securities....... 6,546 6,546
Net loss........... (49,576) (49,576)
------ ---- -------- ---- ------- ------ ------ ---------
BALANCES, DECEMBER
31, 1995......... 63,687 $637 $196,209 $ -- $ (663) $7,088 $(178,098) $ 25,173
====== ==== ======== ==== ======= ====== ====== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 132
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................................................... $(49,576) $ 9,394 $(48,866)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Gain from extinguishment of 5 1/4% convertible subordinated debentures..................... (582) -- --
Depreciation and amortization.............................................................. 1,970 2,619 361
Provision for production tooling........................................................... 300 -- --
Provision for doubtful accounts............................................................ 50 194 232
Provision for sales returns and allowances................................................. 5,028 1,563 457
Provision for restructuring................................................................ -- -- 12,425
Gain on sale of marketable securities...................................................... (2,377) -- (324)
Provision for inventory valuation.......................................................... 12,640 5,362 18,100
Utilization of advertising barter credits.................................................. 3,179 -- --
Write-off of game software development costs............................................... 16,578 804 --
Changes in operating assets and liabilities:
Accounts receivable...................................................................... 1,637 (5,383) 16,863
Inventories.............................................................................. (5,389) (14,177) 951
Other assets............................................................................. 395 (336) 3,178
Accounts payable......................................................................... (10,372) 3,763 (4,925)
Accrued liabilities...................................................................... (42) (660) (15,881)
-------- -------- --------
Net cash provided (used) by operations..................................................... (26,561) 3,143 (17,429)
-------- -------- --------
INVESTING ACTIVITIES:
Sales and maturities of marketable securities.............................................. 55,703 -- 2,525
Purchase of marketable securities.......................................................... (9,997) (50,000) --
Purchases of property, equipment and tooling............................................... (782) (1,207) (663)
Sale of property........................................................................... 29 7,543 --
Game software development costs............................................................ (12,791) (5,810) (789)
Other assets............................................................................... 107 482 541
-------- -------- --------
Net cash provided (used) by investing activities........................................... 32,269 (48,992) 1,614
-------- -------- --------
FINANCING ACTIVITIES:
5 1/4% convertible subordinated debentures extinguished.................................... (518) -- --
Repayments of borrowings................................................................... -- (7,642) (259)
Issuance of common stock, net.............................................................. 72 53,708 199
-------- -------- --------
Net cash provided (used) by financing activities........................................... (446) 46,066 (60)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS...................................... 1,087 (684) (356)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................................. 6,349 (467) (16,231)
CASH AND EQUIVALENTS:
Beginning of year.......................................................................... 22,592 23,059 39,290
-------- -------- --------
End of year................................................................................ $ 28,941 $ 22,592 $ 23,059
======== ======== ========
OTHER CASH FLOW INFORMATION:
Interest paid.............................................................................. $ 2,309 $ 2,303 $ 3,023
======== ======== ========
Income taxes refunded...................................................................... $ -- $ (426) $ (225)
======== ======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Exchange of inventory for advertising services............................................. $ -- $ 3,179 $ --
======== ======== ========
Exchange of property for retirement of debt................................................ $ -- $ 1,891 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 133
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY
Nature of Operations -- The Company designs and markets interactive
multimedia entertainment systems and related software and peripheral products.
Manufacture of these products is performed by third parties. The principal
methods of distribution are through mass market retailers, consumer electronic
specialty stores and distributors of electronic products.
Product Focus -- Since 1992, the Company has focused its research and
development effort on its 64-bit Jaguar interactive multimedia entertainment
system. This product was introduced in 1993 and, in 1995 and 1994, 68% and 76%
of revenues, respectively, were associated with this product. Sales of the
Jaguar in 1995 were disappointing and the Company is currently test marketing
different price points and software bundles for the Jaguar in an attempt to sell
its substantial inventory of such products.
In December 1994, the Company planned price reductions beginning in early
1995 and recognized the impact of this decision on finished and in-process
inventory through a write-down of inventory of $3.6 million, which is included
in cost of sales in the fourth quarter of 1994. In December 1995, the Company
planned further price reductions beginning in early 1996 and recognized the
impact of this decision through a $10.9 million write-down of inventory, which
is included in cost of sales in the fourth quarter of 1995.
The Company continues to carry limited quantities of its older 8-bit and
16-bit video games and computer product lines. As a result of rapid
technological change and intense competition, the Company wrote down inventories
of these products by $18.1 million in 1993 which was included in cost of sales.
Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect recorded amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. In connection with
the change of the Company's focus, measurement of assets and liabilities is
dependent upon management's ability to accurately predict future operating
results. Actual results could differ from these estimates.
Restructuring -- The Company has active operations in the United States and
the United Kingdom. During 1993 and 1992, the Company significantly restructured
its operations around the world, closing operations in Australia and the Far
East, in several European countries and in Canada and Mexico. These operational
closures resulted in the bankruptcy of subsidiaries in Australia and Germany and
may result in the voluntary or involuntary liquidation or bankruptcy of other
subsidiary companies. Charges for restructuring have been separately reported in
the consolidated statements of operations for 1993. The remaining accruals of
$351,000 at December 31, 1995 relate to employee benefits in Italy and lease
obligations in the Netherlands.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the Company and its subsidiaries. All transactions and balances between
the companies are eliminated.
Cash and Equivalents -- Cash equivalents are stated at cost, which
approximates market value, have maturities not exceeding ninety days upon
acquisition and generally consist of certificates of deposit, time deposits,
treasury notes and commercial paper.
Marketable Securities -- Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Marketable securities are
carried as available-for-sale securities and reported at the fair market value.
The cumulative effect of adoption of SFAS 115 as of January 1, 1994 was not
material. Unrealized gains and losses are reported as a separate component of
shareholders' equity. Realized gains and losses are recorded in the statements
of operations and realized gains were $2.4 million in 1995. The cost of
securities sold is based on average cost.
F-7
<PAGE> 134
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Inventories are stated at the lower of cost or market. Cost
is computed using standard costs which approximate actual cost on a first-in,
first-out basis. Market for each of the Company's product lines is determined by
reference to expected sales prices less direct selling expenses.
Prepaid Advertising -- Included in other current assets at December 31,
1994 is $3.2 million of prepaid advertising resulting from a barter transaction.
The amount recorded as prepaid advertising equals the carrying value of certain
inventory exchanged for advertising credits. The Company expensed the prepaid
advertising as utilized during 1995.
Equipment and Tooling -- Equipment and tooling are stated at cost.
Depreciation on equipment is computed using the straight-line method based on
estimated useful lives of the assets of two to five years. Tooling is
depreciated on a units of production basis. Leasehold improvements are amortized
over the estimated useful life or lease term, as appropriate. Fully depreciated
assets, and related depreciation, are excluded from the consolidated financial
statements.
Real Estate Held for Sale -- Real property associated with closed
operations in the U.S. is stated at estimated market value as determined by
recent valuations, appraisals or pending sales offers.
Revenue Recognition -- Sale of consoles, software game cartridges and
related products are recorded as revenue at the time of shipment to customers.
Concurrently, the Company establishes reserves for estimated returns, which are
recorded as a reduction of sales, and for cooperative advertising allowances,
which are recorded as marketing and distribution expense. Royalty revenues are
recognized when earned and collection is probable.
Income Taxes -- The Company adopted SFAS No. 109 "Accounting for Income
Taxes" in the first quarter of 1993 which requires an asset and liability method
for financial accounting and reporting of income taxes. The impact of the
adoption of SFAS 109 was not material.
Foreign Currency Translation -- Assets and liabilities of operations
outside the United States are translated into United States dollars using
current exchange rates, and the effects of foreign currency translation
adjustments are deferred and included as a component of shareholders' equity.
Income (Loss) per Common Share -- Per share amounts are computed based on
the weighted average number of common and dilutive common equivalent shares
(stock options) outstanding during each period. The effect of the assumed
conversion of the 5 1/4% convertible subordinated debentures was antidilutive
for all periods presented and excluded from the computation.
Fiscal Year -- The Company uses a 52/53 week fiscal year which ends on the
Saturday closest to December 31. All fiscal years presented contain 52 weeks.
For simplicity of presentation, the date December 31 is used to represent the
fiscal year end.
Reclassifications -- Certain items have been reclassified in the 1994 and
1993 financial statements to conform to the 1995 presentation and had no effect
on operating results or shareholders' equity.
Recently Issued Pronouncements -- In October 1995, the Financial Accounting
Standards Board issued FASB No. 123, "Accounting for Stock-Based Compensation."
The new standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period. This standard will be effective for the Company
beginning in 1996, and requires measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the Company had applied the new method of accounting.
The Company intends to follow these
F-8
<PAGE> 135
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
3. FINANCIAL INSTRUMENTS
Marketable Securities -- Marketable securities available for sale consist
of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ----------------------------------
GROSS GROSS
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED
ISSUE COST VALUE GAINS COST VALUE GAINS
- ---------------------------------------- --------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Equity securities --
Dixon common stock.................... $ 4,565 $11,606 $7,041 $ 7,890 $ 8,432 $ 542
Government securities --
Federal Home Loan Bank................ 4,993 5,026 33 -- -- --
Federal Home Loan Mortgage Corp....... 5,003 5,017 14 -- -- --
Foreign government debt securities --
Eurodollar notes...................... -- -- -- 50,000 50,000 --
----- ------- ------- ------
Total marketable securities......... $14,561 $21,649 $7,088 $57,890 $58,432 $ 542
===== ======= ======= ======
</TABLE>
The contractual maturities of the government securities range from two to
four years. The Eurodollar notes matured during 1995.
Concentration of Credit Risk -- The Company sells to mass market retailers,
consumer electronic specialty stores and to distributors of electronic products
throughout the United States and Europe. The Company makes ongoing credit
evaluations of customers and, at times, requires letters of credit from some
foreign customers. Sales to foreign customers are generally stated in the
currency of the customer. To date, the Company has not entered into hedges of
these foreign currency exposures.
Fair Value of Financial Instruments -- In accordance with the provisions of
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on and off balance
sheet financial instruments where it is practicable to estimate the value, the
Company has estimated the fair value of its financial instruments. The estimated
fair value of the 5 1/4% convertible subordinated debentures at December 31,
1995 was approximately $20 million based primarily on quoted market prices. The
carrying amounts of the remainder of the Company's financial instruments,
including cash and equivalents, marketable securities, accounts receivable and
accounts payable, approximate fair values due to their short maturities.
4. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Finished goods................................................... $ 9,927 $15,799
Raw materials and work-in-process................................ 1,007 2,386
------- -------
Total....................................................... $10,934 $18,185
======= =======
</TABLE>
5. GAME SOFTWARE DEVELOPMENT COSTS
Internal game software development costs are expensed as incurred as these
costs relate primarily to development tools. External development costs are
capitalized once technological feasibility has been determined. During 1995 and
1994, the Company capitalized $12.8 million and $5.8 million, respectively, of
F-9
<PAGE> 136
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts paid to third parties, primarily as prepaid licenses, in connection with
game development for the Jaguar. The Company amortizes such costs over the
shorter of 12 months from game introduction or the estimated unit sales of the
game title. The Company assesses the recoverability of capitalized games
software development costs in light of many factors, including, but not limited
to, anticipated future revenues, estimated economic useful lives and changes in
software and hardware technologies. Amortization expense and adjustments for
management's assessment of recoverability were $17.1 million (including a
write-off of $16.6 million) and $1.5 million (including a write-off of $804,000)
for the years ended December 31, 1995 and 1994, respectively.
6. EQUIPMENT AND TOOLING
Equipment and tooling at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Equipment and tooling............................................. $1,526 $ 1,874
Furniture and fixtures............................................ 198 708
Leasehold improvements............................................ -- 43
------ -------
Total............................................................. 1,724 2,625
Accumulated depreciation and amortization......................... (753) (1,310)
Reserve for production tooling.................................... (300) --
------ -------
Equipment and tooling -- net...................................... $ 671 $ 1,315
====== =======
</TABLE>
7. REAL ESTATE HELD FOR SALE
Property held for sale at December 31, 1995 consists of nine properties in
California and Texas, from the discontinued consumer electronics and home
entertainment products operation. Certain of the properties have rental tenants,
although all properties are available for sale. Rental income, net of rental
expense and depreciation, is included in other income (expense) and was not
material. Disposals in 1994 represented the Company's building in Germany and
land and building in France, which were disposed of with no significant gain or
loss.
8. ACCRUED LIABILITIES
Accrued liabilities at December 31 consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Accrued interest........................................... $1,483 $1,513
Accrued game software development costs.................... 1,525 --
Accrued restructuring charge............................... 351 719
Accrued royalties.......................................... 28 320
Other...................................................... 1,701 2,625
------ ------
Total...................................................... $5,088 $5,177
====== ======
</TABLE>
9. LETTERS OF CREDIT AND RESTRICTED CASH
At December 31, 1995, cash balances of $700,000 were collateral for
outstanding commercial letters of credit associated with inventory components
and software development. At December 31, 1994, cash balances of $4.5 million
were collateral for outstanding letters of credit.
F-10
<PAGE> 137
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT OBLIGATIONS
Convertible Subordinated Debentures -- The Company has $42.4 million of
5 1/4% convertible subordinated debentures due April 29, 2002. The debentures
may be redeemed at the Company's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into common stock at
$16.3125 per share. At December 31, 1995, 2,596,414 shares of common stock were
reserved for issuance upon conversion. Default with respect to other
indebtedness of Atari Corporation in an aggregate amount exceeding $5 million
would result in an event of default whereby the outstanding debentures would be
due and payable immediately.
In 1995, the Company reacquired in the open market and extinguished $1.1
million face value of these debentures for $500,000, resulting in an
extraordinary credit of $582,000.
Term Loans on Real Estate in Europe -- At December 31, 1993, the Company
had two secured term loans outstanding totaling $7.5 million for its building in
Germany and a term loan of $2.0 million for its land and building in France.
These loans were repaid or exchanged in 1994 from the sale or transfer of the
properties.
11. SETTLEMENTS OF PATENT LITIGATION
During the first quarter of 1994, the Company received $2.2 million with
respect to the settlement of litigation between the Company, Atari Games
Corporation and Nintendo. Although not part of the litigation, the Company sold
1,500,000 shares of its common stock to Time Warner (parent company of Atari
Games Corporation), Inc. for $12.8 million.
During the fourth quarter of 1994, the Company completed a comprehensive
agreement ("Agreement") with Sega Enterprises, Ltd. ("Sega") concerning
resolution of disputes, equity investment and patent and product licensing
agreements. The results of the Agreement were as follows: (i) Sega acquired
4,705,883 shares of the Company's common stock for $40.0 million; (ii) the
Company received a payment of $29.8 million ($50.0 million from Sega, net of
$20.2 million of legal fees and associated costs) in exchange for a license from
Atari covering the use of a library of Atari patents issued between 1977 through
1984 (excluding patents which exclusively claim elements of the Company's JAGUAR
and LYNX products) through the year 2001; and (iii) the Company and Sega agreed
to cross-license up to five software game titles each year through the year
2001.
12. INCOME TAXES
The credit for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Current:
Federal............................................. $-- $-- $ --
Foreign............................................. -- -- (264)
State............................................... -- -- --
-- --
-----
Income tax credit..................................... $-- $-- $(264)
== == =====
</TABLE>
At December 31, 1995, the Company has a U.S. income tax operating loss
carryforward of $165 million which expires in 2006 through 2010, a research and
development tax credit carryforward of $1.8 million which expires in 2002
through 2010, and a California income tax operating loss carryforward of $60
million which expires as follows: $16.4 million in 1997, $16.7 million in 1998,
$1.6 million in 1999 and $21.8 million in 2000.
F-11
<PAGE> 138
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rates for 1995, 1994 and 1993 were 0%, 0%, and
(1)%, respectively, and differ from the federal statutory rate of 35% as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Computed at federal statutory rates................. $(17,402) $ 3,288 $(17,103)
Valuation allowance................................. 18,604 (3,288) 16,821
Effect of foreign tax rates different than statutory
rates and utilization of foreign loss
carrybacks........................................ -- -- 16
Other............................................... (1,202) -- 2
-------- ------- --------
Income tax credit................................... $ -- $ -- $ (264)
======== ======= ========
</TABLE>
The components of the net deferred tax asset at December 31 consist of (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. operating loss carryforwards...................... $ 57,706 $ 42,149
State operating loss carryforwards..................... 3,820 2,321
Capital loss carryforwards............................. 1,035 1,804
Research and development tax credit carryforwards...... 1,813 1,370
Inventory reserves..................................... 3,237 2,781
Restructuring charges.................................. 50 239
Capitalized game software development costs............ 3,022 --
Other items............................................ 4,411 5,826
-------- --------
Subtotal............................................... 75,094 56,490
Valuation allowance.................................... (75,094) (56,490)
-------- --------
Net deferred tax asset................................. $ -- $ --
======== ========
</TABLE>
Due to the uncertainty surrounding the timing and realization of the
benefits of its favorable tax attributes in future years, the Company has
established a valuation allowance to offset its net deferred tax assets.
Current federal and state tax law includes certain provisions limiting the
use of net operating loss carryforwards in the event of certain defined changes
in stock ownership. The annual use of the Company's net operating loss
carryforwards could be limited according to these provisions, and there can be
no assurance that such limitations will not result in the loss of carryforward
benefits during the carryforward period.
13. STOCK OPTIONS
The Company's stock option plan and restricted stock plan provide for the
issuance of up to 3,000,000 shares of common stock through the issuance of
incentive stock options to employees and nonqualified stock options and
restricted stock to employees, directors and consultants. Under the plans, stock
options or restricted stock may be granted at not less than fair market value as
determined by the Board of Directors. Stock options become exercisable as
established by the Board (generally ratably over five years) and expire up to
ten years from date of grant. The Company's right to repurchase restricted stock
lapses over a maximum period of five years. At December 31, 1995, options for
551,925 shares were exercisable and options for 602,310 shares were available
for future grant. At December 31, 1995, no restricted stock under the restricted
stock plan had been issued.
F-12
<PAGE> 139
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to the stock option plan is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
RANGE PER SHARE
NUMBER OF ------------------
OPTIONS LOW HIGH TOTAL
--------- ------ ----- -----------
<S> <C> <C> <C> <C> <C>
Outstanding, January 1, 1993............... 970,400 $1.500 - $7.50 $ 3,131,450
Granted.................................... 535,583 0.875 - 4.75 1,045,093
Exercised.................................. (89,300) 0.875 - 3.00 (195,463)
Cancelled.................................. (222,500) 0.875 - 6.00 (831,625)
---------
Outstanding, December 31, 1993............. 1,194,183 0.875 - 7.50 3,149,455
Granted.................................... 289,500 2.250 - 7.00 1,467,750
Exercised.................................. (157,065) 0.875 - 6.25 (372,403)
Cancelled.................................. (18,160) 1.675 - 7.50 (93,980)
---------
Outstanding, December 31, 1994............. 1,308,458 0.875 - 7.00 4,150,822
Granted.................................... 1,487,000 1.438 - 3.81 3,970,814
Exercised.................................. (82,333) 0.875 - 2.00 (110,250)
Cancelled.................................. (615,600) 0.875 - 7.00 (2,135,175)
---------
Outstanding, December 31, 1995............. 2,097,525 $0.875 - $5.25 $ 5,876,211
=========
</TABLE>
14. SEGMENT INFORMATION
The Company operates in one industry segment -- the design and sale of
consumer electronic products.
The Company's foreign operations at December 31, 1995 consist of sales and
distribution facilities in Europe. Transfers between geographic areas are
accounted for at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Corporate assets
are primarily cash and equivalents, marketable securities and real estate held
for sale.
The following tables present a summary of operations by geographic region
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
North America.............................. $ 8,163 $ 23,158 $ 7,390
Export sales from North America............ 1,868 8,538 --
Europe..................................... 4,595 7,052 18,548
Other...................................... -- -- 3,170
------- ------- -------
Total............................ $ 14,626 $ 38,748 $ 29,108
======= ======= =======
Transfer between geographic areas
(eliminated in consolidation):
North America.............................. $ 4,041 $ 1,046 $ 17,781
Europe..................................... 68 1,895 25,284
Other...................................... -- -- 102
------- ------- -------
Total............................ $ 4,109 $ 2,941 $ 43,167
======= ======= =======
</TABLE>
F-13
<PAGE> 140
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Operating loss:
North America.............................. $(51,036) $(21,600) $(14,025)
Europe..................................... (2,629) (2,447) (19,741)
Other...................................... -- -- (13,733)
------- ------- -------
Total............................ $(53,665) $(24,047) $(47,499)
======= ======= =======
Identifiable assets at December 31:
North America.............................. $ 14,588 $ 37,627 $ 17,369
Europe..................................... 1,856 1,650 5,801
Corporate assets........................... 61,125 91,765 51,663
------- ------- -------
Total............................ $ 77,569 $131,042 $ 74,833
======= ======= =======
</TABLE>
No single customer accounted for more than 10% of total revenues for the
years ended December 31, 1995, 1994 or 1993.
15. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases various facilities and equipment under noncancellable
operating lease arrangements. These leases generally provide renewal options of
five additional years. Minimum future lease payments under noncancellable
operating leases as of December 31, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996................................................ $ 670
1997................................................ 460
1998................................................ 183
1999................................................ 85
2000................................................ 74
------
Total minimum lease payments.............. $1,472
======
</TABLE>
Rent expense for operating leases was $1,193,000, $1,218,000 and $1,251,000
for the years 1995, 1994 and 1993, respectively.
Certain claims and suits arising in the ordinary course of business have
been filed or are pending against the Company. The number of such claims has
increased as the Company significantly downsized its development operations. In
the opinion of management, all such matters have been adequately provided for,
are without merit, or are such that if settled unfavorably would not have a
material adverse effect on the Company's consolidated financial position and
results of operations.
16. SUBSEQUENT EVENT
On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
F-14
<PAGE> 141
ATARI CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996 AND DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $441 and $700 held as restricted
balances at March 31, 1996 and December 31, 1995)................ $ 23,748 $ 28,941
Marketable securities............................................... -- 21,649
Accounts receivable (less allowances for returns and doubtful
accounts:
March 31, 1996 $4,006; December 31, 1995 $4,221)................. 601 2,468
Inventories (See Note 2)............................................ 5,526 10,934
Subordinated secured convertible note with JT Storage, Inc.
(see Note 4)..................................................... 25,000 --
Other current assets................................................ 1,101 1,134
--------- ---------
Total current assets........................................ 55,976 65,126
GAME SOFTWARE DEVELOPMENT COSTS -- Net................................ 861 758
EQUIPMENT AND TOOLING -- Net.......................................... 577 671
REAL ESTATE HELD FOR SALE............................................. 10,468 10,468
OTHER ASSETS.......................................................... 524 546
--------- ---------
TOTAL................................................................. $ 68,406 $ 77,569
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 3,295 $ 4,954
Accrued Liabilities................................................. 5,481 5,088
--------- ---------
TOTAL CURRENT LIABILITIES............................................. 8,776 10,042
--------- ---------
LONG-TERM OBLIGATIONS................................................. 42,354 42,354
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -- authorized, 10,000,000 shares;
none outstanding................................................. -- --
Common stock, $.01 par value -- authorized, 100,000,000 shares;
(outstanding: March 1996, 63,710,318;
December 1995, 63,687,118)....................................... 637 637
Additional paid-in capital.......................................... 196,272 196,209
Unrealized gain on marketable securities............................ -- 7,088
Accumulated translation adjustments................................. (730) (663)
Accumulated deficit................................................. (178,903) (178,098)
--------- ---------
Total shareholders' equity....................................... 17,276 25,173
--------- ---------
TOTAL....................................................... $ 68,406 $ 77,569
========= =========
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE> 142
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
MARCH 31, 1996 AND MARCH 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
<S> <C> <C>
NET REVENUE............................................................ $ 1,272 $ 4,874
COST AND EXPENSES:
Cost of revenues..................................................... 1,211 3,846
Write-down of inventory.............................................. 5,000 --
Research and development............................................. 201 1,815
Marketing and distribution........................................... 758 2,576
General and administrative........................................... 1,251 1,795
------- -------
Total operating expenses..................................... 8,421 10,032
------- -------
OPERATING LOSS......................................................... (7,149) (5,158)
Gain on sale of marketable securities.................................. 6,347 107
Exchange (loss) gain................................................... (60) 5
Other income(expense), net............................................. 293 201
Interest income........................................................ 332 953
Interest expense....................................................... (569) (581)
------- -------
Loss before income taxes and extraordinary credit...................... (806) (4,473)
------- -------
Provision for income taxes............................................. -- --
------- -------
Loss before extraordinary credit....................................... (806) (4,473)
------- -------
Extraordinary credit -- gain on extinguishment of 5 1/4% convertible
subordinated debentures (see Note 3)................................. -- 47
------- -------
NET LOSS............................................................... $ (806) $(4,426)
======= =======
LOSS PER COMMON SHARE:................................................. $ (0.01) $ (0.07)
======= =======
Number of shares used in computations................................ 63,701 63,701
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 143
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------
MARCH 31, MARCH 31,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss)............................................................... $ (805) $ (4,426)
Adjustments to reconcile net (loss) to net cash provided (used) by
operating activities:
Gain from extinguishment of 5 1/4% convertible subordinated debentures... -- (47)
Depreciation and amortization............................................ 136 672
Gain on sale of marketable securities.................................... (6,347) (107)
Provision for inventory valuation........................................ 5,000 --
Changes in operating assets and liabilities:
Accounts receivable.................................................... 1,895 5,035
Inventories............................................................ 408 (4,051)
Other assets........................................................... 44 243
Accounts payable....................................................... (1,664) (8,983)
Accrued liabilities.................................................... 386 851
-------- --------
Net cash (used) by operations............................................ (947) (10,813)
INVESTING ACTIVITIES:
Sale of marketable securities............................................ 20,908 492
Proceeds from property sales............................................. 33 --
Property purchases....................................................... -- (51)
Borrowing by JTS......................................................... (25,000) --
Stock dividend received on investment.................................... -- 82
Decrease in other assets................................................. 22 99
Increase in software development costs................................... (103) (2,864)
-------- --------
Net cash (used) by investing activities.................................. (4,140) (2,242)
FINANCING ACTIVITIES:
Repayments of borrowings................................................. -- (100)
Extinguishment of debt................................................... (75) (46)
Issuance of common stock................................................. 63 84
-------- --------
Net cash (used) by financing activities.................................. (12) (62)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH & EQUIVALENTS..................................................... (94) 47
-------- --------
NET DECREASE IN CASH & EQUIVALENTS....................................... (5,193) (13,070)
CASH & EQUIVALENTS:
Beginning of period...................................................... 28,941 22,592
-------- --------
End of period............................................................ $ 23,748 $ 9,522
======== ========
NON CASH INVESTING ACTIVITIES:
Unrealized gain on marketable securities................................. $ -- $ 1,836
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 144
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's 1995 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission.
The unaudited financial statements included herein reflect all adjustments
(which include only normal, recurring adjustments), which are, in the opinion of
management, necessary to state fairly the results for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full fiscal year.
The Company operates with a 52/53 week fiscal calendar. Both quarters
covered by this report have 13 weeks and for simplicity of presentation, the
calendar quarter date is used to represent the quarter end. The actual fiscal
closing dates for the first quarter of 1996 and 1995 were March 30, and April 1,
respectively.
NOTE 2. INVENTORIES
In the first quarter of 1996, the Company wrote-down inventory by $5.0
million relating to Jaguar products. These write-downs resulted from
management's revised estimates of sales resulting from continued disappointing
sales of Jaguar.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Finished goods....................................... $ 5,049 $ 9,927
Raw materials and work-in-process.................... 477 1,007
------ -------
Total...................................... $ 5,526 $ 10,934
====== =======
</TABLE>
NOTE 3. REPURCHASE OF 5 1/4% SUBORDINATED CONVERTIBLE DEBENTURES
In the first quarter of 1995, the Company repurchased a portion of its
5 1/4% subordinated convertible debentures. The Company repurchased 100 bonds at
face value of $1,000 each, and recorded an extraordinary credit of $47,250.
NOTE 4. MERGER JT STORAGE, INC.
On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
F-18
<PAGE> 145
REPORT OF ARTHUR ANDERSEN LLP
To the Board of Directors of
JTS Corporation:
We have audited the accompanying balance sheets of JTS Corporation (a
Delaware corporation), formerly JT Storage, Inc., as of January 28, 1996 and
January 29, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year ended January 28, 1996 and the period from
inception (February 3, 1994) to January 29, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JTS Corporation as of
January 28, 1996 and January 29, 1995, and the results of its operations and its
cash flows for the year ended January 28, 1996 and the period from inception
(February 3, 1994) to January 29, 1995, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN, LLP
San Jose, California
April 4, 1996
F-19
<PAGE> 146
JTS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 29,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 547 $ --
Trade accounts receivable, less allowance for doubtful accounts of
$730 and $4, respectively........................................ 1,286 13
Receivable from Moduler Electronics................................. 6,892 1,033
Other receivables................................................... 812 28
Inventories......................................................... 2,093 358
Prepaid and other current assets.................................... 240 154
------- ------
Total current assets........................................ 11,870 1,586
------- ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost:
Machinery and equipment............................................. 9,231 2,254
Leasehold improvements.............................................. 398 --
Furniture and fixtures.............................................. 1,145 92
Less -- Accumulated depreciation and amortization................... (2,831) (335)
------- ------
7,943 2,011
------- ------
$ 19,813 $ 3,597
======= ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................. $ 4,323 $ 743
Note payable to stockholder......................................... 1,000 --
Accounts payable --
Trade............................................................ 7,226 1,780
Moduler Electronics.............................................. 9,546 366
Accrued payroll and bonus........................................... 978 249
Other accrued liabilities........................................... 2,523 540
Current portion of capitalized lease obligations and long-term
debt............................................................. 1,520 146
------- ------
Total current liabilities................................... 27,116 3,824
LONG-TERM LIABILITIES:
Capitalized lease obligations and long-term debt, net of current
portion.......................................................... 3,485 61
Convertible notes payable to related parties........................ -- 1,902
Convertible notes payable........................................... -- 3,219
------- ------
Total liabilities........................................... 30,601 9,006
------- ------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value; 31,200 shares authorized (increased to 70,000
shares in February 1996); 27,785 shares issued and outstanding in
1996, liquidation value of $29,716............................... 27,785 --
------- ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value; 60,000 shares authorized
(increased to 90,000 shares in February 1996); 7,367 and 4,833
shares issued and outstanding in 1996 and 1995, respectively..... -- --
Additional paid-in capital.......................................... 6,004 --
Deferred compensation............................................... (4,320) --
Notes receivable from stockholders.................................. (623) --
Accumulated deficit................................................. (39,634) (5,409)
------- ------
Total stockholders' deficit................................. (38,573) (5,409)
------- ------
$ 19,813 $ 3,597
======= ======
</TABLE>
The accompanying notes to financial statements are
an integral part of these balance sheets.
F-20
<PAGE> 147
JTS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
52 WEEKS ENDED FROM INCEPTION TO
JANUARY 28, 1996 JANUARY 29, 1995
---------------- -----------------
<S> <C> <C>
REVENUES:
Product sales............................................... $ 13,502 $ --
Technology license revenue.................................. 5,275 --
-------- -------
18,777 --
COST OF PRODUCT SALES......................................... 28,548 --
-------- -------
GROSS MARGIN (DEFICIT)........................................ (9,771) --
-------- -------
OPERATING EXPENSES:
Research and development.................................... 13,375 3,740
Selling, general and administrative......................... 5,579 1,495
Manufacturing start-up costs................................ 3,812 --
-------- -------
Total operating expenses............................ 22,766 5,235
-------- -------
OPERATING LOSS................................................ (32,537) (5,235)
OTHER INCOME (EXPENSE):
Interest income............................................. 108 --
Interest expense............................................ (589) (144)
Other, net.................................................. (32) (30)
-------- -------
NET LOSS...................................................... $(33,050) $(5,409)
======== =======
NET LOSS PER COMMON SHARE..................................... $ (7.17) $ (1.12)
======== =======
SHARES USED IN COMPUTING NET LOSS PER SHARE................... 4,611 4,833
======== =======
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-21
<PAGE> 148
JTS CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------- PAID-IN DEFERRED FROM ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL
------ ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION,
FEBRUARY 3, 1994........ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
to founders at
$.000001 per share... 4,350 -- -- -- -- -- --
Issuance of common stock
at $.000001 in
exchange for
technology license... 483 -- -- -- -- -- --
Net loss for the
period............... -- -- -- -- -- (5,409) (5,409)
----- --- ------ ------- ----- -------- --------
BALANCE, JANUARY 29,
1995.................... 4,833 -- -- -- -- (5,409) (5,409)
Exchange of common stock
for Redeemable Series
A preferred stock.... (483 ) -- -- -- -- (1,000) (1,000)
Issuance costs of
Redeemable Series A
preferred stock...... -- -- -- -- -- (175) (175)
Shares issued under the
stock option plan.... 17 -- 4 -- -- -- 4
Shares issued under
restricted stock
purchase
agreements........... 3,000 -- 6,000 (5,250) (623) -- 127
Amortization of deferred
compensation......... -- -- -- 930 -- -- 930
Net loss................ -- -- -- -- -- (33,050) (33,050)
----- --- ------ ------- ----- -------- --------
BALANCE, JANUARY 28,
1996.................... 7,367 $ -- $6,004 $ (4,320) $ (623) $ (39,634) $(38,573)
===== === ====== ======= ===== ======== ========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-22
<PAGE> 149
JTS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
52 WEEKS ENDED FROM INCEPTION TO
JANUARY 28, 1996 JANUARY 29, 1995
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(33,050) $(5,409)
Adjustments to reconcile net loss to net cash used in
operating activities --
Receivable from Moduler Electronics........................ (5,859) (1,033)
Payable to Moduler Electronics for finished goods
inventory................................................ 9,180 366
Depreciation and amortization expense...................... 2,496 551
Reserve for bad debts...................................... 726 4
Issuance of preferred stock for services rendered.......... 30 --
Payables converted to note payable and subsequently to
preferred stock.......................................... 300 1,902
Amortization of deferred compensation...................... 930 --
Changes in assets and liabilities:
Trade receivables........................................ (1,999) (17)
Other receivables........................................ (757) (28)
Inventories.............................................. (1,735) (312)
Prepaid and other current assets......................... (86) (154)
Accounts payable......................................... 5,446 1,780
Accrued liabilities...................................... 2,712 686
-------- -------
Net cash used in operating activities................. (21,666) (1,664)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................ (3,132) (1,984)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank line of credit............................. 3,580 743
Proceeds from issuance of common stock........................ 104 --
Proceeds from issuance of preferred stock..................... 18,556 --
Preferred stock issuance costs................................ (175) --
Payments on capital lease obligations......................... (408) (10)
Payments on long-term debt.................................... (90) (90)
Proceeds from notes payable................................... 3,778 3,005
-------- -------
Net cash provided by financing activities............. 25,345 3,648
-------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS......................... 547 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............ -- --
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................. $ 547 $ --
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest........................................ $ 449 $ --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Sale of common stock for notes................................ $ 750 $ --
Equipment purchased under capital leases...................... 5,296 82
Conversion of notes payable to preferred stock................ 9,199 --
Issuance of convertible debt upon Kalok acquisition........... -- 214
Equipment ($280) and inventory ($49) acquired net of related
accrued liabilities of $104 from Kalok..................... -- 225
Issuance of debt upon acquisition of Kalok.................... -- 225
Exchange of TEAC common stock to preferred stock.............. 1,000 --
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-23
<PAGE> 150
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS:
JTS Corporation (the "Company"), a Delaware corporation, formerly JT
Storage, Inc. (Note 12), was incorporated on February 3, 1994 to develop, market
and manufacture hard disk drives. The Company was a development stage company
prior to the commencement of production shipments in October 1995. Accordingly,
the Company ceased to be in the development stage at that time. Moduler
Electronics (India) Private Limited ("Moduler Electronics"), a company owned by
the family of a major stockholder manufactured, on a contract basis, all of the
Company's products. In April 1996, the Company acquired 90% of Moduler
Electronics (Note 10).
On February 4, 1994, as part of a settlement in United States Bankruptcy
Court, the Company acquired certain assets and assumed certain liabilities of
Kalok Corporation ("Kalok") in exchange for a note payable to the Kalok
Bankruptcy estate (Note 5) and a warrant to Kalok's unsecured creditors (Note
7). Liabilities assumed of $543,172 exceeded the fair market value of assets
acquired by approximately $215,000 which, due to uncertainties regarding its
realization, was expensed in the accompanying 1995 statement of operations. In
connection with the settlement agreement, the Company acquired certain
proprietary disk drive technology from TEAC Corporation ("TEAC") in exchange for
482,850 shares of common stock, which represented 10% of the outstanding Common
Stock of the Company. No value was assigned to the acquired technology as it had
no cost basis to TEAC and the common stock was deemed to have nominal value. On
February 3, 1995, the Company agreed to issue 1,000,000 shares of Redeemable
Series A preferred stock to TEAC in exchange for the return of the 482,850
shares of common stock and the cancellation of a shareholder agreement with TEAC
(Note 8).
The Company has continued to develop its technology and manufacturing
capabilities during fiscal 1996. This development has resulted in substantial
increases in accounts receivable, accounts payable, bank borrowings, and a net
working capital deficit of $15,246,000 as of January 28, 1996. Operations
subsequent to year end indicate the Company has continued to suffer losses and
its working capital deficit has continued to increase. These factors raise a
substantial doubt about the ability of the Company to continue as a going
concern. The Company's management is pursuing plans to merge with Atari
Corporation ("Atari"). In the opinion of management, the merger, if successful,
would raise cash adequate to fund operations for at least the next 12 months.
Thereafter, the Company will require additional funding. Subsequent to year end,
Atari extended a $25 million loan to the Company of which $19.7 million had been
used as of April 4, 1996. In the event the merger (Note 10) is not consummated,
the loan will, at Atari's option, either be due September 30, 1996 or converted
into the Company's preferred stock. In addition, Moduler Electronics received
approval of additional financing from another Indian bank resulting in total
unused credit facilities of approximately $12 million, subject to certain
conditions.
2. ACCOUNTING POLICIES:
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Revenue Recognition and Product Warranty
Revenue from product sales is generally recognized upon shipment to
customers. The Company warrants its products against defects in design,
materials and workmanship generally for three years. A provision for estimated
future costs relating to warranty expense is recorded when products are shipped.
F-24
<PAGE> 151
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories include direct materials at third party component manufacturers
(other than Moduler Electronics) and are recorded at the lower of cost
(first-in, first-out) or market and consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Raw materials................................. $2,093 $309
Finished goods................................ -- 49
-----
--
-------
$2,093 $358
======= =======
</TABLE>
Equipment and Leasehold Improvements
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of three years. Repairs and
maintenance costs are expensed as incurred. Major renewals and betterments which
substantially extend the useful life of the asset are capitalized.
The Company had equipment with an historical cost of approximately
$4,400,000 and $530,000 located at Moduler Electronics at January 28, 1996 and
January 29, 1995, respectively.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of salaries, materials and supplies.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of less than three
months to be cash equivalents.
Fiscal year
The fiscal year of the Company is a 52- or 53-week period ending on the
Sunday closest to January 31. The fiscal year for the year ended January 28,
1996 was a 52-week period.
Reclassifications
Certain reclassifications have been made to prior period financial
statements to conform to the current presentation.
Income from Technology License
In February 1995, the Company entered into a technology transfer and
perpetual license agreement. Under this agreement, the Company granted
non-exclusive, perpetual rights to manufacture and sell certain of its products.
In connection with the agreement, the Company was obligated to achieve certain
milestones
F-25
<PAGE> 152
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
regarding the successful completion of engineering tests, the delivery of
working models and the commencement of volume production. As of January 28, 1995
the Company had delivered a working prototype and accordingly, recognized income
of $5,275,000 in connection with achieving specified milestones in fiscal 1996.
The remaining income of $1,125,000 will be recognized as future milestones are
achieved. Funds received under this agreement are not reimbursable to the
licensee.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of shares
of common stock outstanding during the periods. The outstanding shares and
earnings per share have been restated for all periods presented to reflect the
impact of the stock split described in Note 7.
3. INCOME TAXES:
The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves............................ $ 292 $ --
Inventory reserves...................................... 1,731 --
Items not currently deductible principally manufacturing
start-up costs related to Moduler Electronics........ 2,327 181
Net operating loss carryforwards........................ 9,930 1,819
Tax credit carryforwards................................ 600 135
--------- --------
Total deferred tax assets................................. 14,880 2,135
Valuation allowance....................................... (14,828) (2,135)
--------- --------
Deferred tax assets, net of valuation allowance........... 52 --
Deferred tax liabilities -- accelerated depreciation...... (52) --
--------- --------
Net deferred tax assets................................... $ -- $ --
========= ========
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the net deferred tax assets such that a valuation allowance has been recorded to
completely offset the net deferred tax assets. Such factors include recurring
operating losses from inception, recent increases in expense levels to support
the Company's growth, and the fact that the market in which the Company competes
is intensely competitive and is characterized by rapidly changing technology.
For income tax reporting purposes, the Company has Federal and State net
operating loss carryforwards of approximately $27,000,000 and $13,500,000,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $350,000 and $250,000, respectively, all of which
will expire on various dates through 2011.
The Internal Revenue Code contains provisions which may limit the amount of
tax carryforwards available to be used in any given year upon the occurrence of
certain events, including changes in ownership interests.
F-26
<PAGE> 153
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS:
Moduler Electronics Transactions
As discussed in Note 1, the Company uses Moduler Electronics to manufacture
all of the Company's products. The Company purchased finished goods from Moduler
Electronics amounting to approximately $14 million in fiscal 1996 and the
majority of the accounts payable balance to Moduler Electronics at January 28,
1996 is a result of these purchases.
The Company made cash advances totalling approximately $2.5 million and
also sold fixed assets and inventory totalling approximately $8.3 million to
Moduler Electronics in fiscal 1996.
The advances were made to fund the manufacturing start-up of disk drives
for the Company. Because the Company intended to (and subsequently did) acquire
90% of Moduler Electronics (Note 10) and the ultimate realizability of these
advances is subject to the achievement by Moduler Electronics of successful
operations, the Company has expensed 90% of Moduler's Electronics' fiscal 1996
net loss in order to reflect its investment in Moduler Electronics' start-up
operations.
The Company entered into an agreement with Moduler Electronics whereby the
Company has undertaken to bear all inventory loss and the cost of any future
warranty claims, product return and rework charges. In fiscal 1996, the Company
assumed approximately $3,448,000 and $171,000 of inventory reserve and warranty
costs, respectively.
Notes Receivable From Stockholders
In January 1996, the Company loaned certain executive officers $750,000
which was used by the officers to purchase 3,000,000 shares of common stock
under restricted stock purchase agreements. The notes bear interest at an annual
rate of 5.91% and the principal and interest is payable in four annual
installments. The notes are with full recourse and are collateralized by the
stock purchased. As of February 28, 1996, $127,500 had been collected on these
notes. The remaining balance of $622,500 is included in stockholders' deficit in
the 1996 accompanying balance sheet.
Note Payable to Stockholders
In January and February 1996, the Company entered into unsecured loan
agreements totalling $1,965,000 with certain stockholders. The notes bear
interest at 10% per annum and the principal and interest are due on July 15,
1996.
Convertible Notes Payable
As of January 29, 1995, the Company had $5,121,186 outstanding under
certain convertible notes payable. These notes were converted into 5,121,186
shares of redeemable preferred stock in February 1995. The Company also had
$2,764,953 outstanding under certain convertible notes payable in June 1995
which were converted into 2,764,953 shares of redeemable preferred stock in
August 1995.
5. NOTES PAYABLE:
Bank Line of Credit
In December 1995, the Company established a line of credit for $5 million.
As of April 4, 1996, $4,323,000 was outstanding under the line. The line of
credit is collateralized by certain assets, bears interest at 9.5%, is due
monthly and the principal is due on June 30, 1996. The line of credit contains
certain financial covenants, among others, relating to minimum financial ratios
and minimum tangible net worth. The Company was not in compliance with these
covenants at January 28, 1996. The bank has waived compliance
F-27
<PAGE> 154
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with these covenants until such time as the merger with Atari occurs (Note 10);
however, the Company may not draw further on the line.
Capitalized Lease Obligations and Long-Term Debt
In conjunction with the purchase of certain assets of Kalok (see Note 1),
the Company issued a non-interest bearing note payable to the Kalok bankruptcy
estate for $225,000. The note is payable in 10 equal quarterly installments of
$22,500, with the final payment due July 1, 1996.
In fiscal 1995, the Company entered into equipment lease agreements under
which it can lease up to $6.5 million of equipment through July 1996. Payments
are due in equal monthly installments over a 36 to 48 month period. As of
January 28, 1996, the cost of the leased assets was $5,377,588 and the related
accumulated depreciation was $1,087,644. The leases bear interest between 11.5%
and 18.2%.
The following is a schedule of future payments under the note payable to
Kalok and equipment leases together with the present value of the net minimum
lease payments at January 28, 1996:
<TABLE>
<CAPTION>
YEARS ENDING
----------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 2,077
1998........................................... 2,021
1999........................................... 2,198
2000........................................... 285
--------
Total net minimum lease payments............... 6,581
Less -- Amount representing interest........... (1,576)
--------
Present value of net minimum lease payment..... 5,005
Less -- Current portion........................ (1,520)
--------
Long term portion.............................. $ 3,485
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company leases its facilities and certain equipment under
non-cancelable operating leases. The future payments under these leases at
January 28, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
----------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 583
1998........................................... 578
1999........................................... 553
2000........................................... 571
2001........................................... 243
------
$2,528
======
</TABLE>
Total rent expense for the periods ended January 29, 1995 and January 28,
1996 was approximately $180,000 and $425,000, respectively.
Royalty Obligation
As discussed in note 1 the Company licenses certain technology from TEAC.
In the event the Company commences selling certain products incorporating
certain TEAC Technology it will incur a royalty obligation of up to 2% of sales
for a certain period. The Company was not marketing any products incorporating
TEAC developed technology and accordingly, no royalties were due as of January
28, 1996.
F-28
<PAGE> 155
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK:
Stock Split and Capitalization
In February 1995, the Board of Directors approved a 4,350-for-1 common
stock split. All share and per share amounts in the accompanying financial
statements have been restated to reflect this split. In February 1996 the
Company amended its certificate of incorporation and authorized 90,000,000 and
70,000,000 shares of common and Redeemable Series A Preferred Stock,
respectively.
Warrants
The Company has issued warrants to purchase 100,000 shares of common stock
to the unsecured creditors of Kalok Corporation in conjunction with the
Company's acquisition of Kalok's assets. The warrants may be exercised for a
one-year period commencing on the earlier of the closing of an initial public
offering or the public registration of the Company's stock. The exercise price
of the warrant is 25% of the initial public offering price or the fair market
value of the Company's stock if the Company becomes a public registrant absent
an initial public offering. Such warrants were deemed to have nominal value at
the issuance date and, accordingly, are carried at no value in the accompanying
financial statements.
The Company has also issued warrants to purchase 500,000 shares of common
stock at $1.00 and $3.00 to the equipment lease company and the bank with which
it has a line of credit, respectively. The warrants may be exercised at any time
before various dates through 2001. In the event of any acquisition, the warrant
to purchase 450,000 shares issued to the equipment lease company will terminate.
Restricted Stock Purchase Agreement
The Company issued 3,000,000 shares of its common stock to certain officers
in exchange for a $750,000 note receivable (Note 4). The Company has the right
to repurchase such shares at the original purchase price. However, the Company's
right to repurchase 1/48 of such shares lapses monthly. As of January 28, 1996,
2,469,271 shares were subject to repurchase. Upon issuance of the common stock
the Company recorded deferred compensation of $5,250,000 for the difference
between the per share sales price of $.25 and $2.00 (the per share fair market
value at the date of grant for financial reporting purposes). The Company is
recognizing the deferred compensation ratably over the period that the
repurchase agreement lapses. 2,000,000 of such shares, however, will no longer
be subject to repurchase in the event there are certain changes of control of
the Company. The merger (Note 10) constitutes a change of control and
accordingly, any remaining unamortized deferred compensation will be expensed at
that time.
Stock Option Plan
The Company has reserved 4,300,000 shares of common stock for issuance
under its 1995 Stock Option Plan. Under the plan, either incentive or
nonstatutory stock options may be granted to purchase shares of common stock.
Nonstatutory stock options may be granted to employees, nonemployee members of
the Board of Directors and consultants at prices not less than 85% of the fair
value of the stock at the date of the grant, as determined by the Board.
Incentive stock options may be granted only to employees at prices not lower
than the fair value of the stock at the date of grant, as determined by the
Board. Options granted under the plan are generally exercisable at any time, and
expire no later than ten years from the date of grant. Options granted vest at a
rate of 25% per annum.
The following table presents the option activity under the Option Plan for
the period from inception to January 28,1996.
F-29
<PAGE> 156
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTION
NUMBER OF PRICE
OPTIONS PER SHARE
--------- ---------
<S> <C> <C>
Options outstanding at January 29, 1995..................... -- --
Granted..................................................... 3,996,675 $ .25
Exercised................................................... (16,729 ) $ .25
Forfeited................................................... (219,199 ) $ .25
--------- ----
Options outstanding at January 28, 1996..................... 3,760,747 $ .25
--------- ----
Exercisable at January 28, 1996............................. 627,193 $ .25
========= ====
</TABLE>
In February and March 1996, the Company issued options to purchase 486,000
shares of common stock to various employees. Such options are ratably
exercisable ranging from $.25 to $2.95 per share and vest ratably over a four
year period.
In March 1996, two officers purchased 1,000,000 shares of the Company's
Common Stock each at a purchase price of $1.00 per share. All of such shares are
subject to a right of repurchase which lapses after five years of service with
the Company provided, however, that the right of repurchase will lapse at the
rate of one-eighth in September 1996 and 1/48(th) per month thereafter if the
merger with Atari closes (Note 10).
Common Stock Reserved for Future Issuance
As of January 28, 1996, the Company has reserved the following shares of
common stock for issuance in connection with:
<TABLE>
<S> <C>
Conversion of redeemable preferred stock................. 27,785,370
Conversion of redeemable preferred stock expected to be
issued in connection with the Moduler Electronics
acquisition............................................ 1,911,000
Stock option plan........................................ 4,283,271
Warrants to purchase common stock........................ 600,000
----------
34,579,641
==========
</TABLE>
8. REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:
In fiscal 1996, the Company issued 27.8 million shares of Series A
preferred stock at $1.00 per share for cash and conversion of certain notes
payable. The Company also issued 30,000 shares of Series A preferred stock to a
consultant for services. The Company also issued 1,000,000 shares of preferred
stock to TEAC in exchange for 482,850 shares of the Company's common stock and
the termination of the TEAC stockholder agreement. The exchange with TEAC was
accounted for as an equity transaction and the value of the preferred stock
issued was charged to accumulated deficit in the accompanying 1996 statement of
operations.
The rights, restrictions and preferences of the preferred stock are as
follows:
- Annual dividends of $.09 per share per annum, when and if declared by the
Board of Directors. Dividends are cumulative and are payable, at the
option of the Company, in cash or shares of common stock.
- In the event of any liquidation, dissolution or winding up of the
Company, the holders of preferred stock shall be entitled to receive
proceeds equal to $1.00 per share plus the greater of (i) all cumulative
unpaid dividends or (ii) any declared and unpaid dividends for preferred
stock then held by them. This distribution will occur prior to any
distribution to the common shareholders. At January 28, 1996, the
liquidation preference was $29,715,761.
F-30
<PAGE> 157
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- Upon the election of the holders of a majority of the outstanding shares
of preferred stock, 33%, 33% and 34% of the stock will be redeemed in
cash by the Company on February 4, 2000, February 4, 2001, and February
4, 2002, respectively. The redemption price shall be equal to $1.00 plus
all accrued but unpaid dividends.
- The following table represents the redemption amounts required under the
agreement:
<TABLE>
<CAPTION>
YEAR
--------------------------------------------- AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
2000......................................... $ 9,905
2001......................................... 9,905
2002......................................... 9,906
-------
$ 29,716
=======
</TABLE>
- At the option of the holder, each preferred share is convertible into one
share of common stock. The conversion rate is subject to change upon the
occurrence of certain events. The preferred stockholders have agreed to
convert each share of preferred stock into one share of common stock
prior to the closing of the merger with Atari (Note 10).
- The preferred stock converts automatically into common stock at the
earlier of (i) the closing of an underwritten public offering of the
Company's common stock at a price of not less than $5.00 per share and an
aggregate offering price of greater than $10,000,000, or (ii) upon the
affirmative election of the holders of at least 66.7% of the then
outstanding preferred stock.
- The holders of preferred stock are entitled to one vote for each share of
common stock into which such share may be converted.
9. EXPORT SALES AND SIGNIFICANT CUSTOMERS:
The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives and original equipment
manufacturers. The Company's geographic sales as a percent of 1996 net revenues
are as follows:
<TABLE>
<S> <C>
United States.......................................... 19%
Europe................................................. 81%
---
100%
===
</TABLE>
Sales to major customers as a percentage of 1996 product sales are as
follows:
<TABLE>
<S> <C>
Olidata................................................. 34%
Connexe................................................. 12%
Liuski.................................................. 11%
Aashima................................................. 10%
</TABLE>
10. PROPOSED MERGER AND ACQUISITION:
Atari Corporation
On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. The merger requires
shareholder approval and is expected to be consummated in the second quarter of
calendar year 1996. In connection with the merger, Atari extended a bridge loan
to the Company in the amount of $25.0 million maturing on September 30, 1996
with a stated interest rate of 8 1/2% per annum. If the merger is not
consummated, the bridge loan is convertible at the option of Atari or the
F-31
<PAGE> 158
JTS CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company into shares of the Company's Series A preferred stock and warrants to
acquire the Company's Series A preferred stock, subject to certain conditions.
Moduler Electronics
In March 1995, the Company agreed to acquire the hard disk drive division
of Moduler Electronics for 1,911,673 shares of the Company's Series A preferred
stock and a warrant to purchase 500,000 shares of the Company's common stock at
an exercise price of $.25 per share. The Company subsequently assumed
operational and management control of certain portions of the hard disk drive
business of Moduler Electronics. The verbal agreement contemplated that prior to
the Company's acquisition, Moduler Electronics would divest itself of certain
voice coil assembly and other operations not directly involved in its hard disk
drive business.
In April 1996, following Moduler Electronics' divestiture of its voice coil
business and businesses unrelated to its hard disk drive operations, the Company
acquired 90% of the outstanding capital stock of Moduler Electronics. Upon the
closing of the transaction, the Company acquired the stock in consideration for
1,911,673 shares of the Company's Series A preferred stock and a warrant to
purchase 750,000 shares of the Company's common stock at an exercise price of
$0.25 per share. The warrant is immediately exercisable as to 500,000 shares of
the Company's common stock and becomes exercisable with respect to the remaining
250,000 shares when there becomes available to Moduler Electronics certain
borrowings and credit facilities in the amount of $29,000,000. Subject to the
foregoing, the warrant may be exercised at any time until February 25, 2001.
11. RETIREMENT SAVING PLAN
In January 1996, the Company adopted the Employee 401(K) Saving Plan ("the
plan"). The plan covers substantially all of employees and allows participants
to defer a portion of their annual compensation on a pre-tax basis. The plan
permits, but does not require, additional matching contributions and profit
sharing contributions to the plan by the Company on behalf of all participants.
In fiscal 1996, the Company did not make any such contributions.
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
Change in Name
On June 18, 1996, the Company changed its name to JTS Corporation from JT
Storage, Inc.
Litigation
The Company has been served with a complaint filed in the Superior Court of
the State of California in and for the County of Santa Clara by Venture Lending
& Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million. Such amount includes
the lease liability of $3.4 million which is recorded in the accompanying
balance sheet. The Company is currently evaluating its alternatives and the
parties have commenced preliminary settlement discussions.
F-32
<PAGE> 159
JTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28,
1996
APRIL 28, -----------
1996
---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalent and restricted cash............................. $ 5,116 $ 547
Trade accounts receivable, less allowance for doubtful accounts of
$1,086 and $730, respectively....................................... 9,608 1,286
Receivable from Moduler Electronics................................... -- 6,892
Other receivables..................................................... 1,182 812
Inventories........................................................... 12,983 2,093
Prepaid and other current assets...................................... 1,585 240
------ ------
30,474 11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,212 7,943
GOODWILL.............................................................. 185 --
------ ------
TOTAL....................................................... $ 46,871 $ 19,813
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................... $ 10,277 $ 4,323
Notes payable to stockholders......................................... 1,965 1,000
Note payable to Atari Corporation..................................... 25,000 --
Accounts payable --
Trade............................................................... 18,240 7,226
Moduler Electronics................................................. -- 9,546
Accrued liabilities................................................... 4,536 3,501
Current portion of capitalized lease obligation and long-term debt.... 1,651 1,520
------ ------
61,669 27,116
------ ------
LONG-TERM OBLIGATIONS................................................. 6,381 3,485
------ ------
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,687
and 27,785 shares, respectively..................................... 29,697 27,785
------ ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
outstanding: 9,421 and 7,367 shares, respectively................... -- --
Additional paid-in capital............................................ 8,213 6,004
Deferred compensation................................................. (3,990) (4,320)
Notes receivable from stockholders.................................... (2,610) (623)
Accumulated deficit................................................... (52,489) (39,634)
------ ------
(50,876) (38,573)
------ ------
TOTAL....................................................... $ 46,871 $ 19,813
====== ======
</TABLE>
See accompanying notes.
F-33
<PAGE> 160
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 28, 1996 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
REVENUE:
Product sales................................................... $ 17,481 $ 48
Technology license revenue...................................... 100 2,029
-------------- -------
17,581 2,077
-------------- -------
COST AND EXPENSES:
Cost of sales................................................... 19,434 43
Research and development........................................ 7,406 1,758
Selling, general and administrative............................. 3,103 718
-------------- -------
29,943 2,519
-------------- -------
OPERATING LOSS (12,362) (442)
Interest income................................................... 105 --
Interest expense.................................................. (542) --
Other expense, net................................................ (56) (2)
-------------- -------
NET LOSS $(12,855) $ (444)
========== ==========
NET LOSS PER COMMON SHARE......................................... $ (1.47) $(0.10)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 8,732 4,360
========== ==========
See accompanying notes.
</TABLE>
F-34
<PAGE> 161
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------
APRIL 28, 1996 APRIL 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations....................................... $(21,216) $ (3,228)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases................................................ (1,763) (1,654)
Cash acquired from the Moduler acquisition........................ 1,634 --
-------- --------
Net cash used in investing activities............................. (129) (1,654)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock......................... -- 8,855
Proceeds from note payable -- Atari Corporation................... 25,000 --
Other............................................................. 914 (841)
-------- --------
Net cash provided by financing activities......................... 25,914 8,014
NET INCREASE IN CASH AND EQUIVALENTS.............................. 4,569 3,132
CASH AND EQUIVALENTS:
Beginning of period............................................... 547 --
-------- --------
End of period..................................................... $ 5,116 $ 3,132
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred stock in connection with the Moduler
acquisition..................................................... $ 1,912 $ --
Assets of $17,296 acquired net of related liabilities of $15,449
assumed from Moduler............................................ 1,847 --
======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE> 162
JTS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management, the accompanying
financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto for the full year included elsewhere in this
document.
The Company operates with a 52/53 week fiscal calendar. Both quarters
covered by this report have 13 weeks and for simplicity of presentation, the
calendar quarter date is used to represent the quarter end. The actual fiscal
closing date for the first quarter of 1996 and 1995 was April 28 and April 30,
respectively.
NOTE 2. ACQUISITION OF MODULER ELECTRONICS
In April 1996, the Company acquired 90% of the outstanding shares of
Moduler Electronics, a disk drive manufacturer. The Company acquired the stock
in consideration for 1,911,673 shares of the Company's Series A preferred stock
and a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The acquisition was accounted for as a
purchase.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Inventories and other current assets.............................. $ 9,542
Equipment and leasehold improvements.............................. 7,754
Current liabilities assumed....................................... (12,681)
Long-term liabilities assumed..................................... (2,768)
--------
Net assets acquired..................................... $ 1,847
========
</TABLE>
The table below reflects condensed pro forma operating results of the
combined companies for the three months then ended as if the acquisition took
place at the beginning of each period.
<TABLE>
<CAPTION>
APRIL 28, APRIL 30,
1996 1995
--------- ---------
<S> <C> <C>
Revenues................................................ $ 17,581 $ 2,077
Net loss................................................ $ (12,820) $ (1,143)
</TABLE>
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 28, JANUARY 28,
1996 1996
--------- -----------
<S> <C> <C>
Raw materials.......................................... $ 9,355 $ 2,093
Work in process........................................ 3,353 --
Finished goods......................................... 275 --
------- ------
$ 12,983 $ 2,093
======= ======
</TABLE>
NOTE 4. MERGER WITH ATARI CORPORATION
On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. On April 8, 1996, the
merger agreement was amended and restated. The merger required shareholder
approval and is expected to be consummated in the second quarter of 1996. In
connection with the merger, Atari extended a bridge loan to the Company in the
amount of $25.0 million maturing on September 30, 1996 with a stated interest
rate of 8 1/2% per annum. If the merger is not consummated, the bridge loan is
convertible at the option of Atari or the Company into shares of the Company's
Series A preferred stock, subject to certain conditions.
F-36
<PAGE> 163
REPORT OF ARTHUR ANDERSEN LLP
To Moduler Electronics (India) Private Limited:
We have audited the accompanying statements of assets and liabilities of
The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as
of January 28, 1996 and January 31, 1995, and the related statements of revenues
and expenses and cash flows for the year ended January 28, 1996. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The financial statements referred to above have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the joint proxy statement of Atari
Corporation and JTS Corporation, formerly JT Storage, Inc.) as described in Note
1, and are not intended to be a complete presentation of the assets,
liabilities, revenues, expenses and cash flows of Moduler Electronics (India)
Private Limited.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited as of January 28, 1996
and January 31, 1995, and the related revenues, expenses and cash flows for the
year ended January 28, 1996 in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 1 to the
financial statements, the Division has suffered a loss from operations and has
an excess of liabilities over assets that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
San Jose, California
April 4, 1996
F-37
<PAGE> 164
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENTS OF ASSETS AND LIABILITIES
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 488 $ 65
Restricted cash balances............................................ 380 197
Due from other business units, net.................................. -- 776
Advances to suppliers............................................... 249 12
Inventories......................................................... 5,983 1,296
Prepaid expenses and other current assets........................... 264 61
------- ------
Total current assets........................................ 7,364 2,407
PLANT AND EQUIPMENT, at cost, net of accumulated depreciation......... 5,603 1,645
------- ------
Total assets................................................ $12,967 $ 4,052
------- ------
LIABILITIES
CURRENT LIABILITIES:
Secured short term borrowings....................................... $ 6,085 $ 367
Current portion of long term loans and capital lease obligations.... 105 67
Due to related parties, net......................................... 1,168 1,261
Accounts payable.................................................... 6,268 1,494
Accrued liabilities................................................. 197 46
------- ------
Total current liabilities................................... 13,823 3,235
CAPITAL LEASE OBLIGATIONS, net of current portion..................... 21 --
SECURED LONG TERM LOANS, net of current portion....................... 2,742 200
------- ------
Total liabilities........................................... 16,586 3,435
------- ------
NET (LIABILITIES) ASSETS.............................................. $(3,619) $ 617
======= ======
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
F-38
<PAGE> 165
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENT OF REVENUES AND EXPENSES
FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<S> <C>
NET REVENUES...................................................................... $ 15,580
COST OF GOODS SOLD................................................................ (19,160)
--------
Gross margin (deficit)....................................................... (3,580)
OTHER INCOME/(EXPENSE):
Interest and other income....................................................... 141
Foreign currency loss........................................................... (333)
Interest expense................................................................ (464)
--------
Net loss........................................................................ $ (4,236)
========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
F-39
<PAGE> 166
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
(CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $(4,236)
Adjustments to reconcile net loss to net cash used in operating activities --
Depreciation expense.......................................................... 667
Write-off of plant and equipment.............................................. 558
Decrease/(increase) in current assets --
Due from other business units, net.......................................... 776
Advances to suppliers....................................................... (237)
Inventories................................................................. (4,687)
Prepaid expenses and other current assets................................... (203)
Increase (decrease) in current liabilities --
Due to related parties, net................................................. (93)
Accounts payable............................................................ 4,774
Accrued liabilities......................................................... 151
--------
Net cash used in operating activities.................................... (2,530)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment................................................. (2,491)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net secured short term borrowings................................................ 5,718
Principal payments under secured long term loan.................................. (91)
--------
Net cash provided by financing activities................................ 5,627
--------
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH......................... 606
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period.................... 262
--------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period.......................... $ 868
========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
F-40
<PAGE> 167
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND BASIS OF PRESENTATION:
BASIS OF STATEMENTS
The accompanying statements of assets and liabilities of the Hard Disk
Drive Division ("the Division") of Moduler Electronics (India) Private Limited
("the Company") as of January 31, 1995 and January 28, 1996 and the related
statements of revenues and expenses and of cash flows for the period from
February 1, 1995 to January 28, 1996 ("the statements") have been prepared in
conformity with generally accepted accounting principles in the United States of
America, from the accounting books and records maintained by the Company at
Madras, India. The statements have been prepared for the purpose of inclusion in
the registration statement on Form S-4 to be filed by JTS Corporation ("JTS",
formerly JT Storage, Inc.) in compliance with the rules and regulations of the
Securities and Exchange Commission. The Form S-4 filing of JTS is pursuant to
its proposed acquisition of Atari Corporation ("Atari"). In April 1996, JTS
acquired 90% of the outstanding equity shares of the Company. The Division is
likely to be the only remaining business of the Company after the transfer of
the Voice Coil Magnetic Assembly ("VCMA") business to an entity owned by the
Chairman of the Company and his family members. As of April 4, 1996, this
transfer had been made, subject to completion of legal documentation.
Although the Company began business in fiscal 1986, the Division first
began significant operations in fiscal 1996. Division operations prior to fiscal
1996 were insignificant; accordingly, the accompanying financial statements
include the Statements of Assets and Liabilities of the Division as of January
28, 1996 and January 31, 1995 and the related Statement of Revenues and Expenses
for the period from February 1, 1995 to January 28, 1996. These statements were
prepared from the Balance Sheet and the Income Statement, respectively, of the
total businesses of the Company, from which balances and transactions relating
to the businesses that are being divested were excluded.
The Division developed its disk drive manufacturing capabilities during
fiscal 1996 which has resulted in an operating loss and a working capital
deficit of $6,459,000. In addition, the Company will require additional capital
in order to achieve volume production. The Division's disk drive production is
dedicated exclusively to JTS and JTS has recently completed its acquisition of
90% of the Division. The auditors' report on the JTS financial statements dated
April 4, 1996 contains a paragraph regarding a substantial doubt regarding the
ability of JTS to continue as a going concern. These factors raise a substantial
doubt about the Division's ability to continue as a going concern. As discussed
above, JTS plans to merge with Atari. In the opinion of management, the Atari
merger, if successful, would raise capital adequate to fund operations for the
next 12 months.
Since the Company did not maintain separate accounting records for the
Division, certain estimates, which management believed to be reasonable, were
required in order to segregate the Division's account balances as of January 31,
1995 as well as to reflect the proposed divestiture of other businesses as of
January 28, 1996. The segregation of account balances relating to the Division
was made on the following bases:
- Identification basis -- Account balances relating to assets, liabilities,
revenues and expenses ("account balances") pertaining to the Division
were specifically identified and segregated.
- Agreed basis -- Account balances which have been specifically agreed to
be assumed by the Division were identified and segregated.
- Transfer basis -- Account balances pertaining to other businesses which
were being divested, were identified and excluded.
F-41
<PAGE> 168
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- Allocation basis -- Account balances related to expenses incurred by the
Company for the Division have been included in total as the Division was
the significant portion of the Company's operations for fiscal 1996.
INCORPORATION
The Company was incorporated on March 24, 1986 as a private company under
the Indian Companies Act, 1956 in the state of Maharashtra. The Company is owned
principally by Asperal Holdings, Inc. and Dexar Holdings, Inc., companies
registered in Panama, which have a 45% equity stake each. The remaining 10% of
the Company's outstanding equity shares are owned by the Chairman of the
Company, Mr. Manohar Lal Tandon, and his relatives ("the Tandon Family").
The Company was established to operate a 100 percent Export Oriented Unit
("EOU") in the Madras Export Processing Zone ("MEPZ"), a free trade zone
established by the Government of India at Madras, Tamil Nadu, India. The
Company's industrial unit is located in a government provided low cost standard
design factory within the MEPZ. The Company initially undertook the manufacture
of computer hard disk drive components such as Head Gimble Assemblies ("HGA")
and Head Stack Assemblies ("HSA"). During the first five years of operations,
the Company diversified its product line to include two other products, namely,
VCMA and Switch Mode Power Supplies ("SMPS").
During fiscal 1994, the Company closed its SMPS division and established
another EOU for the assembly of hard disk drives. Under the approval obtained
from the Government of India in September 1994, the Company was originally
licensed to manufacture, on an average, 286,000 hard disk drives annually. In
November 1995, the Company obtained a revised approval to manufacture, on an
average, 807,000 hard disk drives and 418,000 subassemblies (i.e., HGAs and
HSAs) annually. In December 1994, the Company discontinued production of HGAs
and HSAs for customers other than JTS, with which it began collaborations to
manufacture hard disk drives.
Though the Division started shipping nominal quantities in January 1995,
commercial production of hard disk drives commenced only in October 1995. The
Company continued to produce VCMAs until January 18, 1996 when the VCMA business
was transferred to a related party. Prior to its divestiture, a portion of the
voice coil assemblies produced by the VCMA business was used in the manufacture
of hard disk drives, while the rest were sold to a related party. Except for the
VCMA business, the Company operated as a captive manufacturer for JTS during
fiscal 1996. With its association, JTS has assumed operational and management
control of certain portions of the Division and has provided financing for the
hard disk drive business and corporate support in areas such as process
engineering, tooling, vendor selection and financial management. Since assuming
operational control, JTS has employed several expatriates consisting of disk
drive industry professionals who have filled senior positions in engineering,
manufacturing, quality control and materials management functions of the
Division.
Export Oriented Unit
In order to encourage export oriented businesses and foreign currency
inflows, the Government of India offers special incentives to EOUs established
in export processing zones such as state grants and subsidies, exemptions
relating to import licenses, exemptions from payment of customs duty on imported
inputs and excise duty on local material procurements, and allotment of low cost
factory space. Such EOUs are also exempted from payment of corporate income
taxes for a block of five years during the first eight years of operations,
subject to fulfillment of certain conditions. Currently, export earnings
received in convertible foreign currency continue to be exempt from tax, even
after the tax holiday period.
F-42
<PAGE> 169
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Current Operations
The Division currently manufactures hard disk drives with different
capacity points, based on technical know-how and designs provided by JTS. The
Division's products are marketed through JTS under the trade names Palladium and
Nordic, and are sold to original equipment manufacturers and system integrators
who incorporate the products into desktop and notebook computers. The Division
remained in development stage until October 1995 when it first started shipping
commercial quantities.
Sources of Supply
Many components incorporated in, or used in the manufacture of, the
Division's products are currently sourced from a single supplier. JTS procures
components for the Division, which it purchases from third party manufacturers
and in turn sells or consigns to the Division. JTS' customers have placed
certain restrictions on vendor and design changes.
The Division purchases all of its components and equipment pursuant to
purchase orders placed from time to time and has no guaranteed supply
arrangements. In the past, there have been certain instances of supply shortages
which had caused delays in manufacturing and loss of sales. Supply shortages
resulting from a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which would have a material adverse impact on the
Division's operating results. Further, the Division produces in-house a number
of critical subassemblies incorporated in the final hard disk drive product.
Failure to produce these subassemblies in adequate quantity or quality could
also adversely impact the operating results of the Division.
Manufacturing Relationships
In the past, the Company has sold subassemblies and other components to
Xyratex in Havant, United Kingdom for the manufacture of hard disk drives under
a subcontract manufacturing agreement between Xyratex and JTS. With the
commencement of commercial production of hard disk drive products by the Company
in October 1995, the Division stopped supplying Xyratex.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Foreign Currency Translation
The Division has determined the United States ("US") dollar to be its
functional currency, in accordance with the Statement of Financial Accounting
Standards No 52, "Foreign Currency Translation", based on indicators such as
cash flows, sales market, sales price, expense, financing and inter-company
transactions and arrangements. Since the Division's books are maintained in
Indian rupees which is not its functional currency, account balances were first
remeasured in US dollar. Since the Division's functional and reporting
currencies are the same, the remeasurement process is intended to produce the
same result as if the Division's books had been maintained in the functional
currency, and obviates separate translation.
Nonmonetary assets and liabilities such as inventories, plant and equipment
and accumulated depreciation thereon have been remeasured using historical
currency exchange rates prevailing at the dates transactions relating to such
elements were recognized in the statements. Expenses related to such nonmonetary
assets and liabilities such as manufacturing overhead costs included in cost of
goods sold have been remeasured using average exchange rates for the period to
approximate remeasurement at the historical exchange rates prevailing at the
dates those elements were recognized in the statements.
All other monetary assets and liabilities that are not denominated in the
Division's functional currency have been translated at the current exchange
rates prevailing on the dates of the statements. Exchange gains
F-43
<PAGE> 170
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and losses from such translation of monetary assets and liabilities have been
recognized in determining net loss for the current period.
Certain expenses and cash flows have been translated at average exchange
rates for the period to approximate translation at the exchange rates prevailing
at the dates those elements were recognized in the statements.
Gains and losses on foreign currency transactions have been included in
determining net loss for the current period in the Statement of Revenues and
Expenses.
Pervasiveness of Estimates
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the dates of the statements and the
related amounts of revenues and expenses during the reporting period. The
Company has maintained its books of accounts in accordance with Indian
accounting standards and in the local currency, the Indian rupee. As discussed
above, the Division's statements have been remeasured into US dollar in
accordance with the Statement of Financial Accounting Standards No 52. As
discussed in Note 1, certain assumptions and estimates which, management
believed to be reasonable, were required to segregate the Division's account
balances from those relating to the rest of the Company's businesses as of
January 31, 1995 and to reflect the divestiture of other businesses as of
January 28, 1996. Actual results could have been different from these estimates
and remeasurements.
Revenue Recognition
Revenues on product sales are recognized at the time of shipment and
include incentives provided by the Government of India on export sales.
Substantially, all shipments are sent directly to JTS' end customers, but are
invoiced by the Division to JTS, which in turn bills and collects from the end
customers.
The Division's accounts receivables as of the dates of the statements
comprised of receivables outstanding from JTS arising from sale of hard disk
drives and receivables from a related party arising from sale of VCMAs. The
Company has not experienced bad debts associated with either of these customers
in the past, and accordingly, has not recorded an allowance for doubtful
accounts.
Due from Other Business Units, Net
As of January 31, 1995, due from other business units represent the excess
of assets over liabilities of the Company's businesses excluding the Division.
Such receivables are expected to be collected within the next twelve months.
Inventories
Inventories include direct materials, freight thereon, direct labor and
related manufacturing overhead costs. The Division values its inventories at
cost, determined on first in, first out ("FIFO") basis, or market value,
whichever is lower.
F-44
<PAGE> 171
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, JANUARY 31,
1996 1995
----------- -----------
<S> <C> <C>
Raw materials......................................... $ 2,520 $ 1,225
Work-in-process....................................... 1,660 71
Finished goods........................................ 1,803 --
------ ------
$ 5,983 $ 1,296
====== ======
</TABLE>
JTS and the Division have an agreement whereby JTS has undertaken to bear
all inventory losses the Division might incur by repurchasing such inventories
from the Division at their carrying value. As of January 28, 1996, JTS assumed
inventory valued at $2,747,802, which is netted against the inventory balance
shown above.
Plant and Equipment
Plant and equipment is recorded at cost and depreciation is computed using
the straight line method over the estimated useful lives of the assets.
Plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE JANUARY 28, JANUARY 31,
(YEARS) 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment............................ 2 - 7 $ 6,703 $ 2,237
Furniture, fixtures and miscellaneous assets....... 2 - 6 288 129
----- ------- ------
6,991 2,366
Less -- Accumulated depreciation................... (1,388) (721)
------- ------
$ 5,603 $ 1,645
======= ======
</TABLE>
Costs of normal repairs and maintenance are expensed as incurred. Major
replacements or betterments of plant and equipment are capitalized. When items
are sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in
determining net loss. The amount expensed for repairs and maintenance for the
period from February 1, 1995 to January 28, 1996 was $494,104.
The Division has certain specialized manufacturing equipment used in its
operations.
Income Tax
Under the Indian Income Tax Act, 1961, the Division, being an EOU located
in an export processing zone, is exempted from payment of corporate income taxes
for a block of five years during the first eight years of operations, subject to
fulfillment of certain conditions.
The Division continues to be exempt from income tax to the extent of income
attributable to the export sales of the Division. As the Division did not have
any taxable income for the period from February 1, 1995 to January 28, 1996, no
provision for income tax has been made.
F-45
<PAGE> 172
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Warranty Costs
The Division manufactures disk drive products to customer specifications
and components for such disk drives are sourced from vendors specified by JTS.
JTS generally provides a three year limited warranty on the Palladium and Nordic
drives manufactured by the Division and has agreed to bear the costs of all
warranty claims, product returns and rework charges. Accordingly, no warranty
cost has been recorded in the Division's statements as of January 28, 1996 and
January 31, 1995.
Prior to the divestiture of the Company's VCMA business, voice coil
products were manufactured and sold principally to a related party which
provided product specifications and mandated specific component sources. No
provision has been provided for any warranty costs on the voice coils sold prior
to the divestiture since the related party, to which the VCMA business is being
sold, has agreed to assume any claims related to such products.
Supplemental Disclosure of Cash Flow Information
For the purposes of the Statement of Cash Flows, the Division considers all
highly liquid investments purchased with original maturities of 90 days or less
to be cash equivalents. The carrying amounts reported in the statements of
assets and liabilities for cash and cash equivalents approximate their fair
values. Cash paid for interest for the period from February 1, 1995 to January
28, 1996 was $404,522. During fiscal 1996, the Company entered into capital
lease obligations amounting to $36,170. The Company also financed the purchase
of equipment amounting to $2,657,145 with secured long-term loans (Note 5).
During the period from February 1, 1995 to January 28, 1996, the Division
received equipment and inventories amounting to $2,569,471 and $6,748,512,
respectively, from related parties. These were recorded as due to related
parties in the Statement of Cash Flows since they are non-cash transactions.
3. RESTRICTED CASH BALANCES:
Restricted cash balances comprise margin money deposits with banks
amounting to $380,013 and $197,578 as of January 28, 1996 and January 31, 1995
respectively. These deposits are maintained as security against letters of
credit issued by banks on behalf of the Division (see Note 4 below). During the
period from February 1, 1995 to January 28, 1996, rates of interest on these
deposits ranged from 9 to 12% per annum.
4. SECURED SHORT TERM BORROWINGS:
The Company has entered into an agreement with a consortium of three Indian
Government owned commercial banks to obtain working capital credit facilities.
The consortium was established in February 1995. While the three banks have
agreed to a total extension of credit and an allocation of participation, each
bank independently sanctions its portion of the participation. The lead bank in
the consortium, Indian Bank, has fully sanctioned its limit, while the other two
banks have only partially sanctioned their participation as of January 28, 1996.
The credit agreement with the consortium has four separate facilities,
namely, export sales accounts receivable bill discounting ("bill discounting"),
exports sales order based inventory packing credit ("packing credit"), foreign
letters of credit ("letters of credit" or "LC"), and letters of guarantee
("guarantee").
Bill discounting is a post-shipment credit facility used to finance export
receivables. Under the Company's bill discounting lines, export invoices are
presented to the bank, upon which the bank advances funds for the full value of
the invoice. Bills are typically discounted for ninety days. This facility is
self-
F-46
<PAGE> 173
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
liquidating in nature whereby advances made by the bank to the Company against
bills discounted are settled through direct retirement of bills by the foreign
customers.
Under the packing credit advance which is a pre-shipment facility, the bank
finances procurement of inventories and other costs incurred for fulfillment of
the Division's export orders. The advances under this facility are liquidated
using the proceeds of bills discounted by the Division. The Division has been
fully utilizing its sanctioned credit limits on its bill discounting and packing
credit facilities, and therefore the total credit availed by the Division
facilitates a continuous rotation of its inventory and invoice financing
requirements.
Under the letter of credit facility, the bank guarantees timely payments to
the Division's foreign suppliers. Letter of credit is a non-funded limit which,
when issued, results in a contingent liability to the Division. The Division is
obligated to pay the bank at the time the bank remits money against documents
presented by the foreign supplier. Contingent liabilities arising from the use
of letters of credit have not been included in the Division's statements but
have been disclosed in Note 7 below.
Letters of guarantee are provided by the bank on behalf of the Division to
third parties with which it has business dealings, to guarantee due performance
of contracts as well as fulfillment of monetary obligations by the Division.
F-47
<PAGE> 174
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Following table summarizes details relating to the credit facilities
described above (in thousands):
<TABLE>
<CAPTION>
STATE BANK OF STATE BANK OF
INDIAN BANK TRAVANCORE HYDERABAD
--------------- ------------- -------------
PARTICULARS 1996 1995 1996 1995 1996 1995
- --------------------------------------------------- ------ ------ ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1. Available lines of credit
(a) Bill Discounting............................. $3,925 $ 972 $1,389 $ -- $ 139 $ 222
(b) Packing Credit............................... 834 556 -- -- 83 --
(c) Letters of Credit............................ 2,431 1,111 1,216 -- 361 361
(d) Letters of Guarantee......................... 28 28 -- -- -- --
2. Amount outstanding
(a) Bill Discounting............................. 3,878 165 1,277 -- 143 --
(b) Packing Credit............................... 503 202 -- -- 80 --
(c) Advances for overdue letters of credit....... 204 -- -- -- -- --
(d) Letters of Credit............................ 2,268 -- 784 -- 279 --
(e) Letters of Guarantee......................... -- -- -- -- -- --
3. Amount by which sanctioned limits have been
exceeded
(a) Bill Discounting............................. -- -- -- -- 4 --
(b) Packing Credit............................... -- -- -- -- -- --
(c) Letters of Credit............................ -- -- -- -- -- --
(d) Letters of Guarantee......................... -- -- -- -- -- --
4. Interest rates
(a) Bill Discounting
--if availed in US Dollars................... 7.5% 6.5% 7.5% -- 7.5% 6.5%
--if availed in Indian Rupees................ 13-15% 13-15% 13-15% -- 13-15% 13-15%
(b) Packing Credit
--if availed in US Dollars................... 7.5% 6.5% -- -- 6.5% --
--if availed in Indian Rupees................ 13-15% 13-15% -- -- 13-15% --
5. Margin
(a) Packing Credit............................... 25% 10% -- -- 25% --
(b) Letters of Credit............................ 10% 10% 10% -- 10% 10%
(c) Letters of Guarantee......................... 10-50% 10-50% -- -- -- --
</TABLE>
Bill discounting agreements are secured by export receivables. Packing
credit agreements are secured by a first charge on the Company's stocks of raw
materials, work in process and finished goods inventories.
Outstanding letters of credit are secured by a charge on goods covered
under the letter of credit and a lien on deposits made by the Company with the
banks.
Letters of guarantee are secured by counter guarantees issued by the
Company and a lien on deposits made by the Company with the banks.
All the above agreements and facilities are fully covered by the personal
guarantee of the Chairman of the Company. The banks have sought for a second
collateral on the Company's plant and equipment, present and future, which have
already been used as collateral for the Company's secured long term loans (see
Note 5 below). As of the date of the statements, the Company was in the process
of fulfilling this requirement.
F-48
<PAGE> 175
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
According to the terms stipulated in the credit facility sanction letter of
Indian Bank, the Company's owners were required to contribute unsecured loans of
approximately $1.8 million and increase the paid-in capital of the Company to
$611,281 (from $69,463) before September 30, 1995. The Company has not fulfilled
this requirement as of the date of the statements. However, the Company has
obtained an undertaking from JTS, that advances made to the Division by JTS to
the extent of $2,558,650, will not be withdrawn or adjusted, either in part or
full, against the bills drawn by the Division, and, in due course, will be
converted into equity capital/unsecured loan.
5. SECURED LONG TERM LOANS:
The Company has entered into term loan agreements with the Industrial
Credit and Investment Corporation of India Limited ("ICICI"), a term lending
institution in India. In September 1992, the Company was sanctioned a rupee loan
of approximately $571,429 for the purpose of augmenting its existing
manufacturing facilities. Approximately $304,713 was available to the Company to
borrow as of January 31, 1995, subsequent to which the Company decided not to
fully avail of this loan before the last date of withdrawal, February 15, 1995.
The loan is repayable in Indian rupees in 12 equal quarterly installments of
approximately $19,450 each commencing from May 1995. Interest on outstanding
amounts are payable quarterly at the rate of 20% per annum.
In October 1994, the Company was sanctioned an additional loan by the
ICICI, for approximately $2,550,000, denominated in four foreign currencies, for
the import of capital equipment. The Division had not borrowed against the loan
as of January 31, 1995, and had utilized the loan for a US dollar equivalent
amount of $2,625,758 as of January 28, 1996. As of January 28, 1996 there were
immaterial unutilized balances in three of the four foreign currencies under the
loan, which were cancelled by ICICI on February 22, 1996 based on a written
request by the Company. The loan is repayable in US dollar in 13 equal quarterly
installments of $201,981 each commencing from April 1997. Interest on
outstanding amounts is payable quarterly at the rate of US dollar LIBOR plus
2.75% per annum. For the period from February 1, 1995 to January 28, 1996, the
interest rates on this loan ranged from 8.7 to 9.5% per annum.
Both loans are secured by all of the Company's property and equipment and
are fully covered by the personal guarantee of the Chairman of the Company.
According to the terms of the agreement for the foreign currency loan, the
Company's promoters were required to contribute unsecured loans of approximately
$1.8 million and increase the paid-in capital of the Company to $611,281 (from
$69,463). Though this amount has not been contributed by the owners as of the
date of the statements, the Company has obtained an undertaking from JTS, that
advances made to the Division by JTS to the extent of $2,558,650, will not be
withdrawn or adjusted, either in part or full, against the bills drawn by the
Division, and, in due course, will be converted into equity capital/unsecured
loan.
In addition to the ICICI term loans, the Company has entered into a term
loan agreement with Corporation Bank, a Government owned commercial bank in
India, for the purchase of automobiles. As of January 28, 1996, the Division had
utilized approximately $31,386 of the total sanctioned amount of $41,678. The
loan is secured by the automobiles and is repayable in thirty equal monthly
installments of $1,047 each.
F-49
<PAGE> 176
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future repayments under the Division's long-term loans are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING LOAN REPAYMENTS
--------------------------------------------- ---------------
<S> <C>
1997 (current portion of long term loans).... $ 90
1998......................................... 898
1999......................................... 834
2000......................................... 808
2001......................................... 202
------
$ 2,832
======
</TABLE>
6. DUE TO RELATED PARTIES, NET:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Due from related parties
Ultra Tek Devices Limited.................................. $ 62 $ 80
Tantec Magnetics........................................... 318 --
Eastern Peripherals Limited................................ -- 65
Memory Electronics......................................... -- 18
Golden Computers Limited................................... -- 120
Advance Technology Devices................................. -- 92
------ ------
Total............................................ 380 375
------ ------
Due to related parties
JTS........................................................ 1,158 667
Nidec Corporation.......................................... 367 --
Tandon Family.............................................. 14 16
Tantec Magnetics........................................... -- 271
Tandon Associates, Inc..................................... -- 603
Reliable Consultancy Services Private Limited.............. -- 1
Tancom Electronics......................................... 9 78
------ ------
Total............................................ 1,548 1,636
------ ------
Net due to related parties................................. $1,168 $1,261
====== ======
</TABLE>
See Note 8 for a description of the relationships and the nature of
transactions between the Division and the above related parties.
F-50
<PAGE> 177
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Capital Leases
The Company has purchased automobiles through certain capital lease
agreements. The gross amount of assets acquired under capital leases and
capitalized was $38,673 as of January 28, 1996. Following is a schedule of
aggregate future minimum lease payments under these capital leases together with
the present value of net minimum lease payments as of January 28, 1996 (in
thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEAR ENDING LEASE PAYMENTS
--------------------------------------------------------------- --------------
<S> <C>
1997........................................................... $ 19
1998........................................................... 15
1999........................................................... 14
---
Total net minimum lease payments............................... 48
Less -- Amount representing interest........................... 12
---
Present value of net minimum lease payments.................... 36
Less -- Current portion........................................ 15
---
$ 21
===
</TABLE>
Purchases
Open letters of credit for import of raw materials in the normal course of
business amounted to $3,594,360 as of January 28, 1996 (see Note 4 above).
Obligations to Employees
The Company has made certain statutory minimum contributions towards
employee obligations as required by labor laws enacted by the Government of
India. These include, inter alia, minimum wages, provident fund, employee state
insurance, bonus, gratuity, earned leave and labor welfare fund.
8. RELATED PARTY TRANSACTIONS:
As discussed in Note 1 above, the Division has functioned as a
manufacturing arm of JTS since its association with JTS. Apart from JTS, the
Division's related parties include Xyratex (former subcontractor of JTS), Nidec
Corporation (supplier to the Company and an equity investee in JTS), and
entities which are owned and/or controlled by the Chairman of the Company or his
relatives.
JTS loaned manufacturing equipment with an historical cost of approximately
$4,400,000 and $530,000 located at the Division at January 28, 1996 and January
31, 1995.
The Division's related party transactions during the period from February
1, 1995 to January 28, 1996 primarily consist of transactions with JTS and
Xyratex. These transactions include, inter alia, purchase of fixed assets and
raw materials from JTS, receipt of certain fixed assets on loan basis from JTS,
receipt of certain raw material free of cost from JTS, sale of disk drives to
JTS, advances received from JTS, remittances made to JTS, assumption of obsolete
inventories and warranty costs by JTS, sale of subassemblies and raw material to
Xyratex, and purchase of tools from Xyratex. Since the VCMA business was part of
the Company until January 28, 1996, transactions between the Division and the
VCMA business have not been considered as related party transactions.
F-51
<PAGE> 178
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net balances due from or to each related party as of January 28, 1996
and January 31, 1995 for sales, purchases, advances, transfers and sharing of
expenses are disclosed in Note 6 above. Summarized information relating to such
transactions for the period from February 1, 1995 to January 28, 1996 are
presented below (in thousands):
<TABLE>
<CAPTION>
NAME OF THE RELATED PARTY NATURE OF TRANSACTION AMOUNT
------------------------------------- -------------------------------------- -------
<S> <C> <C>
Nidec Corporation.................... Purchase of raw material $ 701
Payment for purchase of raw material 522
Tandon Associates, Inc............... Payment for purchases 957
Tancom Electronics................... Purchase of plant and equipment 42
Sale of raw material 41
Proceeds from sale of raw material 55
Charges for common expenses received 3
Advance to Tancom 10
JTS.................................. Purchase of plant and equipment 2,569
Purchase of raw material 6,621
Payment for purchase of raw material 1,052
Advance against export 2,559
Product sales 14,892
Receipt from product sales 8,495
Assumption of obsolete inventories and 2,919
warranty costs by JTS
Tantec Magnetics..................... Purchase of raw material 110
Product sales 465
</TABLE>
The Company has been capitalized since inception with 200,000 shares of
equity stock at a par value of Indian rupees 10 each and 5,000 shares of
preferred stock at a par value of Indian rupees 100 each. The Company's lone
preferred stock shareholder is the son of the Chairman of the Company. As part
of the transfer of the Company's VCMA business to a related party and the
proposed acquisition of the Division by JTS, it was decided in March 1995 to
retire the preferred stock of the Company. Effective January 28, 1996, all
preferred shares were retired for a consideration of Indian rupees 500,000
($13,893). As of January 28, 1996, this amount has been included in "Due to
related parties, net" (see Note 6 above).
F-52
<PAGE> 179
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. OTHER MATTERS:
Technical Know-how and Collaboration Agreement
Foreign currency transactions with parties outside India are subject to
controls imposed by the Reserve Bank of India ("RBI"), India's central bank.
Funds can only be remitted for payments against specific invoices for receipt of
materials or equipment and certain additional limited uses. Except for payments
below $5,000, cash in advance or deposit payments are not freely permitted to
parties outside the country. As part of the Company's disk drive EOU project
approval, the Government has allowed the Company to pay $2 million to JTS for
technical know-how fees. The Company is yet to finalize its agreement with JTS
for the payment of technical know-how fees as of the date of the statements. The
Division has not recorded any liability for possible future payment of technical
know-how fees due to the anticipated acquisition of the Company by JTS. The
Company's term loan agreements with ICICI contains certain restrictions on the
timing and period of payment of technical know-how fees.
Divestiture of Voice Coil Business
The Company transferred the VCMA business, after write-offs of
approximately $350,000 of related party balances, to Tancom Electronics
("Tancom") as of January 28, 1996. Such transfer included plant and equipment
and inventories of the VCMA business, along with certain other assets and
liabilities.
Tancom is owned and controlled by the Chairman of the Company and his
family members and is therefore considered a related party. Retained earnings
attributable to the VCMA business since April 1, 1994 less advances made to
certain related parties were also transferred to Tancom. The Division expects to
continue to purchase voice coil assemblies from Tancom, provided their prices
remain competitive. The Division has not entered into any agreement mandating
the purchase of voice coil assemblies from Tancom.
As of January 28, 1996, the total value of assets transferred to Tancom was
$558,146 and the total value of liabilities transferred totalled $28,148.
Retained earnings of the VCMA business transferred to Tancom totalled $418,493.
Accounts receivable of $428,080 and accounts payable of $236,163 relating to the
voice coil business, outstanding as of January 28, 1996 has been included in the
Statement of Assets and Liabilities of the Division due to regulatory
constraints on transfer of foreign currency receivables and payables. All of the
accounts receivables of the VCMA business are owing from Tantec Magnetics, a
related party to the Company.
10. SUBSEQUENT EVENTS:
New Long Term Loan
On February 20, 1996, the Company was sanctioned an additional foreign
currency loan of $10 million, to be reduced to the extent of participation by
other institutions, by the ICICI for the proposed expansion of its disk drive
business. The Company had received a letter of intent ("letter") from the ICICI
the terms and conditions of which have to be agreed upon by the Company within
30 days before a formal foreign currency loan agreement ("loan agreement") could
be executed by both parties. Interest on this proposed loan shall be payable at
the lending rates of the ICICI prevailing on the date of execution of the loan
agreement. Lending rates of the ICICI are US dollar LIBOR, plus a fixed percent,
if the funds are provided out of the floating rate US dollar funds, and a fixed
rate per annum, if the funds are provided out of fixed rate US dollar funds.
According to the letter, this loan will be secured by a first charge on all of
the Company's equipment, both present and future, subject to any prior charge on
specified equipment in favor of the Company's banks. The Company is also
required to provide an irrevocable and unconditional guarantee from the Chairman
in favor of ICICI for due repayment of the loan along with all interest and any
other moneys. Further, for the loan to
F-53
<PAGE> 180
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
become effective, the Company would have to raise $5,584,885 by issue of equity
shares to promoters, obtain an unsecured loan of $3,601,000 and state subsidies
of $236,177 to meet a part of the cost of the project.
On March 18, 1996, the Company entered into a loan agreement with the ICICI
for $7 million towards their participation in the total sanctioned amount of $10
million. The loan is repayable in US dollar in 12 equal quarterly installments
of $583,333 each commencing form May 20, 1998. The Company has procured an
irrevocable and unconditional guarantee from the Chairman of the Company as
required by the letter of intent. The funding of this loan by ICICI is dependent
upon the Company's compliance with the pre-disbursement conditions relating to
raising of additional equity capital and obtaining of unsecured loans and state
subsidies, mentioned above. If the Company does not comply with these
pre-disbursement conditions, the previously obtained loans from ICICI (see Note
5) could be held in default and ICICI may have the right to recall the earlier
loans, besides not funding the current loan.
F-54
<PAGE> 181
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND
PLAN OF REORGANIZATION
<PAGE> 182
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
ATARI CORPORATION
AND
JT STORAGE, INC.
APRIL 8, 1996
<PAGE> 183
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I -- THE MERGER............................................................. 1
1.1 The Merger....................................................................... 1
1.2 Closing; Effective Time.......................................................... 2
1.3 Effect of the Merger............................................................. 2
1.4 Certificate of Incorporation; Bylaws............................................. 2
1.5 Directors and Executive Officers................................................. 2
1.6 Effect on Capital Stock.......................................................... 2
1.7 Surrender of Certificates........................................................ 3
1.8 No Further Ownership Rights in Atari Stock....................................... 4
1.9 Lost, Stolen or Destroyed Certificates........................................... 4
1.10 Tax Consequences................................................................. 4
1.11 Taking of Necessary Action; Further Action....................................... 4
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF JTS................................. 4
2.1 Organization, Standing and Power................................................. 5
2.2 Capital Structure................................................................ 5
2.3 Authority........................................................................ 6
2.4 Financial Statements............................................................. 7
2.5 Absence of Certain Changes....................................................... 7
2.6 Absence of Undisclosed Liabilities............................................... 7
2.7 Litigation....................................................................... 7
2.8 Restrictions on Business Activities.............................................. 7
2.9 Governmental Authorization....................................................... 8
2.10 Title to Property................................................................ 8
2.11 Intellectual Property............................................................ 8
2.12 Environmental Matters............................................................ 8
2.13 Tax.............................................................................. 9
2.14 Employee Benefit Plans........................................................... 9
2.15 Certain Agreements Affected by the Merger........................................ 10
2.16 Employee Matters................................................................. 10
2.17 Interested Party Transactions.................................................... 10
2.18 Insurance........................................................................ 10
2.19 Compliance With Laws............................................................. 11
2.20 Minute Books..................................................................... 11
2.21 Complete Copies of Materials..................................................... 11
2.22 Brokers' and Finders' Fees....................................................... 11
2.23 Registration Statement; Proxy Statement/Prospectus............................... 11
2.24 Vote Required.................................................................... 11
2.25 Board Approval................................................................... 12
2.26 Underlying Documents............................................................. 12
2.27 Representations Complete......................................................... 12
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF ATARI.............................. 12
3.1 Organization, Standing and Power................................................. 12
3.2 Capital Structure................................................................ 12
3.3 Authority........................................................................ 13
3.4 SEC Documents; Financial Statements.............................................. 13
3.5 Absence of Certain Changes....................................................... 14
</TABLE>
i
<PAGE> 184
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.6 Absence of Undisclosed Liabilities............................................... 14
3.7 Litigation....................................................................... 14
3.8 Restrictions on Business Activities.............................................. 14
3.9 Governmental Authorization....................................................... 15
3.10 Title to Property................................................................ 15
3.11 Intellectual Property............................................................ 15
3.12 Environmental Matters............................................................ 15
3.13 Tax.............................................................................. 16
3.14 Employee Benefit Plans........................................................... 16
3.15 Certain Agreements Affected by the Merger........................................ 17
3.16 Employee Matters................................................................. 17
3.17 Interested Party Transactions.................................................... 17
3.18 Insurance........................................................................ 17
3.19 Compliance With Laws............................................................. 18
3.20 Minute Books..................................................................... 18
3.21 Complete Copies of Materials..................................................... 18
3.22 Broker's and Finders' Fees....................................................... 18
3.23 Registration Statement; Proxy Statement/Prospectus............................... 18
3.24 Opinion of Financial Advisor..................................................... 18
3.25 Board Approval................................................................... 18
3.26 Vote Required.................................................................... 18
3.27 Underlying Documents............................................................. 18
3.28 Representations Complete......................................................... 19
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME................................... 19
4.1 Conduct of Business of JTS and Atari............................................. 19
4.2 Conduct of Business of JTS....................................................... 20
4.3 Conduct of Business of Atari..................................................... 20
4.4 No Other JTS Negotiations........................................................ 21
4.5 No Other Atari Negotiations...................................................... 22
ARTICLE V -- ADDITIONAL AGREEMENTS.................................................. 22
5.1 Proxy Statement/Prospectus; Registration Statement............................... 22
5.2 Meetings of Stockholders......................................................... 23
5.3 Access to Information............................................................ 23
5.4 Public Disclosure................................................................ 23
5.5 Consents; Cooperation............................................................ 23
5.6 Continuity of Interest Certificates.............................................. 24
5.7 Voting Agreements................................................................ 24
5.8 FIRPTA........................................................................... 24
5.9 Legal Requirements............................................................... 24
5.10 Blue Sky Laws.................................................................... 24
5.11 Atari Employee Benefit Plans..................................................... 24
5.12 Atari Debentures................................................................. 25
5.13 Form S-8......................................................................... 25
5.14 Tax-Free Reorganization; Tax Returns............................................. 25
5.15 Registration Rights.............................................................. 25
</TABLE>
ii
<PAGE> 185
TABLE OF CONTENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.16 Indemnification of Officers and Directors........................................ 25
5.17 Listing of JTS Common Stock...................................................... 25
5.18 Atari Consent to JTS Transaction with Moduler.................................... 25
5.19 Atari SEC Documents.............................................................. 25
5.20 Best Efforts and Further Assurances.............................................. 25
ARTICLE VI -- CONDITIONS TO THE MERGER.............................................. 26
6.1 Conditions to Obligations of Each Party to Effect the Merger..................... 26
6.2 Additional Conditions to Obligations of JTS...................................... 27
6.3 Additional Conditions to the Obligations of Atari................................ 28
ARTICLE VII -- TERMINATION, AMENDMENT AND WAIVER.................................... 29
7.1 Termination...................................................................... 29
7.2 Effect of Termination............................................................ 29
7.3 Expenses......................................................................... 29
7.4 Amendment........................................................................ 30
7.5 Extension; Waiver................................................................ 30
ARTICLE VIII -- GENERAL PROVISIONS.................................................. 30
8.1 Non-Survival at Effective Time................................................... 30
8.2 Absence of Third Party Beneficiary Rights........................................ 30
8.3 Notices.......................................................................... 30
8.4 Interpretation................................................................... 31
8.5 Counterparts..................................................................... 31
8.6 Entire Agreement; Nonassignability; Parties in Interest.......................... 31
8.7 Severability..................................................................... 31
8.8 Remedies Cumulative.............................................................. 31
8.9 Governing Law.................................................................... 32
8.10 Rules of Construction............................................................ 32
8.11 Amendment and Restatement........................................................ 32
</TABLE>
iii
<PAGE> 186
SCHEDULES
JTS Disclosure Schedule
Atari Disclosure Schedule
<TABLE>
<S> <C>
Schedule 5.6(a) -- JTS Significant Stockholders
Schedule 5.6(b) -- Atari Significant Shareholders
Schedule 5.7(a) -- JTS Voting Agreement Signatories
Schedule 5.7(b) -- Atari Voting Agreement Signatories
Schedule 5.15 -- Registration Rights Holders
</TABLE>
iv
<PAGE> 187
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Amended and Restated Certificate of Incorporation
Exhibit B Form of Amended and Restated Bylaws
Exhibit C-1 Form of JTS Voting Agreement
Exhibit C-2 Form of Atari Voting Agreement
</TABLE>
v
<PAGE> 188
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is made and entered into as of April 8, 1996, by and between Atari
Corporation, a Nevada corporation ("Atari"), and JT Storage, Inc., a Delaware
corporation ("JTS").
RECITALS
A. Atari is in the business of designing, manufacturing and selling
computers, computer peripheral products and video games.
B. JTS is in the business of designing, manufacturing and selling computer
peripheral products including mass storage computer disc drives.
C. The Boards of Directors of JTS and Atari believe it is in the best
interests of their respective companies and the stockholders of their respective
companies that JTS and Atari combine into a single company through the statutory
merger of Atari with and into JTS (the "Merger") and, in furtherance thereof,
have approved the Merger.
D. In connection with the Merger, among other things, the outstanding
shares of Atari Common Stock, $.01 par value ("Atari Common Stock"), shall be
converted into shares of JTS Common Stock, $.000001 par value ("JTS Common
Stock"), at the rate set forth herein.
E. JTS and Atari desire to make certain representations and warranties and
other agreements in connection with the Merger.
F. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a)(1)(A) of the Code.
G. This Agreement amends and restates that certain Agreement and Plan of
Reorganization by and among Atari, JTS and JTS Acquisition Corporation dated as
of February 12, 1996.
NOW, THEREFORE, in consideration of the covenants and representations set
forth herein, and for other good and valuable consideration, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement, a Certificate of
Merger prepared in accordance with Delaware Law (as defined herein) and Nevada
Law (as defined herein) and reasonably acceptable to counsel to JTS and counsel
to Atari (the "Certificate of Merger"), and the applicable provisions of the
Delaware General Corporation Law ("Delaware Law") and Nevada General Corporation
Law ("Nevada Law"), Atari shall be merged with and into JTS, the separate
corporate existence of Atari shall cease and JTS shall continue as the surviving
corporation. JTS as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as soon as practicable after the
satisfaction or waiver of each of the conditions set forth in Article VI hereof
or at such other time as the parties hereto agree (the "Closing Date"). The
Closing shall take place at the offices of Wilson Sonsini Goodrich & Rosati,
P.C., 650 Page Mill Road, Palo Alto, California, or at such other location as
the parties hereto agree. In connection with the Closing, the parties hereto
shall cause the Merger to be consummated by filing the Certificate of Merger
with (i) the Secretary of State of the State of Delaware and with the Recorder
of the County in which the registered office of JTS is located, in
<PAGE> 189
accordance with the relevant provisions of Delaware Law and (ii) the Secretary
of State of the State of Nevada, in accordance with the relevant provisions of
Nevada Law (the time of such filings being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law and Nevada Law. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of Atari shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Atari shall
become the debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of JTS, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by Delaware Law and such Certificate of Incorporation; provided, however, that
the Certificate of Incorporation of the Surviving Corporation shall be amended
and restated in the form attached hereto as Exhibit A.
(b) The Bylaws of JTS, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended;
provided, however, that the Bylaws of the Surviving Corporation shall be amended
and restated in the form attached hereto as Exhibit B.
1.5 Directors and Executive Officers. At the Effective Time, the directors
of the Surviving Corporation shall be Sirjang Lal Tandon, David T. Mitchell,
Jean D. Deleage, Alan Azan, Roger W. Johnson, LipBu Tan, Jack Tramiel and
Michael Rosenberg. The executive officers of JTS immediately prior to the
Effective Time shall constitute the only executive officers of the Surviving
Corporation as of the Effective Time, unless otherwise designated by JTS.
1.6 Effect on Capital Stock. By virtue of the Merger and without any
action on the part of JTS, Atari or the holders of any of the following
securities:
(a) Conversion of Atari Common Stock. At the Effective Time, each
share of Atari Common Stock issued and outstanding immediately prior to the
Effective Time (other than any shares of Atari Common Stock to be canceled
pursuant to Section 1.6(b)) will be canceled and extinguished and be
converted automatically into the right to receive one (1) share of JTS
Common Stock (the "Exchange Ratio").
(b) Cancellation of Certain Stock. At the Effective Time, each share
of Atari Common Stock owned by JTS or any direct or indirect wholly-owned
subsidiary of JTS immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof.
(c) Atari Stock Options. At the Effective Time, all options to
purchase Atari Common Stock then outstanding under the Atari Amended 1986
Stock Option Plan (the "Atari Stock Option Plan") shall be assumed by JTS
in accordance with Section 5.11.
(d) Atari Debentures. At the Effective Time, JTS shall assume all
obligations of Atari under Atari's 5 1/4% Convertible Subordinated
Debentures Due 2002 (the "Atari Debentures"), and such debentures shall be
convertible into shares of JTS Common Stock in accordance with Section
5.12.
(e) Federated Debentures. To the extent required by that certain
Indenture dated as of April 15, 1985 from the The Federated Group, Inc. to
Security Pacific National Bank, as trustee, together with the first
supplemental indenture thereto dated as of September 24, 1987, at the
Effective Time, JTS shall assume any obligations of Atari under the 7 1/2%
Convertible Subordinated Debentures due April 15, 2010 of The Federated
Group, Inc. (the "Federated Debentures").
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Atari
Common Stock or JTS Common Stock), reorganization, recapitalization or other
like change with
2
<PAGE> 190
respect to Atari Common Stock, JTS Common Stock or JTS Series A Preferred Stock,
$.000001 par value ("JTS Series A Preferred Stock"), occurring after the date
hereof and prior to the Effective Time.
(g) Fractional Shares. No fraction of a share of JTS Common Stock will be
issued, but in lieu thereof each holder of shares of Atari Common Stock who
would otherwise be entitled to a fraction of a share of JTS Common Stock (after
aggregating all fractional shares of JTS Common Stock to be received by such
holder) shall receive from JTS an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii) the closing
price of a share of Atari Common Stock on the trading day immediately prior to
the Effective Time, as reported by the American Stock Exchange.
1.7 Surrender of Certificates.
(a) Exchange Agent. Registrar and Transfer Company, Cranford, NJ, shall
act as exchange agent (the "Exchange Agent") in the Merger.
(b) JTS to Provide Common Stock and Cash. Promptly after the Effective
Time, JTS shall make available to the Exchange Agent for exchange in accordance
with this Article I, through such procedures as JTS may reasonably adopt, (i)
the shares of JTS Common Stock issuable pursuant to Section 1.6(a) in exchange
for shares of Atari Common Stock outstanding immediately prior to the Effective
Time and (ii) cash in an amount sufficient to permit payment of cash in lieu of
fractional shares pursuant to Section 1.6(g).
(c) Exchange Procedures. Promptly after the Effective Time, the Surviving
Corporation shall cause to be mailed to each holder of record of a certificate
or certificates (the "Certificates") which immediately prior to the Effective
Time represented outstanding shares of Atari Common Stock, whose shares were
converted into the right to receive shares of JTS Common Stock (and cash in lieu
of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon receipt of the Certificates by the
Exchange Agent, and shall be in such form and have such other provisions as JTS
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of JTS
Common Stock (and cash in lieu of fractional shares). Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by JTS, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
the holder of such Certificate shall be entitled to receive in exchange therefor
a certificate representing the number of whole shares of JTS Common Stock and
payment in lieu of fractional shares which such holder has the right to receive
pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Atari Common Stock will be deemed from and
after the Effective Time, for all corporate purposes, other than the payment of
dividends, to evidence the ownership of the number of full shares of JTS Common
Stock into which such shares of Atari Common Stock shall have been so converted
and the right to receive an amount in cash in lieu of the issuance of any
fractional shares in accordance with Section 1.6.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions with respect to JTS Common Stock with a record date after
the Effective Time will be paid to the holder of any unsurrendered Certificate
with respect to the shares of JTS Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of JTS
Common Stock issued in exchange therefor, without interest, at the time of such
surrender, the amount of any such dividends or other distributions with a record
date after the Effective Time theretofore payable (but for the provisions of
this Section 1.7(d)) with respect to such shares of JTS Common Stock.
(e) Transfers of Ownership. If any certificate for shares of JTS Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to JTS or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
JTS
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Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of JTS or any agent
designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.7, none of the Exchange Agent, the Surviving Corporation or any party hereto
shall be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Atari Stock. All shares of JTS Common
Stock issued upon the surrender for exchange of shares of Atari Common Stock in
accordance with the terms hereof (including any cash paid in lieu of fractional
shares) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Atari Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of shares
of Atari Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of JTS Common Stock
(and cash in lieu of fractional shares) as may be required pursuant to Section
1.6; provided, however, that JTS may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against JTS, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Atari, the officers and directors of Atari are fully
authorized in the name of the corporation or otherwise to take, and will take,
all such lawful and necessary action, so long as such action is not inconsistent
with this Agreement.
1.12 Dissenting JTS Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of JTS Common Stock or JTS Series A Preferred Stock held by a holder who
has exercised dissenters' rights for such shares in accordance with Delaware Law
or California General Corporation Law to the extent such law is applicable by
virtue of Section 2115 thereof ("California Law") and who, as of the Effective
Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting
Shares"), shall be entitled to such rights as are granted by Delaware Law or
California Law.
(b) JTS shall give Atari (i) prompt notice of any written demands received
by JTS for an appraisal of shares of capital stock of JTS pursuant to Section
262 of Delaware Law or Chapter 13 of California Law, withdrawals of such
demands, and any other related instruments served pursuant to Delaware Law or
California Law and received by JTS and (ii) the opportunity to participate in
all negotiations and proceedings with respect to such demands. JTS shall not,
except with the prior written consent of Atari, voluntarily make any payment
with respect to any such demands or offer to settle or settle any such demands.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF JTS
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition
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(financial or otherwise), properties, assets (including intangible assets),
liabilities, business, operations, results of operations or prospects of such
entity or group of entities. In this Agreement, any reference to a "Material
Adverse Effect" with respect to any entity or group of entities means any event,
change or effect that is materially adverse to the condition (financial or
otherwise), properties, assets, liabilities, business, operations, results of
operations or prospects of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge" means such
party's actual knowledge after due and diligent inquiry.
Except as disclosed in a document of even date herewith and delivered by
JTS to Atari prior to the execution and delivery of this Agreement and referring
to the representations and warranties in this Agreement (the "JTS Disclosure
Schedule"), JTS represents and warrants to Atari as follows:
2.1 Organization, Standing and Power. Each of JTS and its subsidiaries is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. Each of JTS and its subsidiaries has
the corporate power to own its properties and to carry on its business as now
being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse Effect on JTS
and its subsidiaries, taken as a whole. JTS has delivered a true and correct
copy of the Certificate of Incorporation and Bylaws or other charter documents,
as applicable, of JTS and each of its subsidiaries, each as amended to date, to
Atari. Neither JTS nor any of its subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws or equivalent
organizational documents. JTS is the owner of all outstanding shares of capital
stock of each of its subsidiaries and all such shares are duly authorized,
validly issued, fully paid and nonassessable. All of the outstanding shares of
capital stock of each such subsidiary are owned by JTS free and clear of all
liens, charges, claims or encumbrances or rights of others. There are no
outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable
or convertible securities or other commitments or agreements of any character
relating to the issued or unissued capital stock or other securities of any such
subsidiary, or otherwise obligating JTS or any such subsidiary to issue,
transfer, sell, purchase, redeem or otherwise acquire any such securities.
Except as disclosed in the JTS Disclosure Schedule, JTS does not directly or
indirectly own any equity or similar interest in, or any interest convertible or
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business association or entity.
2.2 Capital Structure. The authorized capital stock of JTS consists of
90,000,000 shares of Common Stock, $.000001 par value, and 70,000,000 shares of
Preferred Stock, $.000001 par value, all of which is designated Series A
Preferred Stock, of which there were issued and outstanding as of the close of
business on April 5, 1996, 9,204,741 shares of Common Stock and 29,696,370
shares of Series A Preferred. The JTS Disclosure Schedule contains a true and
complete list of the holders of JTS Common Stock and JTS Series A Preferred
Stock and the number of shares held by each such holder on April 5, 1996. There
are no other outstanding shares of capital stock or voting securities. Each
outstanding share of JTS Series A Preferred Stock is convertible into one (1)
share of JTS Common Stock. All outstanding shares of JTS Common Stock and JTS
Series A Preferred Stock are duly authorized, validly issued, fully paid and
non-assessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not subject
to preemptive rights or rights of first refusal created by statute, the
Certificate of Incorporation or Bylaws of JTS or any agreement to which JTS is a
party or by which it is bound. As of the close of business on April 5, 1996, JTS
has reserved (i) 4,300,000 shares of JTS Common Stock for issuance to employees
and consultants pursuant to the JTS 1995 Stock Option Plan (the "JTS Stock
Option Plan"), of which 37,554 shares have been issued pursuant to option
exercises and 3,680,358 shares are subject to outstanding, unexercised options,
(ii) 600,000 shares of JTS Common Stock for issuance upon the exercise of
outstanding, unexercised JTS Warrants and (iii) 32,500,000 shares of JTS Series
A Preferred Stock and JTS Common Stock for issuance upon conversion of the note
issued to Atari on February 13, 1996 and upon exercise of the warrants issuable
to Atari pursuant to such note. Since April 5, 1996, JTS has not issued or
granted additional options under the JTS Stock Option Plan. Other than pursuant
to this Agreement, there are no other options, warrants, calls, rights,
commitments or agreements of any character to which JTS is a party or by which
it is bound obligating JTS to issue, deliver, sell, repurchase or redeem, or
cause to be
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issued, delivered, sold, repurchased or redeemed, any shares of capital stock of
JTS or obligating JTS to grant, extend, accelerate the vesting of, change the
price of, or otherwise amend or enter into any such option, warrant, call,
right, commitment or agreement. The terms of the JTS Stock Option Plan and the
JTS Warrants permit the assumption or substitution of options or warrants, as
applicable, to purchase Atari Common Stock as provided in this Agreement,
without the consent or approval of the holders of such securities, the JTS
stockholders, or otherwise. True and complete copies of all agreements and
instruments relating to or issued under the JTS Stock Option Plan or JTS
Warrants have been made available to Atari and such agreements and instruments
have not been amended, modified or supplemented, and there are no agreements to
amend, modify or supplement such agreements or instruments in any case from the
form made available to Atari. The shares of JTS Common Stock to be issued
pursuant to the Merger will be duly authorized, validly issued, fully paid, and
non-assessable.
2.3 Authority. JTS has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of JTS, subject only to the approval of the Merger
by JTS's stockholders as contemplated by Section 6.1(a). This Agreement has been
duly executed and delivered by JTS and constitutes the valid and binding
obligation of JTS. The execution and delivery of this Agreement by JTS does not,
and the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under (i) any provision of
the Certificate of Incorporation or Bylaws of JTS or any of its subsidiaries, as
amended, or (ii) any material mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to JTS or
any of its subsidiaries or any of their properties or assets. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality ("Governmental Entity") is required by or with
respect to JTS or any of its subsidiaries in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger as provided in
Section 1.2, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws and the securities laws of any foreign country; (iii) such
filings as may be required under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR"); and (iv) such other consents, authorizations,
filings, approvals and registrations which, if not obtained or made, would not
have a Material Adverse Effect on JTS and its subsidiaries, taken as a whole,
and would not prevent, alter or materially delay any of the transactions
contemplated by this Agreement. The JTS Disclosure Schedule sets forth a full
and complete list of all necessary consents, waivers and approvals of third
parties applicable to the operations of JTS that are required to be obtained by
JTS in connection with the execution and delivery of this Agreement or the
Merger Agreement by JTS or the consummation by JTS of the transactions
contemplated hereby or thereby, except any such consents, waivers and approvals,
which, if not obtained, would not have a Material Adverse Effect on JTS and its
subsidiaries, taken as a whole. Prior to the Closing Date, JTS will obtain all
such consents.
The Stock Purchase Agreement dated as of April 4, 1996 between JTS and
Lunenburg, S.A., a Panama corporation, together with all documents executed in
connection therewith (the "Moduler Agreement"), has been duly executed and
delivered by JTS, the transactions contemplated thereby have been consummated,
and the Moduler Agreement constitutes a valid and binding obligation of JTS. JTS
has provided to Atari a true, correct and complete copy of the Moduler
Agreement, and has performed all obligations required to be performed by it to
date under the Moduler Agreement. To JTS' best knowledge, (a) the other parties
to the Moduler Agreement have performed all obligations required to be performed
by them to date under such agreement, (b) as to such other parties, the Moduler
Agreement is valid, binding and enforceable in accordance with its terms and (c)
the Moduler Agreement is in full force and effect with no default or dispute or
basis therefor existing with respect thereto.
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2.4 Financial Statements. JTS has furnished to Atari its audited
consolidated balance sheet, consolidated statements of operations and
consolidated statements of stockholders equity and cash flows as of and for the
year ended January 28, 1996, and the audited statement of assets and
liabilities, statement of revenues and expenses and cash flows of The Hard Disk
Drive Division of Moduler as of and for the year ended January 28, 1996
(collectively, the "JTS Financial Statements"). The JTS Financial Statements,
including the notes thereto, were complete and correct in all material respects
as of their respective dates, complied as to form in all material respects with
applicable accounting requirements as of their respective dates, and have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto). The JTS Financial
Statements are in accordance with the books and records of JTS and fairly
present the consolidated financial condition and operating results of JTS and
its subsidiaries at the dates and during the periods indicated therein. There
has been no change in JTS accounting policies except as described in the notes
to the JTS Financial Statements.
2.5 Absence of Certain Changes. Since January 28, 1996, (the "JTS Balance
Sheet Date"), JTS has conducted its business in the ordinary course consistent
with past practice and there has not occurred: (i) any change, event or
condition (whether or not covered by insurance) that has resulted in, or might
reasonably be expected to result in, a Material Adverse Effect to JTS and its
subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer of any
material asset of JTS or any of its subsidiaries other than in the ordinary
course of business and consistent with past practice; (iii) any change in
accounting methods or practices (including any change in depreciation or
amortization policies or rates) by JTS or any revaluation by JTS of any of its
or any of its subsidiaries' assets; (iv) any issuance or agreement to issue or
any commitment to issue any equity security, bond, note or other security of JTS
or any of its subsidiaries; (v) any declaration, setting aside, or payment of a
dividend or other distribution with respect to the shares of JTS, or any direct
or indirect redemption, purchase or other acquisition by JTS of any of its
shares of capital stock; (vi) any material contract entered into by JTS or any
of its subsidiaries, other than in the ordinary course of business and as
provided to Atari, or any amendment or termination of, or default under, any
material contract to which JTS or any of its subsidiaries is a party or by which
it is bound; or (vii) any negotiation or agreement by JTS or any of its
subsidiaries to do any of the things described in the preceding clauses (i)
through (vii) (other than negotiations with Atari regarding the transactions
contemplated by this Agreement).
2.6 Absence of Undisclosed Liabilities. JTS has no material obligations or
liabilities of any nature (matured or unmatured, fixed or contingent) other than
(i) those set forth or adequately provided for in the JTS balance sheet and the
Moduler statement of assets and liabilities, each as included in the JTS
Financial Statements, and true, correct and complete copies of which have been
provided to Atari, (collectively, the "JTS Balance Sheet"), (ii) those incurred
in the ordinary course of business and not required to be set forth in the JTS
Balance Sheet under generally accepted accounting principles, and (iii) those
incurred in the ordinary course of business since the JTS Balance Sheet Date and
consistent with past practice.
2.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of JTS or any of its
subsidiaries, threatened against JTS or any of its subsidiaries or any of their
respective properties or any of their respective officers or directors (in their
capacities as such) that, individually or in the aggregate, could have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole. There is
no judgment, decree or order against JTS or any of its subsidiaries, or, to the
knowledge of JTS and its subsidiaries, any of their respective directors or
officers (in their capacities as such), that could prevent, enjoin, alter or
delay any of the transactions contemplated by this Agreement, or that could have
a Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
2.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon JTS or any of its subsidiaries which
has or could have the effect of prohibiting or materially impairing any current
or future business practice of JTS or any of its subsidiaries, any acquisition
of property by JTS or any of its subsidiaries or the conduct of business by JTS
or any of its subsidiaries as currently conducted or as proposed to be conducted
by JTS or any of its subsidiaries.
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2.9 Governmental Authorization. JTS and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which JTS or any of its subsidiaries currently operates or holds any
interest in any of its properties or (ii) which is required for the operation of
JTS's or any of its subsidiaries' business or the holding of any such interest
(herein collectively called "JTS Authorizations"), and all of such JTS
Authorizations are in full force and effect, except where the failure to obtain
or have any of such JTS Authorizations could not reasonably be expected to have
a Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
2.10 Title to Property. JTS and its subsidiaries have good and marketable
title to all of their respective properties, interests in properties and assets,
real and personal, reflected in the JTS Balance Sheet or acquired after the JTS
Balance Sheet Date (except properties, interests in properties and assets sold
or otherwise disposed of since the JTS Balance Sheet Date thereof in the
ordinary course of business), free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except (i) the lien of current
taxes not yet due and payable, (ii) such imperfections of title, liens and
easements as do not and will not materially detract from or interfere with the
use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties and (iii) liens
securing debt which is reflected on the JTS Balance Sheet. The plants, property
and equipment of JTS and its subsidiaries that are used in the operations of
their businesses are in good operating condition and repair. All properties used
in the operations of JTS and its subsidiaries are reflected in the JTS Balance
Sheet to the extent generally accepted accounting principles require the same to
be reflected. The JTS Disclosure Schedule identifies each parcel of real
property owned or leased by JTS or any of its subsidiaries.
2.11 Intellectual Property. JTS and its subsidiaries own, or are licensed
or otherwise possess legally enforceable rights to use all patents, trademarks,
trade names, service marks, copyrights, and any applications therefor,
maskworks, net lists, schematics, technology, know-how, computer software
programs or applications (in both source code and object code form), and
tangible or intangible proprietary information or material ("Intellectual
Property") that are used or proposed to be used in the business of JTS and its
subsidiaries as currently conducted or as proposed to be conducted by JTS and
its subsidiaries. To the knowledge of JTS and its subsidiaries, there is no
material unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of JTS or any of its subsidiaries, any trade secret
material to JTS or any of its subsidiaries, or any Intellectual Property right
of any third party to the extent licensed by or through JTS or any of its
subsidiaries, by any third party, including any employee or former employee of
JTS or any of its subsidiaries. Neither JTS nor any of its subsidiaries has
entered into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification provisions
(i) listed on the JTS Disclosure Schedule or (ii) contained in purchase orders
arising in the ordinary course of business.
2.12 Environmental Matters.
(a) To the knowledge of JTS and its subsidiaries, no substance that is
regulated by any foreign, federal, state or local governmental authority or that
has been designated by any such authority to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment (herein a "Hazardous Material")
is present in, on or under any property that JTS or any of its subsidiaries has
at any time owned, operated, occupied or leased (herein a "JTS Facility"),
except to the extent that such presence has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries, taken as
a whole.
(b) To the knowledge of JTS and its subsidiaries, neither JTS nor any of
its subsidiaries has transported, stored, used, disposed of, manufactured,
released or exposed its employees or any other person to Hazardous Materials
("Hazardous Materials Activity") in material violation of any applicable
foreign, federal, state or local statute, rule, regulation, order or law.
(c) To the knowledge of JTS and its subsidiaries, each of JTS and its
subsidiaries is and at all times has been in compliance with all foreign,
federal, state and local laws relating to emissions, discharges, releases or
threatened releases of Hazardous Materials, except to the extent noncompliance
with such laws has not had and could not reasonably be expected to have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole.
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(d) No action, proceeding, permit revocation, writ, injunction or claim is
pending, or to the knowledge of JTS and its subsidiaries threatened, concerning
the Hazardous Materials Activities of JTS or any of its subsidiaries and/or any
JTS Facilities. Neither JTS nor any of its subsidiaries is aware of any fact or
circumstance which could impose any material environmental liability upon JTS or
any of its subsidiaries.
2.13 Taxes. JTS and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which JTS or any of its
subsidiaries is or has been a member have timely filed all Tax Returns required
to be filed by it, have paid all Taxes shown thereon to be due and has provided
adequate accruals in accordance with generally accepted accounting principles in
its financial statements for any Taxes that have not been paid, whether or not
shown as being due on any Tax Returns. Except as disclosed in the JTS Disclosure
Schedule, (i) no material claim for Taxes has become a lien against the property
of JTS or any of its subsidiaries or is being asserted against JTS or any of its
subsidiaries other than liens for Taxes not yet due and payable, (ii) no audit
of any Tax Return of JTS or any of its subsidiaries is being conducted by a Tax
authority, (iii) no extension of the statute of limitations on the assessment of
any Taxes has been granted by JTS or any of its subsidiaries and is currently in
effect, and (iv) there is no agreement, contract or arrangement to which JTS or
any of its subsidiaries is a party that may result in the payment of any amount
that would not be deductible by reason of Sections 280G, 162 or 404 of the Code.
Neither JTS nor any of its subsidiaries is a party to any tax sharing or tax
allocation agreement nor does JTS or any of its subsidiaries owe any amount
under any such agreement. As used herein, "Taxes" shall mean all taxes of any
kind, including, without limitation, those on or measured by or referred to as
income, gross receipts, sales, use, ad valorem, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
value added, property or windfall profits taxes, customs, duties or similar
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts imposed by any
governmental authority, domestic or foreign. As used herein, "Tax Return" shall
mean any return, report or statement required to be filed with any governmental
authority with respect to Taxes. JTS and each of its subsidiaries are in full
compliance with all terms and conditions of any Tax exemptions or other Tax-
sharing agreement or order of a foreign government and the consummation of the
Merger shall not have any adverse effect on the continued validity and
effectiveness of any such Tax exemptions or other Tax-sharing agreement or
order.
2.14 Employee Benefit Plans.
(a) The JTS Disclosure Schedule lists, with respect to JTS, any trade or
business (whether or not incorporated) which is treated as a single employer
with JTS (an "ERISA Affiliate") within the meaning of Section 414(b), (c), (m)
or (o) of the Code or any subsidiary of JTS (i) all employee benefit plans (as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (ii) all loans to employees in excess of $50,000, loans to
officers, and any stock option, stock purchase, phantom stock, stock
appreciation right, supplemental retirement, severance, sabbatical, disability,
employee relocation, cafeteria (Code section 125), life insurance or accident
insurance plans, programs or arrangements, (iii) all bonus, deferred
compensation or incentive plans, programs or arrangements, (iv) other material
fringe or employee benefit plans, programs or arrangements that apply to senior
management of JTS and that do not generally apply to all employees, and (v) any
current or former employment or executive compensation or severance agreements,
written or otherwise, as to which current or contingent obligations of JTS of
greater than $50,000 exist for the benefit of, or relating to, any current or
former employee, consultant or director of JTS (together, the "JTS Employee
Plans"), and a copy of each such JTS Employee Plan and each summary plan
description and annual report on the Form 5500 series required to be filed with
any government agency for each JTS Employee Plan for the three most recent Plan
years has been delivered to Atari.
(b) (i) None of the JTS Employee Plans promises or provides retiree medical
or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any JTS Employee Plan, which could
reasonably be expected to have, in the aggregate, a Material Adverse Effect on
JTS or its subsidiaries; (iii) all JTS Employee Plans have been administered in
compliance with the requirements prescribed by any and all statutes, rules and
regulations (including ERISA and the Code, orders, or governmental rules and
regulations currently in effect with respect thereto and including all
applicable requirements for notification to participants
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or to the Department of Labor, Internal Revenue Service or Secretary of the
Treasury), except as would not have, in the aggregate, a Material Adverse Effect
on JTS or its subsidiaries, and JTS and each of its subsidiaries have performed
all obligations required to be performed by them under, are not in any material
respect in default under or violation of, and have no knowledge of any material
default or violation by any other party to, any of the JTS Employee Plans; (iv)
each JTS Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has received a
favorable determination letter from the Internal Revenue Service (the "IRS") as
to such qualification, and nothing has occurred which could reasonably be
expected to cause the loss of such qualification or exemption; (v) all material
contributions required to be made by JTS or any of its subsidiaries to any JTS
Employee Plan have been made on or before their due dates and a reasonable
amount has been accrued for contributions to each JTS Employee Plan for the
current plan years; and (vi) no JTS Employee Plan is covered by, and neither JTS
nor any subsidiary has incurred or expects to incur any liability under Title IV
of ERISA or Section 412 of the Code.
(c) With respect to each JTS Employee Plan that constitutes a group health
plan within the meaning of Section 5000(b)(1) of the Code or Section 607(1) of
ERISA, JTS and each of its United States subsidiaries have complied with the
applicable health care continuation and notice provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), and the
proposed regulations thereunder, except to the extent that such failure to
comply would not, in the aggregate, have a Material Adverse Effect on JTS and
its subsidiaries.
2.15 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of JTS or any of its subsidiaries, (ii) increase any
benefits otherwise payable by JTS or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
2.16 Employee Matters. Except as to matters which could not, in the
aggregate, have a Material Adverse Effect on JTS and its subsidiaries, taken as
a whole, JTS and each of its subsidiaries are in compliance in all respects with
all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and employment practices, and is not engaged
in any unfair labor practice. There are no pending claims against JTS or any of
its subsidiaries under any workers compensation plan or policy or for long term
disability. Neither JTS nor any of its subsidiaries has any material obligations
under COBRA with respect to any former employees or qualifying beneficiaries
thereunder. There are no controversies pending or, to the knowledge of JTS or
any of its subsidiaries, threatened, between JTS or any of its subsidiaries and
any of their respective employees, which controversies have or could have a
Material Adverse Effect on JTS and its subsidiaries, taken as a whole. Neither
JTS nor any of its subsidiaries is a party to any collective bargaining
agreement or other labor unions contract nor does JTS nor any of its
subsidiaries know of any activities or proceedings of any labor union or
organize any such employees.
2.17 Interested Party Transactions. Except as disclosed in the JTS
Disclosure Schedule, neither JTS nor any of its subsidiaries is indebted to any
director, officer, employee or agent of JTS or any of its subsidiaries (except
for amounts due as normal salaries and in reimbursement of ordinary expenses),
and no such person is indebted to JTS or any of its subsidiaries. Except as
disclosed in the JTS Disclosure Schedule, no officer, director or stockholder of
JTS or any affiliate of such person has, either directly or indirectly, (i) an
interest in any corporation, partnership, firm or other person or entity which
furnishes or sells services or products which are similar to those furnished or
sold by JTS or (ii) a beneficial interest in a contract or agreement to which
JTS is a party or by which JTS may be bound. For purposes of this Section 2.17,
there shall be disregarded any interest which arose solely from the ownership of
less than a one percent (1%) equity interest in a corporation whose stock is
regularly traded on a national securities exchange or over-the-counter market.
2.18 Insurance. JTS and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of JTS and its
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subsidiaries. There is no claim pending under any of such policies or bonds as
to which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and JTS and its subsidiaries are otherwise in compliance
with the terms of such policies and bonds. JTS has no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.19 Compliance With Laws. Each of JTS and its subsidiaries has complied
with, are not in violation of, and have not received any notices of violation
with respect to, any federal, state, local or foreign statute, law or regulation
with respect to the conduct of its business, or the ownership or operation of
its business, except for such violations or failures to comply as could not be
reasonably expected to have a Material Adverse Effect on JTS and its
subsidiaries, taken as a whole.
2.20 Minute Books. The minute books of JTS and its subsidiaries made
available to Atari contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of JTS and the respective subsidiaries through the date of this
Agreement, and reflect all transactions referred to in such minutes accurately
in all material respects.
2.21 Complete Copies of Materials. JTS has delivered or made available
true and complete copies of each document which has been requested by Atari or
its counsel in connection with their legal and accounting review of JTS and its
subsidiaries.
2.22 Brokers' and Finders' Fees. JTS has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or investment bankers' fees or any similar charges in connection
with this Agreement or any transaction contemplated hereby.
2.23 Registration Statement; Proxy Statement/Prospectus. The information
supplied by JTS for inclusion in the registration statement on Form S-4 (or such
other or successor form as shall be appropriate, the "Registration Statement")
pursuant to which the shares of JTS Common Stock to be issued in the Merger will
be registered with the Securities and Exchange Commission (the "SEC") shall not
at the time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The information
supplied by JTS for inclusion in the proxy statement/prospectus to be sent to
the stockholders of JTS and Atari in connection with the meeting of JTS's
stockholders to consider the Merger (the "JTS Stockholders Meeting") and in
connection with the meeting of Atari's stockholders to consider the Merger (the
"Atari Stockholders Meeting") (such proxy statement/prospectus as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed to JTS's stockholders and Atari's
stockholders, at the time of the JTS Stockholders Meeting, at the time of the
Atari Stockholders Meeting and at the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made therein not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the JTS Stockholders Meeting or the Atari Stockholders Meeting which
has become false or misleading. If at any time prior to the Effective Time any
event or information should be discovered by JTS which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
JTS shall promptly inform Atari. Notwithstanding the fore going, JTS makes no
representation, warranty or covenant with respect to any information supplied by
Atari which is contained in any of the foregoing documents.
2.24 Vote Required. The affirmative votes of the holders of (i) a majority
of the shares of JTS Common Stock and JTS Series A Preferred Stock outstanding
on the record date set for the JTS Stockholders Meeting, voting together, (ii) a
majority of the shares of JTS Common Stock outstanding on the record date set
for the JTS Stockholders Meeting, voting separately as a class, and (iii) at
least two-thirds of the shares of JTS Series A Preferred outstanding on the
record date set for the JTS Stockholders Meeting, voting separately as a class,
are the only votes of the holders of any of JTS's capital stock necessary to
approve this Agreement and the transactions contemplated hereby.
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2.25 Board Approval. The Board of Directors of JTS has unanimously (i)
approved this Agreement and the Merger, (ii) determined that the Merger is in
the best interests of the stockholders of JTS and is on terms that are fair to
such stockholders and (iii) recommended that the stockholders of JTS approve
this Agreement and the Merger.
2.26 Underlying Documents. True and complete copies of all underlying
documents set forth on the JTS Disclosure Schedule or described as having been
disclosed or delivered to Atari pursuant to this Agreement have been furnished
to Atari.
2.27 Representations Complete. None of the representations or warranties
made by JTS herein or in any Schedule hereto, including the JTS Disclosure
Schedule, or certificate furnished by JTS pursuant to this Agreement, when all
such documents are read together in their entirety, contains or will contain at
the Effective Time any untrue statement of a material fact, or omits or will
omit at the Effective Time to state any material fact necessary in order to make
the statements contained herein or therein, in the light of the circumstances
under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ATARI
Except as disclosed in the Atari SEC Documents (as defined in Section 3.4)
or in a document of even date herewith and delivered by Atari to JTS prior to
the execution and delivery of this Agreement and referring to the
representations and warranties in this Agreement (the "Atari Disclosure
Schedule"), Atari represents and warrants to JTS as follows:
3.1 Organization, Standing and Power. The Atari Disclosure Schedule
identifies each subsidiary of Atari that is a "significant subsidiary" of Atari
as defined by Rule 1-02(v) of Regulation S-X (the "Significant Subsidiaries").
Atari and each of its Significant Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Each of Atari and its Significant Subsidiaries has the corporate
power to own its properties and to carry on its business as now being conducted
and as proposed to be conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified and
in good standing would have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole. Atari has delivered a true and correct copy of
the Articles of Incorporation and Bylaws or other charter documents, as
applicable, of Atari and each of its Significant Subsidiaries, each as amended
to date, to JTS. Neither Atari nor any of its Significant Subsidiaries is in
violation of any of the provisions of its Articles of Incorporation or Bylaws or
equivalent organizational documents. Atari is the owner of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock of each such subsidiary are owned by Atari free and
clear of all liens, charges, claims or encumbrances or rights of others. There
are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other securities
of any such subsidiary, or otherwise obligating Atari or any such subsidiary to
issue, transfer, sell, purchase, redeem or otherwise acquire any such
securities. Except as disclosed in the Atari SEC Documents (as defined in
Section 3.4), Atari does not directly or indirectly own any equity or similar
interest in, or any interest convertible or exchangeable or exercisable for, any
equity or similar interest in, any corporation, partnership, joint venture or
other business association or entity.
3.2 Capital Structure. The authorized capital stock of Atari consists of
100,000,000 shares of Common Stock, $.01 par value, and 10,000,000 shares of
Preferred Stock, $.01 par value, of which there were issued and outstanding as
of the close of business on March 29, 1996, 63,727,318 shares of Common Stock
and no shares of Preferred Stock. There are no other outstanding shares of
capital stock or voting securities of Atari, other than shares of Atari Common
Stock issued after March 29, 1996 upon the exercise of options issued under the
Atari 1986 Stock Option Plan (the "Atari Stock Option Plan"). All outstanding
shares of Atari have been duly authorized, validly issued, fully paid and are
nonassessable and free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof, and are not subject
to
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preemptive rights or rights of first refusal created by statute, the Articles of
Incorporation or Bylaws of Atari or any agreement to which Atari is a party or
by which it is bound. As of the close of business on March 29, 1996, Atari has
reserved 3,000,000 shares of Common Stock for issuance to employees, directors
and consultants pursuant to the Atari Stock Option Plan, of which 599,674 shares
have been issued pursuant to option exercises, and 899,125 shares are subject to
outstanding, unexercised options. Since March 29, 1996, Atari has not issued or
granted additional options under the Atari Stock Option Plan. There are no other
options, warrants, calls, rights, commitments or agreements of any character to
which Atari is a party or by which it is bound obligating Atari to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of Atari or obligating
Atari to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement.
3.3 Authority. Atari has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Atari, subject only to the approval of the
Merger by the Atari stockholders as contemplated by Section 6.1(a). This
Agreement has been duly executed and delivered by Atari and constitutes the
valid and binding obligations of Atari. The execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (i) any provision of the Articles of Incorporation or Bylaws of
Atari or any of its Significant Subsidiaries, as amended, or (ii) any material
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Atari or any of its Significant
Subsidiaries or any of their properties or assets. No consent, approval, order
or authorization of, or registration, declaration or filing with, any
Governmental Entity, is required by or with respect to Atari or any of its
Significant Subsidiaries in connection with the execution and delivery of this
Agreement by Atari or the consummation by Atari of the transactions contemplated
hereby, except for (i) the filing of the Certificate of Merger as provided in
Section 1.2, (ii) the filing with the SEC and the American Stock Exchange of the
Proxy Statement relating to the Atari Stockholders Meeting, (iii) the filing of
a Form 8-K and Form 10-C with the SEC and the American Stock Exchange within 15
days and 10 days, respectively, after the Closing Date, (iv) any filings as may
be required under applicable state securities laws and the securities laws of
any foreign country, (v) such filings as may be required under HSR, (vi) such
filings as may be required under the rules and regulations of the American Stock
Exchange, and (vii) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Atari and its subsidiaries, taken as a whole, and would not prevent,
alter or materially delay any of the transactions contemplated by this
Agreement. The Atari Disclosure Schedule sets forth a full and complete list of
all necessary consents, waivers and approvals of third parties applicable to the
operations of Atari that are required to be obtained by Atari in connection with
the execution and delivery of this Agreement or the Merger Agreement by Atari or
the consummation by Atari of the transactions contemplated hereby or thereby,
except any such consents, waivers and approvals, which, if not obtained, would
not have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole. Prior to the Closing Date, Atari will obtain all such consents.
3.4 SEC Documents; Financial Statements. Atari has furnished to JTS a true
and complete copy of each report, registration statement, definitive proxy
statement, and other filings filed with the SEC by Atari since January 1, 1993
(other than filings pursuant to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and any registration statement on Form
S-8), and prior to the Effective Time, Atari will have furnished JTS with true
and complete copies of any additional documents (other than filings pursuant to
Section 16 of the Exchange Act, and any registration statement on Form S-8)
filed with the SEC by Atari prior to the Effective Time (collectively, the
"Atari SEC Documents"). As of their respective filing dates, the Atari SEC
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the Atari SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances in which they were made, not misleading,
except to the
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extent corrected by a subsequently filed Atari SEC Document. The financial
statements of Atari, including the notes thereto, included in the Atari SEC
Documents (the "Atari Financial Statements") were complete and correct in all
material respects as of their respective dates, complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto as of their respective
dates, and have been prepared in accordance with generally accepted accounting
principles applied on a basis consistent throughout the periods indicated and
consistent with each other (except as may be indicated in the notes thereto or,
in the case of unaudited statements included in Quarterly Reports on Form 10-Qs,
as permitted by Form 10-Q of the SEC). The Atari Financial Statements are in
accordance with the books and records of Atari and fairly present the
consolidated financial condition and operating results of Atari and its
subsidiaries at the dates and during the periods indicated therein (subject, in
the case of unaudited statements, to normal, recurring year-end adjustments).
There has been no change in Atari accounting policies except as described in the
notes to the Atari Financial Statements.
3.5 Absence of Certain Changes. Since December 31, 1995 (the "Atari
Balance Sheet Date"), Atari has conducted its business in the ordinary course
consistent with past practice and there has not occurred: (i) any change, event
or condition (whether or not covered by insurance) that has resulted in, or
might reasonably be expected to result in, a Material Adverse Effect to Atari
and its subsidiaries, taken as a whole; (ii) any acquisition, sale or transfer
of any material asset of Atari or any of its subsidiaries other than in the
ordinary course of business and consistent with past practice; (iii) any change
in accounting methods or practices (including any change in depreciation or
amortization policies or rates) by Atari or any revaluation by Atari of any of
its assets; (iv) any issuance or agreement to issue or any commitment to issue
any equity security, bond, note or other security of Atari or any of its
subsidiaries; (v) any declaration, setting aside, or payment of a dividend or
other distribution with respect to the shares of Atari, or any direct or
indirect redemption, purchase or other acquisition by Atari of any of its shares
of capital stock; (vi) any material contract entered into by Atari, other than
in the ordinary course of business and as provided to JTS, or any amendment or
termination of, or default under, any material contract to which Atari is a
party or by which it is bound; or (vii) any negotiation or agreement by Atari or
any of its subsidiaries to do any of the things described in the preceding
clauses (i) through (vii) (other than negotiations with JTS regarding the
transactions contemplated by this Agreement).
3.6 Absence of Undisclosed Liabilities. Atari has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in the Balance Sheet
included in Atari's Annual Report on Form 10-K for the period ended December 31,
1995 (the "Atari Balance Sheet"), (ii) those incurred in the ordinary course of
business and not required to be set forth in the Atari Balance Sheet under
generally accepted accounting principles, and (iii) those incurred in the
ordinary course of business since the Atari Balance Sheet Date and consistent
with past practice.
3.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Atari or any of its
subsidiaries, threatened against Atari or any of its subsidiaries or any of
their respective properties or any of their respective officers or directors (in
their capacities as such) that, individually or in the aggregate, could have a
Material Adverse Effect on Atari and its subsidiaries, taken as a whole. There
is no judgment, decree or order against Atari or any of its subsidiaries or, to
the knowledge of Atari or any of its subsidiaries, any of their respective
directors or officers (in their capacities as such) that could prevent, enjoin,
alter or delay any of the transactions contemplated by this Agreement, or that
could have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole. The outcome of the matter In re The Federated Group, Inc. Alleged Debtor
U.S.B.C. (N.D.Cal. Div. 5) No. 92-50412-JRG Chapter 7, is not reasonably likely
to have a Material Adverse Effect on Atari and its subsidiaries, taken as a
whole.
3.8 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Atari or any of its subsidiaries which
has or could have the effect of prohibiting or materially impairing any current
or future business practice of Atari or any of its subsidiaries, any acquisition
of property by Atari or any of its subsidiaries or the conduct of business by
Atari or any of its subsidiaries as currently conducted or as proposed to be
conducted by Atari or any of its subsidiaries.
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3.9 Governmental Authorization. Atari and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Atari or any of its subsidiaries currently operates or holds
any interest in any of its properties or (ii) which is required for the
operation of Atari's or any of its subsidiaries' business or the holding of any
such interest (herein collectively called "Atari Authorizations"), and all of
such Atari Authorizations are in full force and effect, except where the failure
to obtain or have any of such Atari Authorizations could not reasonably be
expected to have a Material Adverse Effect on Atari and its subsidiaries, taken
as a whole.
3.10 Title to Property. Atari and its Significant Subsidiaries have good
and marketable title to all of their respective properties, interests in
properties and assets, real and personal, reflected in the Atari Balance Sheet
or acquired after the Atari Balance Sheet Date (except properties, interests in
properties and assets sold or otherwise disposed of since the Atari Balance
Sheet Date thereof in the ordinary course of business), free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) the lien of current taxes not yet due and payable, (ii) such
imperfections of title, liens and easements as do not and will not materially
detract from or interfere with the use of the properties subject thereto or
affected thereby, or otherwise materially impair business operations involving
such properties and (iii) liens securing debt which is reflected on the Atari
Balance Sheet. The plants, property and equipment of Atari and its Significant
Subsidiaries that are used in the operations of their businesses are in good
operating condition and repair. All properties used in the operations of Atari
and its Significant Subsidiaries are reflected in the Atari Balance Sheet to the
extent generally accepted accounting principles require the same to be
reflected. The Atari Disclosure Schedule identifies each parcel of real property
owned or leased by Atari or any of its Significant Subsidiaries
3.11 Intellectual Property. Atari and its Significant Subsidiaries own, or
are licensed or otherwise possess legally enforceable rights to use all
Intellectual Property that are used or proposed to be used in the business of
Atari and its Significant Subsidiaries as currently conducted or as proposed to
be conducted by Atari and its subsidiaries, except to the extent that the
failure to have such rights have not had and could not reasonably be expected to
have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole.
To the knowledge of Atari and its Significant Subsidiaries, there is no material
unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of Atari or any of its subsidiaries, any trade
secret material to Atari or any of its subsidiaries, or any Intellectual
Property right of any third party to the extent licensed by or through Atari or
any of its subsidiaries, by any third party, including any employee or former
employee of Atari or any of its subsidiaries. Neither Atari nor any of its
subsidiaries has entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property, other than
indemnification provisions (i) listed on the Atari Disclosure Schedule or (ii)
contained in purchase orders arising in the ordinary course of business.
3.12 Environmental Matters.
(a) To the knowledge of Atari and its Significant Subsidiaries, no
Hazardous Material is present in, on or under any property that Atari or any of
its subsidiaries has at any time owned, operated, occupied or leased (herein an
"Atari Facility"), except to the extent that such presence has not had and could
not reasonably be expected to have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole.
(b) To the knowledge of Atari and its Significant Subsidiaries, neither
Atari nor any of its subsidiaries has engaged in a Hazardous Materials Activity
in material violation of any applicable foreign, federal, state or local
statute, rule, regulation, order or law.
(c) To the knowledge of Atari and its Significant Subsidiaries, each of
Atari and its subsidiaries is and at all times has been in compliance with all
foreign, federal, state and local laws relating to emissions, discharges,
releases or threatened releases of Hazardous Materials, except to the extent
noncompliance with such laws has not had and could not reasonably be expected to
have a Material Adverse Effect on Atari and its subsidiaries, taken as a whole.
(d) No action, proceeding, permit revocation, writ, injunction or claim is
pending, or to the knowledge of Atari and its subsidiaries threatened,
concerning the Hazardous Materials Activities of Atari or any of its
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subsidiaries and/or any Atari Facilities. Neither Atari nor any of its
Significant Subsidiaries is aware of any fact or circumstance which could impose
any material environmental liability upon Atari or any of its subsidiaries.
3.13 Taxes. Atari and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Atari or any of
its subsidiaries is or has been a member have timely filed all Tax Returns
required to be filed by it, have paid all Taxes shown thereon to be due and has
provided adequate accruals in accordance with generally accepted accounting
principles in its financial statements for any Taxes that have not been paid,
whether or not shown as being due on any Tax Returns. Except as disclosed in the
Atari SEC Documents, (i) no material claim for Taxes has become a lien against
the property of Atari or any of its subsidiaries or is being asserted against
Atari or any of its subsidiaries other than liens for Taxes not yet due and
payable, (ii) no audit of any Tax Return of Atari or any of its subsidiaries is
being conducted by a Tax authority, (iii) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Atari or any of
its subsidiaries and is currently in effect, and (iv) there is no agreement,
contract or arrangement to which Atari or any of its subsidiaries is a party
that may result in the payment of any amount that would not be deductible by
reason of Sections 280G, 162 or 404 of the Code. Neither Atari nor any of its
subsidiaries is a party to any tax sharing or tax allocation agreement nor does
Atari or any of its subsidiaries owe any amount under any such agreement. As
used herein, "Taxes" shall mean all taxes of any kind, including, without
limitation, those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, value added, property
or windfall profits taxes, customs, duties or similar fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any governmental authority,
domestic or foreign. As used herein, "Tax Return" shall mean any return, report
or statement required to be filed with any governmental authority with respect
to Taxes. Atari and each of its subsidiaries are in full compliance with all
terms and conditions of any Tax exemptions or other Tax-sharing agreement or
order of a foreign government and the consummation of the Merger shall not have
any adverse effect on the continued validity and effectiveness of any such Tax
exemption or other Tax-sharing agreement or order.
3.14 Employee Benefit Plans.
(a) The Atari Disclosure Schedule lists, with respect to Atari, any ERISA
affiliate of Atari or any subsidiary of Atari (i) all employee benefit plans (as
defined in Section 3(3) of ERISA), (ii) all loans to employees in excess of
$50,000, loans to officers, and any stock option, stock purchase, phantom stock,
stock appreciation right, supplemental retirement, severance, sabbatical,
disability, employee relocation, cafeteria (Code section 125), life insurance or
accident insurance plans, programs or arrangements, (iii) all bonus, deferred
compensation or incentive plans, programs or arrangements, (iv) other material
fringe or employee benefit plans, programs or arrangements that apply to senior
management of Atari and that do not generally apply to all employees, and (v)
any current or former employment or executive compensation or severance
agreements, written or otherwise, as to which current or contingent obligations
of Atari of greater than $50,000 exist for the benefit of, or relating to, any
current or former employee, consultant or director of Atari (together, the
"Atari Employee Plans"), and a copy of each such Atari Employee Plan and each
summary plan description and annual report on the Form 5500 series required to
be filed with any government agency for each Atari Employee Plan for the three
most recent Plan years has been delivered to JTS.
(b) (i) None of the Atari Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Atari Employee Plan, which could
reasonably be expected to have, in the aggregate, a Material Adverse Effect on
Atari or its subsidiaries; (iii) all Atari Employee Plans have been administered
in compliance with the requirements prescribed by any and all statutes, rules
and regulations (including ERISA and the Code, orders, or governmental rules and
regulations currently in effect with respect thereto and including all
applicable requirements for notification to participants or to the Department of
Labor, Internal Revenue Service or Secretary of the Treasury), except as would
not have, in the aggregate, a Material Adverse Effect on Atari or its
subsidiaries, and Atari and each of its subsidiaries have performed all
obligations required to be performed by them under, are not in any material
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respect in default under or violation of, and have no knowledge of any material
default or violation by any other party to, any of the Atari Employee Plans;
(iv) each Atari Employee Plan intended to qualify under Section 401(a) of the
Code and each trust intended to qualify under Section 501(a) of the Code has
received a favorable determination letter from the IRS as to such qualification,
and nothing has occurred which could reasonably be expected to cause the loss of
such qualification or exemption; (v) all material contributions required to be
made by Atari or any of its subsidiaries to any Atari Employee Plan have been
made on or before their due dates and a reasonable amount has been accrued for
contributions to each Atari Employee Plan for the current plan years; and (vi)
no Atari Employee Plan is covered by, and neither Atari nor any subsidiary has
incurred or expects to incur any liability under Title IV of ERISA or Section
412 of the Code.
(c) With respect to each Atari Employee Plan that constitutes a group
health plan within the meaning of Section 5000(b)(1) of the Code or Section
607(1) of ERISA, Atari and each of its United States subsidiaries have complied
with the applicable health care continuation and notice provisions of COBRA and
the proposed regulations thereunder, except to the extent that such failure to
comply would not, in the aggregate, have a Material Adverse Effect on Atari and
its subsidiaries.
3.15 Certain Agreements Affected by the Merger. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Atari or any of its subsidiaries, (ii) increase any
benefits otherwise payable by Atari or (iii) result in the acceleration of the
time of payment or vesting of any such benefits.
3.16 Employee Matters. Except as to matters which could not, in the
aggregate, have a Material Adverse Effect on Atari and its subsidiaries, taken
as a whole, Atari and each of its Significant Subsidiaries are in compliance in
all respects with all currently applicable laws and regulations respecting
employment, discrimination in employment, terms and conditions of employment,
wages, hours and occupational safety and health and employment practices, and is
not engaged in any unfair labor practice. There are no pending claims against
Atari or any of its subsidiaries under any workers compensation plan or policy
or for long term disability. Neither Atari nor any of its subsidiaries has any
material obligations under COBRA with respect to any former employees or
qualifying beneficiaries thereunder. There are no controversies pending or, to
the knowledge of Atari or any of its subsidiaries, threatened, between Atari or
any of its subsidiaries and any of their respective employees, which
controversies have or could have a Material Adverse Effect on Atari and its
subsidiaries, taken as a whole. Neither Atari nor any of its subsidiaries is a
party to any collective bargaining agreement or other labor unions contract nor
does Atari nor any of its subsidiaries know of any activities or proceedings of
any labor union or organize any such employees.
3.17 Interested Party Transactions. Except as disclosed in the Atari
Disclosure Schedule or the Atari SEC Documents, neither Atari nor any of its
subsidiaries is indebted to any director, officer, employee or agent of Atari or
any of its subsidiaries (except for amounts due as normal salaries and in
reimbursement of ordinary expenses), and no such person is indebted to Atari or
any of its subsidiaries. Except as disclosed in the Atari Disclosure Schedule or
the Atari SEC Documents, no officer, director or shareholder of Atari or any
affiliate of such person has, either directly or indirectly, (i) an interest in
any corporation, partnership, firm or other person or entity which furnishes or
sells services or products which are similar to those furnished or sold by Atari
or (ii) a beneficial interest in a contract or agreement to which Atari is a
party or by which Atari may be bound. For purposes of this Section 3.17, there
shall be disregarded any interest which arose solely from the ownership of less
than a one percent (1%) equity interest in a corporation whose stock is
regularly traded on a national securities exchange or over-thecounter market.
3.18 Insurance. Atari and each of its Significant Subsidiaries have
policies of insurance and bonds of the type and in amounts customarily carried
by persons conducting businesses or owning assets similar to those of Atari and
its subsidiaries. There is no claim pending under any of such policies or bonds
as to which coverage has been questioned, denied or disputed by the underwriters
of such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid and Atari and its Significant Subsidiaries are
otherwise in compliance with the terms of such policies and bonds. Atari has no
knowledge of any threatened termination of, or premium increase with respect to,
any of such policies.
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3.19 Compliance With Laws. Each of Atari and its Significant Subsidiaries
has complied with, are not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Atari and
its subsidiaries, taken as a whole.
3.20 Minute Books. The minute books of Atari and its subsidiaries made
available to JTS contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of Atari and the respective subsidiaries through the date of this
Agreement, and reflect all transactions referred to in such minutes accurately
in all material respects.
3.21 Complete Copies of Materials. Atari has delivered or made available
true and complete copies of each document which has been requested by JTS or its
counsel in connection with their legal and accounting review of Atari and its
subsidiaries.
3.22 Broker's and Finders' Fees. Atari has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.23 Registration Statement; Proxy Statement/Prospectus. The information
supplied by Atari for inclusion in the Registration Statement shall not, at the
time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC, contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The information supplied by Atari for inclusion in the Proxy
Statement shall not, on the date the Proxy Statement is first mailed to JTS's
stockholders and Atari's stockholders, at the time of the JTS Stockholders
Meeting, at the time of the Atari Stockholders Meeting and at the Effective
Time, contain any statement which, at such time and in light of the
circumstances under which it is made, is false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the JTS Stockholders Meeting or the Atari
Stockholders Meeting which has become false or misleading. If at any time prior
to the Effective Time any event or information should be discovered by Atari
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, Atari will promptly inform JTS.
Notwithstanding the foregoing, Atari makes no representation, warranty or
covenant with respect to any information supplied by JTS which is contained in
any of the foregoing documents.
3.24 Opinion of Financial Advisor. Atari has been advised in writing by
its financial advisor, Montgomery Securities, that in such advisor's opinion, as
of the date hereof, the consideration to be paid by Atari hereunder is fair,
from a financial point of view, to Atari.
3.25 Board Approval. The Board of Directors of Atari has unanimously (i)
approved this Agreement and the Merger, (ii) determined that the Merger is in
the best interests of its stockholders and is on terms that are fair to such
stockholders and (iii) recommended that its stockholders approve this Agreement
and the Merger.
3.26 Vote Required. The affirmative vote of the holders of a majority of
the shares of Atari Common Stock outstanding on the record date set for the
Atari Stockholders Meeting is the only vote of the holders of any of Atari's
capital stock necessary to approve this Agreement and the transactions
contemplated hereby. No shareholder of Atari will be entitled to statutory
dissenters rights under Nevada Law as a result of the Merger.
3.27 Underlying Documents. True and complete copies of all underlying
documents set forth on the Atari Disclosure Schedule or described as having been
disclosed or delivered to JTS pursuant to this Agreement have been furnished to
JTS.
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3.28 Representations Complete. None of the representations or warranties
made by Atari herein or in any Schedule hereto, including the Atari Disclosure
Schedule, or certificate furnished by Atari pursuant to this Agreement, or the
Atari SEC Documents, when all such documents are read together in their
entirety, contains or will contain at the Effective Time any untrue statement of
a material fact, or omits or will omit at the Effective Time to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not misleading.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of JTS and Atari. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, each of JTS and Atari agrees (except to the
extent expressly contemplated by this Agreement or as consented to in writing by
the other), to carry on its and its subsidiaries' business in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted, to
pay and to cause its subsidiaries to pay debts and taxes when due (subject to
good faith disputes over such debts or taxes) and to pay or perform other
obligations when due. Each of JTS and Atari agrees to promptly notify the other
of any event or occurrence not in the ordinary course of its or its
subsidiaries' business, and of any event which could have a Material Adverse
Effect on it and its subsidiaries, taken as a whole. Without limiting the
foregoing, except as expressly contemplated by this Agreement, neither JTS nor
Atari shall do, cause or permit any of the following, or allow, cause or permit
any of its subsidiaries to do, cause or permit any of the following, without the
prior written consent of the other:
(a) Charter Documents. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws (except as contemplated by Section
1.4 hereof);
(b) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than the issuance of shares
of its Common Stock pursuant to the exercise of stock options, warrants or
other rights therefor outstanding as of the date of this Agreement;
provided, however, that in addition to any grants specifically described on
the JTS Disclosure Schedule, JTS may, in the ordinary course of business
consistent with past practice, grant options for the purchase of up to
250,000 shares of JTS Common Stock under the JTS Stock Option Plan and
issue shares of JTS Common Stock upon the exercise of such options; and
provided, further, that Atari may issue securities under the Atari Option
Plan.
(c) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries;
(d) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its and its parent's/subsidiaries'
business, taken as a whole;
(e) Taxes. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Return or any
amendment to a material Return, enter into any closing agreement, settle
any claim or assessment in respect of Taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in
respect of Taxes;
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(f) Stock Option Plans, Etc. Accelerate, amend or change the period
of exercisability of options, warrants or other rights granted under its
employee stock plans or authorize cash payments in exchange for any
options, warrants or other rights granted under any of such plans;
(g) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (f) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.2 Conduct of Business of JTS. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement, JTS
shall not do, cause or permit any of the following, or allow, cause or permit
any of its subsidiaries to do, cause or permit any of the following, without the
prior written consent of Atari:
(a) Material Contracts. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its material contracts, other than in the ordinary course of
business consistent with past practice;
(b) Intellectual Property. Transfer to any person or entity any
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(c) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(d) Indebtedness. Incur any indebtedness for borrowed money (except
amounts borrowed under JTS's existing revolving credit line or drawdowns of
existing credit facilities for working capital or construction purposes
only) or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(e) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business and other
than as disclosed in the JTS Disclosure Schedule;
(f) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $50,000 in any one case or $250,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the JTS Financial Statements;
(g) Termination or Waiver. Terminate or waive any right of
substantial value, other than in the ordinary course of business;
(h) Employee Benefit Plans. Adopt or amend any employee benefit or
stock purchase or option plan;
(i) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with Atari prior
to the filing of such a suit, (iii) in such cases in which the damages or
legal fees are not reasonably expected to material, or (iv) for a breach of
this Agreement; or
(j) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.2(a) through (i) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.3 Conduct of Business of Atari. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated
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by this Agreement, Atari shall not do, cause or permit any of the following, or
allow, cause or permit any of its subsidiaries to do, cause or permit any of the
following, without the prior written consent of JTS:
(a) Material Contracts. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its material contracts, other than in the ordinary course of
business consistent with past practice;
(b) Intellectual Property. Transfer to any person or entity any
rights to its Intellectual Property other than in the ordinary course of
business consistent with past practice;
(c) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole, except in the ordinary course of business consistent with past
practice;
(d) Indebtedness. Incur any indebtedness for borrowed money (except
amounts borrowed under JTS's existing revolving credit line or drawdowns of
existing credit facilities for working capital or construction purposes
only) or guarantee any such indebtedness or issue or sell any debt
securities or guarantee any debt securities of others;
(e) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business and other
than as disclosed in the Atari Disclosure Schedule;
(f) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $50,000 in any one case or $250,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Atari Financial Statements;
(g) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
and consistent with past practice, and in any event not to exceed $25,000
per quarter;
(h) Termination or Waiver. Terminate or waive any right of
substantial value, other than in the ordinary course of business;
(i) Employee Benefit Plans. Adopt or amend any employee benefit or
stock purchase or option plan;
(j) Lawsuits. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with JTS prior
to the filing of such a suit, (iii) in such cases in which the damages or
legal fees are not reasonably expected to material, or (iv) for a breach of
this Agreement; or
(k) Other. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.3(a) through (j) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
4.4 No Other JTS Negotiations. From and after the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, JTS shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by JTS or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than Atari,
relating to the possible acquisition of JTS or any of its subsidiaries (whether
by way of merger, purchase of capital stock, purchase of assets of otherwise) or
any of its or their capital stock or any material portion of its or their assets
(with any such efforts by any such person, including a firm proposal to make
such an acquisition, to be referred to as a "JTS Acquisition Proposal") (ii)
provide non-public information with respect to JTS or any of its subsidiaries to
any person, other than Atari, relating to a possible
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JTS Acquisition Proposal by any person, other than Atari, (iii) enter into an
agreement with any person, other than Atari, providing for a possible JTS
Acquisition Proposal, or (iv) make or authorize any statement, recommendation or
solicitation in support of any possible JTS Acquisition Proposal by any person
other than Atari. If JTS or any of its subsidiaries receives any unsolicited
offer or proposal to enter negotiations relating to a JTS Acquisition Proposal,
JTS shall immediately notify Atari thereof, including information as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. JTS recognizes and acknowledges
that a breach of this Section 4.4 may cause irreparable and material loss and
damage to Atari as to which Atari may not have an adequate remedy at law or in
damages and that, accordingly, JTS agrees that the issuance of an injunction or
other equitable remedy is the appropriate remedy for any such breach.
4.5 No Other Atari Negotiations. From and after the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement in
accordance with its terms, Atari shall not, directly or indirectly (i) solicit,
initiate discussion or engage in negotiations with any person (whether such
negotiations are initiated by Atari or otherwise) or take any other action
intended or designed to facilitate the efforts of any person, other than JTS,
relating to the possible acquisition of Atari (whether by way of merger,
purchase of capital stock, purchase of assets of otherwise) or any of its
capital stock or any material portion of its assets (with any such efforts by
any such person, including a firm proposal to make such an acquisition, to be
referred to as an "Atari Acquisition Proposal") (ii) provide non-public
information with respect to Atari to any person, other than JTS, relating to a
possible Atari Acquisition Proposal by any person, other than JTS, (iii) enter
into an agreement with any person, other than JTS, providing for a possible
Atari Acquisition Proposal, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Atari Acquisition
Proposal by any person other than JTS. If Atari receives any unsolicited offer
or proposal to enter negotiations relating to an Atari Acquisition Proposal,
Atari shall immediately notify JTS thereof, including information as to the
identity of the party making any such offer or proposal and the specific terms
of such offer or proposal, as the case may be. Atari recognizes and acknowledges
that a breach of this Section 4.5 may cause irreparable and material loss and
damage to JTS as to which JTS may not have an adequate remedy at law or in
damages and that, accordingly, JTS agrees that the issuance of an injunction or
other equitable remedy is the appropriate remedy for any such breach.
Notwithstanding the foregoing, nothing contained in this Agreement (i) shall
prevent the Board of Directors of Atari from referring any third party to this
Section 4.5 or providing a copy of this Agreement (other than the JTS Disclosure
Schedule) to any third party, (ii) shall prevent the Board of Directors of Atari
from considering, negotiating, approving and recommending to the shareholders of
Atari an unsolicited bona fide written Atari Acquisition Proposal which the
Board of Directors of Atari determines in good faith (after consultation with
its financial advisors and after consultation with outside counsel as to whether
the Board of Directors is required to do so in order to discharge properly its
fiduciary duties to shareholders under applicable law) would result in a
transaction more favorable to the Company's shareholders from a financial point
of view than the transaction contemplated by this Agreement (any such Atari
Acquisition Proposal being referred to herein as a "Superior Atari Proposal").
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement. As promptly as
practicable after the execution of this Agreement, JTS and Atari shall prepare,
and Atari shall file with the SEC, preliminary proxy materials relating to the
approval of the Merger and the transactions contemplated hereby by the
stockholders of each of JTS and Atari and, as promptly as practicable following
receipt of SEC comments thereon, JTS and Atari shall file with the SEC a
Registration Statement on Form S-4 (or such other or successor form as shall be
appropriate), which complies in form with applicable SEC requirements and shall
use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. The Proxy Statement shall include
the recommendation of the Board of Directors of JTS in favor of the Merger;
provided that such recommendation may not be included or may be withdrawn if
previously included if JTS's Board of Directors, upon written advice of its
outside legal counsel, shall determine that to include such recommenda-
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tion or not withdraw such recommendation if previously included would constitute
a breach of the Board's fiduciary duty under applicable law. The Proxy Statement
shall include the recommendation of the Board of Directors of Atari in favor of
the Merger; provided that such recommendation may not be included or may be
withdrawn if previously included if Atari's Board of Directors, upon written
advice of its outside legal counsel, shall determine that to include such
recommendation or not withdraw such recommendation if previously included would
constitute a breach of the Board's fiduciary duty under applicable law.
5.2 Meetings of Stockholders.
(a) JTS shall promptly after the date hereof take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the JTS Stockholders Meeting on or prior to June 30, 1996 or as soon
thereafter as is practicable. JTS shall consult with Atari and use all
reasonable efforts to hold the JTS Stockholders Meeting on the same day as the
Atari Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the JTS Stockholders Meeting without the consent of Atari.
JTS shall use its best efforts to solicit from stockholders of JTS proxies in
favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
(b) Atari shall promptly after the date hereof take all action necessary in
accordance with Nevada Law and its Articles of Incorporation and Bylaws to
convene the Atari Stockholders Meeting on or prior to June 30, 1996 or as soon
thereafter as is practicable. Atari shall consult with JTS and shall use all
reasonable efforts to hold the Atari Stockholders Meeting on the same day as the
JTS Stockholders Meeting and shall not postpone or adjourn (other than for the
absence of a quorum) the Atari Stockholders Meeting without the consent of JTS.
Atari shall use its best efforts to solicit from stockholders of Atari proxies
in favor of the Merger and shall take all other action necessary or advisable to
secure the vote or consent of stockholders required to effect the Merger.
5.3 Access to Information. JTS shall afford Atari and its accountants,
counsel and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to (i) all of JTS's and its
subsidiaries' properties, books, contracts, commitments and records, and (ii)
all other information concerning the business, properties and personnel of JTS
and its subsidiaries as Atari may reasonably request. JTS agrees to provide to
Atari and its accountants, counsel and other representatives copies of internal
financial statements promptly upon request. Atari shall afford JTS and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i) all of
Atari's and its subsidiaries' properties, books, contracts, commitments and
records, and (ii) all other information concerning the business, properties and
personnel of Atari and its subsidiaries as JTS may reasonably request. Atari
agrees to provide to JTS and its accountants, counsel and other representatives
copies of internal financial statements promptly upon request. No information or
knowledge obtained in any investigation pursuant to this Section 5.3 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.4 Public Disclosure. Atari and JTS shall consult with each other before
issuing any press release or otherwise making any public statement or making any
other public (or non-confidential) disclosure regarding the terms of this
Agreement and the transactions contemplated hereby, and neither shall issue any
such press release or make any such statement or disclosure without the prior
approval of the other (which approval shall not be unreasonably withheld),
except as may be required by law.
5.5 Consents; Cooperation. Each of Atari and JTS shall promptly apply for
or otherwise seek, and use its best efforts to obtain, all consents and
approvals required to be obtained by it for the consummation of the Merger,
including those required under HSR, and shall use its best efforts to obtain all
necessary consents, waivers and approvals under any of its material contracts in
connection with the Merger for the assignment thereof or otherwise. The parties
hereto will consult and cooperate with one another, and consider in good faith
the views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with proceedings
under or relating to HSR or any other federal or state antitrust or fair trade
law.
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5.6 Continuity of Interest Certificates.
(a) Schedule 5.6(a) sets forth those persons who hold one percent (1%) or
more of the outstanding shares of JTS capital stock (the "JTS Significant
Stockholders"). JTS shall provide Atari such information and documents as Atari
shall reasonably request for purposes of reviewing such list. JTS shall use its
best efforts to deliver or cause to be delivered to Atari, concurrently with the
execution of this Agreement (and in each case prior to the Effective Time) from
each of the JTS Significant Stockholders, an executed Continuity of Interest
Certificate in a form reasonably satisfactory to counsel to Atari. The Surviving
Company shall be entitled to place appropriate legends on the certificates
evidencing any JTS Common Stock held by such JTS Significant Stockholders, and
to issue appropriate stop transfer instructions to the transfer agent for JTS
Common Stock, consistent with the terms of such Continuity of Interest
Certificates.
(b) Schedule 5.6(b) sets forth those persons who hold five percent (5%) or
more of the outstanding shares of Atari capital stock (the "Atari Significant
Stockholders"). Atari shall provide JTS such information and documents as JTS
shall reasonably request for purposes of reviewing such list. Atari shall use
its best efforts to deliver or cause to be delivered to JTS, concurrently with
the execution of this Agreement (and in each case prior to the Effective Time)
from each of the Atari Significant Stockholders, an executed Continuity of
Interest Certificate in a form reasonably satisfactory to counsel to JTS. The
Surviving Company shall be entitled to place appropriate legends on the
certificates evidencing any JTS Common Stock to be received by such Atari
Significant Stockholders pursuant to the terms of this Agreement, and to issue
appropriate stop transfer instructions to the transfer agent for JTS Common
Stock, consistent with the terms of such Continuity of Interest Certificates.
5.7 Voting Agreements.
(a) Prior to or concurrently with the execution of this Agreement, each JTS
stockholder named in Schedule 5.7(a) shall have executed and delivered to Atari
a Voting Agreement substantially in the form of Exhibit C-1 attached hereto.
(b) Prior to or concurrently with the execution of this Agreement, each
Atari stockholder named in Schedule 5.7(b) shall have executed and delivered to
JTS a Voting Agreement substantially in the form of Exhibit C-2 attached hereto.
5.8 FIRPTA. Promptly following the Closing, JTS and Atari shall deliver to
the IRS appropriate notices that their capital stock is not a "U.S. Real
Property Interest" as defined in and in accordance with the requirements of
Treasury Regulation Section 1.897-2(h)(2).
5.9 Legal Requirements. Each of Atari and JTS will, and will cause their
respective subsidiaries to, take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on them with respect
to the consummation of the transactions contemplated by this Agreement and will
promptly cooperate with and furnish information to any party hereto necessary in
connection with any such requirements imposed upon such other party in
connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
5.10 Blue Sky Laws. JTS shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the JTS Common Stock in connection with the
Merger. Atari shall use its best efforts to assist JTS as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of JTS Common Stock in connection
with the Merger.
5.11 Atari Employee Benefit Plans. At the Effective Time, each outstanding
option to purchase shares of Atari Common Stock under the Atari Stock Option
Plan whether vested or unvested, will be assumed by JTS. Each such option so
assumed by JTS under this Agreement shall continue to have, and be subject to,
the same terms and conditions set forth in the Atari Stock Option Plan
immediately prior to the Effective Time,
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except that (i) such option will be exercisable for that number of whole shares
of JTS Common Stock equal to the product of the number of shares of Atari Common
Stock that were issuable upon exercise of such option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole number of shares of JTS Common Stock, and (ii) the per share exercise
price for the shares of JTS Common Stock issuable upon exercise of such assumed
option will be equal to the quotient determined by dividing the exercise price
per share of Atari Common Stock at which such option was exercisable immediately
prior to the Effective Time by the Exchange Ratio, rounded up to the nearest
whole cent. It is the intention of the parties that the options so assumed by
JTS qualify following the Effective Time as incentive stock options as defined
in Section 422 of the Code to the extent such options qualified as incentive
stock options prior to the Effective Time.
5.12 Atari Debentures. Each Atari Debenture, upon its surrender to JTS at
any time at or following the Closing, shall be exchanged for a debenture in
substantially identical form (i) representing the right to convert into that
number of shares of JTS Common Stock equal to the number of shares of Atari
Common Stock for which such debenture was previously convertible multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of JTS
Common Stock, and (ii) with a per share conversion price for the shares of JTS
Common Stock issuable upon exercise of such assumed debenture equal to the
quotient determined by dividing the conversion price per share of JTS Common
Stock at which such debenture was convertible immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole cent.
5.13 Form S-8. JTS agrees to file, no later than five (5) days after the
Closing, a registration statement on Form S-8 covering the shares of JTS Common
Stock issuable pursuant to outstanding options under the Atari Stock Option Plan
assumed by JTS.
5.14 Tax-Free Reorganization; Tax Returns. Atari and JTS shall each use
its best efforts to cause the Merger to be treated as a "reorganization" within
the meaning of Section 368(a)(1)(A) of the Code and shall report the Merger as
such in all federal and, to the extent permitted, all state and local tax
returns filed after the Effective Time of the Merger.
5.15 Registration Rights. At or prior to the Closing, JTS shall provide to
the holders of Atari Common Stock listed on Schedule 5.15 hereto, the
registration rights set forth in that certain Registration Rights Agreement
dated as of February 3, 1995 by and among JTS and the entities listed on Exhibit
A thereto, by amending such agreement in a form reasonably acceptable to counsel
to Atari.
5.16 Indemnification of Officers and Directors. After the Effective Time,
the Surviving Corporation shall (to the extent not prohibited by law) indemnify
and hold harmless, and pay in advance expenses, costs, damages, settlements and
fees to each director or officer of Atari serving as such as of the date hereof
as provided in the Nevada law or the Articles of Incorporation or bylaws of
Atari or any indemnification agreement to which Atari and such officer or
director is a party, in each case as in effect at the date hereof, which
provisions shall survive the Merger and shall continue in full force and effect
after the Effective Time.
5.17 Listing of JTS Common Stock. Atari and JTS shall each use its best
efforts to cause the JTS Common Stock to be approved for listing on the Nasdaq
National Market or the American Stock Exchange, such that trading in JTS Common
Stock shall commence on the first trading day following the Closing.
5.18 Atari Consent to JTS Transaction with Moduler. JTS covenants and
agrees with Atari that JTS will not amend or modify the Moduler Agreement
without the prior written consent of Atari.
5.19 Atari SEC Documents. Atari covenants and agrees with JTS that from
and after the date hereof, Atari will timely file all reports which it is
required to file with the SEC pursuant to the Exchange Act.
5.20 Best Efforts and Further Assurances. Each of the parties to this
Agreement shall use its best efforts to effectuate the transactions contemplated
hereby and to fulfill or cause to be fulfilled the conditions to closing under
this Agreement. Each party hereto, at the reasonable request of another party
hereto, shall execute and deliver such other instruments and do and perform such
other acts and things as may be necessary
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or desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by (i) the holders of a majority of the shares of
JTS Common Stock and JTS Series A Preferred Stock outstanding as of the
record date set for the JTS Stockholders Meeting, voting together, (ii) a
majority of the shares of JTS Common Stock outstanding on the record date
set for the JTS Stockholders Meeting, voting separtely as a class, (iii)
the holders of at least two-thirds of the shares of JTS Series A Preferred
outstanding as of the record date set for the JTS Stockholders Meeting,
voting separately as a class, and (iv) the holders of a majority of the
shares of Atari Common Stock outstanding as of the record date set for the
Atari Stockholders Meeting.
(b) Registration Statement Effective. The SEC shall have declared the
Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
by the SEC; and all requests for additional information on the part of the
SEC shall have been complied with to the reasonable satisfaction of the
parties hereto.
(c) Exchange Act Registration Statement Effective. JTS shall have
filed a Registration Statement on Form 8-A with the SEC pursuant to the
Exchange Act (the "Form 8-A"). The SEC shall have declared the Form 8-A
effective. No stop orders suspending the effectiveness of the Form 8-A or
any part thereof shall have been issued and no proceeding for that purpose,
shall have been initiated or threatened by the SEC.
(d) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint or prohibition preventing the consummation of the Merger, nor
shall any proceeding brought by an administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal. In the event an injunction or other order shall have been
issued, each party agrees to use its reasonable diligent efforts to have
such injunction or other order lifted.
(e) Governmental Approval. Atari and JTS and their respective
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents, if any, necessary for consummation of or
in connection with the Merger and the several transactions contemplated
hereby, including such approvals, waivers and consents as may be required
under the Securities Act, under state Blue Sky laws, and under HSR.
(f) Tax Opinion. Atari and JTS shall have received substantially
identical written opinions of Wilson Sonsini Goodrich & Rosati, P.C., and
Cooley Godward Castro Huddleson & Tatum, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, and such
opinions shall not have been withdrawn. In rendering such opinions, counsel
shall be entitled to rely upon representations of Atari and JTS and certain
stockholders of Atari and JTS.
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(g) Listing of JTS Common Stock. The JTS Common Stock shall have been
approved for quotation on the Nasdaq National Market or the American Stock
Exchange.
(h) Limit on JTS Dissenting Shares. No more than 5.0% of the shares
of JTS Common Stock and JTS Series A Preferred Stock shall be Dissenting
Shares or entitled to exercise any dissenters or appraisal rights with
respect to the Merger.
(i) Continuity of Interest Certificates. Atari shall have received
from each of the JTS Significant Stockholders an executed Continuity of
Interest Certificate as contemplated by Section 5.6 hereof. JTS shall have
received from each of the Atari Significant Shareholders an executed
Continuity of Interest Certificate as contemplated by Section 5.6 hereof.
(j) Supplemental Indentures. To the extent required by the indenture
related to the Atari Debentures or the indenture related to the Federated
Debentures, Atari and JTS shall have entered into supplemental indentures
with the trustees for such debentures, such supplemental indentures to be
in a form reasonably satisfactory to counsel to Atari and counsel to JTS.
6.2 Additional Conditions to Obligations of JTS. The obligations of JTS to
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, by JTS:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of Atari in this Agreement shall be true and
correct in all respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, except to
the extent that the failure of such representations and warranties to be
true and accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on Atari and its subsidiaries
and (ii) Atari shall have performed and complied in all respects with all
covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time, except to the
extent that the failure to so perform or comply has not had and could not
reasonably be expected to have a Material Adverse Effect on Atari and its
subsidiaries.
(b) Certificate of Atari. JTS shall have been provided with a
certificate executed on behalf of Atari by its President and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Atari under this
Agreement are true and complete in all respects except to the extent
that the failure of such representations and warranties to be true and
accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on Atari and its
subsidiaries; and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Atari on or before such date have been so performed in
all respects except to the extent that the failure to so perform or
comply has not had and could not reasonably be expected to have a
Material Adverse Effect on Atari and its subsidiaries.
(c) Third Party Consents. JTS shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose
consent or approval shall be required in connection with the Merger under
any material contract of Atari or any of its Significant Subsidiaries or
otherwise.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting JTS' conduct or operation of
the business of Atari and its subsidiaries, following the Merger shall be
in effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(e) Legal Opinions. JTS shall have received legal opinions from
Wilson Sonsini Goodrich & Rosati, P.C. and Atari's Nevada counsel, which
opinions shall be reasonably satisfactory to counsel to JTS.
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(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Atari and its
subsidiaries, taken as a whole.
6.3 Additional Conditions to the Obligations of Atari. The obligations of
Atari to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Atari:
(a) Representations, Warranties and Covenants. (i) The
representations and warranties of JTS in this Agreement shall be true and
correct in all respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time, except to
the extent that the failure of such representations and warranties to be
true and accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries and
(ii) JTS shall have performed and complied in all respects with all
covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time, except to the
extent that the failure to so perform or comply has not had and could not
reasonably be expected to have a Material Adverse Effect on JTS and its
subsidiaries.
(b) Certificate of JTS. Atari shall have been provided with a
certificate executed on behalf of JTS by its Chief Executive Officer and
Chief Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by JTS under this
Agreement are true and complete in all respects; except to the extent
that the failure of such representations and warranties to be true and
accurate in such respects has not had and could not reasonably be
expected to have a Material Adverse Effect on JTS and its subsidiaries;
and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by JTS on or before such date have been so performed in all
respects except to the extent that the failure to so perform or comply
has not had and could not reasonably be expected to have a Material
Adverse Effect on JTS and its subsidiaries.
(c) Third Party Consents. Atari shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of JTS or any of its subsidiaries or otherwise.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting JTS' conduct or operation of
the business of JTS and its subsidiaries, following the Merger shall be in
effect, nor shall any proceeding brought by an administrative agency or
commission or other Governmental Entity, domestic or foreign, seeking the
foregoing be pending.
(e) Legal Opinion. Atari shall have received a legal opinion from
Cooley Godward Castro Huddleson & Tatum, which opinion shall be reasonably
satisfactory to counsel to Atari.
(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of JTS and its subsidiaries,
taken as a whole.
(g) Conversion of JTS Series A Preferred Stock. Each outstanding
share of JTS Series A Preferred Stock shall be converted into one (1) share
of JTS Common Stock.
(h) Right of First Refusal and Co-Sale Agreement. The provisions of
the Right of First Refusal and Co-Sale Agreement dated as of February 3,
1995 by and among JTS and certain other parties, as amended, shall have
terminated.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. Notwithstanding approval of this Agreement by the
stockholders of JTS or Atari, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time:
(a) by mutual written consent of JTS and Atari;
(b) by Atari if (i) it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
JTS, which has or can reasonably be expected to have a Material Adverse
Effect on JTS and its subsidiaries, taken as a whole, and such breach has
not been cured within five (5) days after written notice to JTS (provided
that, no cure period shall be required for a breach which by its nature
cannot be cured) or (ii) there shall be any final action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would prohibit
JTS's ownership or operation of all or a material portion of the business
of Atari or any of its subsidiaries, or compel Atari or any of Atari's
subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold
separate or otherwise relinquish all or a material portion of the business
or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's
subsidiaries as a result of the Merger.
(c) by JTS if (i) it is not in material breach of its obligations
under this Agreement and there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Atari, which has or can reasonably be expected to have a Material Adverse
Effect on Atari and its subsidiaries, taken as a whole, and such breach has
not been cured within five (5) days after written notice to Atari (provided
that, no cure period shall be required for a breach which by its nature
cannot be cured) or (ii) there shall be any final action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would prohibit
JTS's ownership or operation of all or a material portion of the business
of JTS or any of its subsidiaries, or compel Atari or any of Atari's
subsidiaries or JTS or any of JTS's subsidiaries to dispose of or hold
separate or otherwise relinquish all or a material portion of the business
or assets of JTS or any of JTS's subsidiaries or Atari or any of Atari's
subsidiaries as a result of the Merger.
(d) by any party hereto if: (i) the Closing has not occurred by July
31, 1996, (ii) there shall be a final, non-appealable order of a federal or
state court in effect preventing consummation of the Merger; (iii) there
shall be any final action taken, or any statute, rule, regulation or order
enacted, promulgated or issued or deemed applicable to the Merger by any
Governmental Entity which would make consummation of the Merger illegal;
(iv) if JTS's stockholders do not approve the Merger and this Agreement by
the requisite vote at JTS Stockholders Meeting; (v) if Atari's stockholders
do not approve the Merger and this Agreement by the requisite vote at the
Atari Stockholders Meeting; or (vi) if the Atari Board of Directors shall
have accepted, approved or recommended to the shareholders of Atari a
Superior Atari Proposal.
Where action is taken to terminate this Agreement pursuant to this Section
7.1, it shall be sufficient for such action to be authorized by the Board of
Directors of the party taking such action and for such party to then notify the
other parties in writing of such action.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Atari and JTS or their
respective officers, directors, stockholders or affiliates, except to the extent
that such termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth this Agreement; provided
that, the provisions of Section 7.3 (Expenses) and this Section 7.2 shall remain
in full force and effect and survive any termination of this Agreement.
7.3 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense, except
that expenses incurred in connection with printing the Proxy Materials and the
S-4
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Registration Statement, registration and filing fees incurred in connection with
the S-4 Registration Statement and the Proxy Materials and fees, costs and
expenses associated with compliance with applicable state securities laws,
listing of the JTS Common Stock on the Nasdaq National Market or the American
Stock Exchange, and with HSR in connection with the Merger shall be shared
equally by JTS and Atari.
7.4 Amendment. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
JTS or Atari shall not (i) alter or change the amount or kind of consideration
to be received on conversion of the Atari Common Stock, (ii) alter or change any
term of the Certificate of Incorporation of the Surviving Corporation to be
effected by the Merger, or (iii) alter or change any of the terms and conditions
of the Agreement if such alteration or change would adversely affect the holders
of Atari Common Stock.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival at Effective Time. The representations, warranties and
agreements set forth in this Agreement shall terminate at the Effective Time,
except that the agreements set forth in Article I, Section 5.8 (FIRPTA), Section
5.11 (Employee Benefit Plans), Section 5.12 (Atari Debentures), Section 5.13
(Form S-8), Section 5.14 (Tax Free Reorganization; Tax Returns), Section 5.16
(Indemnification), Section 5.20 (Best Efforts and Further Assurances), 7.3
(Expenses), and this Article VIII shall survive the Effective Time.
8.2 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties to this Agreement.
8.3 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Atari, to:
Atari Corporation
455 South Mathilda Avenue
Sunnyvale, California 94086
Attention: Jack Tramiel
Facsimile No.: (408) 328-0909
Telephone No.: (408) 328-0900
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with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Facsimile No.: (415) 493-6811
Telephone No.: (415) 493-9300
(b) if to JTS, to:
JTS Corporation
166 Baypointe Parkway
San Jose, California 95134
Attention: David T. Mitchell
Facsimile No.: (408) 468-1619
Telephone No.: (408) 468-1800
with a copy to:
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
Palo Alto, California 94306
Attention: Andrei M. Manoliu, Esq.
Facsimile No.: (415) 857-0663
Telephone No.: (415) 843-5000
8.4 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.5 Counterparts. This Agreement may be executed in counterparts, both of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
8.6 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Schedules, including the JTS Disclosure Schedule and the Atari Disclosure
Schedule (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise.
8.7 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
8.8 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
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8.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law. Each of
the parties hereto irrevocably consents to the exclusive jurisdiction of any
court located in the County of Santa Clara, California, in connection with any
matter based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner authorized by
the laws of the State of California for such persons and waives and covenants
not to assert or plead any objection which they might otherwise have to such
jurisdiction and such process.
8.10 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
8.11 Amendment and Restatement. The parties hereto hereby consent and
agree that this Agreement shall constitute an amendment and restatement of that
certain Agreement and Plan of Reorganization by and among Atari, JTS and JTS
Acquisition Corporation dated as of February 12, 1996.
IN WITNESS WHEREOF, JTS and Atari have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized, all as of
the date first written above.
JT STORAGE, INC.
By: /s/ David T. Mitchell
------------------------------------
President
ATARI CORPORATION
By: /s/ Sam Tramiel
------------------------------------
President
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APPENDIX B-1
FORM OF ATARI VOTING AGREEMENT
<PAGE> 221
APPENDIX B-1
ATARI CORPORATION
AMENDED AND RESTATED
VOTING AGREEMENT
This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and
entered into as of April 8, 1996, by and among JT STORAGE, INC., a Delaware
corporation ("JTS"), and the undersigned stockholder ("Stockholder") of ATARI
CORPORATION, a Nevada corporation ("Atari").
RECITALS
A. Whereas JTS and the Stockholder desire to amend that certain Voting
Agreement, dated as of February 12, 1996, and related Irrevocable Proxy to Vote
Stock of Atari Corporation dated as of February 12, 1996.
B. Pursuant to an Amended and Restated Agreement and Plan of
Reorganization, dated as of April 8, 1996 (the "Reorganization Agreement") by
and among JTS and Atari, Atari is merging with and into JTS (the "Merger");
C. The Reorganization Agreement amends and restates that certain Agreement
and Plan of Reorganization dated as of February 12, 1996, by and among JTS,
Atari and JT Acquisition Corporation ("Newco");
D. Pursuant to Section 5.7 of the Reorganization Agreement, in order to
induce JTS to enter into the Reorganization Agreement, Atari has agreed to
solicit the proxy of certain significant stockholders of Atari on behalf of JTS
and to cause certain significant stockholders of Atari to execute and delivery
Voting Agreements to JTS;
E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number
of shares of the outstanding Common Stock, $0.01 par value per share, of Atari
as is indicated on the signature page of this Agreement (the "Shares"); and
F. In consideration of the execution of the Reorganization Agreement by
JTS, Stockholder agrees not to transfer or otherwise dispose of any of the
Shares, or any other shares of capital stock of Atari acquired by Stockholder
hereafter and prior to the Expiration Date (as defined in Section 1.1 below),
and agrees to vote the Shares and any other such shares of capital stock of
Atari so as to facilitate consummation of the Merger.
NOW, THEREFORE, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except
as may be specifically required by court order), sell, exchange, pledge (except
in connection with a bona fide loan transaction, provided that any pledgee
agrees not to transfer, sell, exchange, pledge or otherwise dispose of or
encumber the Shares or any New Shares (as defined in Section 1.2) prior to the
Expiration Date and to be subject to the Proxy (as defined in Section 3)) or
otherwise dispose of or encumber the Shares or any New Shares, or to make any
offer or agreement relating thereto, at any time prior to the Expiration Date.
As used herein, the term ("Expiration Date") shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective in accordance with
the terms and provisions of the Reorganization Agreement, (ii) the close of
business on December 31, 1996 and (iii) the date of termination of the
Reorganization Agreement.
1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of
Atari that Stockholder purchases or with respect to which Stockholder otherwise
acquires beneficial ownership after the date of this Agreement and prior to the
Expiration Date ("New Shares") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of Atari
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of
B-1-1
<PAGE> 222
the stockholders of Atari with respect to any of the following, Stockholder
shall vote the Shares and any New Shares in favor of approval of the
Reorganization Agreement and the Merger and any matter that could reasonably be
expected to facilitate the Merger. This Agreement is intended to bind
Stockholder as a stockholder of Atari only with respect to the specific matters
set forth herein and shall not prohibit Stockholder from acting in accordance
with his or her fiduciary duties, if applicable, as an officer or director of
Atari.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to JTS a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in
Section 78.355 of the Nevada General Corporation Law, covering the total number
of Shares and New Shares beneficially owed or as to which beneficial ownership
is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by
Stockholder set forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder
hereby represents, warrants and covenants to JTS that Stockholder (i) is the
beneficial owner of the Shares, which at the date of this Agreement are and at
all times up until the Expiration Date will be free and clear of any liens,
claims, options, charges or other encumbrances; (ii) does not beneficially own
any shares of capital stock of Atari other than the Shares (excluding shares as
to which Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy.
5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of JTS, to carry out the purpose and intent of this
Agreement.
6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
7. TERMINATION. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
8. MISCELLANEOUS.
8.1 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other.
8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that JTS will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to JTS upon any such violation, JTS shall
have the right to enforce such covenants and agreements by specific performance,
injunctive relief or by any other means available to JTS at law or in equity.
8.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return
B-1-2
<PAGE> 223
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to JTS, to:
JTS Corporation
166 Baypointe Parkway
San Jose, California 95134
Attention: David T. Mitchell
Facsimile No.: (408) 468-1619
Telephone No.: (408) 468-1800
With a copy to:
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Attention: Andrei M. Manoliu, Esq.
Facsimile No.: (415) 857-0663
Telephone No.: (415) 843-5000
(b) if to Stockholder, to the address set forth below.
8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by,
construed and enforced in accordance with the internal laws of the State of
Nevada.
8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof and
supersede all prior negotiations and understandings between the parties with
respect to such subject matters.
8.8 COUNTERPART. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
8.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
B-1-3
<PAGE> 224
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
JT STORAGE, INC.
By:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER
By:
--------------------------------------
Title:
--------------------------------------
Stockholder's Address for Notice:
--------------------------------------
--------------------------------------
Shares beneficially owned:
------------------------------------------------------------
shares of Atari Common Stock
B-1-4
<PAGE> 225
EXHIBIT A
IRREVOCABLE PROXY TO VOTE STOCK OF
ATARI CORPORATION
The undersigned stockholder of Atari Corporation, a Nevada corporation
("Atari"), hereby irrevocably (to the full extent permitted by Section 78.355 of
the Nevada General Corporation Law) appoints the members of the Board of
Directors of JT Storage, Inc., a Delaware corporation ("JTS"), and each of them,
as the sole and exclusive attorneys and proxies of the undersigned, with full
power of substitution and resubstitution, to vote and exercise all voting and
related rights (to the full extent that the undersigned is entitled to do so)
with respect to all of the shares of capital stock of Atari that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of Atari issued or issuable in respect thereof on or after
the date hereof (collectively, the "Shares") in accordance with the terms of
this Proxy. The Shares beneficially owned by the undersigned stockholder of
Atari as of the date of this Proxy are listed below. Upon the undersigned's
execution of this Proxy, any and all prior proxies given by the undersigned with
respect to any Shares are hereby revoked and the undersigned agrees not to grant
any subsequent proxies with respect to the Shares until after the Expiration
Date (as defined below).
This Proxy is irrevocable (to the extent provided in Section 78.355 of the
Nevada General Corporation Law), is granted pursuant to that certain Amended and
Restated Voting Agreement dated as of the date hereof, by and among JTS and the
undersigned stockholder (the "Voting Agreement") which amends and restates that
certain Voting Agreement, dated as of February 12, 1996, by and among JTS and
the undersigned stockholder, and is granted in consideration of JTS entering
into that certain Amended and Restated Agreement and Plan of Reorganization by
and among JTS and Atari (the "Reorganization Agreement") which amends and
restates that certain Agreement and Plan of Reorganization by and among JTS,
Atari and JTS Acquisition Corporation dated as of February 12, 1996. The
Reorganization Agreement provides for the merger of Atari with and into JTS. As
used herein, the term "Expiration Date" shall mean the earlier to occur of (i)
such date and time as the Merger shall become effective in accordance with the
terms and provisions of the Reorganization Agreement, (ii) the close of business
on December 31, 1996 and (iii) the date of termination of the Reorganization
Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Section 78.320 of the Nevada General Corporation Law), at
every annual, special or adjourned meeting of the stockholders of Atari and in
every written consent in lieu of such meeting in favor of approval of the Merger
and the Reorganization Agreement and in favor of any matter that could
reasonably be expected to facilitate the Merger. The attorneys and proxies named
above may not exercise this Proxy on any other matter except as provided above.
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. This Proxy is irrevocable to the
extent provided in Section 78.355 of the Nevada General Corporation Law.
Dated: April 8, 1996
(Signature of Stockholder)
Shares beneficially owned: (Print Name of Stockholder)
________ shares of Atari Common Stock
<PAGE> 226
APPENDIX B-2
FORM OF JTS VOTING AGREEMENT
<PAGE> 227
APPENDIX B-2
JT STORAGE, INC.
AMENDED AND RESTATED
VOTING AGREEMENT
This AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement") is made and
entered into as of April 8, 1996, by and among ATARI CORPORATION, a Nevada
corporation ("Atari"), and the undersigned stockholder ("Stockholder") of JT
STORAGE, INC., a Delaware corporation ("JTS").
RECITALS
A. Whereas Atari and the Stockholder desire to amend that certain Voting
Agreement, dated as of February 12, 1996, and related Irrevocable Proxy to Vote
Stock of JT Storage, Inc., dated as of February 12, 1996.
B. Pursuant to an Amended and Restated Agreement and Plan of
Reorganization, dated as of April , 1996 (the "Reorganization Agreement") by
and among JTS and Atari, Atari is merging with and into JTS (the "Merger");
C. The Reorganization Agreement amends and restates that certain Agreement
and Plan of Reorganization dated as of February 12, 1996, by and among JTS,
Atari and JT Acquisition Corporation;
D. Pursuant to Section 5.7 of the Reorganization Agreement, in order to
induce Atari to enter into the Reorganization Agreement, JTS has agreed to
solicit the proxy of certain significant stockholders of JTS on behalf of Atari
and to cause certain significant stockholders of JTS to execute and delivery
Voting Agreements to Atari;
E. Stockholder is the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such number
of shares of the outstanding Common Stock, $0.000001 par value per share, of JTS
as is indicated on the signature page of this Agreement (the "Shares"); and
F. In consideration of the execution of the Reorganization Agreement by
Atari, Stockholder agrees not to transfer or otherwise dispose of any of the
Shares, or any other shares of capital stock of JTS acquired by Stockholder
hereafter and prior to the Expiration Date (as defined in Section 1.1 below),
and agrees to vote the Shares and any other such shares of capital stock of JTS
so as to facilitate consummation of the Merger.
NOW, THEREFORE, the parties agree as follows:
1. AGREEMENT TO RETAIN SHARES.
1.1 TRANSFER AND ENCUMBRANCE. Stockholder agrees not to transfer (except
as may be specifically required by court order), sell, exchange, pledge (except
in connection with a bona fide loan transaction, provided that any pledgee
agrees not to transfer, sell, exchange, pledge or otherwise dispose of or
encumber the Shares or any New Shares (as defined in Section 1.2) prior to the
Expiration Date and to be subject to the Proxy (as defined in Section 3)) or
otherwise dispose of or encumber the Shares or any New Shares, or to make any
offer or agreement relating thereto, at any time prior to the Expiration Date.
As used herein, the term ("Expiration Date") shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective in accordance with
the terms and provisions of the Reorganization Agreement, (ii) the close of
business on December 31, 1996 and (iii) the date of termination of the
Reorganization Agreement.
1.2 NEW SHARES. Stockholder agrees that any shares of capital stock of JTS
that Stockholder purchases or with respect to which Stockholder otherwise
acquires beneficial ownership after the date of this Agreement and prior to the
Expiration Date ("New Shares") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
B-2-1
<PAGE> 228
2. AGREEMENT TO VOTE SHARES. At every meeting of the stockholders of JTS
called with respect to any of the following, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of JTS
with respect to any of the following, Stockholder shall vote the Shares and any
New Shares in favor of approval of the Reorganization Agreement and the Merger
and any matter that could reasonably be expected to facilitate the Merger. This
Agreement is intended to bind Stockholder as a stockholder of JTS only with
respect to the specific matters set forth herein and shall not prohibit
Stockholder from acting in accordance with his or her fiduciary duties, if
applicable, as an officer or director of Atari.
3. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Atari a proxy in the form attached hereto as
Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in
Section 212 of the Delaware General Corporation Law, covering the total number
of Shares and New Shares beneficially owed or as to which beneficial ownership
is acquired (as such term is defined in Rule 13d-3 under the Exchange Act) by
Stockholder set forth therein.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER. Stockholder
hereby represents, warrants and covenants to Atari that Stockholder (i) is the
beneficial owner of the Shares, which at the date of this Agreement are and at
all times up until the Expiration Date will be free and clear of any liens,
claims, options, charges or other encumbrances; (ii) does not beneficially own
any shares of capital stock of JTS other than the Shares (excluding shares as to
which Stockholder currently disclaims beneficial ownership in accordance with
applicable law); and (iii) has full power and authority to make, enter into and
carry out the terms of this Agreement and the Proxy.
5. ADDITIONAL DOCUMENTS. Stockholder hereby covenants and agrees to
execute and deliver any additional documents necessary or desirable, in the
reasonable opinion of Atari, to carry out the purpose and intent of this
Agreement.
6. CONSENT AND WAIVER. Stockholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreement to which Stockholder is a party or pursuant to any rights
Stockholder may have.
7. TERMINATION. This Agreement and the Proxy delivered in connection
herewith shall terminate and shall have no further force or effect as of the
Expiration Date.
8. MISCELLANEOUS.
8.1 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
8.2 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by either
of the parties without the prior written consent of the other.
8.3 AMENDMENT AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
8.4 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Atari will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Atari upon any such violation, Atari
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Atari at law
or in equity.
8.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return
B-2-2
<PAGE> 229
receipt requested) or sent via facsimile (with confirmation of receipt) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Atari, to:
Atari Corporation
455 South Mathilda Avenue
Sunnyvale, California 94086
Attention: Jack Tramiel
Facsimile No.: (408) 328-0909
Telephone No.: (408) 328-0900
With a copy to:
Wilson, Sonsini, Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Facsimile No.: (415) 493-6811
Telephone No.: (415) 493-9300
(b) if to Stockholder, to the address set forth below.
8.6 GOVERNING LAW. This Agreement and the Proxy shall be governed by,
construed and enforced in accordance with the internal laws of the State of
Delaware.
8.7 ENTIRE AGREEMENT. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof and
supersede all prior negotiations and understandings between the parties with
respect to such subject matters.
8.8 COUNTERPART. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
8.9 EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
B-2-3
<PAGE> 230
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
ATARI CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
STOCKHOLDER
By:
--------------------------------------
Title:
--------------------------------------
Stockholder's Address for Notice:
--------------------------------------
--------------------------------------
Shares beneficially owned:
------------------------------------------------------
shares of JTS Common Stock
------------------------------------------------------
shares of JTS Series A Preferred Stock
B-2-4
<PAGE> 231
EXHIBIT A
IRREVOCABLE PROXY TO VOTE STOCK OF
JT STORAGE, INC.
The undersigned stockholder of JT Storage, Inc. a Delaware corporation
("JTS"), hereby irrevocably (to the full extent permitted by Section 212 of the
Delaware General Corporation Law) appoints the members of the Board of Directors
of Atari Corporation, a Nevada corporation ("Atari"), and each of them, as the
sole and exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of JTS that now are or hereafter
may be beneficially owned by the undersigned, and any and all other shares or
securities of JTS issued or issuable in respect thereof on or after the date
hereof (collectively, the "Shares") in accordance with the terms of this Proxy.
The Shares beneficially owned by the undersigned stockholder of JTS as of the
date of this Proxy are listed below. Upon the undersigned's execution of this
Proxy, any and all prior proxies given by the undersigned with respect to any
Shares are hereby revoked and the undersigned agrees not to grant any subsequent
proxies with respect to the Shares until after the Expiration Date (as defined
below).
This Proxy is irrevocable (to the extent provided in Section 212 of the
Delaware General Corporation Law), is granted pursuant to that certain Amended
and Restated Voting Agreement dated as of the date hereof, by and among Atari
and the undersigned stockholder (the "Voting Agreement") which amends and
restates that certain Voting Agreement, dated as of February 12, 1996, by and
among Atari and the undersigned stockholder, and is granted in consideration of
Atari entering into that certain Amended and Restated Agreement and Plan of
Reorganization by and among JTS and Atari (the "Reorganization Agreement") which
amends and restates that certain Agreement and Plan of Reorganization by and
among JTS, Atari and JTS Acquisition Corporation dated as of February 12, 1996.
The Reorganization Agreement provides for the merger of Atari with and into JTS.
As used herein, the term "Expiration Date" shall mean the earlier to occur of
(i) such date and time as the Merger shall become effective in accordance with
the terms and provisions of the Reorganization Agreement, (ii) the close of
business on December 31, 1996 and (iii) the date of termination of the
Reorganization Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Section 228 of the Delaware General Corporation Law), at
every annual, special or adjourned meeting of the stockholders of JTS and in
every written consent in lieu of such meeting in favor of approval of the Merger
and the Reorganization Agreement and in favor of any matter that could
reasonably be expected to facilitate the Merger. The attorneys and proxies named
above may not exercise this Proxy on any other matter except as provided above.
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned. This Proxy is irrevocable to the
extent provided in Section 212 of the Delaware General Corporation Law.
<TABLE>
<S> <C>
Dated: April 8, 1996
----------------------------------------------
(Signature of Stockholder)
----------------------------------------------
Shares beneficially owned: (Print Name of Stockholder)
______ shares of JTS Common Stock
______ shares of JTS Series A Preferred Stock
</TABLE>
<PAGE> 232
APPENDIX C
MONTGOMERY SECURITIES FAIRNESS OPINION
<PAGE> 233
MONTGOMERY LETTERHEAD
February 5, 1996
Board of Directors
Atari Corporation
1196 Borregas Avenue
Sunnyvale, California 94089
Gentlemen:
We understand that Atari Corporation, a Nevada corporation (the "Company"),
JT Storage, Inc., a Delaware corporation ("JTS"), and JTS Acquisition
Corporation, a Delaware corporation ("Newco"), propose to enter into an
Agreement and Plan of Reorganization, dated as of February 12, 1996 (the
"Reorganization Agreement"), pursuant to which the Company and JTS will be
merged with and into Newco, which will be the surviving entity (the "Merger").
Pursuant to the Merger, as more fully described in the February 2, 1996 draft of
the Reorganization Agreement provided to us by the Company, we understand that
each outstanding share of (a) the common stock of the Company, $.01 par value
per share (the "Company Common Stock"), (b) the common stock of JTS, par value
$.000001 per share, and (c) the Series A preferred stock of JTS, par value
$.000001 per share, in each case not owned directly or indirectly by Newco, will
be converted into 1.00 shares (the "Exchange Ratio") of the common stock, par
value $.01 per share, of Newco ("Newco Common Stock"). We understand that,
immediately following the Merger, the former securityholders of the Company and
JTS will own approximately 61% and 39% respectively, of the Newco Common Stock
on a fully diluted basis. We also understand that Newco is a newly formed
corporation with no material assets and no liabilities.
You have asked for our opinion as investment bankers as to whether the
Exchange Ratio to be paid by Newco pursuant to the Merger is fair to the Company
from a financial point of view, as of the date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company,
including the consolidated financial statements for recent years and interim
periods to September 30, 1995, and certain other relevant financial and
operating data relating to the Company and JTS made available to us from
published sources and from the internal records of the Company and JTS,
including the consolidated financial statements of JTS for recent years and
interim periods to November 30, 1995; (ii) reviewed the February 2, 1996 draft
of the Reorganization Agreement provided to us by the Company; (iii) reviewed
certain historical market prices and trading volumes of the Company Common Stock
as reported in the American Stock Exchange; (iv) compared the Company and JTS
from a financial point of view with certain other companies in the computer
peripherals industry that we deemed to be relevant; (v) considered the financial
terms, to the extent publicly available, of selected recent business
combinations of companies in the computer peripherals industry that we deemed to
be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed
with representatives of the management of the Company and JTS certain
information of a business and financial nature regarding the Company and JTS,
furnished to us by them; (vii) reviewed and discussed with representatives of
the management of the Company and JTS financial forecasts and related
assumptions of JTS, provided to us by JTS management; (viii) made inquiries
regarding and discussed the Merger and the draft of the Reorganization Agreement
and other matters related thereto with the Company's counsel; and (ix) performed
such other analyses and examinations as we have deemed appropriate.
In connection with our review, we have assumed and relied upon the accuracy
and completeness of the foregoing information and we have not assumed any
responsibility for independent verification of such information. With respect to
the financial forecasts provided to us as described above, we have assumed for
purposes of our opinion that such forecasts have been reasonably prepared on
bases reflecting the best
<PAGE> 234
available estimates and judgments of the management of JTS at the time of
preparation as to the future financial performance of JTS, and, except as
described below, that they provide a reasonable basis upon which we can form our
opinion. For purposes of our opinion and with the agreement of management of the
Company, we have adjusted the financial forecasts for JTS provided to us by its
management to reflect more conservative assumptions regarding future results of
operations. We have also assumed that there have been no material changes in the
Company's or JTS' assets, financial condition, results of operations, business
or prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of counsel and independent accountants
to the Company as to all legal and financial reporting matters with respect to
the Company, the Merger and the draft of the Reorganization Agreement. In
addition, we have not assumed responsibility for making an independent
evaluation, appraisal or physical inspection of the assets or individual
properties of the Company or JTS, nor have we been furnished with any such
appraisals. Finally, our opinion is based on economic, monetary and market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms described in the draft of the
Reorganization Agreement without any amendments thereto, and without waiver by
the Company or JTS of any of the conditions to their respective obligations
thereunder.
We have, in the ordinary course of our business, previously performed
various investment banking services for JTS.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Exchange Ratio to be paid by Newco pursuant to the
Merger is fair to the Company from a financial point of view, as of the date
hereof.
This opinion is directed to the Board of Directors of the Company and is
not a recommendation to any shareholder as to how such shareholder should vote
with respect to the Merger. This opinion may not be used or referred to by the
Company, or quoted or disclosed to any person in any manner, without our prior
written consent, which consent is hereby given to its inclusion in any proxy
statement or prospectus filed with the Securities and Exchange Commission in
connection with the Merger. In furnishing this opinion, we do not admit that we
are experts within the meaning of the term "experts" as used in the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder
(the "Securities Act"), nor do we admit that this opinion constitutes a report
or valuation within the meaning of Section 11 of the Securities Act.
Very truly yours,
Montgomery Securities
MONTGOMERY SECURITIES
<PAGE> 235
APPENDIX D-1
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
<PAGE> 236
APPENDIX D-1
SECTION 262
DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
Section 262 Appraisal Rights. (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.sec. 251, 252, 254, 257, 258 or 263 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock which, at
the record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than 2,000 stockholders;
and further provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of sec. 251 of this
title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258 and 263 of this title to accept for such
stock anything except: a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation; b. Shares of stock of any
other corporation which at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
held of record by more than 2,000 stockholders; c. Cash in lieu of
fractional shares of the corporations described in the foregoing
subparagraphs a. and b. of this paragraph; or d. Any combination of the
shares of stock and cash in lieu of fractional shares described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof, that
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appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (b) hereof, upon
written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting for the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. Such written
statement shall be mailed to the stockholder within 10 days after his
written request or such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of
a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by one or more publications at least one week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware, or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the
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stockholders who have demanded an appraisal for their shares and who hold
stock represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceeds until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the
stock (except dividends or other distributions payable to stockholder of
record at a date which is prior to the effective date for the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of his demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing no appraisal proceeding in the Court of
Chancery shall be dismissed as to any stockholder without the approval of
the Court, and such approval may be conditioned upon such terms as the
Court deems just.
(l) The shares of the surviving or resulting Corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
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APPENDIX D-2
CHAPTER 13 OF THE
CALIFORNIA GENERAL CORPORATION LAW
<PAGE> 240
APPENDIX D-2
CHAPTER 13
GENERAL CORPORATION LAW OF CALIFORNIA
DISSENTERS RIGHTS
SECTION 1300. Right to Require Purchase; "Dissenting Shares" and
"Dissenting Shareholder" Defined.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) of Section 1201, each shareholder of such corporation entitled
to vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action. but adjusted for any stock split or share dividend which
becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (0) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to five percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger-. provided, however, that
subparagraph (A) rather than subparagraph (B) of this paragraph applies in
any case where the approval required by Section 1201 is sought by written
consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1301.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SECTION 1301. Demand for Purchase.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within ten (10) days alter the date of such approval accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's fight under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
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dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within thirty (30) days after the
date on which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. Endorsement of Shares.
Within thirty (30) days after the date on which notice of the approval by
the outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder. the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
SECTION 1303. Agreed Price; Time for Payment.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within thirty (30) days after the
amount thereof has been agreed or within thirty (30) days after any statutory or
contractual conditions to the reorganization are satisfied, whichever is later,
and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
SECTION 1304. Dissenter's Action to Enforce Payment.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six (6) months after the date on
which notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
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(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. Appraiser's Report; Payment; Costs.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within ten (10) days from the date of their appointment or within such
further time as may be allowed by the court or the report is not confirmed by
the court, the court shall determine the fair market value of the dissenting
shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. Dissenting Shareholder's Status as Creditor.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. Dividends Paid as Credit Against Payment.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. Continuing Rights and Privileges of Dissenting Shareholders.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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SECTION 1309. Termination of Dissenting Shareholder Status.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six (6) months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. Suspension of Proceedings for Payment Pending Litigation.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. Exempt Shares.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. Attacking Validity of Reorganization or Merger.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof, but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter, but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon ten (10)
days' prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by or under common control with, another party
to the reorganization or short-form merger, in any action to attack the validity
of the reorganization or short-form merger or to have the reorganization or
short-form merger set aside or rescinded, (1) a party to a reorganization or
short-form merger which controls another party to the reorganization or
short-form merger shall have the burden of proving that the transaction is just
and reasonable as to the shareholders of the controlled party, and (2) a person
who controls two or more parties to a reorganization shall have the burden of
proving that the transaction is just and reasonable as to the shareholders of
any party so controlled.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
will have broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws will provide that the Registrant will indemnify its directors and
executive officers and may indemnify other officers to the fullest extent
permitted by law. Under its Bylaws, indemnified parties will be entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also will require the Registrant to advance
litigation expenses in the case of stockholder derivative actions or other
actions, against an undertaking by the indemnified party to repay such advances
if it is ultimately determined that the indemnified party is not entitled to
indemnification.
In addition, the Registrant's Certificate of Incorporation will provide
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. This provision in the Certificate of Incorporation will
not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant for acts or omissions not in good faith or involving intentional
misconduct, for knowing violation of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also will not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers. Such indemnity agreements contain provisions
that are in some respects broader than the specific indemnification provisions
contained in Delaware law.
II-1
<PAGE> 246
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated April 8, 1996,
between JTS and Atari
2.2(a) -- Form of Agreement of Merger of JTS Corporation and Atari Corporation
2.2(b) -- Form of Articles of Merger Merging Atari Corporation With and Into JTS Corporation
3.1 -- Restated Certificate of Incorporation, as amended, JTS Corporation
3.2 -- Form of Amended and Restated Certificate of Incorporation to be filed immediately
prior to the consummation of the Merger of JTS Corporation
3.3 -- Bylaws of JTS Corporation
3.4 -- Form of Amended and Restated Bylaws of JTS Corporation
4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation
4.2 -- Form of Amended and Restated Registration Rights Agreement
4.3 -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987
4.4 -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985
4.5 -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated
September 24, 1987
4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated March 25, 1994,
issued to Venture Lending & Leasing, Inc.
4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995,
issued to Silicon Valley Bank
4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996,
issued to Lunenburg S.A.
5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to legality of securities
being registered
8.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to certain tax matters,
dated July 12, 1996
8.2 -- Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters, dated July
12, 1996
9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares
between JTS and certain stockholders of Atari
9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the voting of shares
between Atari and certain stockholders of JTS
10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock option agreements
10.2 -- 1996 Non-Employee Directors' Plan and form of stock option agreement
10.3 -- 401(k) Plan, adopted March 15, 1996
10.4 -- Form of Indemnity Agreement
10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995
10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996
10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David
T. Mitchell and related Promissory Note
10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T.
Mitchell and related Promissory Note
10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang
Lal Tandon and related Promissory Note
10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and
Kenneth D. Wing and related Promissory Note
10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W.
Virginia Walker and related Promissory Note
</TABLE>
II-2
<PAGE> 247
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David
Pearce and related Promissory Note
10.13 -- Form of convertible promissory note between JTS and certain principal stockholders
of JTS
10.14 -- Form of promissory note between JTS and certain principal stockholders of JTS
10.15 -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and
related Security Agreement dated February 13, 1996, between JTS and Atari
10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A.
10.17 -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler
10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust
10.19 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
September 15, 1992
10.20 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
October 11, 1994
10.21 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The
Industrial Credit and Investment Corporation of India Limited as Lenders, dated
March 18, 1996
10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended
January 26, 1995
10.23 -- TEAC Master Agreement, dated February 4, 1994
10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995
10.25+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on
February 3, 1995 and December 5, 1995
10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq
10.27+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and
Western Digital
10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995,
between JTS and Pont
10.29+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent
Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon
Valley Bank
10.30 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as Borrower and the
State Bank of Hyderabad as Lender, dated February 1994.
10.31 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as Borrower and SCICI
Limited as Lender, dated June 13, 1996.
10.32 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as Borrower and the
State Bank of Travancore as Lender, dated November 11, 1995.
10.33 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as Borrower and the
State Bank of India as Lender, dated September 5, 1995.
21.1 -- List of Subsidiaries
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and 8.2
23.4 -- Consent of Montgomery Securities. Reference is made to Appendix C.
24.1 -- Powers of Attorney. Reference is made to page II-6.
27.1 -- Financial Data Schedule
99.1 -- Form of JTS Proxy
99.2 -- Form of Atari Proxy
</TABLE>
- ---------------
+ Exhibits for which confidential treatment has been requested
II-3
<PAGE> 248
(b) Financial Statement Schedules
JTS Corporation:
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
No financial statement schedules are required of Atari Corporation.
(c) Item 4(b) Reports
See Appendix C to the Joint Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filled as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Joint Proxy Statement/Prospectus
pursuant to Items 4,10(b), 11 or 13 of Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(4) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the Certificate of
Incorporation and the Bylaws of the Registrant and the Delaware General
Corporation Law, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the question has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 249
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, JTS
Corporation has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, County of Santa Clara, State of California, on the 12th day of
July, 1996.
JTS Corporation
By /s/ W. Virginia Walker
W. Virginia Walker
Executive Vice President, Finance
and
Administration and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------------- --------------
<C> <S> <C>
/s/ DAVID T. President, Chief Executive July 12, 1996
MITCHELL* Officer and Director
David T. Mitchell (Principal Executive Officer)
/s/ W. VIRGINIA WALKER Executive Vice President, Finance July 12, 1996
W. Virginia Walker and Administration, Chief
Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
/s/ SIRJANG LAL TANDON* Chairman of the Board and July 12, 1996
Sirjang Lal Tandon Corporate Technical Strategist
/s/ JEAN D. Director July 12, 1996
DELEAGE*
Jean D. Deleage
/s/ LIP-BU Director July 12, 1996
TAN*
Lip-Bu Tan
/s/ ALAIN L. Director July 12, 1996
AZAN*
Alain L. Azan
/s/ ROGER W. JOHNSON* Director July 12, 1996
Roger W. Johnson
*By /s/ W. VIRGINIA WALKER
W. Virginia Walker
</TABLE>
II-5
<PAGE> 250
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the financial statements of JTS Corporation included in this registration
statement, and have issued our report thereon dated April 4, 1996. Our audit was
made for the purpose forming an opinion on those statements taken as a whole.
The schedule listed in the index above is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 4, 1996
S-1
<PAGE> 251
SCHEDULE II
JTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED JANUARY 28, 1996 AND
THE PERIOD FROM INCEPTION (FEBRUARY 3, 1994) TO JANUARY 29, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Period ended:
January 29, 1995.............................. $ -- $ 4 $ -- $ 4
January 28, 1996.............................. $ 4 $ 726 $ -- $ 730
SALES RETURN RESERVE:
Period ended:
January 29, 1995.............................. $ -- $ -- $ -- $ --
January 28, 1996.............................. $ -- $1,088 $ -- $1,088
ACCRUED WARRANTY:
Period ended:
January 29, 1995.............................. $ -- $ 328 $ -- $ 328
January 28, 1996.............................. $328 $ 306 $ -- $ 634
</TABLE>
S-2
<PAGE> 252
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
2.1 -- Amended and Restated Agreement and Plan of Reorganization, dated
April 8, 1996, between JTS and Atari
2.2(a) -- Form of Agreement of Merger of JTS Corporation and Atari
Corporation
2.2(b) -- Form of Articles of Merger Merging Atari Corporation With and
Into JTS Corporation
3.1 -- Restated Certificate of Incorporation, as amended, JTS
Corporation
3.2 -- Form of Amended and Restated Certificate of Incorporation to be
filed immediately prior to the consummation of the Merger of JTS
Corporation
3.3 -- Bylaws of JTS Corporation
3.4 -- Form of Amended and Restated Bylaws of JTS Corporation
4.1 -- Form of Specimen Common Stock Certificate of JTS Corporation
4.2 -- Form of Amended and Restated Registration Rights Agreement
4.3 -- Atari and Security Pacific National Bank Indenture, dated April
29, 1987
4.4 -- Federated Group/Security Pacific National Bank Indenture, dated
April 15, 1985
4.5 -- First Supplemental Federated Group/Security Pacific National
Bank Indenture, dated September 24, 1987
4.6 -- Warrant to Purchase 450,000 shares of JTS Common Stock, dated
March 25, 1994, issued to Venture Lending & Leasing, Inc.
4.7 -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated
December 18, 1995, issued to Silicon Valley Bank
4.8 -- Warrant to Purchase up to 750,000 shares of JTS Common Stock,
dated April 4, 1996, issued to Lunenburg S.A.
5.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to
legality of securities being registered
8.1 -- Opinion of Cooley Godward Castro Huddleson & Tatum as to certain
tax matters, dated July 12, 1996
8.2 -- Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax
matters, dated July 12, 1996
9.1 -- Forms of Voting Agreement and irrevocable proxy regarding the
voting of shares between JTS and certain stockholders of Atari
9.2 -- Forms of Voting Agreement and irrevocable proxy regarding the
voting of shares between Atari and certain stockholders of JTS
10.1 -- Amended and Restated 1995 Stock Option Plan and forms of stock
option agreements
10.2 -- 1996 Non-Employee Directors' Plan and form of stock option
agreement
10.3 -- 401(k) Plan, adopted March 15, 1996
10.4 -- Form of Indemnity Agreement
10.5 -- Employment Contract of Kenneth D. Wing, dated June 15, 1995
10.6 -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996
10.7 -- Restricted Stock Purchase Agreement, dated January 2, 1996,
between JTS and David T. Mitchell and related Promissory Note
10.8 -- Restricted Stock Purchase Agreement, dated March 6, 1996,
between JTS and David T. Mitchell and related Promissory Note
10.9 -- Restricted Stock Purchase Agreement, dated March 6, 1996,
between JTS and Sirjang Lal Tandon and related Promissory Note
10.10 -- Restricted Stock Purchase Agreement, dated January 2, 1996,
between JTS and Kenneth D. Wing and related Promissory Note
10.11 -- Restricted Stock Purchase Agreement, dated January 5, 1996,
between JTS and W. Virginia Walker and related Promissory Note
10.12 -- Restricted Stock Purchase Agreement dated January 2, 1996,
between JTS and David Pearce and related Promissory Note
10.13 -- Form of convertible promissory note between JTS and certain
principal stockholders of JTS
10.14 -- Form of promissory note between JTS and certain principal
stockholders of JTS
</TABLE>
<PAGE> 253
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ---------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.15 -- Subordinated Secured Convertible Promissory Note, dated February
13, 1996, and related Security Agreement dated February 13,
1996, between JTS and Atari
10.16 -- Stock Purchase Agreement, dated April 4, 1996, between JTS and
Lunenburg S.A.
10.17 -- Technical Know-How License Agreement, dated June 14, 1996,
between JTS and Moduler
10.18 -- Lease, dated June 15, 1995, between JTS and Cilker Revocable
Trust
10.19 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated September 15, 1992
10.20 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated October 11, 1994
10.21 -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as
Borrower and The Industrial Credit and Investment Corporation of
India Limited as Lenders, dated March 18, 1996
10.22 -- Agreed Order Compromising Controversies, dated February 4, 1994,
as amended January 26, 1995
10.23 -- TEAC Master Agreement, dated February 4, 1994
10.24+ -- TEAC License Agreement, dated February 4, 1994, as amended on
February 3, 1995
10.25+ -- Development Agreement, dated June 16, 1994, between JTS and
Compaq, as amended on February 3, 1995 and December 5, 1995
10.26+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between
JTS and Compaq
10.27+ -- Technology Transfer and License Agreement, dated February 3,
1995, between JTS and Western Digital
10.28+ -- Agreement between JTS and Pont Peripherals Corporation, dated
January 31, 1995, between JTS and Pont
10.29+ -- Business Loan Agreement, Promissory Note and Collateral,
Assignment, Patent Mortgage and Security Agreement, dated
December 18, 1995, between JTS and Silicon Valley Bank
10.30 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as
Borrower and the State Bank of Hyderabad as Lender, dated
February 1994.
10.31 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as
Borrower and SCICI Limited as Lender, dated June 13, 1996.
10.32 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as
Borrower and the State Bank of Travancore as Lender, dated
November 11, 1995.
10.33 -- Loan Agreement between Modular Electronics (India) Pvt. Ltd. as
Borrower and the State Bank of India as Lender, dated September
5, 1995.
21.1 -- List of Subsidiaries
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1, 8.1 and
8.2
23.4 -- Consent of Montgomery Securities. Reference is made to Appendix
C.
24.1 -- Powers of Attorney. Reference is made to page II-6.
27.1 -- Financial Data Schedule
99.1 -- Form of JTS Proxy
99.2 -- Form of Atari Proxy
</TABLE>
- ---------------
+ Exhibits for which confidential treatment has been requested
<PAGE> 1
Exhibit 2.2(b)
ARTICLES OF MERGER
MERGING
ATARI CORPORATION
WITH AND INTO
JTS CORPORATION
___________________
Pursuant to Section 251 of the General Corporation Law of
the State of Delaware and Section 78.458 of the General Corporation Law
of the State of Nevada
JTS Corporation, a Delaware corporation ("JTS"), and Atari Corporation,
a Nevada corporation ("Atari"), DO HEREBY CERTIFY AS FOLLOWS:
FIRST: That JTS was incorporated on February __, 1994 under the name
"JT Storage, Inc." pursuant to the Delaware General Corporation Law (the
"Delaware Law"), and that Atari was incorporated on May 17, 1984, pursuant to
the Nevada General Corporation Law (the "Nevada Law").
SECOND: That an Amended and Restated Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of April 8, 1996, by
and between JTS and Atari, setting forth the terms and conditions of the merger
of Atari with and into JTS (the "Merger"), has been approved, adopted,
certified, executed and acknowledged by the Board of Directors of each of the
constituent corporations in accordance with Section 251 of the Delaware Law in
the case of JTS and Section 92A.100 of the General Corporation Law of the State
of Nevada in the case of Atari.
THIRD: That the Reorganization Agreement and the Merger were submitted
to a vote of the stockholders of JTS. Of the _________ shares of Common Stock
of JTS (the "JTS Common Stock") outstanding, _________ shares were entitled to
vote as a class, and of the _________ shares of Series A Preferred Stock of
JTS (the "JTS Series A Preferred"), ________ shares were entitled to vote as a
class. Of such shares, ________ shares of JTS Common Stock were voted in favor
of the Reorganization Agreement and the Merger and ________ shares of JTS
Series A Preferred Stock were voted in favor of the Reorganization Agreement
and the Merger, in each case a sufficient number for approval.
FOURTH: That the Reorganization Agreement and the Merger were submitted
to a vote of the stockholders of Atari. Of the ________ shares of Common Stock
of Atari outstanding, ________ shares were entitled to vote. Of such shares,
________ shares were voted in favor of the Reorganization and Merger, a
sufficient number for approval.
FIFTH: That the name of the surviving corporation (the "Surviving
Corporation") shall be JTS Corporation.
SIXTH: That pursuant to the Reorganization Agreement, the Restated
Certificate of Incorporation of the Surviving Corporation is amended to read in
its entirety as set forth in Exhibit A hereto.
<PAGE> 2
SEVENTH: That an executed copy of the Reorganization Agreement is on
file at the principal place of business of the Surviving Corporation at the
following address:
JTS Corporation
166 Baypointe Parkway
San Jose, California 95134
EIGHTH: That a copy of the Reorganization Agreement will be furnished by
the Surviving Corporation, on request and without cost, to any stockholder of
any constituent corporation.
NINTH: That the Merger shall become effective upon the filing of this
Articles of Merger with each of the Secretary of State of the State of
Delaware and the Secretary of State of the State of Nevada.
IN WITNESS WHEREOF, each of Atari and JTS has caused this Certificate
of Merger to be executed in its corporate name this __ of July, 1996.
ATARI CORPORATION
By: ___________________________
Title: President
ATTEST:
____________________________
Secretary
JTS CORPORATION
By: ___________________________
Title: President
ATTEST:
____________________________
Secretary
<PAGE> 1
Exhibit 8.1
[COOLEY GODWARD LETTERHEAD]
July 12, 1996
WEBB B. MORROW III
Direct: (415) 843-5080
JTS Corporation Internet: [email protected]
166 Baypointe Parkway
San Jose, California 95134
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section 6.1(f) of the
Amended and Restated Agreement and Plan of Reorganization dated April 8, 1996
(the "Reorganization Agreement") by and between JTS Corporation, a Delaware
corporation ("JTS") and Atari Corporation, a Nevada corporation (the "Company").
Atari will merge into JTS (the "Merger") pursuant to the Reorganization
Agreement and related Certificate of Merger to be filed by JTS and Atari with
the Secretaries of State of Delaware and Nevada on the Closing Date
(collectively, including the exhibits to each, the "Agreements").
Except as otherwise provided, capitalized terms not defined herein have the
meanings set forth in the Reorganization Agreement or in certificates dated June
14, 1996 delivered to us by JTS and Atari containing certain representations of
JTS and Atari (the "Certificates of Representations"). All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
We have acted as counsel to JTS in connection with the Merger. As such, and for
the purpose of rendering this opinion, we have examined originals, certified
copies or copies otherwise identified to our satisfaction as being true copies
of the original of the following documents (including all exhibits and schedules
attached thereto):
(a) the Agreements;
(b) the Certificates of Representations;
(c) Continuity of Interest Certificates executed and delivered by
certain shareholders of Atari (the "Continuity of Interest Certificates"); and
(d) such other instruments and documents related to the formation,
organization and operation of JTS and Atari and related to the consummation of
the Merger and the transactions contemplated thereby as we have deemed necessary
or appropriate.
<PAGE> 2
[LETTERHEAD]
Page 2
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof):
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there is (or
will be prior to the Closing) due execution and delivery of all documents where
due execution and delivery are a prerequisite to the effectiveness thereof;
2. The truth and accuracy at all relevant times, of all
representations, warranties and statements made or agreed to by JTS and Atari,
their managements, employees, officers, directors and shareholders in connection
with the Merger, including but not limited to those set forth in the Agreements
(including the exhibits) and in the Certificates of Representations and in the
Continuity of Interest Certificates; and that all covenants contained in such
agreements are performed without waiver or breach of any material provision
thereof;
3. There is no plan or intention on the part of Atari's shareholders to
engage in a sale, exchange, transfer, distribution, pledge or other disposition
(including a distribution by a corporation to its shareholders) or any
transaction which would result in a reduction of risk of ownership, or a direct
or indirect disposition (a "Sale") of shares of JTS Common Stock to be received
in the Merger that would reduce Atari shareholders' ownership of JTS Common
Stock to a number of shares having an aggregate fair market value, as of the
Effective Time, of less than fifty percent (50%) of the aggregate fair market
value of all of the capital stock of Atari outstanding immediately prior to the
consummation of the Merger. Shares of Atari capital stock (a) with respect to
which dissenters' rights are exercised in the Merger (b) which are exchanged for
cash in lieu of fractional shares of JTS Common Stock or (c) which are sold,
redeemed or disposed of in a transaction that is in contemplation of or related
to the Merger, shall be considered shares of capital stock of Atari which are
exchanged in the Merger for shares of JTS Common Stock which are then disposed
of pursuant to a plan.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that for federal income tax purposes:
1. The merger of Atari into JTS will be a reorganization within the
meaning of Section 368(a)(1)(A) of the Code.
2. No gain or loss will be recognized by holders of Atari capital stock
solely upon their receipt of JTS capital stock solely in exchange for Atari
capital stock in the Merger (except to the extent of cash received in lieu of a
fractional share of JTS capital stock).
<PAGE> 3
[LETTERHEAD]
Page 3
3. The aggregate tax basis of the JTS capital stock received by Atari
stockholders in the Merger will be the same as the aggregate tax basis of Atari
capital stock surrendered in exchange therefor less the tax basis, if any,
allocated to fractional share interests.
4. The holding period of the JTS capital stock received in the Merger
will include the period for which the Atari capital stock surrendered in
exchange therefor was held, provided that the Atari capital stock is held as a
capital asset at the time of the Merger.
5. Cash payments received by holders of Atari capital stock in lieu of
a fractional share will be treated as if a fractional share of JTS capital stock
had been issued in the Merger and then redeemed by JTS. A stockholder of Atari
receiving such cash will generally recognize gain or loss upon such payment,
equal to the difference (if any) between such stockholder's basis in the
fractional share and the amount of cash received.
6. A shareholder who exercises appraisal or dissenters' rights with
respect to a share of JTS capital stock and who receives payment for such stock
in cash should generally recognize capital gain or loss (if such share was held
as a capital asset at the time of the Merger) measured by the difference between
the shareholder's basis in such share and the amount of cash received, provided
that such payment is neither essentially equivalent to a dividend nor has the
effect of a distribution of a dividend (a "Dividend Equivalent Transaction"). A
sale of capital stock of JTS pursuant to an exercise of appraisal or dissenters'
rights will generally not be a Dividend Equivalent Transaction if, as a result
of such exercise, the shareholder exercising dissenters' rights and all parties
related to such Shareholder own no shares of JTS Stock (either actually or
constructively with the meaning of Section 318 of the Code) after the Merger.
If, however, a stockholder's sale for cash of JTS capital stock pursuant to an
exercise of appraisal or dissenters' rights is a Dividend Equivalent
Transaction, then such shareholder will generally recognize income for federal
income tax purposes in an amount up to the entire amount of cash so received.
7. Neither JTS nor Atari will recognize material amounts of gain solely
as a result of the Merger.
In addition, we have reviewed the discussion contained in the Prospectus/Proxy
Statement included in the Registration Statement on the Form S-4 under "THE
MERGER - Certain Federal Income Tax Matters" (the "Tax Discussion") and we
believe that, subject to the qualifications and limitations contained in the Tax
Discussion, the matters stated in the Tax Discussion, to the extent they
represent matters of law or legal conclusions, are fairly presented.
<PAGE> 4
[LETTERHEAD]
Page 4
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger. In addition, no opinion is
expressed as to any federal income tax consequence of the Merger except as
specifically set forth herein and this opinion may not be relied upon except
with respect to the consequences specifically discussed herein.
No opinion is expressed as to any transaction other than the Merger as described
in the Agreements or to any other transaction whatsoever including the Merger if
all the transactions described in the Agreements are not consummated in
accordance with the terms of the Agreements and without waiver of any material
provision thereof. To the extent any of the representations, warranties,
statements and assumptions material to our opinion and upon which we have relied
are not complete, correct, true and accurate in all material respects at all
relevant times, our opinion would be adversely affected and should not be relied
upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
the courts. The conclusions are based on the Code, existing judicial decisions,
administration regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes would not adversely
affect the accuracy of the conclusions stated herein. Nevertheless, by rendering
this opinion, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
This opinion has been delivered to you solely for the purposes set forth in
Section 7.1(f) of the Reorganization Agreement and may not be relied upon or
utilized for any other purpose or by any other person or entity, and may not be
distributed or otherwise made available to any other person or entity without
our prior written consent, except for the filing of this opinion as an Exhibit
to the Form S-4 and the references to this firm in the Tax Discussion.
Sincerely,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
/s/ Webb B. Morrow
- ----------------------
Webb B. Morrow III
WBM/ekh
<PAGE> 1
Exhibit 8.2
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
July 12, 1996
Atari Corporation
455 south Mathilda Avenue
Sunnyvale, California 94086
Ladies and Gentlemen:
We have acted as counsel for Atari Corporation, a Nevada corporation
("Atari") in connection with the preparation and execution of the Amended and
Restated Agreement and Plan of Merger dated as of April 8, 1996 and related
Certificate of Merger (the "Merger Agreement") among JT Storage, Inc., a
Delaware corporation ("JTS") and Atari. Pursuant to the Merger Agreement, Atari
will merge with and into JTS (the "Merger"). Unless otherwise defined,
capitalized terms referred to herein have the meanings set forth in the Merger
Agreement. All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the Registration Statement on Form S-4 filed by Atari and JTS with
the Securities and Exchange Commission (which contains a joint proxy
statement/prospectus) (the "Registration Statement"), the Merger Agreement
(including Exhibits) and such other documents pertaining to the Merger as we
have deemed necessary or appropriate. We have also relied upon certificates of
officers of Atari and JTS respectively (the "Officers' Certificates") as well as
continuity of interest certificates executed and delivered by certain
shareholders of Atari (the "Continuity of Interest Certificates").
In connection with rendering this opinion, we have also assumed (without any
independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof;
<PAGE> 2
Atari Corporation
July 12, 1996
Page 2
2. Any statement made in any of the documents referred to herein, "to the
best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any of the
documents referred to herein or otherwise made to us are true and correct in all
material respects and no actions have been (or will be) taken which are
inconsistent with such representations; and
4. The Merger will be reported by Atari and JTS on their respective federal
income tax returns in a manner consistent with the opinion set forth below.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the Merger
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the statements set forth in the Officers' Certificates and the
Continuity of Interest Certificates are true and correct as of the date hereof,
on the Effective Date of the Registration Statement and at the Effective Time,
then:
(a) For federal income tax purposes, the Merger will qualify as a
"reorganization" as defined in Section 368(a) of the Code.
(b) No gain or loss will be recognized by holders of Atari capital
stock solely upon their receipt of JTS capital stock solely in exchange for
Atari capital stock in the Merger (except to the extent of cash received in lieu
of a fractional share of JTS capital stock).
(c) The aggregate tax basis of the JTS capital stock received by Atari
stockholders in the Merger will be the same as the aggregate tax basis of Atari
capital stock surrendered in exchange therefor less the tax basis, if any,
allocated to fractional share interests.
(d) The holding period of the JTS capital stock received in the Merger
will include the period for which the Atari capital stock surrendered in
exchange therefor was held, provided that the Atari capital stock is held as a
capital asset at the time of the Merger.
(e) Cash payments received by holders of Atari capital stock in lieu of
a fractional share will be treated as if a fractional share of JTS capital stock
had been issued in the Merger and then redeemed by JTS. A stockholder of Atari
receiving such cash will generally recognize gain or loss upon such payment,
equal to the difference (if any) between such stockholder's basis in the
fractional share and the amount of cash received.
<PAGE> 3
Atari Corporation
July 12, 1996
Page 3
(f) A shareholder who exercises appraisal or dissenters' rights with
respect to a share of JTS capital stock and who receives payment for such stock
in cash should generally recognize capital gain or loss (if such share was held
as a capital asset at the time of the Merger) measured by the difference between
the shareholder's basis in such share and the amount of cash received, provided
that such payment is neither essentially equivalent to a dividend nor has the
effect of a distribution of a dividend (a "Dividend Equivalent Transaction"). A
sale of capital stock of JTS pursuant to an exercise of appraisal or dissenters'
rights will generally not be a Dividend Equivalent Transaction if, as a result
of such exercise, the shareholder exercising dissenters' rights and all parties
related to such Shareholder own no shares of JTS Stock (either actually or
constructively with the meaning of Section 318 of the Code) after the Merger.
If, however, a stockholder's sale for cash of JTS capital stock pursuant to an
exercise of appraisal or dissenters' rights is a Dividend Equivalent
Transaction, then such shareholder will generally recognize income for federal
income tax purposes in an amount up to the entire amount of cash so received.
(g) Neither JTS nor Atari will recognize material amounts of gain
solely as a result of the Merger.
(h) The discussion entitled "THE PROPOSED MERGER AND RELATED
TRANSACTIONS - Certain Federal Income Tax Considerations" in the Registration
Statement insofar as it relates to the statements of law or legal conclusions is
correct in all material respects.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of any
new developments in the application or interpretation of the federal income tax
laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger). Furthermore, this opinion relates only to the
holders of JTS stock who hold such stock as a capital asset. No opinion is
expressed as to the Federal income tax treatment that may be relevant to a
particular investor in light of personal circumstances or to certain types of
investors subject to special treatment under the Federal income tax laws (for
example, life insurance companies, dealers in securities, taxpayers subject to
the alternative
<PAGE> 4
Atari Corporation
July 12, 1996
Page 4
minimum tax banks, tax-exempt organizations, non-United States persons, and
stockholders who acquired their shares of Atari stock pursuant to the exercise
of options or otherwise as compensation).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
This opinion has been delivered to you for the purposes of being included as
an exhibit to the Registration Statement and satisfying the requirements of
Section 6.1(f) of the Merger Agreement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and to
the use of our name under the heading "Certain Federal Income Tax Matters" in
the Registration Statement.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
Exhibit 10.19
LOAN AGREEMENT
BETWEEN
MODULER ElECTRONICS (I) PVT. LTD.
AS BORROWER
AND
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED
AS LENDER
<PAGE> 2
LOAN AGREEMENT
THIS Agreement made this 15th day of September One Thousand
Nine Hundred and Ninety Two between MODULER ELECTRONICS (I) PVT. LTD., a company
within the meaning of the Companies Act, 1956 (1 of 1956) and having its,
Registered office at 35 & 36, SDF Block 1, Madras Export Processing Zone
Tambaram, Kadaperi, Madras 600 045 (hereinafter referred to as to the
"Borrower", which expression shall, unless it be repugnant or to the subject or
context thereof, include its successors and assigns);
AND
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a
public company incorporated under the Indian Companies Act, 1913 (7 of office
at 163, and having its registered office at Backbay Reclamation, Bombay 400 020
(hereinafter referred to as "the Lender", which expression shall, unless it be
repugnant to the subject or context thereof, include its unless it be repugnant
or successors and assigns).
<PAGE> 3
CONTENTS
<TABLE>
<CAPTION>
Article Subject Page No.
------- ------- -------
<S> <C> <C>
I DEFINITIONS: GENERAL CONDITIONS 2
II AGREEMENT AND TERMS OF LOAN 3
III SECURITY 6
IV APPOINTMENT OF NOMINEE DIRECTOR(S) 8
V SPECIAL CONDITIONS 8
VI EFFECTIVE DATE OF AGREEMENT 8
SCHEDULE I - THE PROJECT 9
SCHEDULE II - FINANCING PLAN 10
SCHEDULE III - AMORTIZATION SCHEDULE 11
SCHEDULE IV - SPECIAL CONDITIONS 12
</TABLE>
<PAGE> 4
3
Provided, however, that the General Conditions shall in their
application to this Agreement stand modified as under:
a) The words "commitment charge" wherever they appear shall
be substituted by "Front End Fees".
b) Section 4.16 - PLACE AND MODE OF PAYMENT BY THE BORROWER be
substituted by the following:
"Section 4.16 - PLACE AND MODE OF PAYMENTS AND CREDIT
THEREFOR-
All monies payable by the Borrower to the Lender shall be paid
to the Lender at such office(s) as may be specified by them by telegraphic,
telex or mail transfer to the account of such, office(s) or by cheque or bank
draft drawn in favour of the Lender on a scheduled bank at Bombay or such
other place or to such other account as the Lender may notify to the Borrower
and shall be so paid as to enable the Lender to realise, at par, the amount on
or before the relative due date.
Credit for all payments by local cheque/bank draft will be given on the Lender's
immediately next working day after the date of receipt of the instrument or the
relative due date whichever is later.
Credit for all payments by outstation cheque/bank draft will be given only on
realisation or on the relative due date whichever is later."
c) Section 7.4 - NOMINEE DIRECTOR sub clause (v) be substituted
as follows:
The Nominee Director(s) shall be entitled to receive all
notices agenda, minutes of Board Meetings, etc. and to attend
all General Meetings and Board Meetings and meetings of any
Committees of the Board of which he is a member."
ARTICLE II
AGREEMENT AND TERMS OF LOAN
2.1. AMOUNT AND TERMS OF LOAN:
The Borrower agrees to borrow from the lender and the Lender
agrees to lend to the Borrower, on the terms and conditions contained herein as
also in the General Conditions, sum to the maximum extent of Rs. 180 lacs.
<PAGE> 5
4
2.2 INTEREST
(i) The Borrower shall pay to the Lender interest at the
rate of 20% per annum on the principal amounts of the Loan
outstanding from time to time, quarterly in each year, on
February 15, May 15, August 15 and November 15.
(ii) Disbursements made pending creation of final security as
stipulated in Article III hereof shall carry further
interest at the rate of 1% per annum till creation of such
security.
PROVIDED that in the event of any upward revision of the
minimum lending rate(s) of the commercial banks for cash credits, the Borrower
shall pay to the Lender interest at such higher rate as shall from time to time
be fixed by the Lender and intimated to the Borrower but so that such revised
rate shall not at any point of time exceed the highest of the interest rates
charged by the commercial banks for cash credits.
PROVIDED further that in the event of increase in the rate of
interest :
(a) The Borrower shall have an option to prepay to the Lender
forthwith on receipt of such intimation, the entire
outstanding of the Loan together with all outstanding interest
and other charges thereon with such premium as may be
specified by the Lender.
(b) In the alternative, the Borrower shall have an option to make
such prepayment together with interest, at the increased rate
as intimated till payment, at any time during a period of two
years after receipt of such intimation.
2.3 FRONT END FEE
The Company shall pay to the Lenders Front End Fee of 1% of
the Loan on or before signing this Agreement.
2.4 COSTS AND CHARGES
The Borrower shall pay all taxes, duties, costs, charges and
expenses in connection with or relating to the Loan transaction (including costs
of investigation of title and protection of Lender's interests). In the event
of the Borrower failing to pay the aforesaid monies, the Lender will be at
liberty but shall not be obliged to pay the same. All such sums shall be
reimbursed by the Borrower to the lender within 30 days from the date of notice
of demand from the Lender and shall be debited to the Borrower's Loan Account
and shall carry interest at the rate of 20% per annum from the date of payment
till such reimbursement.
<PAGE> 6
5
In case of default in making such reimbursement within 30 days
from the date of notice of demand, the Borrower shall also pay on the defaulted
amounts, liquidated damages at the rate 2% per annum from the date of notice of
demand till reimbursement in accordance with the provisions of the General
Conditions.
2.5 LAST DATE OF WITHDRAWAL :
Unless the Lender otherwise agrees, the right to make
withdrawals from the Loan shall cease on February 15, 1995.
2.6 REPAYMENT
The Borrrower undertakes to repay the principal amounts of the
Loan in accordance with the Amortization Schedule set forth in Schedule III
hereto.
2.7 CONVERSION RIGHT IN CASE OF DEFAULT
(a) If
the Borrower commits a default in payment or repayment of
three consecutive instalments of principal amounts of the Loan
or interest thereon or any combination thereof,
then, the Lender shall have the right to convert (which right
is hereinafter referred to as "the conversion right") at its
option the whole of the outstanding amount of the Loan, or a
part not exceeding 20% of the Loan, whichever is lower, into
fully paid-up equity shares of the Borrower, at par, in the
manner specified in a notice in writing to be given by the
lender to the Borrower (which notice is hereinafter referred
to as the "notice of conversion") prior to the date on which
the conversion is to take effect, which date shall be
specified in the said notice (which date is hereinafter
referred to as the "date of conversion").
<PAGE> 7
6
On receipt of notice of conversion, the Borrower shall allot
and issue the requisite number of fully paid-up equity shares
to the Lender as from the date of conversion and the Lenders
shall accept the same in satisfaction of the principal amount
of the Loan to the extent so converted. The part of the Loan
so converted shall cease to carry interest as from the date of
conversion and the Loan shall stand correspondingly reduced.
Upon such conversion, the instalments of the Loan payable after
the date of conversion as per Schedule III hereto shall stand
reduced proportionately by the amounts of the Loan so
converted. The equity shares so alloted and issued to the
Lender shall carry, from the date of conversion, the right to
receive proportionately the dividends and other distributions
declared or to be declared in respect of the equity capital of
the Borrower. Save as aforesaid, the said shares shall rank
pari passu with the existing equity shares of the Borrower in
all respects. The Borrower shall, at all times, maintain
sufficient unissued equity shares for the above purpose.
ii) The conversion right reserved as aforesaid may be exercised by
the Lender on one or more occasions during the currency of the
Loan on the happening of any of the events specified in
sub-clauses 1 (a) above.
iii) The Borrower assures and undertakes that in the event of the
Lender exercising the right of conversion as aforesaid, the
Borrower shall get the equity shares which will be issued to
the Lender as a result of the conversion, listed with the
Stock Exchange(s) at Bombay and Madras.
iv) (a) For purposes of sub-clause 1 (a) above it shall not be
construed as a default, if the Borrower approaches the Lender
well in advance for postponement of principal or interest, as
the case may be, and the Lender agrees to the same.
ARTICLE III
SECURITY
3.1 SECURITY FOR THE LOAN
(A) The Loan together with all interest, liquidated
damages, premia on prepayment or on redemption, costs, expenses and other
monies whatsoever stipulated in this Agreement shall be secured by
<PAGE> 8
7
(a) a first charge by way of hypothecation in favour of the Lender
off all the Borrower's movables save and except book debts),
including movable machinery, machinery spares, tools and
accessories, present and future, subject to prior charges
created and/or to be created:
i) in favour of the Borrower's Bankers on the Borrower's
stocks of raw materials, semi-finished and finished goods,
consumable stores and such other movables as may be agreed
to by the Lender for securing the borrowings for working
capital requirements in the ordinary course of business.
(B) The Borrower shall make out a good and marketable title to
its properties to the satisfaction of the Lender and comply
with all such formalities as may be necessary or required for
the said purpose.
3.2 CREATION OF ADDITIONAL SECURITY
If, at any time during the subsistence of this Agreement, the
Lender is of the opinion that the security provided by the Borrower has become
inadequate to cover the balance of the Loan then outstanding, then, on the
Lender advising the Borrower to that effect, the Borrower shall provide and
furnish to the Lender, to the satisfaction of the Lender such additional
security as may be acceptable to the Lender to cover such deficiency.
3.3 ACQUISITION OF ADDITIONAL IMMOVABLE PROPERTIES
So long as any monies remain due and outstanding to the
Lender, the Borrower undertakes to notify the Lender in writing of all its
acquisitions of immovable properties and as soon as practicable thereafter to
make out a marketable title to the satisfaction of the Lender and charge the
same in favour of the Lender by way of first charge in such form and manner as
may be decided by the Lender.
3.4 GUARANTEE
The Borrower shall procure irrevocable and unconditional
personal guarantee from M.L. Tandon in favour of the Lender for the due
repayment of the Loan and the payment of all interest and other monies payable
by the Borrower in the form prescribed by the Lender and to be delivered to the
Lender before any part of the Loan is advanced. The Borrower shall not pay any
guarantee commission to the said Guarantors.
<PAGE> 9
8
ARTICLE IV
APPOINTMENT OF NOMINEE DIRECTOR(S)
The Borrower agrees that the Lender shall be entitled to
appoint and withdraw from time to time one Director on the Board of Directors
of the Borrower at any time during the currency of this Agreement.
ARTICLE V
SPECIAL CONDITIONS
The Loan hereby granted shall also be subject to the Borrower
complying with the special conditions set out in Schedule IV hereto.
ARTICLE VI
EFFECTIVE DATE OF AGREEMENT
This Agreement shall become binding on the Borrower and the
Lender on and from the date first above written. It shall be in force till all
the monies due and payable under this Agreement are fully paid off.
<PAGE> 10
9
SCHEDULE I
THE PROJECT
Moduler Electronics (I) Pvt. Ltd. (MEPL), an existing 100%
EOU has been promoted by the Tandon group for manufacture and export of
Winchester Head Gimble Assembly (HGA) for use in hard disk drives and Switch
Mode Power Supplies (SMPS) for use in computers and instrumentation. The
company now proposes to augment its existing manufacturing facilities at Meepz,
Madras in order to manufacture the latest version of HGA and also expand the
production capacity of SMPS from the existing level of 10,000 nos. per month to
25,000 nos. per month.
The cost of the project, expected to be implemented by March
1994, is estimated at Rs. 470 lacs.
The Borrower has requested the Lenders and the Lenders have at
the request of the Borrower agreed to lend and advance to the Borrower the
Rupee Term Loans of Rs. 180 lacs to meet a part of the cost of the project.
<PAGE> 11
10
FINANCIAL PLAN
<TABLE>
<S> <C>
Cost of Project
---------------
Plant & machinery - HGA 152
- SMPS 100
Incremental margin money 218
for working capital
---
470
---
Means of Financinq
------------------
Rupee loan - ICICI 180
Internal accruals 290
---
470
---
</TABLE>
<PAGE> 12
11
SCHEDULE III
AMORTIZATION SCHEDULE
(Rs. in lacs)
<TABLE>
<CAPTION>
Principal amount
Date Payment Principal outstanding after
Due Payment Amount each payment
---------------- ---------------- -------------------
<S> <C> <C>
180
May 15, 1995 15 165
August 15, 1995 15 150
November 15, 1995 15 135
February 15, 1996 15 120
May 15, 1996 15 105
August 15, 1996 15 90
November 15, 1996 15 75
February 15, 1997 15 60
May 15, 1997 15 45
August 15, 1997 15 30
November 15, 1997 15 15
February 15, 1998 15 --
</TABLE>
<PAGE> 13
12
SCHEDULE IV
SPECIAL CONDITIONS
--- N I L ----
<PAGE> 14
13
IN WITNESS WHEREOF the Borrower has caused its Common Seal to be
affixed hereto and to a duplicate hereof on the day, month and year first
hereinabove written and the Lender has caused the same and the said duplicate
to be executed by the hand of Shri S. Nagarkatte authorized official of the
Lender as hereinafter appearing.
THE COMMON SEAL OF MODULER ELECTRONICS (1) PVT. LIMITED has pursuant to the
Resolution of its Board of Directors passed in that behalf on the 9th day of
September 1992 hereunto been affixed in the presence of Shri M.L. Tandon,
Director, who has signed these presents in token thereof and Shri B.V. Shah
authorized person who has countersigned the same in token thereof.
SIGNED AND DELIVERED BY the withinnamed Lender by the hand of Shri S.
Nagarkatte an authorized official of the Tender.
<PAGE> 15
GENERAL CONDITIONS
NO. GC-I-86
APPLICABLE TO ASSISTANCE PROVIDED
BY FINANCIAL INSTITUTIONS
<PAGE> 16
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Number Title Page No.
<S> <C> <C>
I Applicability 02
II Definitions 02
III Approvals 03
IV Disbursement, Interest, 03-06
Commitment, other
charges and Repayment.
V Borrower's warranties 07
VI Predisbursement conditions 08
VII Conditions applicable
during currency of Loan
Agreement
1. Project 09
2. Financing of Project 10
3. General Covenants 10
4. Nominee Director 13
5. Management 14
VIII Reports 15
IX Inspection 15
X Events of default and remedies 16-18
XI Cancellation, suspension 19
and termination
XII Waiver 20
XIII Applicability of other statutes 21
XIV Miscellaneous 21
</TABLE>
* * * *
<PAGE> 17
2
ARTICLE I
APPLICABILITY
The General conditions set out herein shall, if the Loan Agreement so
provides, be applicable to the assistance provided singly or jointly (that is
in participation) by Industrial Development Bank of India ('IDBI'),
Industrial Finance Corporation of India ('IFCI'), The Industrial Credit And
Investment Corporation of India Limited ('ICICI'), Industrial Reconstruction
Bank of India ('IRBI'), Life Insurance Corporation of India ('ILIC'), General
Insurance Corporation of India ('GIC'), National Insurance Company Limited
('NIC'), New India Assurance Company Limited ('GIC'), Oriental Insurance
Company Limited ('OIC), United India Insurance Company Limited ('UII') and
Unit Trust of India ('UTI').
If there is any inconsistency between the General Conditions and the
Loan Agreement, the Loan Agreement will prevail.
All the provisions of these General Conditions and the Loan Agreement
shall have full force and effect till all monies due from the Borrower to the
Lenders under the Loan Agreement are paid/repaid in full.
ARTICLE II
DEFINITIONS
The following terms have the following meanings in these General
Conditions and in the Loan Agreement :
1. "Borrower" means the party to the Loan Agreement to which the Loans are
made.
2 "Lead Institution" means any one of the Lenders as may be designated by
them, from time to time, as their attorney in a particular Loan
transaction. In the event of any Lender granting Loan(s) to the Borrower
singly (and not in participation with other Lenders), the expression
"Lead Institution" wherever it appears in these General Conditions or in
the Loan Agreement shall mean only the "Lender".
3. "Lenders" means IDBI, IFCI, ICICI, IRBI, LIC, GIC, NIC, NIA, OIC, UII
and UTI or any one or more of them where the subject or context, so
admits.
4. "Loan Agreement" means the particular loan agreement and includes these
General Conditions as applied thereto, and all schedules and amendments
supplemental to the Loan Agreement.
<PAGE> 18
3
5. "Loans" means the loans agreed to be provided under the Loan Agreement.
6. "Normal Loan" means that component of a rupee term loan which carries
interest at the maximum rate applicable to a widely held public limited
company.-
7. "Project" means the project for which the Loans are agreed to be
granted, as described in the Loan Agreement.
8. All other terms used in these General Conditions shall have the meanings
assigned to them under the Loan Agreement.
ARTICLE III
APPROVALS
Unless otherwise agreed to by the Lead Institution, the Borrower shall
approach the Lead Institution for obtaining all consents and approvals required
under the Loan Agreement. All acts and deeds done, and all consents and
approvals given, by the Lead Institution shall be deemed to have been done and
given by every Lender individually.
ARTICLE IV
DISBURSEMENT, INTEREST, COMMITMENT,
OTHER CHARGES AND REPAYMENT
Section 4.1 - TERMS OF DISBURSEMENT
(i) The Loans will be disbursed by the Lenders through the Lead
Institution, in one or more instalment(s) as may be decided by the Lead
Institution subject to the Borrower complying with the provisions of the Loan
Agreement and the disbursement procedure stipulated by the Lead Institution and
the expenditure incurred on the Project being in consonance with the details
mentioned in Loan Agreement. All disbursements shall be by
cheque(s)/authorisation(s) and the collection/ remittance charges will be borne
by the Borrower. The interest on the Loans will accrue as from the date of the
cheque(s)/authorisation(s) of the Lead Institution.
(ii) In the event of the Lender(s) agreeing to disburse any amount of the
Loans pending creation of final security as stipulated in the Loan Agreement,
the same may be disbursed on such terms as may be decided by the Lead
Institution.
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Section 4.2 - ADJUSTMENT OF OVERDUES
The Lead Institution may deduct from sums to be lent to the Borrower any
monies then remaining due and payable by the Borrower to the Lenders.
Section 4.3 - INTEREST
(i) All interest on the Loans and an all other monies accruing due under
the Loan Agreement shall, in case the same be not paid on the respective due
dates, carry further interest at the applicable rate(s) under the Loan
Agreement, computed from the respective due dates and shall become payable upon
the footing of compound interest with quarterly rests as provided in the Loan
Agreement.
(ii) All interest or other monies which shall accrue under the provisions
of the Loan Agreement shall also be payable in the manner and on the dates as
mentioned in the Loan Agreement for payment of interest on the principal
amounts of the Loans.
Section 4.4 - COMMITMENT CHARGES
(i) Commitment charge shall be payable in the manner and on the dates
specified for payment of interest under the Loan Agreement.
(ii) Arrears of commitment charge shall carry interest at the applicable
rate for Normal Loans on the date of the Loan Agreement.
(iii) Commitment charge shall be payable even though the Loans are
ultimately cancelled or not availed of for any reason whatsoever.
(iv) In the event of such cancellation, the commitment charge in respect of
the Loans or any part thereof which has been cancelled, shall cease to accrue
from the day on which the Borrower's request for cancellation is received by
the Lead Institution.
Section 4.5 - WEIGHTED AVERAGE RATE OF INTEREST AND COMMITMENT CHARGE
The Lenders may charge interest and commitment charge on the Loans at the
weighted average rate, where applicable.
For the purpose of this clause, "weighted average rate" means the weighted
mean of the rates of interest or commitment charge, as the case may be,
applicable to the Loans.
Section 4.6 - COMPUTATION OF INTEREST AND OTHER CHARGES
Interest and all other charges shall accrue from day to day and shall be
computed on the basis of 365 days' year and the actual number of days elapsed.
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Section 4.7 - REPAYMENT
(i) The Lead Institution may, in suitable circumstances, revise, vary or
postpone the repayment of the principal amounts of the Loans or the
balance outstanding for the time being or any instalment(s) of the
said principal amounts of the Loans or any part there of upon such
terms and conditions as may be decided by the Lead Institution.
(ii) In the event of any default in the payment of installments, of
principal, any interest, commitment charge and liquidated damages,
postponement, if any, allowed by the Lead Institution shall be at the
rate of interest as may be stipulated by the Lead Institution at the
time of postponement.
(iii) If, for any reason, the amount finally disbursed by the Lenders out of
the Loans is less than the amount of the Loans, the instalment(s) of
repayment of the Loans shall stand reduced proportionately but shall
be payable on the due dates as specified in the Amortization Schedule
in the Loan Agreement.
Section 4.8 - ACCELERATION OF REPAYMENT BY THE LENDERS
If the Lead Institution finds that the profitability of the Borrower, the
cash flow and other circumstances so warrant, the Lead Institution may, on
previous intimation to the Borrower, require the Borrower to prepay the Loans
on dates earlier than the dates specified in the Amortization Schedule in the
Loan Agreement and also increase the amount of the installments of repayment
fixed in that Schedule.
Section 4.9 - PREMATURE REPAYMENT
The Borrower shall not prepay the outstanding principal amounts of the
Loans in full or in part, before the due dates except after the conversion
right is exercised in full, or has lapsed and after obtaining the prior
approval of the Lead Institution (which may be granted conditionally).
Section 4.10 - DUE DATE OF PAYMENT
If the due date in respect of any instalment of principal, interest,
commitment charge and liquidated damages and all other monies payable under the
Loan Agreement falls on a Saturday or a day which is a bank holiday at the
place where the payment is to be made, the immediately preceding working day
shall be the due date for such payment.
Section 4.11 - LIQUIDATED DAMAGES ON DEFAULTED AMOUNTS
In case of default in payment of instalment of principal, interest,
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commitment charge and all other monies (except liquidated damages) on their
respective due dates, liquidated damages at the rate of 2% per annum for the
period of default. Liquidated damages shall be payable in the manner and on
the dates as specified in the Loan Agreement for payment of interest. Arrears
of liquidated damages shall carry interest at the applicable rate for Normal
Loans on the date of the Loan Agreement.
Section 4.12 - REIMBURSEMENT OF EXPENSES
(i) The Borrower shall reimburse all sums paid by the Lead Institution or
the Lenders under Article VII Sections 7.3(vii), 7.5(vii), Article
IX-Section 9(b) and Article X Section 10.4 within 30 days from the date
of notice of demand from the Lead Institution. All such sums shall be
debited to the Borrower's Loan Account and shall carry interest from the
date of payment till such reimbursement at the applicable rate for
Normal Loans on the date of the Loan Agreement.
(ii) In case of default in making such reimbursement within 30 days from the
date of notice of demand, the Borrower shall also pay an the defaulted
amounts, liquidated damages at the rate of 2% per annum from the expiry
of 30 days from the date of notice of demand till reimbursement in
accordance with the provisions of Section 4.11.
Section 4.13 - APPROPRIATION OF PAYMENTS
a) Unless otherwise agreed to by the Lead Institution, any payments due
and payable under the Loan Agreement and made by the Borrower shall be
appropriated towards such dues in the following order, viz.,
(i) Premium on prepayment;
(ii) Costs, charges, expenses and other monies;
(iii) Interest on costs, charges, expenses and other monies;
(iv) Commitment charge;
(v) Interest on arrears of commitment charge;
(vi) Interest, including additional interest, payable in terms of the Loan
Agreement;
(vii) Further interest and liquidated damages on defaulted amounts payable
in terms of Section 4.3(i) and 4.11;
(viii) Repayment of installments of principal due and payable under the Loan
Agreement.
b) Notwithstanding anything contained in Clause(a) hereinabove, the
Lenders may, at their discretion, appropriate such payments towards
the dues, if any, payable by the Borrower in respect of earlier
loan(s) availed of by the Borrower from the Lenders in the order
specified in the relative Loan Agreement(s).
Section 4.14 - RESTRICTION ON PREFERENTIAL PAYMENTS
The borrower shall pay and discharge all its liabilities to each of
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Section 4.15 - SHARING OF PREFERENTIAL PAYMENTS
If the Borrower makes any payment to any of the Lenders in preference
to other Lenders, the Lender receiving such payment shall, notwithstanding
anything to the contrary contained in the Loan Agreement, share the same with
other(s) on pro-rata basis or in such other manner as the Lenders may mutually
agree and such sharing shall be binding on the Borrower.
Section 4.16 - PLACE AND MODE OF PAYMENT BY THE BORROWER
All monies payable by the Borrower to the Lenders shall be paid to the
Lead Institution at such office(s) as may be specified by the Lead Institution,
by telegraphic, telex or mail transfer to the account of such office(s) or by
cheque or bank draft drawn in favour of the Lead Institution on a scheduled bank
at Bombay or such other place or to such other account as the Lead Institution
may notify to the Borrower and shall be so paid as to enable the Lead
Institution to realise, at par, the amount on or before the relative due date.
Credit for all payments by cheque/bank draft will be given only on realisation
or on the relative due date, whichever is later.
ARTICLE V
Section 5 - BORROWER'S WARRANTIES
Except to the extent already disclosed in writing by the Borrower to
the Lenders, the Borrower shall be deemed to have assured, confirmed and
undertaken as follows:
(a) DUE PAYMENT OF PUBLIC AND OTHER DEMANDS
The Borrower is not in arrears of any public demands such as
income-tax, corporation tax and all other taxes and revenues or any other
statutory dues payable to the Central or State Governments or any local or other
authority.
(b) SELLING AND PURCHASING AGREEMENTS
The Borrower has entered into requisite selling and purchasing
arrangements to the satisfaction of the Lead Institution.
(c) MANAGEMENT AGREEMENT
The terms and conditions of appointment of Managing Director or any
other person holding substantial powers of management by whatever name called
shall be subject to the approval of the Lead Institution.
(d) CONFLICT WITH MEMORANDUM AND ARTICLES OF ASSOCIATION
Nothing in the Loan Agreement conflicts with the Memorandum and
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ARTICLE VI
PREDISBURSEMENT CONDITIONS
Section 6 - CONDITIONS PRECEDENT TO DISBURSEMENT
The obligation of the Lenders to make disbursements under the Loan
Agreement shall be subject to the Borrower performing all its obligations and
undertakings under the Loan Agreement besides compliance by the Borrower with
the Disbursement Procedure stipulated by the Lead Institution, such as
submission of necessary information, documents, etc. to the satisfaction of the
Lead Institution. Before seeking disbursement, the Borrower shall also comply
with the following conditions:
(a) RAISING OF SHARE CAPITAL
The Borrower shall raise share capital as stipulated in the Loan Agreement
and the promoters shall subscribe to such share capital to the extent
stipulated by the Lead Institution.
(b) SECURITY IN FAVOUR OF LENDERS
The Borrower shall create security as stipulated in the Loan Agreement in
favour of the Lenders.
(c) BORROWING FROM OTHER INSTITUTIONS/BANKS
The Borrower shall enter into effective agreements with other institutions
and banks in the form and substance satisfactory to the Lead Institution for
raising of funds as per the financing plan.
(d) NON-EXISTENCE OF EVENT OF DEFAULT
The Borrower shall satisfy the Lead Institution that no event of default
as defined in Article X hereof and no event which, with the lapse of time or
notice and lapse of time as specified in Article X, would become an event of
default, has happened and been continuing.
(e) COMPLIANCE WITH SPECIAL CONDITIONS
The Borrower shall comply with such special conditions as may be
stipulated by the Lead Institution at the time of communication of the sanction
of the Loans or subsequently.
(f) DETAILED REVIEW OF THE PROGRESS
(1) The Lead Institution shall have the right to review the cost of the
project before final disbursement of the Loans.
(2) The Lead Institution may withhold disbursement of the amount of the
Loans equivalent to the provision against margin money for working
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capital in the cost of the Project, till such time as the Project
is completed and build-up of working capital commences.
(g) UNDERTAKING FOR MEETING SHORTFALL
The Borrower shall procure undertaking(s) from such persons as may be
specified by the Lead Institution in the form required by the Lead Institution,
whereby it/he/they shall take the responsibility for making arrangements
satisfactory to the Lead Institution for meeting the shortfall, if any, in the
resources of the Borrower for completing the project and for working capital.
The Borrower shall join in such undertaking as a confirming party. The funds
brought in to meet the shortfall in the resources of the Borrower for
completing the Project and/or working capital shall be in such form and manner
and on such terms as may be required by the Lead Institution.
ARTICLE VII
CONDITIONS APPLICABLE DURING CURRENCY OF THE LOAN AGREEMENT
Section 7.1 - PROJECT
The Borrower shall,
(i) PROJECT CHANGES
Promptly notify the Lead Institution of any proposed change in the nature
or scope of the Project and of any event or condition which might materially
and adversely affect or delay completion of the project or result in
substantial overrun in the original estimate of costs.
Any proposed change in the nature or scope of the Project shall not be
implemented or funds committed therefor without the prior approval of the Lead
Institution.
(ii) CONTRACT CHANGES
Obtain prior concurrence of the Lead Institution to any material
modification or cancellation of the Borrower's agreements with its machinery
suppliers, collaborators, technical consultants and suppliers of raw materials.
(iii) DELAY IN COMPLETING THE PROJECT
Promptly inform the Lead Institution of the circumstances and conditions
which are likely to disable the Borrower from implementing the Project or which
are likely to delay its completion or compel the Borrower to abandon the same.
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Section 7.2 - FINANCING OF THE PROJECT
The Borrower shall,
(i) UTILISATION OF THE LOANS
Furnish to the Lead Institution at the end of each month following the
month in which the Loan monies are disbursed, a statement showing the manner
in which the said monies have been utilised.
(ii) SPECIAL BANK ACCOUNT
(a) Keep the drawals from the Loans in special accounts in the name of
the Borrower with a scheduled bank to be approved by the Lead
Institution, the payments from which the account shall be subject to
verification by any person authorised in this behalf by the Lead
Institution. The Borrower shall also obtain and furnish to the Lead
Institution a letter (in a form approved by the Lead Institution)
from the said bank forgoing its right of set-off or lien in respect
of such account.
(b) Keep such records as may be required by the Lead Institution to
facilitate verification of the entries in the said account. The
Borrower shall also authorise the said bank to furnish to the Lead
Institution, as and when required by it, certified true copy of the
said account with details for verification by the Lead Institution,
at the expense of the Borrower.
(c) Not transfer the Loans or any portion thereof from the said special
account for being kept in call or any deposit in any bank without
obtaining the prior approval of the Lead Institution.
Section 7.3 - GENERAL COVENANTS
The Borrower shall,
(i) NEW PROJECT
Not undertake any new project, diversification, modernisation or
substantial expansion of the Project described herein. The word 'substantial'
shall have the same meaning as under the Industries (Development and
Regulation) Act, 1951.
(ii) LOANS AND DEBENTURES
Not issue any debentures, raise any loans, accept deposits from public,
issue equity or preference capital, change its capital structure or create any
charge on its assets or give any guarantees without the prior approval of the
Lead Institution. This provision shall not apply to normal trade guarantees or
temporary loans and advances granted to staff or contractors or suppliers in
the ordinary course of business or to raising of unsecured loans, overdrafts,
cash credit or other facilities from banks in the ordinary course of business.
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(iii) PREMATURE REPAYMENT
Not prepay any loan availed of by it from any other party without the
prior approval of the Lead Institution. If for any reason, the Borrower is
required to prepay any loan, it shall make proportionate prepayment to the
Lenders as well as subject to such conditions as may be stipulated by the
Lenders.
(iv) COMMISSION
Not pay any commission to its promoters, directors, managers or other
persons for furnishing guarantees, counter guarantees or indemnities or for
undertaking any other liability in connection with any financial assistance
obtained for or by the Borrower or in connection with any other obligation
undertaken for or by the Borrower for the purpose of the Project.
(v) NOTICE OF WINDING UP OR OTHER LEGAL PROCESS
Promptly inform the vendors if it has notice of any application for
winding up having been made or any statutory notice of winding up under the
provisions of the Companies Act, 1956, or any other notice under any other Act
or otherwise of any suit or other legal process intended to be filed or
initiated against the Borrower and affecting the title to the properties of the
Borrower or if a receiver is appointed of any of its properties or business or
undertaking.
(vi) ADVERSE CHANGES IN PROFITS AND PRODUCTION
Promptly inform the Lead Institution of the happening of any labour
strikes, lockouts, shut-downs, fires or other similar happenings likely to have
an adverse effect on the Borrower's profits or business and of any material
changes in the rate of production or sales of the Borrower with an explanation
of the reasons therefor.
(vii) INSURANCE
a) Keep insured up to the replacement value thereof as approved by the Lead
Institution (including surveyor's and architect's fees) the properties
charged/to be charged to the Lenders and such of its other properties as
are of an insurable nature against fire, theft, lightning, explosion,
earthquake, riot, strike, civil commotion, storm, tempest, flood, marine
risks, erection risks, war risks, and such other risks as may be
specified by the Lead Institution and shall duly pay all premia and
other sums payable for that purpose. The insurance in respect of the
properties charged/to be charged to the Lenders shall be taken in the
joint names of the Borrower and the Lenders and any other person or
institution having an insurable interest in the properties of the
Borrower and acceptable to the Lead Institution. The Borrower shall
keep deposited with the Lead Institution the insurance policies and
renewals thereof.
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b) Agree that, in the event of failure on the part of the
Borrower to insure the properties or to pay the insurance
premia or other sums referred to above, the Lenders may get
the properties insured or pay the insurance premia and other
sums referred to above, as the case may be.
(viii) LOSS OR DAMAGE BY UNCOVERED RISKS
Promptly inform the Lead Institution of any loss or damage which the
Borrower may suffer due to any force majeure circumstances or act of God, such
as earthquake, flood, tempest or typhoon, etc. against which the Borrower may
not have insured its properties.
(ix) ANNUAL ACCOUNTS
Submit its duly audited annual accounts, within six months from the
close of its accounting year. In case statutory audit (if required) is not
likely to be completed during this period, the Borrower shall get its accounts
audited by an independent firm of Chartered Accountants and furnish the same to
the Lead Institution.
(x) DIVIDEND
Not declare or pay any dividend to its shareholders during any
financial year unless it has paid all the dues to the Lenders up to the date on
which the dividend is proposed to be declared or paid or has made satisfactory
provisions therefor. Further, the Borrower shall not declare dividend to the
equity shareholders in excess of 15% or the average of the dividend paid in the
three preceding years, whichever is higher, without prior approval of the Lead
Institution, which may be given conditionally.
(xi) SUBSIDIARIES
Not create any subsidiary or permit any company to become its
subsidiary.
(xii) MEMORANDUM AND ARTICLES OF ASSOCIATION
Carry out such alterations to its Memorandum and Articles of
Association as may be deemed necessary in the opinion of the Lead Institution
to safeguard the interests of the Lenders arising out of the Loan Agreement.
(xiii) MERGER CONSOLIDATION, ETC.
Not undertake or permit any merger, consolidation, reorganisation,
scheme or arrangement or compromise with its creditors or shareholders or
effect any scheme of amalgamation or reconstruction.
(xiv) INVESTMENTS BY BORROWER
Not make any investments by way of deposits, loans, share capital,
etc. in any concern.
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(xv) REVALUATION OF ASSETS
Not revalue its assets at any time during the currency of the Loans.
(xvi) TRADING ACTIVITY
Not carry on any general trading activity other than the sale of its
own products.
(xvii) SELLING AND PURCHASING ARRANGEMENTS
Undertake that any arrangement for the sale of its products and
purchase of raw materials and inputs, shall be subject to prior approval of the
Lead Institution. If so required by the Lead Institution, the Borrower shall
take steps to suitably modify or terminate the existing selling/purchasing
arrangements in such manner as may be required by the Lead Institution. The
Borrower shall not enter into any fresh agreement for the appointment of sole
selling agents/sole purchasing agents without the prior approval of the Lead
Institution. Any such arrangement shall be subject to such terms and
conditions as may be stipulated by the Lead Institution.
Section 7.4 - NOMINEE DIRECTOR
(i) Each of the Lenders shall have the right to appoint and remove from
time to time, Director(s) on the Board of Directors of the Borrower as
set out in the Loan Agreement (such directors are hereinafter referred
to as 'Nominee Director(s)').
(ii) The Nominee Director(s) shall not be required to hold qualification
shares and not be liable to retire by rotation.
(iii) The Nominee Director(s) shall be entitled to all the rights and
privileges of other directors including the sitting fees and expenses
as payable to other Directors but if any other fees, commission,
monies or remuneration in any form is payable to the Directors, the
fees, commission, monies and remuneration in relation to such Nominee
Director(s) shall accrue to the Lenders and the same shall accordingly
be paid by the Borrower directly to the Lead Institution for the
account of the concerned Lenders.
Provided that if any such Nominee Director is an officer of the
Lenders, the sitting fees in relation to such Nominee Director(s)
shall also accrue to the Lenders and the same shall accordingly be
paid by the Borrower directly to the Lead Institution for the account
of the concerned Lenders. Any expenditure incurred by the Lenders or
the Nominee Director(s) in connection with his appointment or
directorship shall be borne by the Borrower.
(iv) The Nominee Director(s) shall be appointed a Member of the Management
Committee or other Committees of the Board, if so desired by the
Lenders.
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(v) The Nominee Director(s) shall be entitled to receive all notices,
agenda, etc. and to attend all General Meetings and Board Meetings and
Meetings of any Committees of the Board of which he is a member.
(vi) If, at any time, the Nominee Director is not able to attend a meeting
of the Board of Directors or any of its Committees of which he is a
member, the Lenders may depute an observer to attend the meeting. The
expenses incurred by the Lenders in this connection shall be borne by
the Borrower.
Section 7.5 - MANAGEMENT
Unless the Lead Institution otherwise agrees
(i) EXISTING MANAGEMENT
The Borrower shall not remove any person, by whatever name called,
exercising substantial powers of management of the affairs of the Borrower at
the time of execution of the Loan Agreement.
(ii) PAYMENT OF REMUNERATION
The person(s) referred to in (i) shall not be paid any commission in
any year unless all the dues of the Lenders in that year have been paid to the
satisfaction of the Lead Institution.
(iii) PAYMENT OF COMPENSATION
The Borrower shall not pay any compensation to any of the persons
mentioned in (i) above in the event of loss of his/their office(s) for any
reason whatsoever if there is a default in repayment of dues to the Lenders.
(iv) UNDERTAKINGS
The Borrower shall obtain suitable undertakings for giving effect to
(ii) and (iii) above from the persons mentioned in (i) above. The
appointment/reappointment including terms of appointment (or alteration in such
terms) of the persons mentioned in (i) above shall be subject to the prior
approval of the Lead Institution.
(v) FUTURE ARRANGEMENT
The Borrower shall, as and when required by the Lead Institution,
appoint and change to the satisfaction of the Lead Institution, suitable
technical, financial and executive staff of proper qualifications and experience
for the key posts. The terms of such appointments including any changes
therein, shall be subject to prior approval of the Lead Institution.
(vi) REVIEW OF MANAGEMENT
In case of default in payment of any dues to the Lenders or if in the
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opinion of the Lead Institution the business of the Borrower is conducted in a
manner opposed to the public policy or in a manner prejudicial to Lenders'
interest, the Lead Institution shall have the right to review the management
set up or organisation of the Borrower and to require the Borrower to
restructure it as may be considered necessary by the Lead Institution,
including the formation of Management Committees with such powers and functions
as may be considered suitable by the Lead Institution.
(vii) APPOINTMENT OF TECHNICAL/MANAGEMENT CONSULTANT
The Lead Institution shall have the right to appoint, whenever it
considers necessary, any person, firm, company or association of persons
engaged in technical, management or any other consultancy business to inspect
and examine the working of the Borrower and its factory and to report to the
Lead Institution. The Lead Institution shall have the right to appoint,
whenever it considers necessary, any Chartered Accountants/Cost Accountants as
auditors for carrying out any specific assignment(s) or to examine the financial
or cost accounting system and procedures adopted by the Borrower for its
working or as concurrent or internal auditors, or for conducting a special
audit of the Borrower. The costs, charges and expenses including professional
fees and travelling and other expenses of such consultants or auditors shall be
payable by the Borrower.
(viii) The Borrower shall constitute such committees of the Board with such
composition and functions as may be required by the Lead Institution for close
monitoring of different aspects of its working.
(ix) UNDERTAKINGS FOR NON-DISPOSAL OF SHAREHOLDINGS
The Borrower shall not recognise or register any transfer of shares in
the Borrower's capital made or to be made by promoters, their friends or
associates as may be specified by the Lenders.
ARTICLE VIII
REPORTS
Section 8
The Borrower shall furnish to the Lead Institution such reports as may
be required by the Lead Institution.
ARTICLE IX
INSPECTION
Section 9 - The Borrower shall,
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a) PROJECT EXPENDITURE RECORDS
Maintain records showing expenditure incurred on the Project, utilisation
of the disbursements out of the Loans, progress of the Project and the
operations and financial conditions of the Borrower and such records shall be
open to examination by the Lenders and their authorised representatives.
b) TECHNICAL, FINANCIAL AND LEGAL INSPECTIONS
Permit the Lenders and their authorised representatives to carry our
technical, financial and legal inspections during the construction and
operation periods of the Project and to inspect all records, registers and
accounts of the Borrower. Any such representative of the Lenders shall have
free access at all reasonable times to any part of the Borrower's factory and
to its records, registers and accounts and to all schedules, costs, estimates,
plans and specifications relating to the plant and shall receive full
cooperation and assistance from the employees of the Borrower. The cost of
inspection, including travelling and all other expenses shall be payable by the
Borrower to the Lenders in this behalf.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 10.1
If one or more of the events specified in this Section (hereinafter
called 'events of default') happen(s), the Lead Institution or the Lenders or
any of them may, by a notice in writing to the Borrower, declare the principal
of and all accrued interest on the Loans to be due and payable forthwith and the
security created in terms of Article III of the Loan Agreement shall become
enforceable and the Lenders shall have the following rights (anything in the
Loan Agreement to the contrary notwithstanding) namely: -
(i) to enter upon and take possession of the assets of the Borrower; and
(ii) to transfer the assets of the Borrower by way of lease or leave and
licence or sale.
EVENTS OF DEFAULT
a) DEFAULT IN PAYMENT OF PRINCIPAL SUMS OF THE LOANS
Default has occurred in the payment of principal sums of the Loans on
the due dates.
b) DEFAULT IN PAYMENT OF INTEREST
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instalment of interest on the Loans and such default has continued for a period
of thirty days.
c) ARREARS OF INTEREST
Interest amounting to at least Rs. 500 has been in arrears and unpaid
for thirty days after becoming due.
d) DEFAULT IN PERFORMANCE OF COVENANTS AND CONDITIONS
Default has occurred in the performance of any other covenant,
condition or agreement on the part of the Borrower under the Loan Agreement and
any other agreement and such default has continued for a period of thirty
days after notice in writing.thereof has been given to the Borrower by the
Lenders/Lead Institution.
e) SUPPLY OF MISLEADING INFORMATION
Any information given by the Borrower in its application for Loans, in
the reports and other information furnished by the Borrower in accordance with
the Reporting System and the warranties given/deemed to have been given by the
Borrower to the Lead Institution/Lenders is misleading or incorrect in any
material respect.
f) INABILITY TO PAY DEBTS
If there is reasonable apprehension that the Borrower is unable to pay
its debts or proceedings for taking it into liquidation, either voluntarily or
compulsorily, may be or have been commenced.
g) INADEQUATE INSURANCE
If the properties and assets offered to the Lenders as security for
the Loans have not been kept insured by the Borrower or depreciate in value to
such an extent that, in the opinion of the Lead Institution, further security
to the satisfaction of the Lead Institution should be given and on advising the
Borrower to that effect such security has not been given to the Lenders.
h) SALE, DISPOSAL AND REMOVAL OF ASSETS
If, without the prior approval of the Lead Institution, any land,
buildings, structures or plant and machinery of the Borrower are sold, disposed
of, charged, encumbered or alienated or the said buildings, structures,
machinery, plant or other equipment are removed, pulled down or demolished.
i) REFUSAL TO DISBURSE LOANS BY OTHER FINANCIAL INSTITUTION
If the other financial institution(s) or bank(s) with whom the Borrower
has entered into agreements for financial assistance have refused to disburse
it(s)/their loan(s) or any part thereof or have recalled its/their loan(s)
under their respective loan agreements with the Borrower.
<PAGE> 33
18
j) PROCEEDINGS AGAINST BORROWER
The Borrower has voluntarily or involuntarily become the subject of
proceedings under any bankruptcy or insolvency law or the Borrower is
voluntarily or involuntarily dissolved.
k) INABILITY TO PAY DEBTS ON MATURITY
The Borrower is unable or has admitted in writing its inability to pay
its debts as they mature.
l) LIQUIDATION OR DISSOLUTION OF THE BORROWER
The Borrower has taken or suffered to be taken any action for its
reorganisation, liquidation or dissolution.
m) APPOINTMENT OF RECEIVER OR LIQUIDATOR
A receiver or liquidator has been appointed or allowed to be appointed
of all or any part of the undertaking of the Borrower.
n) ATTACHMENT OR DISTRAINT ON MORTGAGED PROPERTIES
If an attachment or distraint has been levied on the mortgaged
properties or any part thereof or certificate proceedings have been taken or
commenced for recovery of any dues from the Borrower.
o) EXTRAORDINARY CIRCUMSTANCES
If extraordinary circumstances have occurred which make improbable for
the Project to be carried out and for the Borrower to fulfill its obligations
under the Loan Agreement.
Section 10.2 CONSEQUENCES OF DEFAULT
On the happening of any of the events of default, in addition to the
rights specified in Section 10.1 hereof, each of the Lenders shall be entitled
to appoint and remove from time to time Whole-time Director(s) on the Board of
Directors of the Borrower (such Director(s) are hereinafter referred to as "the
whole-time Nominee Director(s)"). Such Whole-time Nominee Director(s) shall
exercise such powers and duties as may be approved by the Lenders and have such
rights as are usually exercised by or are available to a Whole-time Director,
in the management of the affairs of the Borrower. Such Whole-time Nominee
Director(s) shall not be required to hold qualification shares nor be liable
to retire by rotation and shall be entitled to receive such remuneration, fees,
commission and monies as may be approved by the Lead Institution. Such
Whole-time Nominee Director(s) shall have the right to receive notices of and
attend all General Meetings and Board Meetings or any committees of the
Borrower of which they are members.
<PAGE> 34
19
Any expense that maybe incurred by the Lenders or such Whole-time
Nominee Director(s) in connection with their appointment or directorship shall
be paid or reimbursed by the Borrower to the Lenders, or as the case may be, to
such Whole-time Nominee Director(s).
Section 10.3 NOTICE TO THE LENDERS ON THE HAPPENING OF AN EVENT OF DEFAULT
If any event of default or any event which, after the notice, or lapse
of time, or both, would constitute an event of default has happened, the
Borrower shall, forthwith give notice thereof to the Lead Institution in
writing specifying the nature of such event of default, or of such event.
Section 10.4 EXPENSES OF PRESERVATION OF ASSETS OF BORROWER AND OF
COLLECTION
All expenses incurred by the Lenders after an event of default has
occurred in connection with:
(i) preservation of the Borrower's assets (whether then or thereafter
existing); and
(ii) collection of amounts due under the Loan Agreement shall be payable by
the Borrower.
ARTICLE XI
CANCELLATION, SUSPENSION AND TERMINATION
Section 11.1 CANCELLATION BY NOTICE TO THE LENDERS
The Borrower may, by notice in writing to the Lead Institution, cancel
the Loans or any part thereof which the Borrower has not withdrawn prior to
the giving of such notice. Provided that such cancellation shall be pro-rata
for each Lender.
Section 11.2 SUSPENSION
Further access by the Borrower to the use of the Loans may be
suspended or terminated by the Lead Institution/Lenders.
a) NON-COMPLIANCE OF TERMS AND CONDITIONS
Upon failure by the Borrower to carry out all or any of the terms of
the Loan Agreement or on the happening of any event of default referred to in
Article X hereof.
<PAGE> 35
20
b) EXTRAORDINARY SITUATION
If any extraordinary situation makes it improbable that the Borrower
would be able to perform its obligations under the Loan Agreement.
c) ASSIGNMENT OR TRANSFER OF PROPERTIES TO RECEIVER, ASSIGNEE, ETC.
If the Borrower takes or permits to be taken any action or proceedings
whereby any of its properties shall or may be assigned or, in any manner,
transferred or delivered to any receiver, assignee, liquidator or other person
whether appointed by the Borrower or by any Court of Law whereby such property
shall or may be distributed among the creditors of the Borrower or the Borrower
suffers any charge to be created over its properties in any legal proceedings.
d) CHANGE IN THE BORROWER'S SET-UP
If any change in the Borrower's set-up has taken place which, in the
opinion of the Lead Institution (which shall be final and binding on the
Borrower), would adversely affect the conduct of the Borrower's business or the
financial position or the efficiency of the Borrower's management or personnel
or the execution of the Project.
Section 11.3 SUSPENSION TO CONTINUE TILL DEFAULT REMEDIED
The right of the Borrower to make withdrawals from the Loans shall
continue to be suspended until the Lead Institution has notified the Borrower
that the right to make withdrawals has been restored.
Section 11.4 TERMINATION
If any of the events described above as also in Article X hereof has
been continuing or if the Borrower has not withdrawn the Loans by the date
referred to in the Loan Agreement or such later date as may be agreed to by the
Lead Institution, then, in such event, the Lead Institution may, by notice in
writing to the Borrower, terminate the right of the Borrower to make
withdrawals. Upon such notice, the undrawn amount of the Loans shall stand
cancelled. Notwithstanding any cancellation, suspension or termination
pursuant to the aforesaid provisions, all the provisions of the Loan Agreement
shall continue to be in full force and effect as herein specifically provided.
ARTICLE XII
WAIVER
Section 12 WAIVER NOT TO IMPAIR THE RIGHTS OF THE LENDERS
No delay in exercising omission to exercise any right, power or
<PAGE> 36
21
remedy accruing to the Lead Institution/Lenders upon any default under the Loan
Agreement, security documents or any other agreement or document shall impair
any such right, power or remedy or shall be construed to be a waiver thereof or
any acquiescence in such default, nor shall the action or inaction of the Lead
Institution/Lenders in respect of any default or any acquiescence by it in any
default, affect or impair any right, power or remedy of the Lead
Institution/Lenders in respect of any other default.
ARTICLE XIII
APPLICABILITY OF OTHER STATUTES
Section 13 APPLICATION OF OTHER STATUTES
Nothing contained in the Loan Agreement shall prejudice or in any way
affect the rights vested in the Lenders under the Industrial Development Bank
of India Act, 1964 (18 of 1964), Industrial Finance Corporation Act, 1948 (15
of 1948), Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), Life
Insurance Corporation of India Act, 1956 (31 of 1956), General Insurance
Business (Nationalisation) Act, 1972 (57 of 1972) and Unit Trust of India Act,
1963 (52 of 1963) or any other statute.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 SERVICE OF NOTICE
Any notice or request to be given or made to the Lead Institution/the
Lenders or to the Borrower or to any other party shall be in writing. Such
notice or request shall be deemed to have been given or made when it is
delivered by hand or despatched by mail or telegram to the party to which it is
required to be given or made at such party's designated address.
Section 14.l SERVICE OF NOTICE
a) Each of the Lenders shall maintain, in accordance with its usual
practice, accounts evidencing the amounts from time to time lent by
and owing to it under the Loan Agreement.
b) The Lead Institution shall maintain in its books a control account or
accounts in which shall be recorded.
(1) the amount of any advance made under the Loan Agreement by
each of the Lenders;
<PAGE> 37
22
(2) the amount of any principal or interest due or to become due
from the Borrower to each of the Lenders under the Loan
Agreement;
(3) the amount of any sum received or recovered by the Lead
Institution under the Loan Agreement and/or security documents
executed in favour of the Lenders and the other Lender's
participation therein.
In any legal action or proceedings arising out of or in connection
with the Loan Agreement, the entries made in the accounts maintained
pursuant to sub-clauses (a) and (b) above shall be prima-facie
evidence of the existence and amount of obligations of the Borrower as
therein recorded.
Section 14.3 BENEFIT OF THE LOAN AGREEMENT
The Loan Agreement shall be binding upon and enure to the benefit of
each party thereto and its successors and assigns.
Section 14.4 HEADINGS
The headings of various Articles and Sections herein and in the Loan
Agreement are inserted for convenience of reference and are not deemed to
affect the construction of the relative provisions.
<PAGE> 1
EXHIBIT 10.20
[CURRENCY]
The Industrial Credit & Investment
Corporation of India Limited
163, Backbay Reclamation
Bombay 400 020
Dear Sirs:
In consideration of your having agreed to grant to Moduler Electronics
(I) Pvt. Ltd. ("the Company"), the financial assistance in terms of the Foreign
Currency Loan Agreement dated the 11th day of October 1994, we the Directors
of the Company, do hereby, in pursuance of the said Loan Agreement, jointly and
severally, undertake to you that we shall not demand or withdraw nor shall the
Company repay any unsecured loans/deposits or any part thereof brought in/to be
brought in by us for financing the capital cost and the requirement of working
capital for the Company's project as per the Financing Plan approved by you so
long as any moneys remain due by the Company to you under the said Loan
Agreement or till the project is duly completed whichever is later without your
prior approval.
<PAGE> 2
: 2 :
We agree that if a dispute arises whether the Project is duly completed
or not, your decision shall be final and binding on us.
We note that such unsecured loans/deposits shall carry interest as may
be agreed to by you. We further agree that the Company shall not pay any
interest on such unsecured loans/deposits, if at the time of such payment,
there is a default in the payment of installments of principal and/or interest
due and owing by the Company to you.
Yours faithfully,
[SIG]
/s/ M.L. Tandon
<PAGE> 3
: 3 :
We note the above and agree and confirm that we shall not repay to the
above mentioned the unsecured loans/deposits or any part thereof when received
by us for financing the capital cost and the requirement of working capital for
our Project as per the Financing Plan approved by you so long as any moneys
remain due by us to you under the said Loan Agreement or till our Project is
duly completed, whichever is later, without your prior approval. We shall pay
such interest on the said unsecured loans/deposits as may be agreed to by you.
We agree not to pay any interest on the said unsecured loans/deposits if at the
time of such payment thee is a default in the payment of installments of
principal and/or interest due and owing by us to you.
For Moduler Electronics (I) Pvt. Ltd.
[SIG]
Director
Dated this 11th day of October 1994,
<PAGE> 4
[CURRENCY]
LOAN AGREEMENT
FC-Foreign Currency
THIS AGREEMENT made this 11th day of October One Thousand Nine Hundred
and Ninety Four at Bombay between Moduler Electronics (I) Pvt. Ltd., a Company
within the meaning of the Companies Act, 1956 (1 of 1956) and having its
Registered Office at 406, Dalamal Towers, Nariman Point, Bombay 400 021
(hereinafter referred to as "the Borrower" which expression shall, unless it be
repugnant to the subject or context thereof, include its successors and
assigns);
AND
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a
public company incorporated under the Indian Companies Act, 1913 (7 of 1913) and
having its registered office at 163, Backbay Reclamation, Bombay 400 020
(hereinafter referred to as "the Lenders" which expression shall, unless it be
repugnant to the subject or context thereof, include its successors and
assigns);
<PAGE> 5
: 2 :
ARTICLE - I
DEFINITIONS
1.1 The following terms shall have the following meanings:
(a) "Due Date" means, in respect of
i) an instalment of principal - the date on which the instalment falls due
as stipulated in Schedule V hereto.
ii) interest - the date on which interest falls due as stipulated in
Schedule V hereto.
iii) commitment charge - the date on which commitment charge falls due as
stipulated in Section 2.3 of Article II hereof.
<PAGE> 6
: 3 :
(b) "Financing Plan" means the financing plan as described in Schedule III
hereto.
(c) "General Conditions" means the GENERAL CONDITIONS No. GC-FC-88 APPLICABLE
TO FOREIGN CURRENCY LOANS PROVIDED BY FINANCIAL INSTITUTIONS.
(d) "Loan" or "Loans" - means the amounts of various foreign currencies
specified in Section 2.1 of Article II hereof or their equivalents in other
foreign currencies used for their purchase, agreed to be provided by the
Lenders for the Project or (as the context requires) so much thereof as may
be outstanding from time to time.
(e) "Project" - means the project to be financed as described in Schedule II
hereto.
1.2 GENERAL CONDITIONS
The Loan(s) hereby agreed to be granted by the Lenders shall be subject
to the Borrower complying with the terms and conditions set out herein and also
in the General Conditions a copy of which is annexed hereto. The General
Conditions shall be deemed to form part of this Agreement and shall be read as
if they are specifically incorporated herein.
ARTICLE - II
AGREEMENT AND TERMS OF LOAN
2.1 AMOUNT AND TERMS OF LOAN
The Borrower agrees to borrow from the Lenders and the Lenders agree to
lend to the Borrower out of foreign currencies specified in Schedule IV hereto,
on the terms and conditions contained herein as also in the General Conditions,
the sums to the maximum extent in various foreign currencies set out in Schedule
I equivalent in the aggregate to about Rs.803 lacs.
2.2 INTEREST
i) The Borrower shall pay to the Lenders interest on the Loan(s) at the
rate(s) and in the manner provided in Schedule V hereto.
ii) Disbursements made pending creation of final security as stipulated in
Article III hereof shall carry further interest at the rate of 1% per
annum till creation of such security.
<PAGE> 7
: 4 :
iii) Provided however, interest on rupee tied defaulted amounts, arrears of
liquidated damages and sums incurred by the Lenders by way of expenses in
terms of Sections 4.11, 4.5 and 4.7 respectively of the General Conditions
shall be payable quarterly on January 1, April 1, July 1 and October 1.
2.3 FRONT END FEE
The Borrower shall pay to the Lenders Front End Fee of 1.05% of the Loan
on or before signing this Agreement.
2.4 LAST DATE OF WITHDRAWALS
Unless the Lenders otherwise agree, the right to make drawals from the
Loan(s) shall cease on January 31, 1995.
2.5 REPAYMENT
The Borrower undertakes to repay the principal amount of the Loan(s) in
accordance with the Amortization Schedule set forth in Schedule VI hereto.
2.6 CONVERSION RIGHT IN CASE OF DEFAULT
If the Borrower commits a default in payment or repayment of any
instalment of principal amount of the Loans or interest thereon or any
combination thereof, then, the Lenders shall have the right to convert (which
right is hereinafter referred to as "the conversion right") at its option 20% of
the rupee equivalent of the defaulted amount determined in accordance with
Section 4.11 of Article IV of the General Conditions into fully paid up equity
shares of the Borrower, at par, in the manner specified in the notice in writing
to be given by the Lenders to the Borrower (which notice is hereinafter referred
to as the "notice of conversion") prior to the date on which the conversion is
to take effect, which date shall be specified in the said notice (hereinafter
referred to as the "date of conversion").
i) On receipt of notice of conversion, the Borrower shall allot and
issue the requisite number of fully paid-up equity shares to the Lenders as from
the date of conversion and the Lenders shall accept the same in satisfaction of
the said defaulted amount(s) in respect of the Loans to the extent so converted.
The amount so converted shall cease to carry interest as from the date of
conversion and the outstanding amount in respect of the loans shall stand
correspondingly reduced. The equity shares so allotted and issued to the
Lenders shall carry, from the date of conversion, the right to receive
proportionately the dividends and other distributions declared or to be declared
in respect of the equity capital of the Borrower. Save as aforesaid, the said
shares shall rank pari passu with the existing equity shares of the Borrower in
all respects. The Borrower shall, at all times, maintain sufficient unissued
equity shares for the above purpose.
<PAGE> 8
: 5 :
ii) The conversion right reserved as aforesaid may be exercised by the
Lenders on one or more occasions during the currency of the Loan(s)
on the happening of the default as specified in this Section.
iii) The Borrower assures and undertakes that in the event of the Lenders
exercising the right of conversion as aforesaid, the Borrower shall get
the equity shares which will be issued to the Lenders as a result of
the conversion, listed with the Stock Exchange(s) as Bombay.
ARTICLE - III
SECURITY
3.1 SECURITY FOR THE LOAN
(A) The Loan(s) together with all interest, liquidated damages, commitment
charges premia on prepayment or on redemption, costs, expenses and other monies
whatsoever stipulated in this Agreement shall be secured by: -
a) a first charge by way of hypothecation in favour of the Lenders of all
the Borrower's moveables (save and except book debts), including
moveable machinery, machinery spares, tools and accessories present and
future, subject to prior charges created and/or to be created:-
i) in favour of the Borrower's Bankers on the Borrower's stocks of raw
materials, semi- finished and finished goods, consumable stores and
such other moveables as may be agreed to by the Lead Institution for
securing the borrowings for working capital requirements in the
ordinary course of business; and
The charges referred to above shall rank pari passu with the mortgages
and charges created and/or to be created in favour of ICICI for its existing
loans.
(B) The borrower shall make out a good and marketable title to its
properties to the satisfaction of the Lenders and comply with all such
formalities as may be necessary or require for the said purpose.
<PAGE> 9
: 6 :
3.2 CREATION OF ADDITIONAL SECURITY
If at any time during the subsistence of this Agreement, the Lenders is
of the opinion that the security provided by the Borrower has become inadequate
to cover the balance of the Loans then outstanding, then, on the Lenders
advising the Borrower to that effect, the Borrower shall provide and furnish to
the Lenders, to the satisfaction of the Lenders, such additional security as
may be acceptable to the Lenders to cover such deficiency.
3.3 ACQUISITION OF ADDITIONAL IMMOVEABLE PROPERTIES
So long as any monies remain due and outstanding to the Lenders, the
Borrower undertakes to notify the Lenders in writing of all its acquisitions of
immoveable properties and as soon as practicable thereafter to make out a
marketable title to the satisfaction of the Lenders and charge the same in
favour of the Lenders by way of first charge the same in favour of the Lenders
by way of first charge in such form and manner as may be decided by the Lenders.
3.4 GUARANTEE
The Borrower shall procure irrevocable and unconditional personal
guarantee(s) from M.L. Tandon in favour of the Lenders for the due repayment
of the Loans and the payment of all interest and other monies payable by the
Borrower in the form prescribed by the Lenders and to be delivered to the
Lenders before any part of the Loan is advanced. The Borrower shall not pay
any guarantee commission to the said Guarantor.
ARTICLE - IV
APPOINTMENT OF NOMINEE DIRECTOR(S)
The Borrower agrees that the Lenders shall be entitled to appoint and
withdraw from time to time One Director on the Board of Directors of the
Borrower during the currency of this Agreement.
ARCICLE - V
SPECIAL CONDITIONS
The loan(s) hereby granted shall also be subject to the Borrower
complying with the special conditions set out in Schedule VII hereto.
<PAGE> 10
: 7 :
ARTICLE - VI
EFFECTIVE DATE OF AGREEMENT
This Agreement shall become binding on the Borrower and the Lenders on
and from the date first above written. It shall be in force till all the monies
due and payable under this Agreement are fully paid of.
<PAGE> 11
: 8 :
SCHEDULE I
PARTICULARS OF LOANS
<TABLE>
<CAPTION>
NAME OF THE LENDER LOAN
------------------ ----
RC Equal US$ (Rs. in lacs)
--- --------- -------------
<S> <C> <C> <C>
The Industrial Credit and Investment US$ 16,50,375 520
Corporation of India Limited (ICICI) SGD 8,45,395 266
163 Backbay Reclamation BEF 6,627 2
Bombay 400 020 YEN 47,603 15
--------- ---
TOTAL 25,50,000 803
========= ===
</TABLE>
<PAGE> 12
: 9 :
SCHEDULE II
PROJECT
The Loan(s) shall be utilised by the Borrower for import of Capital
Goods under Open General Licence.
The Rupee figure has been arrived at on the basis of rates of exchange
of the foreign currencies involved prevailing at the time of sanction of the
Loan(s) and is subject to revision based on the fluctuations in foreign currency
rates.
<PAGE> 13
: 10 :
SCHEDULE III
FINANCING PLAN
A. The total estimated cost of the project is Rs.2274 lacs made up as
under:
<TABLE>
<CAPTION>
(Rc in lacs)
Rupee equivalent
Rupee of foreign currency
Cost cost
----- -------------------
<S> <C> <C>
Plant & Machinery -
a) Imported
i) CIF value 910
Technical know-how fees 630
Miscellaneous fixed assets 75
Preoperative expenses 15
Contingencies 50
Margin money for working capital 594
---- -----
734 1,540
-----
Total of Rupee & foreign currency cost 2,274
=====
</TABLE>
B. The proposed sources of financing are as follows:
<TABLE>
<CAPTION>
(Rs. in lacs)
<S> <C>
(1) SHARE CAPITAL
a) Promoters 200
(2) FOREIGN CURRENCY LOANS
a) ICICI 803
(3) DEFERRED PAYMENTS
Technical knowhow fees 630
(4) UNSECURED LOANS FROM PROMOTERS 641
-----
2,274
=====
</TABLE>
<PAGE> 14
: 11 :
SCHEDULE IV
(Particulars of ICICI Loans)
The Loan referred to in Section 2.1 herein is comprised of the following:-
i) US $ 16,50,375
ii) SGD 12,85,000
iii) BEF 2,15,900
iv) YEN 46,87,500
which is agreed to be provided as follows:-
i) US $ 16,50,375
ii) SGD 12,85,000
iii) BEF 2,15,900
iv) YEN 46,87,500
equivalent in the aggregate to US$ 25,50,000 (hereinafter referred to as
the "US Dollars Loan - 1994") (which expression shall, unless expressly
provided otherwise, mean the aggregate to the amounts of various foreign
currencies used for their purchase expressed in US$ equivalent or so much as
may be outstanding from time to time) out of the US Dollars available with
ICICI.
<PAGE> 15
: 12 :
SCHEDULE V
PART I
SUB PART Y
(US DOLLAR LOAN - 1994)
The following provisions shall apply to the US Dollars Loan - 1994 :
I. REPAYMENT
The US Dollar Loan - 1994 is repayable in accordance with the
amortization schedule set forth in Schedule VI. The amortization schedule has
been drawn up on the basis of the aggregate US $ equivalent of the foreign
currencies involved at the rates of exchange prevailing at the time of each
disbursement. In such an event the Borrower shall, unless otherwise determined
by ICICI, repay to ICICI, the principal amount of the US Dollar Loan - 1994 in
accordance with the amortization schedule as of revised.
All sums payable by the Borrower under this Agreement, shall be paid in
full without set off or counter claim and without any deduction or withholding
on account of any present or future taxes, levies, imposts, duties, charges or
withholdings of any future taxes, levies, imposts, duties, charges or
withholdings of any nature or otherwise imposed in India or by any taxing
authority in India.
II. INTEREST:
The Borrower shall pay to ICICI interest on the principal amount of the
US Dollar Loan - 1994 outstanding from time to time quarterly in each year on
January 1, April 1, July 1 and October 1 at the rate of US Dollar LIBOR +2.75%
per annum.
III. COMPUTATION OF INTEREST AND OTHER CHARGES:
Interest and all other charges will be calculated on the basis of a 360
day year and the actual number of days elapsed.
IV. PREPAYMENT
Unless expressly agreed to by ICICI and subject to payment of such
premium as may be stipulated by ICICI, the Borrower shall not be entitled to
prepay in whole or in part, the US Dollar Loan - 1994 before the due date(s).
<PAGE> 16
: 13 :
SCHEDULE VI
AMORTISATION SCHEDULE FOR ICICI LOAN
IN US$
<TABLE>
<CAPTION>
Principle
amount
outstanding
Date after
payment Payment of each
due Principle payment
------- ---------- -----------
<S> <C> <C>
25,50,000
April 1, 1997.......................... 1,96,150 23,53,850
July 1, 1997.......................... 1,96,150 21,57,100
Oct. 1, 1997.......................... 1,96,150 19,61,550
Jan. 1, 1998.......................... 1,96,150 17,65,400
April 1, 1998.......................... 1,96,150 15,69,250
July 1, 1998.......................... 1,96,150 13,73,100
Oct. 1, 1998.......................... 1,96,150 11,76,950
Jan. 1, 1999.......................... 1,96,150 9,80,800
April 1, 1999.......................... 1,96,150 7,84,650
July 1, 1999.......................... 1,96,150 5,88,500
Oct. 1, 1999.......................... 1,96,150 3,02,350
Jan. 1, 2000.......................... 1,96,150 1,96,200
April 1, 2000.......................... 1,96,200 0
---------
Total.......................... 25,50,000
=========
</TABLE>
[SEAL]
<PAGE> 17
: 14 :
SCHEDULE - VII
SPECIAL CONDITIONS
1) The company shall obtain from the promoters, unsecured loans of Rs. 641 lacs
for financing a part of the cost of the project. Such unsecured loans may
carry interest at the rate of 17.5%p.a. or the rate of dividend paid on
equity capital whichever is lower. The payment of interest on such
unsecured loans and repayment thereof shall be subordinate to payment of
interest and repayment of ICICI dues. Such unsecured loans shall not carry
interest for the year in which the company has not paid dividends on its
equity capital.
2) The company shall arrange with Tandon Associates Inc, USA for deferred
payment of technical knowhow fees of Rs. 630 lacs over a period of 3 years
begining in 1996 and ending in 1998. The payment of the deferred technical
knowhow fees and royalty will be subordinate to payment of interest on and
repayment of ICICI dues. Such deferred technical knowhow fees and royalty
shall not carry any interest.
3) The Company does not undertake any new project or expansion or make any
investment or take any assets on lease without prior approval of ICICI
during the currency of ICICI loans.
4) The company shall undertake in terms of section 6(g) of GC-FC-88.
5) The company undertakes that during the currency of the loans from ICICI, it
shall not, without obtaining prior consent in writing of ICICI declare
dividend in excess of the rate stipulated in the Loan Agreement nor declare
any dividend on its share capital, if it fails to meet its obligations to
pay interest and / or instalments and / or other moneys payable to ICICI so
long as it is in default.
6) ICICI shall be entitled to appoint one nominee on the Board of Directors of
the company during the currency of ICICI assistance.
<PAGE> 18
: 15 :
IN WITNESS WHEREOF the Borrower has caused its Common Seal to be
affixed hereto and to duplicate hereof and ICICI has caused this Agreement to
be executed in duplicate on the day, month and year first above written as
hereinafter appearing:
THE COMMON SEAL of Moduler
Electronics (I) Pvt. Ltd. has
pursuant to the Resolution of its
Board of Directors passed in that
behalf on the 10th day of October
1994 hereunto been affixed in the
presence of Shri /s/ [SIG] /s/ [SIG]
Director who has signed these -------------------
presents in token thereof and
Shri
Secretary/authorised person who
has countersigned the same in
token hereof. /s/ [SIG]
------------------
SIGNED AND DELIVERED by the
withinnamed Lenders by the hand of
Shri /s/ [SIG] an authorised /s/ [SIG]
official of ICICI. ------------------
27/53
<PAGE> 19
GENERAL CONDITIONS
NO. GC-FC-88
APPLICABLE TO FOREIGN CURRENCY LOANS PROVIDED BY
FINANCIAL INSTITUTIONS
<PAGE> 20
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE NUMBER TITLE PAGE NO.
- -------------- ----- --------
<S> <C> <C>
I Applicability 01
II Definitions 01-02
III Approvals 02
IV Disbursement, Interest, Commitment 02-06
and other charges and Repayment
V Borrower's warranties 06-07
VI Predisbursement conditions 07-09
VII Conditions applicable during currency
of the Loan Agreement
1. Project 09-10
2. Utilisation of the Loans 10
3. General Covenants 10-14
4. Nominee Director 14
5. Management 14-16
VIII Reports 16
IX Inspection 16
X Events of default and remedies 17-20
XI Cancellation, suspension and termination 20-22
XII Waiver 22
XIII Applicability of other Statutes 22
XIV Miscellaneous 22
</TABLE>
<PAGE> 21
1
ARTICLE I
APPLICABILITY
The General Conditions set out herein shall, if the Loan Agreement so
provides, be applicable to the foreign currency loans provided singly or
jointly by the Industrial Development Bank of India (IDBI), The Industrial
Finance Corporation of India (IFCI) and the Industrial Credit and Investment
Corporation of India Limited (ICICI).
If there is any inconsistency between these General Conditions and the
Loan Agreement, the Loan Agreement will prevail.
All the provisions of these General Conditions and the Loan Agreement
shall have full force and effect till all monies due from the Borrower to the
Lenders under the Loan Agreement are paid/repaid in full.
ARTICLE II
DEFINITIONS
The following terms have the following meanings in these General
conditions and in the Loan Agreement:
1. "Borrower" means the party to the Loan Agreement to which the Loans are
made.
2. "Foreign Lending Agency" means the Agency providing foreign currency funds
to the Lenders pursuant to terms of their Agreements.
3. "Lead Institution" means any one of the Lenders as may be designated by them
from time to time, as their attorney in a particular loan transaction. In the
event of any Lender granting loan(s) to the Borrower singly (and not jointly
with other Lenders), the expression "Lead Institution" wherever it appears in
these General Conditions or in the Loan Agreement shall mean only the "Lender".
4. "Lenders" means IDBI, IFCI and ICICI or anyone or more of them where the
subject or context so admits.
5. "Loan Agreement" means the particular loan agreement and includes these
General Conditions and applied thereto, and all schedules and amendments
supplemental to the Loan Agreement.
6. "Loan" or "Loans" means amounts of various foreign currencies or their
equivalents in other foreign currencies used for their purchase, agreed to be
provided by the Lenders under the Loan Agreement or (as the context requires)
so much thereof as may be outstanding from time to time.
<PAGE> 22
2
7. "Project" means the project for which the Loans are agreed to be granted,
as described in the Loan Agreement.
8. All other terms used in these General Conditions shall have the meanings
assigned to them under the Loan Agreement.
ARTICLE III
APPROVALS
Unless otherwise agreed to by the Lead Institution, the Borrower shall
approach the Lead Institution for obtaining all consents and approvals required
under the Loan Agreement. All acts and deeds done, and all consents and
approvals given, by the Lead Institution shall be deemed to have been done and
given by every Lender individually.
ARTICLE IV
DISBURSEMENT, INTEREST, COMMITMENT AND OTHER CHARGES AND REPAYMENT
SECTION 4.1 - TERMS OF DISBURSEMENT
(i) The Loans will be disbursed by the Lenders in such manner as may
be decided by the Lenders subject to the Borrower complying with the provisions
of the Loan Agreement and the disbursement procedure(s) stipulated by the
Lenders (including production/execution of evidences/documents required for
disbursement) and the expenditure incurred on the Project being in consonance
with the details mentioned in the Loan Agreement.
(ii) In the event of the Lenders agreeing to disburse any amount of the
Loans pending creation of final security as stipulated in the Loan Agreement,
the same may be disbursed on such terms as may be decided by the Lenders.
All disbursements shall be by authorisation(s) and the
collection/remittance charges will be borne by the Borrower. The interest on
the Loans will accrue as from the value date as specified in the authorisation.
SECTION 4.2 - INTEREST
(i) All interest on the Loans and on all other monies accruing due under
the Loan Agreement shall, in case the same be not paid on the respective due
dates, carry further interest at the applicable rate(s) under the Loan
Agreement, computed from the respective due dates and shall become payable upon
the footing of compound interest with quarterly/half yearly/yearly rests as
provided in the Loan Agreement.
<PAGE> 23
3
(ii) All interest and other monies which shall accrue under the provisions
of the Loan Agreement shall also be payable in the manner and on the dates as
mentioned in the Loan Agreement for payment of interest on the principal
amounts of the Loans.
SECTION 4.3 - COMMITMENT CHARGE
(i) Commitment charge shall be payable in the manner and on the dates
specified in the Loan Agreement.
(ii) Arrears of commitment charge shall carry interest at the lending
rate(s) of the Lenders for normal rupee term loans prevailing on the date of
default.
(iii) Commitment charge shall be payable even though the Loans are
ultimately cancelled or not availed of for any reason whatsoever.
(iv) In the event of such cancellation, the commitment charge in respect
of the Loans or any part thereof which has been cancelled, shall cease to
accrue from the day on which the Borrower's request for cancellation is
received by the Lenders.
SECTION 4.4 - REPAYMENT
(i) The Lenders may, in suitable circumstances, revise, vary or postpone
the repayment of the principal amounts of the Loans or the balance outstanding
for the time being or any installments) of the said principal amounts of the
Loans or any part thereof upon such terms and conditions as may be decided by
the Lenders.
(ii) In the event of any default in the payment of installment(s) of
principal, any interest, commitment charge or liquidated damages, postponement,
if any, allowed by the Lenders shall be at the rate of interest as may be
stipulated by The Lenders at the time of postponement.
(iii) If, for any reason, the amount finally disbursed by the Lenders out
of the Loans is less than the amount of the Loans, the installment(s) of
repayment of the Loans shall stand reduced proportionately but shall be payable
on the due dates as specified in the Amortization Schedule(s) in the Loan
Agreement.
SECTION 4.5 - LIQUIDATED DAMAGES ON DEFAULTED AMOUNTS
In case of default in payment of installment(s) of principal,
interest, commitment charge and all other monies (except liquidated damages) on
their respective due dates, the Borrower shall pay on the defaulted amounts,
liquidated damages at the rate of 2% per annum for the period of default.
Liquidated damages shall be payable in the manner and
<PAGE> 24
4
on the dates as specified in the Loan Agreement for payment of interest.
Arrears of liquidated damages shall carry interest at the lending rate(s) of
the Lenders for normal rupee term loans prevailing on the date of default.
4.6 - INCREASED COSTS
In the event of the Lenders being called upon to pay any additional
amount by the Foreign Lending Agency, in terms of their respective agreements,
or on account of factors beyond the control of the Lenders, the Borrower shall
reimburse all such amounts to the Lenders.
SECTION 4.7 - REIMBURSEMENT OF EXPENSES
(i) The Borrower shall reimburse all sums paid by the Lead Institution/the
Lenders under Article IV - Sections 4.6 and 4.10(f) Article VII - Sections
7.3(B)(v), 7.3(B)(vii), 7.5(vii), Article IX-Section 9(b)(iii) and Article X
- - Section 10.4 within 30 days from the date of notice of demand from the Lead
Institution/Lenders. All such sums shall be debited to the Borrower's Loan
Account and shall carry interest from the date of payment till such
reimbursement at the lending rate(s) of the Lenders for normal rupee term loans
prevailing on the date of payment.
(ii) In case of default in making such reimbursement within 30 days from the
date of notice of demand, the Borrower shall also pay on the defaulted amounts,
liquidated damages at the rate of 2% per annum from the expiry of 30 days from
the date of notice of demand till reimbursement in accordance with the
provisions of Section 4.5.
SECTION 4.8 - APPROPRIATION OF PAYMENTS
a) Unless otherwise agreed to by the Lenders, any payments due and
payable under the Loan Agreement and made by the Borrower shall be appropriated
towards such dues in the following order, viz., -
(i) Premium on prepayment;
(ii) Costs, charges, expenses and other monies;
(iii) Interest on costs, charges, expenses and other monies;
(iv) Commitment charge;
(v) Interest on arrears of commitment charge;
(vi) Interest payable in terms of the Loan Agreement;
(vii) Further interest and liquidated damages on defaulted amounts
payable in terms of Section 4.2(i) and 4.5;
(viii) Repayment of installments of principal due and payable under the Loan
Agreement.
<PAGE> 25
5
b) Notwithstanding anything contained in Clause(a) hereinabove, the
Lenders may, at their discretion, appropriate such payments towards the dues,
if any, payable by the Borrower in respect of earlier loan(s) availed of by the
Borrower from the Lenders in the order specified in the relative Loan
Agreement(s).
4.9 - ALTERATION IN SOURCE(S) OF THE LOAN/CURRENCY/INTEREST SWAPS
The Lenders may, at any time, in their absolute discretion, alter the
sources from which the Loans or any part thereof is agreed to be
provided/provided under the Loan Agreement. In such an event, the liability of
the Borrower in respect of the Loans or such part thereof in respect of which
the source(s) has been altered as regards rate(s) of interest, repayment(s) of
principal and currencies and date(s) and mode of such payment/repayment shall
be as applicable to the loan(s) out of such altered source(s) as intimated by
the Lenders, which shall be final and binding on the Borrower.
The Lenders may, at any time, in their absolute discretion, effect
currency and/or interest rate swap for the Loans or any part thereof agreed to
be provided/provided herein. In such an event, the liability of the Borrower
in respect of which the Loans or such part thereof in respect of the currency
or currencies of repayment/payment of principal, interest and all other monies
payable hereunder/rate(s) of interest on principal of the Loans/or such part
thereof shall be as intimated by the Lenders, which shall be final and binding
on the Borrower.
SECTION 4.10 - PLACE AND MODE OF PAYMENT
Notwithstanding anything contained hereinbefore, the Borrower shall
make payments to each of the Lenders, whether of principal amount of the Loan,
interest, commitment charge, premium on prepayment or on redemption, if any, in
equivalent rupees in lieu of foreign currencies. For the purpose of this
section, the following conditions shall apply: -
a) The rupee sum shall be determined by the Lenders with reference to the
actual cost to the Lenders (including all commission or other bank charges and
out-of-pocket expenses) in remitting the foreign currencies on the due dates.
b) The rupee sum shall be paid by the Borrower to the Lenders 15 days in
advance of the due dates to enable the Lenders to remit the foreign currencies
on the due dates.
c) The rupee sum shall be paid by the Borrower to the Lenders by cheque or
bank draft drawn on a Scheduled Bank in Bombay/New Delhi and the
collection/remittance charges, if any, in respect thereof will be borne by the
Borrower.
<PAGE> 26
6
d) Credit for all payments made by the Borrower in terms of Agreement by
cheque/bank draft will be given only on realisation or on the relative due
date, whichever is later.
e) For the purpose of sub-section (a) hereof a statement signed by a
designated officer of the Lenders shall be sufficient evidence of the costs,
commission, expenses, etc.
f) Any difference on account of exchange fluctuations in the rates of
foreign currencies involved between the payment made by the Borrower to the
Lenders and the actual cost to the Lenders as referred to in sub-section (a)
above shall be borne by or be given credit to the Borrower.
In the case of ICICI, if ICICI decides not to call for payment in
equivalent rupees in the manner provided above, ICICI shall have the right to
notify the Borrower the place or places where and the person or persons to whom
the payments in foreign currencies falling due thereafter shall be made and all
expenses involved in making payments in the manner so notified shall be borne
by the Borrower.
SECTION 4.11 - RUPEE TYING OF DEFAULTED AMOUNTS
Without prejudice to any of the obligations of the Borrower in terms
of the Loan Agreement, in the event of default by the Borrower in making
payment in discharge of any of its obligations under the Loan Agreement on the
due dates then, notwithstanding anything to the contrary contained in the Loan
Agreement, the liability of the Borrower thereafter in respect of such amounts
shall be in rupees, which shall be determined and notified by the Lenders to
the Borrower in accordance with the provisions of sub-section 4.10(a)
hereinabove (hereinafter referred to as "the rupee tied defaulted amounts").
Notwithstanding anything to the contrary contained in the Loan
Agreement, the rupee tied defaulted amounts will carry interest and further
interest from the respective due dates at the lending rate(s) of the Lenders
for normal rupee term loans prevailing on the date of default and shall be
payable on the dates specified in the Loan Agreement.
ARTICLE V
SECTION 5 - BORROWER'S WARRANTIES
Except to the extent already disclosed in writing by the Borrower to
the Lenders, the Borrower shall be deemed to have assured, confirmed and
undertaken as follows:
<PAGE> 27
7
(a) DUE PAYMENT OF PUBLIC AND OTHER DEMANDS
The Borrower is not in arrears of any public demands such as
income-tax, corporation tax and all other taxes and revenues or any other
statutory dues payable to the Central or State Government(s) or any local or
other authority.
(b) SELLING AND PURCHASING ARRANGEMENTS
The Borrower has entered into requisite selling and purchasing
arrangements to the satisfaction of the Lead Institution.
(c) MANAGEMENT AGREEMENT
The terms and conditions of appointment of Managing Director or any
other person holding substantial powers of management, by whatever name called,
shall be subject to the approval of the Lead Institution.
(d) CONFLICT WITH MEMORANDUM AND ARTICLES OF ASSOCIATION
Nothing in the Loan Agreement conflicts with the Memorandum and
Articles of Association of the Borrower.
(e) IMPORT LICENCE
The Borrower has obtained import licence(s) with list of
equipment/necessary information about eligibility, scope and validity of
imports under Open General Licence for equipment to be imported for the
Project, and final quotation therefor. The Borrower further undertakes to
obtain information regarding changes in import policy, eligibility and scope of
import and shall advise the Lenders in this regard from time to time.
ARTICLE VI
PREDISBURSEMENT CONDITIONS
SECTION 6 - CONDITIONS PRECEDENT TO DISBURSEMENT
The obligation of the Lenders to make disbursements under the Loan
Agreement shall be subject to the Borrower performing all its obligations and
undertakings under the Loan Agreement besides compliance by the Borrower with
the Disbursement Procedure stipulated by the Lenders, such as submission of
necessary information, documents, etc. to the satisfaction of the Lenders.
Before seeking disbursement the Borrower shall also comply with the following
conditions:
<PAGE> 28
8
(a) RAISING OF SHARE CAPITAL
The Borrower shall raise share capital as stipulated in the Loan
Agreement and the promoters shall subscribe to such share capital to the extent
stipulated by the Lenders.
(b) SECURITY IN FAVOUR OF THE LENDERS
The Borrower shall create security as stipulated in the Loan
Agreement in favour of the Lenders.
(c) BORROWING FROM OTHER INSTITUTIONS/BANKS
The Borrower shall enter into effective agreements with other
institutions/banks in the form and substance satisfactory to the Lenders for
raising of funds as per the Financing Plan.
(d) NON-EXISTENCE OF EVENT OF DEFAULT
The Borrower shall satisfy the Lenders that no event of default as
defined in Article X hereof and no event which, with the lapse of time or
notice and lapse of time as specified in Article X would become an event of
default, has happened and been continuing.
(e) DRAW DOWN SCHEDULE
The Borrower shall, within a period of 30 days from the date of the
Loan Agreement or such extended period as may be agreed to by the Lenders,
supply to the Lenders full information regarding the orders for the equipment
placed by it with its foreign suppliers and the schedule showing the dates on
which it expects to establish Letters of Credit under the disbursement
procedure and the dates on which payments under those Letters of Credit are
expected to be made.
(f) LETTERS OF CREDIT
The Borrower shall open Letter(s) of Credit for import of capital
goods approved under the financing plan only through the Lead Institution/the
Lenders.
(g) COMPLIANCE WITH SPECIAL CONDITIONS
The Borrower shall comply with such special conditions as may be
stipulated by the Lenders at the time of communication of the sanction of the
Loan or subsequently.
(h) DETAILED REVIEW OF THE PROGRESS
The Lenders shall have the right to review the cost of the Project
before final disbursement of the Loan.
<PAGE> 29
9
(i) UNDERTAKING FOR MEETING SHORTFALL
The Borrower shall procure undertaking(s) from such persons as may be
specified by the Lead Institution in the form required by the Lead Institution
whereby it/he/they shall take the responsibility for making arrangements
satisfactory to the Lead Institution for meeting the shortfall, if any, in the
resources of the Borrower for completing the Project and for working capital.
The Borrower shall join in such undertaking as a confirming party. The funds
brought in to meet the shortfall in the resources of the Borrower for
completing the Project and/or working capital shall be in such form and manner
and on such terms as may be required by the Lead Institution
ARTICLE VII
CONDITIONS APPLICABLE DURING CURRENCY OF THE LOAN AGREEMENT
SECTION 7.1 - PROJECT
The Borrower shall,
(i) PROJECT IMPLEMENTATION
Carry out and operate the Project with due diligence and efficiency
and in accordance with sound engineering, technical, administrative, financial,
managerial and industrial standards and business practices with qualified and
experienced management and personnel and in accordance with the Financing Plan
and cause the financing specified in the Financing Plan to be applied
exclusively to the Project.
(ii) PROJECT CHANGES
Promptly notify the Lead Institution of any proposed change in the
nature or scope of the Project and of any event or condition which might
materially and adversely affect or delay completion of the Project or result in
substantial overrun in the original estimate of costs. Any proposed change in
the nature or scope of the Project shall not be implemented or funds committed
therefor without the prior approval of the Lead Institution.
(iii) CONTRACT CHANGES
Obtain prior concurrence of the Lead Institution to any material
modification or cancellation of the Borrower's agreements with its machinery
suppliers, collaborators, technical consultants and suppliers of raw materials.
<PAGE> 30
10
(iv) DELAY IN COMPLETING THE PROJECT
Promptly inform the Lead institution of the circumstances and
conditions which are likely to disable the Borrower from implementing the
Project or which are likely to delay its completion or compel the Borrower to
abandon the same.
SECTION 7.2 - UTILISATION OF THE LOANS
(i) The Borrower shall use the Loans solely for the purposes
described in the Loan Agreement and covenants that the capital goods and
services purchased from the Loan shall be used exclusively in the carrying out
of the Project.
(ii) The Borrower shall purchase the capital goods and services to be
financed out of the Loans at a reasonable price, account being taken also of
other relevant factors such as time of delivery, efficiency, reliability of the
goods, their suitability for the Project and availability of maintenance
facilities and spare parts therefor and in the case of services, their quality
and the competence of the parties rendering them.
(iii) The Borrower shall not use the proceeds of the Loan for the purpose of
trading in any other currency.
SECTION 7.3 - GENERAL COVENANTS
(A) Without the prior approval of the Lead Institution, the Borrower shall
not
(i) NEW PROJECT
Undertake any new project, diversification, modernisation or
substantial expansion of the Project described herein. The word
"substantial" shall have the same meaning as under the Industries (Development
and Regulation) Act, 1951.
(ii) LOANS AND DEBENTURES
Issue any debentures, raise any loans, accept deposits from public,
issue equity or preference capital, change its capital structure, create any
charge on its assets or give any guarantees. This provision shall not apply to
normal trade guarantees or temporary loans and advances granted to staff or
contractors or suppliers in the ordinary course of business or to raising of
unsecured loans, overdrafts, cash credit or other facilities from banks in the
ordinary course of business.
(iii) PREMATURE REPAYMENT
Prepay any loan availed of by it from any other party.
<PAGE> 31
11
(iv) COMMISSION
Pay any commission to its promoters, directors, managers or other
persons for furnishing guarantees, counter guarantees or indemnities or for
undertaking any other liability in connection with any financial assistance
obtained for or by the Borrower or in connection with any other obligation
undertaken for or by the Borrower for the purpose of the Project.
(v) DIVIDEND
Declare or pay any dividend to its shareholders during any financial
year unless it has paid all the dues to the Lenders up to the date on which the
dividend is proposed to be declared or paid or has made satisfactory
provisions therefor. Further, the Borrower shall not declare dividend to the
equity shareholders in excess of 15% or the average of the dividend paid in the
three preceding years, whichever is higher, without prior approval of the Lead
Institution, which may be given conditionally.
(vi) SUBSIDIARIES
Create any subsidiary or permit any company to become its subsidiary.
(vii) MERGER, CONSOLIDATION, ETC.
Undertake or permit any merger, consolidation, reorganisation, scheme
of arrangement or compromise with its creditors or shareholders or effect any
scheme of amalgamation or reconstruction.
(viii) INVESTMENTS BY BORROWER
Make any investments by way of deposits, loans, share capital, etc.
in any concern.
(ix) REVALUATION OF ASSETS
Revalue its assets at any time during the currency of the Loans.
(x) TRADING ACTIVITY
Carry on any general trading activity other than the sale of its own
products.
(B) Unless otherwise agreed to by the Lead Institution, the Borrower
shall,
(i) ACCOUNTING AND COST CONTROL SYSTEMS
Promptly and diligently instal and thereafter maintain an accounting
and cost control system satisfactory to the Lenders and maintain
<PAGE> 32
12
books of accounts and other records adequate to reflect truly and fairly the
financial position of the Borrower and the results of its operations (including
the progress of the Project) in conformity with sound accounting principles
consistently applied. Such records and books shall be open to examination by
the Lenders and any authorised representative of the Foreign Lending Agency.
(ii) INFORMATION OF LOANS, GOODS, ETC.
Provide to the Lenders all such information relating to the Loans,
the goods and services financed out of the Loans, the Project and its
operations and other related matters as the Lenders or the Foreign Lending
Agency shall, from time to time, at their discretion request, including
information relating to the administration, management and financial condition
of the Borrower.
(iii) NOTICE OF WINDING UP OR OTHER LEGAL PROCESS
Promptly inform the Lenders if it has notice of any application for
winding up having been made or any statutory notice of winding up under the
provisions of the Companies Act, 1956, or any other notice under any other Act
or otherwise of any suit or other legal process intended to be filed or
initiated against the Borrower and affecting the title to the properties of the
Borrower or if a receiver is appointed of any of its properties or business or
undertaking.
(iv) ADVERSE CHANGES IN PROFITS AND PRODUCTION
Promptly inform the Lead Institution of the happening of any labour
strikes, lockouts, shutdowns, fires or any event likely to have a substantial
effect on the Borrower's profits or business and of any material changes in the
rate of production or sales of the Borrower with an explanation of the reasons
therefor.
(v) INSURANCE
a) Insure and keep insured against such risks as may be
determined by the Lenders all the goods to be imported for the purpose of the
Project whether financed out of the proceeds of the Loans or not and in
particular the goods to be financed out of the proceeds of the Loans as are of
an insurable nature against all marine, transit and other hazards incidental to
the acquisition, transportation and delivery of the goods to the place of use
or installation and for such insurance any indemnity shall be payable in a
currency freely usable by the Borrower to replace or repair such goods.
b) Keep insured up to the replacement value thereof as approved
by the Lead Institution (including surveyor's and architect's fees) the
properties charged/to be charged to the Lenders and such of its other
properties as are of an insurable nature against fire, theft, lightning,
explosion, earthquake, riot, strike, civil commotion, storm, tempest, flood,
marine risks, erection risks, war risks and such other risks as may be
specified by the Lead Institution.
<PAGE> 33
13
c) Duly pay all premia and other sums payable for that purpose. The
insurance in respect of the properties charged/to be charged to the Lenders
shall be taken in the joint names of the Borrower and the Lenders and any other
person or institution having an insurable interest in the properties of the
Borrower and acceptable to the Lead Institution. The Borrower shall keep
deposited with the Lead Institution the insurance policies and renewals
thereof.
d) Agree that, in the event of failure on the part of the Borrower to
insure the properties or to pay the insurance premia or other sums referred to
above, the Lenders may get the properties insured or pay the insurance premia
and other sums referred to above, as the case may be.
(Vi) LOSS OR DAMAGED BY UNCOVERED RISKS
Promptly inform the Lead Institution of any loss or damage which the Borrower
may suffer due to any force majeure circumstances or act of God such as
earthquake, flood, tempest or typhoon, etc. against which the Borrower may not
have insured its properties.
(vii) COSTS AND CHARGES
Pay all taxes, duties, cesses, costs, charges and expenses in connection with
or relating to the Loan transaction (including cost of investigation of title
and protection of the Lenders' interest). In the event of the Borrower failing
to pay the aforesaid monies, the Lenders/Lead Institution shall be at liberty
but shall not be obliged to pay the same.
(viii) ANNUAL ACCOUNTS
Submit to each of the Lenders its duly audited annual accounts
within six months from the close of its accounting year. In case
statutory audit (if required) is not likely to be completed during this
period, the Borrower shall get its accounts audited by an independent firm of
Chartered Accountants and furnish the same to the Lead Institution.
(ix) MEMORANDUM AND ARTICLES OF ASSOCIATION
Carry out such alterations to its Memorandum and Articles of Association as
may be deemed necessary in the opinion of the Lead Institution to safeguard the
interests of the Lenders arising out of the Loan Agreement.
(x) SELLING AND PURCHASING ARRANGEMENTS
Undertake that if so required by the Lead Institution, the Borrower shall
take steps to suitably modify or terminate the existing selling/purchasing
arrangements in such manner as may be required by the Lead Institution. The
Borrower shall not enter into any fresh agreement for the appointment of sole
selling agents/sole purchasing agents without the
<PAGE> 34
14
prior approval of the Lead Institution. Any such arrangement shall he subject
to such terms and conditions as may be stipulated by the Lead Institution.
SECTION 7.4 - NOMINEE DIRECTOR
(i) Each of the Lenders shall have the right to appoint and remove
from time to time, Director(s) on the Board of Directors of the Borrower as set
out in the Loan Agreement (such directors are hereinafter referred to as
'Nominee Director(s)').
(ii) The Nominee Director(s) shall not be required to hold qualification
shares and not be liable to retire by rotation.
(iii) The Nominee Director(s) shall be entitled to all the rights and
privileges of other Directors including the sitting fees and expenses as
payable to other Directors but if any other fees, commission, monies or
remuneration in any form is payable to the Directors, the fees, commission,
monies and remuneration in relation to such Nominee Director(s) shall accrue to
the Lenders and the same shall accordingly be paid by the Borrower directly to
the Lead Institution for the account of the concerned Lender. Provided that,
if any such Nominee Director(s) is an officer of the Lenders, the sitting fees
in relation to such Nominee Director(s) shall also accrue to the Lenders and
the same shall accordingly be paid by the Borrower directly to the Lead
Institution for the account of the concerned Lender.
Any expenditure incurred by the Lenders or the Nominee Director(s) in
connection with his appointment or directorship shall be borne by the Borrower.
(iv) The Nominee Director(s) shall be appointed a Member of the Management
Committee or other Committees of the Board, if so desired by the Lenders.
(v) The Nominee Director(s) shall be entitled to receive all notices,
agenda, etc. and to attend all General Meetings and Board Meetings and
Meetings of any Committees of the Board of which he is a member.
(vi) If, at any time, the Nominee Director(s) is not able to attend a
meeting of the Board of Directors or any of its Committees of which he is a
member, the Lenders may depute an observer to attend the meeting. The expenses
incurred by the Lenders in this connection shall be borne by the Borrower.
SECTION 7.5 - MANAGEMENT
Unless the Lead Institution otherwise agrees:
<PAGE> 35
15
(i) EXISTING MANAGEMENT
The Borrower shall not remove any person, by whatever name called,
exercising substantial powers of management of the affairs of the Borrower at
the time of execution of the Loan Agreement.
(ii) PAYMENT OF REMUNERATION
The person(s) referred to in (i) above shall not be paid any
commission in any year unless all the dues of the Lenders in that year have
been paid to the satisfaction of the Lead Institution.
(iii) PAYMENT OF COMPENSATION
The Borrower shall not pay any compensation to any of the persons
mentioned in (i) above in the event of loss of his/their office(s) for any
reason whatsoever if there is a default in repayment of dues to the Lenders.
(iv) UNDERTAKINGS
The Borrower shall obtain suitable undertakings for giving effect to
(ii) and (iii) above from the persons mentioned in (i) above. The
appointment/reappointment including terms of appointment (or alteration in such
terms) of the persons mentioned in (i) above shall be subject to the prior
approval of the Lead Institution.
(v) FUTURE ARRANGEMENT
The Borrower shall, as and when required by the Lead Institution,
appoint and change to the satisfaction of the Lead Institution suitable
technical, financial and executive staff of proper qualifications and
experience for the key posts. The terms of such appointments including any
changes therein, shall be subject to prior approval of the Lead Institution.
(vi) REVIEW OF MANAGEMENT
In case of default in payment of any dues to the Lenders or if in the
opinion of the Lead Institution the business of the Borrower is conducted in a
manner opposed to the public policy or in a manner prejudicial to the Lenders'
interest, the Lead Institution shall have the right to review the management
set up or organisation of the Borrower and to require the Borrower to
restructure it as may be considered necessary by the Lead Institution,
including the formation of Management Committees with such powers and functions
as may be considered suitable by the Lead Institution.
(vii) APPOINTMENT OF TECHNICAL/MANAGEMENT CONSULTANTS/CHARTERED ACCONTANTS
The Lead Institution shall have the right to appoint, whenever it
considers
<PAGE> 36
necessary, any person, firm, company or association of persons engaged in
technical, management or any other consultancy business to inspect and examine
the working of the Borrower and its factory and to report to the Lead
Institution. The Lead Institution shall have the right to appoint, whenever it
considers necessary, any Chartered Accountants/Cost Accountants as auditors for
carrying out any specific assignments) or to examine the financial or cost
accounting systems and procedures adopted by the Borrower for its working or as
concurrent or internal auditors, or for conducting a special audit of the
Borrower. The costs, charges and expenses including professional fees and
travelling and other expenses of such consultants or auditors shall be payable
by the Borrower.
(viii) COMMITTEES OF BOARD
The Borrower shall constitute such committees of the Board
with such composition and functions as may be required by the Lead Institution
for close monitoring of different aspects of its working.
(ix) UNDERTAKINGS FOR NON-DISPOSAL OF SHAREHOLDINGS
The Borrower shall not recognise or register any transfer of shares in the
Borrower's capital made or to be made by promoters, their friends or associates
as may be specified by the Lead Institution. The Borrower shall obtain and
furnish to the Lead Institution suitable undertakings from such person for
giving effect to the above.
ARTICLE VIII
REPORTS
Section 8 - The Borrower shall furnish to the Lenders such reports at may be
required by the Lenders.
ARTICLE IX
INSPECTION
Section 9 - The Borrower shall,
a) PROJECT EXPENDITURE RECORDS
Maintain records and procedures adequate to record and monitor the progress of
the Project (including its cost and the benefits to be derived from it) to
identify the goods and services financed out of the Loan, to disclose their use
in the Project and the operations and financial condition of the
<PAGE> 37
17
Borrower and such records shall be open to examination by the Lenders, the
Foreign Lending Agency and their authorised representatives.
b) TECHNICAL, FINANCIAL AND LEGAL INSPECTIONS
(i) Permit the Lenders, by themselves or jointly with the Foreign
Lending Agency and their authorised representatives, to carry out technical,
financial and legal inspections of the goods purchased out of the Loans and to
visit any facilities and construction sites included in the Project and to
examine any plants, installations, sites, works, buildings, property,
equipment, records and documents relevant to the performance of the obligations
of the Borrower under the Loan Agreement. Any such representative of the
Lenders and/or the Foreign Lending Agency shall have free access at all
reasonable times to the Borrower's properties and shall receive full
cooperation and assistance from the employees of the Borrower.
(ii) Permit any whole-time officer of the Lenders or any authorised
representative of the Foreign Lending Agency or a qualified practising Auditor
to examine the Borrower's books and papers and will give all facilities to
enable any technically qualified person chosen by tile Lenders or the Foreign
Lending Agency to report on the business of the Borrower at any time.
Provided that, if the technically qualified person is not a whole-time employee
of the Lenders or an authorised representative of the Foreign Lending Agency
such technically qualified person shall be reasonably acceptable to the
Borrower having regard to his other activities, if any.
(iii) The cost of inspection, including travelling and all other
expenses, shall be payable by tile Borrower to the Lenders/the Foreign
Lending Agency in this behalf.
ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
Section 16.1 If one or more of the events specified in this Section
(hereinafter called 'events of default') happen(s), the Lead Institution or the
Lenders or any of them may, by a notice in writing to the Borrower, declare the
principal of and all accrued interest on the Loans to be due and payable
forthwith and the security created in terms of Article III of, the Loan
Agreement shall become enforceable and the Lenders shall have the following
rights (anything in the Loan Agreement to the contrary notwithstanding) namely:
(i) to enter upon and take possession of the assets of the Borrower; and
(ii) to transfer the assets of the Borrower by way of lease or leave
and licence or sale.
<PAGE> 38
18
EVENTS OF DEFAULT
a) DEFAULT IN PAYMENT OF PRINCIPAL SUMS OF THE LOANS
Default has occurred in the payment of principal sums of the Loans on the due
dates.
b) DEFAULT IN PAYMENT OF INTEREST
Default has been committed by the Borrower in payment of any instalment of
interest on the Loans and such default has continued for a period of thirty
days.
c) ARREARS OF INTEREST
Interest amounting to at least Rs. 500 has been in arrears and unpaid for
thirty days after becoming due.
d) DEFAULT IN PERFORMANCE OF COVENANTS AND CONDITIONS
Default has occured in the performance of any other covenant, condition or
agreement on the part of the Borrower under the Loan Agreement or any other
agreement and such default has continued for a period of thirty days after
notice in writing thereof has been given to the Borrower by the Lenders/Lead
Institution.
e) SUPPLY OF MISLEADING INFORMATION
Any information given by the Borrower in its Loan Application, in the reports
and other information furnished by the Borrower in accordance with the
Reporting System and the warranties given/deemed to have been given by the
Borrower to the Lenders/Lead Institution is misleading or incorrect in any
material respect.
f) INABILITY TO PAY DEBTS
If, there is reasonable apprehension that the Borrower is unable to pay its
debts or proceedings for taking it into liquidation, either voluntarily or
compulsorily, may be or have been commenced.
g) INADEQUATE INSURANCE
If, the properties and assets offered to the Lenders as security for the Loans
have not been kept insured by the Borrower or depreciate in value to such an
extent that, in the opinion of the Lead Institution, further security to the
satisfaction of the Lead Institution should be given and on advising the
Borrower to that effect such security has not been given to the Lenders.
<PAGE> 39
19
h) SALE, DISPOSAL AND REMOVAL OF ASSETS
If, without the prior approval of the Lead Institution any
land, buildings, structures or plant and machinery of the Borrower are sold,
disposed of, charged, encumbered or alienated or the said buildings,
structures, machinery, plant or other equipment are removed, pulled down or
demolished.
i) REFUSAL TO DISBURSE LOANS BY OTHER FINANCIAL INSTITUTIONS
If the other financial institutions or bank(s) with whom the
Borrower has entered into agreements for financial assistance have refused to
disburse its/their loan(s) or any part thereof or have recalled its/their
loan(s) under their respective loan agreement(s) with the Borrower.
j) PROCEEDINGS AGAINST BORROWER
The Borrower has voluntarily or involuntarily become the
subject of proceedings under any bankruptcy or insolvency law or the Borrower
is voluntarily or involuntarily dissolved.
k) INABILITY T0 PAY DEBTS ON NATURITY
The Borrower is unable or has admitted in writing its
inability to pay its debts as they mature.
l) LIQUIDATION OR DISSOLUTION OF THE BORROWER
The Borrower has taken or suffered to be taken any action for
its reorganisation, liquidation or dissolution.
m) APPOINTMENT OF RECEIVER OR LIQUIDATOR
A receiver or liquidator has been appointed or allowed to be
appointed of all or any part of the undertaking of the Borrower.
n) ATTACHMENT OR DISTRAINT ON MORTGAGED PROPERTIES
If, an attachment or distraint has been levied on the
mortgaged properties or any part thereof or certificate proceedings have been
taken or commenced for recovery of any dues from the Borrower.
o) EXTRAORDINARY CIRCUMSTANCES
If, extraordinary circumstances have occured which make it
improbable for the Project to be carried out and for the Borrower to fulfill
its obligations under the Loan Agreement.
Section 10.2 CONSEQUENCES OF DEFAULT
On the happening of any of the events of default, in addition
to
<PAGE> 40
20
the rights specified in Section 10.1 hereof, each of the Lenders shall be
entitled to appoint and remove from time to time Whole-time Director(s) on the
Board of Directors of the Borrower (such Director (s) are hereinafter referred
to as "the Whole-time Nominee Director(s)"). Such Whole-time Nominee
Director(s) shall exercise such powers and duties as may be approved by the
Lenders and have such rights as are usually exercised by or are available to
a Whole-time Director in the management of the affairs of the Borrower. Such
Whole-time Nominee Director(s) shall not be required to hold qualification
shares nor be liable to retire by rotation and shall be entitled
to receive such remuneration, fees, commission and monies as may be approved by
the Lead Institution. Such Whole-time Nominee Director(s) shall have the right
to receive notices of and attend all General meetings and Board Meetings or any
committee(s) of the Borrower of which they are members.
Any expense that may be incurred by the Lenders or such
Whole-time Nominee Director(s) in connection with their appointment or
directorship shall be paid or reimbursed by the Borrower to the Lenders or as
the case may be, to such Whole-time Nominee Director(s).
Section 10.3 NOTICE TO THE LENDERS ON THE HAPPENING OF AN EVENT OF DEFAULT
If, any event of default or any event which, after the notice,
or lapse of time, or both, would constitute an event of default has happened,
the Borrower shall, forthwith give notice thereof to the Lead Institution in
writing specifying the nature of such event of default, or of such event.
Section 10.4 EXPENSES OF PRESERVATION OF ASSETS OF BORROWER AND OF COLLECTION
All expenses incurred by the Lenders after an event of default
has occurred in connection with:-
(i) preservation of the Borrower's assets (whether then or
thereafter existing) and
(ii) collection of amounts due under the Loan Agreement shall
be payable by the Borrower.
ARTICLE XI
CANCELLATION, SUSPENSION AND TERMINATION
Section 11.1 CANCELLATION BY NOTICE TO THE LENDERS
The Borrower may, by notice in writing to the Lead
Institution, cancel the Loans or any part thereof which the Borrower has not
withdrawn prior to the giving of such notice. Provided that such cancellation
shall be pro-rata for each Lender.
<PAGE> 41
21
Section 11.2 SUSPENSION
Further access by the Borrower to the use of the Loans may be
suspended or terminated by the Lenders/Lead Institution:
a) NON-COMPLIANCE OF TERMS AND CONDITIONS
Upon failure by the Borrower to carry out all or any of the
terms of the Loan Agreement or on the happening of any event of default
referred to in Article X hereof.
b) EXTRAORDINARY SITUATION
If, any extra ordinary situation makes it improbable that the
Borrower would be able to perform its obligations under the Loan Agreement.
c) ASSIGNMENT OR TRANSFER OF PROPERTIES T0 RECEIVER, ASSIGNEE, ETC.
If, the Borrower takes or permits to be taken any action or
proceedings whereby any of its properties shall or may be assigned or, in any
manner, transferred or delivered to any receiver, assignee ' liquidator or
other person, whether appointed by the Borrower or by any Court of Law, whereby
such property shall or may be distributed among the creditors of the Borrower
or the Borrower suffers any charge to be created over its properties in any
legal proceedings.
d) CHANGE IN THE BORROWER'S SET-UP
If, any chance in the Borrower's set-up has taken place which,
in the opinion of the Lead Institution (which shall be final and binding on the
Borrower), would adversely affect the conduct of the Borrower's business or the
financial position or the efficiency of the Borrower's management or personnel
or the execution of the Project.
e) DENIAL OF ACCESS
If, for any reason, the Lenders are denied further access to
their loan(s) facility from the Foreign Lending Agency.
Section 11.3 SUSPENSION TO CONTINUE TILL DEFAULT REMEDIED
The right of the Borrower to make withdrawals from the Loans
shall continue to be suspended until the Lead Institution has notified the
Borrower that the right to make withdrawals has been restored.
Section 11.4 TERMINATION
If any of the events described above or in Article X hereof
has been continuing or if the right of the Borrower to make withdrawals from
the Loans shall have been suspended with respect to any amount of the Loans
<PAGE> 42
22
for a continuous period of thirty days or if the Borrower has not withdrawn the
Loans by the date referred to in the Loan Agreement or such later date as may
be agreed to by the Lenders or if the Lenders are denied access to their
loan(s) by the Foreign Lending Agency, then, in such event, the Lead
Institution may, by notice in writing to the Borrower, terminate the right of
the Borrower to make withdrawals. Upon such notice, the undrawn amount of the
Loans shall stand cancelled. Notwithstanding any cancellation, suspension or
termination pursuant to the aforesaid provisions, all the provisions of the
Loan Agreement shall continue to be in full force and effect as herein
specifically provided.
ARTICLE XII
WAIVER
Section 12. WAIVER NOT TO IMPAIR THE RIGHTS OF THE LENDERS
No delay in exercising or omission to exercise any right, power or
remedy accruing to the Lenders/Lead Institution upon any default under the Loan
Agreement, security documents or any other agreement or document shall impair
any such right, power or remedy or shall be construed to be a waiver thereof or
any acquiescence in such default, nor shall the action or inaction of the
Lenders/Lead Institution in respect of any default or any acquiescence by them
in any default, affect or impair any right, power or remedy of the Lenders/Lead
Institution in respect of any other default.
ARTICLE XIII
APPLICABILITY OF OTHER STATUTES
Section 13. APPLICATION OF OTHER STATUTES
Nothing contained in the Loan Agreement shall prejudice or in any way
affect the rights vested in the Lenders under the Industrial Development Bank of
India Act, 1964 (18 of 1964), Industrial Finance Corporation Act, 1948 (15 of
1948), or any other statute.
ARTICLE XIV
MISCELLANEOUS
Section 14.1 SERVICE OF NOTICE
Any notice or request to be given or made to the Lenders/Lead
Institution or to the Borrower or to any other party shall be in writing.
Such notice or request shall be deemed to have been given or made when it
<PAGE> 43
23
is delivered by hand or despatched by mail or telegram to the party to which it
is required to be given or made at such party's designated address.
Section 14.2 EVIDENCE OF DEBT
a) Each of the Lenders shall maintain, in accordance with
their usual practice, accounts evidencing the amounts from time to time lent by
and owing to them under the Loan Agreement.
b) In any legal action or proceedings arising out of or in
connection with the Loan Agreement, the entries made in the accounts maintained
pursuant to sub-clause (a) above shall be prima-facie evidence of the existence
and amount of obligations of the Borrower as therein recorded.
Section 14.3 BENEFIT OF THE LOAN AGREEMENT
The Loan Agreement shall be binding upon and enure to the benefit of
each party thereto and its successors and assigns.
Section 14.4 HEADINGS
The headings of various Articles and Sections herein and in the Loan
Agreement are inserted for convenience of reference and are not deemed to affect
the construction of the relative provisions.
<PAGE> 44
The Industrial Credit and Investment
Corporation of India Limited
Dear Sirs,
Foreign Currency Loan aggregating US$ 2550,000 equivalent to
about Rs.803 lacs sanctioned by your Corporation to us
With reference to the circular sent by you alongwith your sanction
letter 07??400?? dated October 5, 1994 for the above mentioned Foreign Currency
Loan, we do hereby undertake to your Corporation that we shall submit to your
Corporation (Foreign Exchange Department) quarterly statement in the prescribed
form as and when any part of the Foreign Currency Loan is drawn by us.
We are aware that on the faith of the above undertaking given by us,
you have agreed to consider our eligibility, inter alia, to provide the above
mentioned Foreign Currency Loan and to sign the Heads of Agreement with your
Corporation in respect of the same.
Yours faithfully,
Shri M.L. Tandon
Director
Dated this 11th day of October, 1994.
<PAGE> 1
Exhibit 10.21
LOAN AGREEMENT
(FOREIGN CURRENCY LOAN)
BETWEEN
MODULER ELECTRONICS (INDIA) PVT. LTD.
AS BORROWER
AND
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED
AS LENDERS
<PAGE> 2
LOAN AGREEMENT
--------------
FC-Foreign Currency
-------------------
THIS AGREEMENT made this 18th day of March One Thousand Nine Hundred and
Ninety Six at Bombay between MODULER ELECTRONICS (INDIA) PVT. LTD. a Company
within the meaning of the Companies Act, 1956 (1 of 1956) and having its
Registered Office at 406, Dalamal Towers, Nariman Point, Bombay 400 021
(hereinafter referred to as "the Borrower" which expression shall, unless it be
repugnant to the subject or context thereof, include its successors and
assigns);
AND
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a public
company incorporated under the Indian Companies Act, 1913 (7 of 1913) and having
its registered office at 163, Backbay Reclamation, Bombay 400 020 (hereinafter
referred to as "the Lenders" which expression shall, unless it be repugnant to
the subject or context thereof, include its successors and assigns);
<PAGE> 3
2
ARTICLE - I
DEFINITIONS
1.1 The following terms shall have the following meanings:-
(a) "Due Date" means, in respect of
i) an instalment of principal -- the date on which the instalment falls due
as stipulated in Schedule V hereto.
ii) interest -- the date on which interest falls due as stipulated in
Schedule V hereto.
iii) commitment charge -- the date on which commitment charge falls due as
stipulated in Section 2.3 of Article II hereof.
[SEAL]
<PAGE> 4
(b) "Financing Plan" means the financing plan as described in Schedule III
hereto.
(c) "General Conditions" means the GENERAL CONDITIONS No. GC-FC-88 APPLICABLE
TO FOREIGN CURRENCY LOANS PROVIDED BY FINANCIAL INSTITUTIONS.
(d) "Loan" or "Loans" means the amounts of various foreign currencies
specified in Section 2.1 of Article II hereof or their equivalents in other
foreign currencies used for their purchase, agreed to be provided by the
Lenders for the Project or (as the context requires) so much thereof as may be
outstanding from time to time.
(e) "Project" means the project to be financed as described in Schedule II
hereto.
1.2 GENERAL CONDITIONS
The Loan(s) hereby agreed to be granted by the Lenders shall be subject
to the Borrower complying with the terms and conditions set out herein and also
in the General Conditions a copy of which is annexed hereto. The General
Conditions shall be deemed to form part of this Agreement and shall be read as
if they are specifically incorporated herein.
ARTICLE - II
AGREEMENT AND TERMS OF LOAN
2.1 AMOUNT AND TERMS OF LOAN
The Borrower agrees to borrow from the Lenders and the Lenders agree
to lend to the Borrower out of foreign currencies specified in Schedule IV
hereto, on the terms and conditions contained herein as also in the General
Conditions, the sums to the maximum extent in various foreign currencies set
out in Schedule I equivalent in the aggregate to about Rs.2520 lacs.
2.2A. INTEREST
i) The Borrower shall pay to the Lenders interest on the Loan(s) at the
rate(s) and in the manner provided in Schedule V hereto.
ii) Disbursements made pending creation of final security as stipulated in
Article III hereof shall carry further interest at the rate of 1% per
annum till creation of such security.
iii) Provided however, interest on rupees: defaulted amounts, arrears of
liquidated damages and sums incurred by the Lenders by way of expenses in
terms of Sections 4.11, 4.5 and 4.7 respectively of the General Conditions
shall be payable quarterly on February 20, May 20, August 20 and November
20.
[SEAL]
<PAGE> 5
2.2B INTEREST RATE SURCHARGE
"The Borrower shall pay to the Lenders interest rate surcharge at the
rate of 25% per annum or such other rate Reserve Bank of India (RBI) may
indicate from time to time on the lending rate. The interest rate surcharge will
be payable by the Borrower from the date of drawal of the loan. Such interest
rate surcharge shall be payable quarterly each year along with the interest
payable on the outstanding amounts of the Loan."
2.3 FRONT END FEE
The Borrower shall pay to the Lenders Front End Fee of 1.05% of the
Loan on or before signing this Agreement.
2.4 LAST DATE OF WITHDRAWALS
Unless the Lenders otherwise agree, the right to make drawals from the
Loan(s) shall cease on March 31, 1997.
2.5 REPAYMENT
The Borrower undertakes to repay the principal amount of the Loan(s) in
accordance with the Amortization Schedule set forth in Schedule VI hereto.
2.6 CONVERSION RIGHT IN CASE OF DEFAULT
If the Borrower commits a default in payment or repayment of any
instalment of principal amount of the Loans or interest thereon or any
combination thereof, then, the Lenders shall have the right to convert (which
right is hereinafter referred to as "the conversion right") at its option 20%
of the rupee equivalent of the defaulted amount determined in accordance with
Section 4.11 of Article IV of the General Conditions into fully paid up equity
shares of the Borrower, at par, in the manner specified in a notice in writing
to be given by the Lenders to the Borrower (which notice is hereinafter
referred to as the "notice of conversion") prior to the date on which the
conversion is to take effect, which date shall be specified in the said notice
(hereinafter referred to as the "date of conversion").
i) On receipt of notice of conversion, the Borrower shall allot and issue the
requisite number of fully paid-up equity shares to the Lenders as from the
date of conversion and the Lenders shall accept the shares in satisfaction
of the said defaulted amount(s) in respect of the Loans to the extent so
converted. The amount so converted shall cease to carry interest as from the
date of conversion and the outstanding amount in respect of the Loans shall
stand correspondingly reduced. The equity shares so allotted and issued to
the Lenders shall cease from the date of conversion, the right to receive
proportionately the dividends and other distributions declared or to be
declared in respect of the equity capital of the Borrower. Save as
aforesaid, the said shares shall rank pari passu with the existing equity
shares of the Borrower in all respects. The Borrower shall, at all times,
maintain sufficient unissued equity shares for the above purpose.
[SEAL]
<PAGE> 6
(i) The conversion right reserved as aforesaid may be exercised by the
Lenders on one or more occasions during the currency of the Loan(s) on
the happening of the default as specified in this Section.
(ii) The Borrower assumes and undertakes that in the event of the Lenders
exercising the right of conversion as aforesaid, the Borrower shall
get the equity shares which will be issued to the Lenders as a result
of the conversion, listed with the Bombay Stock Exchange.
ARTICLE III
SECURITY
3.1 SECURITY FOR THE LOAN
(A) The Loan(s) together with all interest, liquidated damages, commitment
charges premia on prepayment or on redemption, costs, expenses and other
monies whatsoever stipulated in this Agreement shall be secured by:
a) a first charge by way of hypothecation in favour of the Lenders of
all the Borrower's moveables (save and except book debts), including
moveable machinery, machinery spares, tools and accessories present
and future, subject to prior charges created and/or to be created:
i) in favour of the Borrower's Bankers on the Borrower's stocks
of raw materials, semi-finished and finished goods,
consumable stores and such other moveables as may be agreed
to by the Lead Institution for securing the borrowings for
working capital requirements in the ordinary course of
business; and
The mortgages and charges referred to above shall rank pari passu with
the mortgages and charges created and/or to be created in favour of:
i) ICICI for its Rupee Loan of Rs.84 lacs.
ii) ICICI for its Foreign Currency Loan equivalent to US $7.55 million.
(B) The Borrower shall make out a good and marketable title to its properties to
the satisfaction of the Lenders and comply with all such formalities as may
be necessary or required for the said purpose.
[SEAL]
<PAGE> 7
3.2 CREATION OF ADDITIONAL SECURITY
If at any time during the subsistence of this Agreement, the Lenders is
of the opinion that the security provided by the Borrower has become inadequate
to cover the balance of the Loans then outstanding, then, on the Lenders
advising the Borrower to that effect, the Borrower shall provide and furnish to
the Lenders, to the satisfaction of the Lenders, such additional security as
may be acceptable to the Lenders to cover such deficiency.
3.3 ACQUISITION OF ADDITIONAL IMMOVEABLE PROPERTIES
So long as any monies remain due and outstanding to the Lenders, the
Borrower undertakes to notify the Lenders in writing of all its acquisitions of
immoveable properties and as soon as practicable thereafter to make out a
marketable title to the satisfaction of the Lenders and charge the same in
favour of the Lenders by way of first charge the same in favour of the Lenders
by way of first charge in such form and manner as may be decided by the
Lenders.
3.4 GUARANTEE
The Borrower shall procure irrevocable and unconditional personal
guarantee(s) from M.L. Tandon in favour of the Lenders for the due repayment
of the Loans and the payment of all interest and other monies payable by the
Borrower in the form prescribed by the Lenders and to be delivered to the
Lenders before any part of the Loan is advanced. The Borrower shall not pay any
guarantee commission to the said Guarantor(s).
ARTICLE - IV
APPOINTMENT OF NOMINEE DIRECTOR(S)
The Borrower agrees that the Lenders shall be entitled to appoint and
withdraw from time to time one Director on the Board of Directors of the
Borrower during the currency of this Agreement.
ARTICLE - V
SPECIAL CONDITIONS
The Loan(s) hereby granted shall also be subject to the Borrower
complying with the special conditions set out in Schedule VII hereto.
[SEAL]
<PAGE> 8
ARTICLE - VI
EFFECTIVE DATE OF AGREEMENT
This Agreement shall become binding on the Borrower and the Lenders on and
from the date first above written. It shall be in force till all the monies due
and payable under this Agreement are fully paid off.
[SEAL]
<PAGE> 9
SCHEDULE I
PARTICULARS OF LOANS
<TABLE>
<CAPTION>
Name of the Lender Loan
- ------------------ ----
(Equivalent)
RC Equal US$ (Rs. in lacs)
---- --------- -------------
<S> <C> <C> <C>
The Industrial Credit and US 7,000,000 2520
Investment Corporation of India Dollars
Limited (ICICI)
163 Backbay Reclamation
Bombay 400 020
</TABLE>
[SEAL]
<PAGE> 10
9
SCHEDULE II
PROJECT
The Borrower proposes to expand existing facilities for manufacture of
Winchester Disk drives for computers from 500,000 nos. per annum to 1,200,000
nos. per annum, at Madras Export Processing Zone, Madras.
The Loan(s) shall be utilised by the Borrower for import of Capital
Goods.
<PAGE> 11
10
SCHEDULE III
FINANCING PLAN
A. The total estimated cost of the project is Rs.8290 made up as under:
<TABLE>
<CAPTION>
(Rs in lacs)
Rupee equivalent
Rupee of foreign currency Total
Cost cost cost
----- ------------------- ------
<S> <C> <C> <C>
Land & Site Development
Buildings
Plant & Machinery -
a) Imported
i) CIF value 6705 6705
ii) Import Duty
iii) Clearing & Forwarding
Charges
b) Indigenous
c) Foundation & Erection Charges
Miscellaneous fixed assets 190 190
Preliminary and Capital Issue
expenses including interest
during construction period 344 344
Contingencies
Margin money for working 1051 1051
capital ----
Total of Rupee &
foreign currency cost 8290
====
</TABLE>
B. The proposed sources of financing are as follows:
<TABLE>
<CAPTION>
(Rs. in lacs)
<S> <C> <C>
SHARE CAPITAL 1990
FOREIGN CURRENCY LOANS
ICICI 3600
INTERNAL RESOURCES 1319
UNSECURED LOANS/DEPOSITS 1296
SUBSIDY 85
----
TOTAL 8290
====
</TABLE>
The Rupee figure has been arrived at on the basis of rates of exchange
of the foreign currencies involved prevailing at the time of sanction of the
Loan(s) and is subject to revision based on the fluctuations in foreign
currency rates.
[SEAL]
<PAGE> 12
11
SCHEDULE IV
The Loan referred to in section 2.1 herein is comprised of the
following:
(i) USD 7,000,000
which is agreed to be provided as follows:
(i) USD 7,000,000
equivalent in the aggregate to US$ 7,000,000 (hereinafter referred to as the
("Bayerische Loan") (which expression shall, unless expressly provided
otherwise, mean the aggregate of the amounts of various foreign currencies of
their equivalents in other foreign currencies used for their purchase expressed
in US$ equivalent or so much thereof as may be outstanding from time to time)
out of the facility available to ICICI in terms of the Facility Agreement
entered into between ICICI, Bayerische Landesbank Cirozentrale and other Banks
mentioned in the Facility Agreement.
[SEAL]
<PAGE> 13
: 12 :
SCHEDULE V
PART I
SUB PART h
(BAYERISCHE LOAN)
The following provisions shall apply to the Bayerische Loan:
1. APPLICATION OF PROCEEDS
-----------------------
No part of the Bayerische Loan shall be used for any purpose other than
for the import of capital goods.
2. INTEREST
--------
The Borrower shall pay to ICICI interest on the principal amount of the
Bayerische Loan outstanding from time to time quarterly on February 20, May 20,
August 20, and November 20 at a floating rate of 4% over and above the US$
LIBOR plus applicable interest tax as may be advised by ICICI to the Borrower.
However, the last interest payment date shall be on February 20, 20003.
3. COMPUTATION OF INTEREST & OTHER CHARGES
---------------------------------------
Interest and other charges shall accrue from day to day and shall be
calculated on the basis of a year of 360 days and the actual number of days
elapsed.
[SEAL]
<PAGE> 14
13
4. REPAYMENT
Bayerische Loan is repayable in accordance with the Amortization
Schedule set forth in Schedule VI Part I Sub part - h hereto. The Amortization
Schedule has been drawn up on the basis of the aggregate U.S. equivalent of the
foreign currencies involved at the rates of exchange prevailing at the time of
sanction of the Bayerische Loan and is subject to revision on the basis of
rates of exchange prevailing at the time of each disbursement.
5. PREPAYMENT AND FORWARD CONTRACTS
Unless expressly agreed to by ICICI and subject to payment of such
premium as may be stipulated by ICICI the Borrower shall not be entitled to
prepay in whole or in part of the Bayerische Loan before the due date nor shall
be entitled to enter into forward contracts to buy foreign currencies in
respect of the Bayerische Loan or in respect of payment of interest or other
payments herein.
6. DUE DATE
If the Due Date referred to herein falls on a day which is not a
business day, Due Date shall be extended to the next succeeding business day,
unless such day falls in the next succeeding calendar month, in which event,
such due date shall be immediately preceding business day. Business day shall
be construed as a reference to a day (other than Saturday or Sunday) on which
banks are generally open for business in Singapore, London, New York City, Hong
Kong and Bombay.
[SEAL]
<PAGE> 15
7. LAST DATE OF WITHDRAWAL
-----------------------
Unless otherwise agreed to by ICICI, no part of the Bayerische Loan shall
be drawn after January 15, 1997.
[SEAL]
<PAGE> 16
15
SCHEDULE VI
PART I
SUB PART h
AMORTISATION SCHEDULE
(BAYERISCHE LOAN)
<TABLE>
<CAPTION>
IN US$
Principal amount
Date payment outstanding
due Payment of Principal after each payment
- -------------------------------------------------------------------------------
<S> <C> <C>
7,000,000
May 20, 1998 583,333 6,416,667
August 20, 1998 583,333 5,833,334
November 20, 1998 583,333 5,250,001
February 20, 1999 583,333 4,666,668
May 20, 1999 583,333 4,083,335
August 20, 1999 583,333 3,500,002
November 20, 1999 583,333 2,916,669
February 20, 2000 583,333 2,333,236
May 20, 2000 583,333 1,750,003
August 20, 2000 583,333 1,166,670
November 20, 2000 583,333 583,337
February 20, 2001 583,333 ---
</TABLE>
[SEAL]
<PAGE> 17
16
SCHEDULE - VII
SPECIAL CONDITIONS
1. The Company shall implement the Project within the overall project cost of
Rs.8290 lacs ("the Project Cost") and in accordance with the financing plan
("the Financing Plan") both as agreed to between the Company and ICICI and
which will be set out in the loan Agreement and shall commence commercial
production on or before April 1, 1997 ("the Completion Date").
2. The Company shall, out of the envisaged cash accruals of Rs.2330 lacs during
the period 1/4/96 to 31/3/97, utilise a sum of Rs.1977 lacs for meeting a
part of the cost of the Project and/or other requirements of funds.
3. The Company shall raise Rs.2010 lacs by issue of Equity Shares to promoters
to the satisfaction of ICICI for meeting a part of the cost of the Project
and/or other requirements of funds.
4. Before the loans become effective -
The Company shall raise at least 50% of the abovementioned equity capital of
Rs.2010 lacs, i.e. at least Rs.1005 lacs, to the satisfaction of ICICI for
meeting a part of the cost of the project.
5. The Company shall obtain State Subsidy of Rs.85 lacs for meeting a part of
the cost of the Project. In the event the Company is unable to obtain the
subsidy, the Company shall raise funds on terms satisfactory to ICICI to
meet the shortfall.
6. The Company shall raise unsecured loan of Rs.1296 lacs, to the satisfaction
of ICICI for meeting a part of the cost of the project. The unsecured loans
shall not carry any interest till the Company commences payment of dividend.
Thereafter, the interest on such loan shall be equal to the interest on
secured loans or the percentage of dividend, whichever is lower.
Before the loans become effective -
The Company shall raise at least 50% of the abovementioned unsecured loans
of Rs.1296 lacs, i.e. at least Rs.648 lacs, to the satisfaction of ICICI for
meeting a part of the cost of the project.
[SEAL]
<PAGE> 18
17
7. The Company shall undertake/furnish an undertaking from M.L.Tandon in
terms of Section 8(g) of GC-FC-88.
8. The Company shall make satisfactory arrangements with its bankers for
meeting its additional working capital requirements and shall furnish a
letter from its bankers in this regard.
9. The Company shall satisfy ICICI that the physical progress as well as
expenditures incurred on the Project are as per the original schedule.
To this end, the Company agrees and undertakes to furnish to ICICI such
information and data as may be required by ICICI.
10. The Company shall suitably among its Articles of Association to provide
for appointment of nominee director by ICICI on the Board of the
Company.
11. ICICI shall be entitled to appoint one nominee of the Board of Directors
of the Company during the currency of ICICI's assistance.
[SEAL]
<PAGE> 19
18
IN WITNESS WHEREOF the Borrower has caused its Common Seal to be affixed
hereto and to duplicate hereof and ICICI has caused this Agreement to be
executed in duplicate on the day, month and year first above written as
hereinafter appearing:
<TABLE>
<S> <C>
THE COMMON SEAL of Moduler
Electronics (India) Pvt. Ltd.
has pursuant to the Resolution of
its Board of Directors passed in
that behalf on the 29th day of
February 1996 hereunto been affixed
in the presence of Shri M.I. Trade
Director who have signed these
presents in token thereof and
Shri Bhupendra V. Shah authorized
person who has countersigned the
same in token thereof. /s/ Bhupendra V. Shah
SIGNED AND DELIVERED by the
within named Lenders by the hand of
Shri I. Raghacudran an authorized
official of ICICI, ICICI acting as
the Lender. /s/ Shri I. Raghacudran
</TABLE>
<PAGE> 1
EXHIBIT 10.25
DEVELOPMENT AGREEMENT
DEVELOPMENT AGREEMENT (the "Agreement") made as of the 16th of June 1994,
by and between COMPAQ COMPUTER CORPORATION, a Delaware corporation having its
principal place of business at 20555 S.H. 249, Houston, Texas 77070 [hereafter
"Compaq"] and JT STORAGE, INC., a Delaware corporation having its principal
place of business at 1289 Anvilwood Avenue, Sunnyvale, California 94089
[hereafter "JTS"].
PRELIMINARY RECITALS
WHEREAS, Compaq (i) is in the business of designing, manufacturing and
marketing Computer Products, including hard disk drives ("HDD"), computer
options/accessories, and software for such HDDs, and (ii) possesses expertise
and owns proprietary rights related to its products, including, but not limited
to, copyrights, know-how, inventions, trade secrets, patents, patent
applications and the like; and
WHEREAS JTS desires to promote its HDDs to the personal computer industry;
and
WHEREAS JTS desires to have Compaq endorse and adopt JTS's proposed design
for HDDs as an industry standard; and
WHEREAS Compaq's endorsement of JTS's proposed design for HDDs as an
industry standard will aid in the adoption by the industry at large; and
WHEREAS Compaq has agreed to assist JTS's efforts to promote and develop an
industry standard for certain HDD technology in exchange for the covenants,
licenses, and consideration recited herein; and
WHEREAS, the parties desire to develop hardware and software products which
will incorporate existing technology of JTS, and additional new technology to be
developed by JTS; and
WHEREAS, Compaq is a manufacturer of personal computer products sold and
distributed on a world-wide basis; and
WHEREAS, JTS has demonstrated some small form factor HDD technology and
product concepts which appear to be of particular use to Compaq for its personal
computer products; and
WHEREAS, JTS has certain technology that Compaq desires to utilize in its
personal computer products and JTS desires to complete development on
<PAGE> 2
such technology and make products using such technology available for use by
Compaq on the terms and conditions set forth herein; and
WHEREAS, JTS desires to License certain future additional developments
to Compaq, as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and undertakings hereinafter set forth, the parties hereto hereby
agree as follows:
AGREEMENTS
----------
1.0 Certain Definitions
- -----------------------
1.1 Acceptance and Accepted means strict compliance with the provisions
of the applicable technical specification unless compliance is waived or
modified in writing by Compaq and shall be satisfied by JTS's submittal of the
software (firmware) and/or hardware (as specified by the Development Plan) with
a statement that such software and/or hardware [hereafter collectively referred
to as "Product"] complies with the applicable technical specification, provided,
however, that Compaq, in its sole discretion shall determine whether such
Product is in compliance with the applicable specification. After submittal by
JTS, Compaq shall test such Product, in randomly selected commercially
reasonable quantities, to verify compliance and to determine whether JTS can
reasonably produce the Product in commercial quantities. Compaq's tests shall be
performed as soon as commercially practical. In the event that the Product does
not comply with the applicable specifications (including but not limited to the
engineering specifications attached hereto, shock and vibration specification
and other specifications provided by Compaq), Compaq shall provide detailed
information of such non-compliance to JTS. In the event that Compaq does not
provide JTS with a written notice that the Product submitted by JTS is in
compliance with the applicable specifications within ten business (10) days [the
"First Period"] then in such event the Product submitted by JTS shall be deemed
to be in non-compliance. Thereafter, JTS shall have ten business (10) days [the
"Section Period"] to correct such non-compliance and resubmit the Product for
Acceptance. Compaq shall again have ten (10) business days [the "Third Period"]
to retest the Product and provide JTS with details, if any, of non-compliant
operation. In the event that Compaq does not provide JTS with a written notice
that the Product submitted by JTS is in compliance with the applicable
specifications during such Third Period then in that event the Product submitted
by JTS shall be deemed to be in non-compliance. In the event that Compaq does
not respond in writing within the aforesaid First Period and/or Third Period
with a written acceptance of the Product submitted, such submitted Product shall
be deemed to be in non-compliance and shall not be Accepted. The submittal by
JTS of a non-compliant Product shall not toll a Project Milestone or satisfy a
Project Milestone. In the event that JTS submits a non-
<PAGE> 3
compliant Product, Compaq may serve a notice of material breach and the Cure
Period shall run concurrently with any attempts by JTS to correct a
non-compliant Product and such Cure Period shall run concurrently with Compaq's
testing and verification program. Notwithstanding the foregoing, Acceptance of
a Product by Compaq shall not relieve JTS from its obligation to resolve any
hardware and/or software bugs which are discovered after Acceptance.
1.2 "Additional Developments" as applied to JTS, means any
improvements in, modifications on, derivative works of, variations of, new
designs of, discoveries related to, or developments utilizing any of the
Licensed Technology or any other additional development (including
reproduction tooling and drawings and product design and processes and
Accessories), whether separately developed, licensed or otherwise obtained by
or on behalf of such Person or jointly developed, licensed or otherwise
obtained by or on behalf of such Person during the term of this Agreement now
existing or hereafter developed, including patents and patent applications and
licenses therefore in each case, solely in connection with the development,
manufacture or sale of HDDs; provided that if Additional Developments are
obtained by a party hereto from an unaffiliated third party then the
obligations of the party hereto to license such Additional Development to the
other parties hereto shall be conditioned upon obtaining the consent of such
Unaffiliated third party to such license, which consent the party hereto shall
undertake its best efforts to obtain.
1.3 "Affiliate" as applied to any Person means any other Person
directly or indirectly controlling, controlled by, or under common control with,
that Person. For purposes of this definition, the term "control" (including,
with correlative meanings, the terms controlling, controlled by and under
common control with), as applied to any Person, means the possession, directly
or indirectly, of the power to vote 50% or more of the Voting Stock (or in the
case of a Person which is not a corporation, 50% or more of the ownership
interest, beneficial or otherwise) of such Person or otherwise to direct or
cause the direction of the management and policies of that Person, whether
through the ownership of Voting Stock or other ownership interest, by contract
or otherwise. All executive officers, 50% or greater shareholders and directors
of any Person shall be deemed to be Affiliates of such Person for the purposes
of this Agreement. "Unaffiliated" shall refer to a person or entity which is
not an Affiliate.
1.4 "Change in Corporate Control" means any circumstance in which (i)
any person, entity or group (other than pursuant to a venture capital
financing) acquires direct or indirect beneficial ownership [as defined in Rule
13d-3 under the Exchange Act of 1934 as Amended] in the aggregate securities of
a party representing more than thirty percent (30%) of the total combined
voting power of such party's then issued and outstanding voting securities,
(ii) the sale of all or substantially all of the assets of a party occurs to
any person or entity which is not a wholly-owned subsidiary of such party,
(iii) a party is liquidated, or (iv) a
<PAGE> 4
party experiences a change in the composition of a majority of its Board of
Directors as a result of an election contest.
1.5 "Derived Program" means, individually or collectively, any and all
derivations or Source made by compiling and/or processing of Source, or
modified, enhanced or extended versions thereof, to create a machine-readable
object code (binary), intermediate code or interpreted form, and all copies or
portions thereof. Derived Programs also include Documentation. For purposes of
this Agreement, Derived Programs shall be construed to be "derivative works"
and "compilations," within the meaning of such terms in the Copyright Act (17
U.S.C. Section 101 et seq.).
1.6 "Development Plan" means the product development and design plan
which is set out in Exhibit A.
1.7 "Documentation" means all written materials furnished hereunder by
either party, including, but not limited to, user and maintenance manuals, and
materials useful for designing, developing, testing, marketing and maintaining
products, and providing training related thereto.
1.8 "Effective Date" shall mean the date last affixed on the signature
line of this Agreement.
1.9 "Filing" means any documentation, application, filing,
registration or the like required to perfect the parties' interest in the
developed Technology under statutory intellectual property rights protection
mechanisms.
1.10 "Future Generation Products" means any HDD product, other than
the Nordic Series, that utilizes the Licensed Technology or Additional
Developments, and was developed or in development prior to end of the Term of
this Agreement.
1.11 "HDD" shall mean hard disk drive in any form factor or size.
1.12 "Licensed Products" means the Nordic Series and the Future
Generation Products.
1.13 "Licensed Technology" all technical information and intellectual
property of JTS, including without limitation, patents, patent applications and
copyrights (and all extensions, continuations, continuations in part,
divisions, reexaminations and reissues thereof), trade secrets, inventions,
source codes, object codes, flow charts, processes, techniques, specifications,
drawings, parts layouts, parts lists, all technical information and other
intellectual property pertaining to Parts, circuitry, tooling and testing
requirements, know-how, manuals and other technical data and support
documentation, whether or not patentable or copyrightable and whether or not
actually patented or copyrighted.
<PAGE> 5
1.14 "Nordic Series" means any HDD with a width of between 3.25 and
3.75 inches and a height of less than .40 (four-tenths) inches, and all
Licensed Technology pertaining principally thereto.
1.15 "JTS Patents" means all domestic and foreign patents and utility
models which issue from any applications filed by or for JTS and/or its
Subsidiaries during the Term of this Agreement but does not include design,
ornamental, industrial design patents, or design registrations.
1.16 "Person" means a natural person, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization or a governmental entity or any department, agency or political
subdivision thereof.
1.17 "Project Milestones" means that set of milestones which is set
forth in Exhibit B.
1.18 [*]
1.19 "Source" means software (firmware) source code provided or
developed under this Agreement, and any portion thereof. Source is provided in
human-readable form and contains specific algorithms, instructions, plans,
routines and the like, for controlling the operation of a central processing
unit (including microprocessors, controllers, etc.), or otherwise used by a
central processing unit to do a particular job or solve a particular problem.
Machine-readable form (a "Derived Program") is derived upon compilation of such
Source. Source may be provided as printed listings of code or on magnetic
media, and includes any Documentation and information related to Source. Source
includes corrections, modifications, and enhancements thereto by JTS during the
Term.
1.20 "Subsidiary" means any entity of which fifty percent (50%) or more
of the voting rights are owned or controlled, directly or indirectly, by a
party hereto, provided, however, that such entity shall be deemed to be a
Subsidiary only for so long as such ownership or control exists.
1.21 "Technology" means, Background Technology, developed Technology or
Residuals, and includes, but is not limited to, technical information, data and
processes, whether tangible or intangible, including, without limitation, any
and all techniques, discoveries, inventions, copyrights, mask works, VHSIC
hardware description language ("VHDL") descriptions, net
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 6
lists, know-how, patents (including any extension, reissue or renewal
patents), patent, mask work or copyright applications, inventor certificates,
trade secrets, designs, drawings, specifications, schematics, software programs
(including Source and object codes), microcode, operating and instructional
manuals, magnetic tapes, methods of production and any other proprietary
information.
1.22 "Term" shall mean the period commencing with the execution of this
Agreement and ending on the fifth anniversary of this agreement. This Agreement
shall automatically renew for an additional five (5) year period, if Compaq is
purchasing HDDs from JTS in commercially reasonable quantities during the fifth
year.
1.23 "Use" or "Used" means the application, exploitation,
commercialization and sublicensing of Technology, including (i) modifying
Technology to form derivative works, (ii) incorporating portions of original or
modified Technology into products, (iii) research, design, experimentation,
development, or marketing of products, and (iv) making, having made, leasing,
selling or otherwise transferring hardware Background Technology in products.
2.0 Development of Nordic HDD
A. JTS agrees to develop the Nordic HDDs in conformance with the
Development Plan attached hereto as Exhibit A and in conformance with the
Project Milestones as set forth in the attached Exhibit B. JTS agrees that the
Project Milestones shall not have been satisfied until the Nordic design is
Accepted by Compaq. Failure to meet a Project Milestone, produce an HDD in
conformance with the Development Plan, and/or failure to design an HDD in
conformance with the Nordic Technical Specifications shall be deemed to be a
material default of this Agreement.
B. JTS further agrees that the Nordic HDDs shall be in strict
conformance with the Nordic Technical Specifications attached hereto as Exhibit
C. The parties agree that to the extent that Exhibit C contains "TBDs" (To Be
Determined) such information shall be inserted into the specification at a later
date and that such information shall be negotiated in good faith by the parties
prior to July 30, 1994 unless otherwise agreed to in writing by both parties.
JTS agrees that the information designated as "TBD" is not material and will
not result in any changes to the Milestone Dates, Schedule, and/or result in
additional cost. To the extent that JTS later finds that the information
designated as "TBD" will impact the Milestone Dates, Schedule, and/or result in
additional cost, JTS will notify Compaq in writing within five (5) business days
of the time that Compaq provides JTS with the information designated as "TBD"
which has resulted in a change to the Milestone Date, Schedule, and/or resulting
in additional cost. In the event that JTS does not notify Compaq within five (5)
business days, then in
<PAGE> 7
such event the information furnished as a "TBD" will be deemed to have no
impact on the Milestone Dates, Schedule, and/or cost of the project.
C. In consideration for JTS' agreement to design the Nordic HDD in
conformance with the Development Plan and the Project Milestones and in
conformance with the Nordic Technical Specifications, Compaq shall pay [*]
as non-recurring engineering charges (NRE) to JTS for the development of two
Nordic HDDs, a three-inch (3"), single disk, seven millimeter (7 mm) high RDS
(Nordic 1) and a three-inch (3"), dual disk, ten millimeter (10 mm) high HDD
(Nordic 2) (hereafter collectively referred to as "Nordic HDDs").
The NRE charges referred to above shall be payable as follows:
[*]
D. In the event of a material default by JTS, JTS agrees to refund any
NRE moneys advanced by Compaq. JTS further agrees that in the event of a
material default by JTS, Compaq at its sole option, may apply the NRE previously
paid by Compaq, as an offset against its purchases of other HDD (e.g. Palladium
or Sterling) from JTS. The offset may be applied at any time and in any
increments which Compaq may in its sole judgment effect.
E. In consideration of the covenants and obligations set forth in this
Agreement, JTS agrees that it shall not undertake any other development projects
for any third party and that it will focus the appropriate resources to the
development of the Nordic HDDs. A breach of this provision shall be deemed to be
a material breach of this Agreement.
F. JTS agrees that Compaq shall have no obligations to provide any
technology, licenses, firmware, development resources, engineering resources or
any contribution, other than the NRE listed above, to the Nordic development
efforts.
G. In consideration of the covenants and obligations set forth in this
Agreement, Compaq will have a first right of refusal on all of Nordic production
for a period of [*] commencing with volume production of Nordic HDDs.
Additionally, JTS agrees that during the Term of this Agreement, Compaq shall
[*] Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE> 8
have a right of first refusal to license and/or otherwise acquire any newly
developed JTS product and/or technology on a right of first refusal and on
pricing and royalties which are [*] .
H. Except for any of its pre-existing obligations to TEAC, JTS agrees
not to license the Nordic design to a third party manufacturer.
I. In consideration of the convenants and obligations set forth in this
Agreement, JTS agrees that Compaq will have price preferences which shall result
in Compaq's price being at least [*] lower than any price paid by any other
party for JTS' HDDs, such price preferences commencing with volume production
of Nordic HDDs and shall extend for the initial Term of this Agreement. In the
event this Agreement is extended beyond the initial Term, then in such event
Compaq will have a price preference which shall result in Compaq's price being
at least [*] lower than any price paid by any other party for JTS' HDDs.
J. In consideration of the covenants and obligations set forth in this
Agreement, JTS agrees not to market the Nordic HDDs to any third party before
the Nordic HDDs are Accepted by Compaq and JTS further agrees that it will not
sell any Nordic HDDs to any third party for the [*] . JTS shall be free to
market Nordic HDDs to third parties during the [*] provided however, that
marketing efforts shall not include the sale of Nordic HDDs to such third
parties in contravention of the [*] . Additionally, JTS agrees that it will
not sample in quantities exceeding two (2) Nordic HDDs to any third party
during the [*] .
K. Following Acceptance by Compaq of the Nordic HDDs and - provided
further that JTS is able to supply Compaq with quantities of Nordic HDDs as set
out in the applicable purchasing documents within the schedule provided in such
purchasing documents, if Compaq fails to fulfill its minimum purchase
obligations of Nordic HDDs (as such obligation is set forth in the accompanying
purchasing documents), then in that event JTS shall notify Compaq of its
default. In the event that Compaq fails to cure such default within thirty (30)
days of such notice, then in such event JTS shall be relieved of any further
obligations with respect to the [*] . Notwithstanding the foregoing, Compaq
and JTS agree that Compaq will not be declared to be in default of its
purchasing obligations if JTS is not able to deliver HDDs on the schedule
agreed to in writing by the parties. JTS further acknowledges that in the
event Compaq is required to place orders for HDDs with an alternate supplier
because of reasonable uncertainty of JTS' delivery, such decision may result
in Compaq's inability to purchase HDDs from JTS. JTS agrees that such
inability shall not be considered as a default condition.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 9
L. Upon expiration of the [*] , and in consideration of the
covenants and obligations set forth in this Agreement, Compaq will receive a
royalty of [*] HDD for each Nordic HDD sold to a third party, such royalty
payable for the initial Term of this Agreement. In the event that this Agreement
is extended beyond the initial Term, then in such event, Compaq will receive a
royalty of [*] HDD for each Nordic HDD sold to a third party. The foregoing
royalties shall be payable quarterly in accordance with the provisions of this
Agreement and subject to the audit provision of this Agreement.
M. In consideration of the covenants and obligations set forth in this
Agreement, Compaq will be licensed to use the Nordic designs [hereafter
"Licensed Technology"] to make and have made any HDDs, for use in Compaq's
products; such license shall permit Compaq to use the Nordic design on a
royalty-free basis in the event that JTS is unable to meet Compaq's volume or
shipment schedule and such schedule is set forth in a mutually agreed Corporate
Purchase Agreement, or in the event of a material default on the Nordic
development program. Compaq's right to use the Nordic design shall be of
sufficient scope to permit Compaq to improve/modify the JTS design.
N. Provided that JTS is not in default and in the event that Compaq in
its sole discretion chooses to have Nordic HDDs manufactured by a third party
after Acceptance of the Nordic design, then in that event Compaq shall pay JTS a
royalty at the rate of [*] HDD during the initial Term of this Agreement;
such HDDs shall bear JTS' trademarks. In the event that this Agreement is
extended beyond the initial Term of this Agreement. Compaq's royalty obligation
shall be reduced from [*] HDD to a royalty of [*] HDD Compaq's right to
use the Licensed Technology and the Nordic design shall be of sufficient scope
to permit Compaq to improve/modify the JTS design.
O. In consideration of the foregoing covenants and obligations set
forth above by JTS, Compaq agrees that it will design the Nordic HDD products
into at least one of its computer products and further agrees to place purchase
orders for the Nordic HDDs as set forth in the Corporate Purchase Agreement.
3.0 Compaq's Purchasing Obligations
Upon Compaq's Acceptance of the Nordic HDDs, qualification of JTS'
manufacturing operations and compliance with other terms and conditions as set
forth in Compaq's purchasing documents, (including but not limited to Corporate
Purchase Agreement (CPA)); Compaq will place purchase orders towards the
purchase of a minimum quantity of [*] HDDs over a
two (2) year period. Compaq's obligations to purchase HDDs shall be as more
specifically set forth in the accompanying CPA and purchasing documents.
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE> 10
4.0 Transfer of Licensed Technology
4.1 Delivery by JTS
A. Licensed Technology and Additional Developments. As of the date
of this Agreement, JTS will deliver to Compaq copies or originals of all of the
Nordic Licensed Technology in its possession. From time to time during the term
of this Agreement in a reasonably prompt manner as, JTS shall, at its sole
expense, deliver to Compaq in written form, and such other useful format and
media as may be reasonably required for the manufacture and support of the
Licensed Products, all Licensed Technology and Additional Developments that
come into the possession of JTS or any of its Affiliates not previously so
delivered.
B. Disclosure of Additional Developments. Without limiting the
foregoing, with respect to Additional Developments, JTS shall at the time this
Agreement is executed and delivered and from time to time thereafter; but in
no event less frequently than quarterly, disclose to Compaq in writing and
confer with it as to all Additional Developments under consideration or in
development by or on behalf of JTS or any of its Affiliates.
4.2 Confidentiality.
A. JTS and Compaq each agree to undertake all reasonable efforts
to treat, and to cause each of its Affiliates, licensees and sublicensees to
treat, as confidential all proprietary information with respect to the Licensed
Technology and Additional Developments. Each of the parties hereto acknowledge
that another party hereto may find it necessary to disclose general
descriptions of proprietary information during the conduct of its business to
banks and other financial institutions contemplating the provision of project
financing to such party. In addition, each of the parties hereto acknowledge
that another party hereto may find it necessary to disclose proprietary
information in connection with the proper grant of sublicenses to parties other
than a party hereto. Under such circumstances, JTS or Compaq, as the case may
be, may make such information available to third parties to the limited extent
necessary for such third party to fulfill its supply or other permitted
purposes, provided that such party shall first obtain from the recipients, a
fully-executed confidentiality agreement which is at least as restrictive as
the confidentiality agreement contained herein; provided, however, that the
foregoing shall not restrict Compaq's or JTS's right to provide technical
information (other than the Restricted Ancillary Technology) and test data that
is reasonably requested by customers in the ordinary course of business.
B. With respect to information not subject to Section 4.2(A)
above, each of JTS and Compaq agree to undertake all reasonable efforts to
treat, and to cause each of its Affiliates to treat, as confidential all other
proprietary information of any party hereto obtained through its relationship
with another
<PAGE> 11
party hereto established hereunder or otherwise, and will not disclose any such
information to a third party except as necessary to comply with its obligations
to TEAC but in no event shall JTS disclose any Compaq Confidential Information,
or otherwise use such information for its own purposes.
C. Neither JTS nor Compaq shall be bound by the provisions of this
Section 4.2 with respect to information which (a) was previously known to the
recipient at the time of disclosure; (b) is in the public domain at the time of
disclosure; (c) becomes a part of the public domain after the time of
disclosure, other than through disclosure by the recipient or some other third
party who is under an agreement of confidentiality with respect to the subject
information or obtained the information from the recipient; (d) is required to
be disclosed by law or (e) is disclosed by a third party not bound by any
agreement of confidentiality with respect to such information which third party
did not obtain from the recipient.
D. Each of JTS and Compaq shall take action as another party hereto
may reasonably request from time to time to safeguard the confidentiality of
any information subject to the terms of this Section 4.2.
E. To the extent that United States Export Control Regulations, or
similar laws of any jurisdiction, are applicable, neither of JTS nor Compaq
shall, without having first fully complied with such regulations, (i) knowingly
transfer, directly or indirectly, any unpublished technical data obtained or to
be obtained from the other party hereto to a destination outside the United
States, or such other relevant jurisdiction, or (ii) knowingly ship, directly
or indirectly, any product produced using such unpublished technical data to
any destination outside the United States, or such other relevant jurisdiction.
F. The obligations of JTS and Compaq under this Section 4.2 shall
survive the expiration or earlier termination of all or any part of this
Agreement.
4.3 Support of Licensed Technology. From time to time under this
Agreement, each of the parties hereto shall provide the other parties hereto
with any support materials that they shall have on hand and which shall be
reasonably requested for the manufacture, of the Licensed Products as provided
for herein, including, without limitation, any manuals, reports, specifications
or drawings required by customers to use the Licensed Products in the
manufacture of their products. Each of Compaq and JTS shall also allow the
other access to each of their engineering staffs and will allow each others
engineers to visit each of their manufacturing, or research facilities, for the
purpose of providing or receiving support of the technology licensed by each of
them hereunder.
5. Licensing Matters
5.1 Grant of License by JTS. Subject to the terms of this Agreement,
JTS hereby grants to Compaq:
<PAGE> 12
A. Nonexclusive Rights to Manufacture. The nonexclusive right and
license to manufacture the Licensed Products, and to use the Licensed
Technology and any Additional Developments made by JTS and/or its Affiliates in
connection therewith.
B. Nonexclusive Rights to Sell. The nonexclusive right and license to
sell the Licensed Products, in Compaq Products or as options for use in Compaq
Products, and to use the Licensed Trademarks, the Licensed Technology and any
Additional Developments made by JTS and/or its Affiliates in connection
therewith.
C. Nonexclusive Rights to Use. The nonexclusive right to use the
Licensed Technology and Additional Developments made by JTS and/or any of its
Affiliates for the purpose of making Additional Developments.
5.2 Sublicensing. The licenses granted in Section 5.1 above shall not
include the right to sublicense to a third party, except (i) that either party
may sublicense such licenses in connection with the manufacturing of Nordic HDDs
and/or parts and accessories therefore, for use in the manufacture or assembly
of finished goods to fulfill orders placed by Compaq, and, (ii) that either
party may sublicense their rights to manufacture or assemble to a third party
making products to Nordic specifications as necessary to fill Compaq orders for
Nordic HDDs and under the tradenames or trademarks of JTS.
Further, the parties shall from time to time consider in good faith the
granting of additional sublicenses to other manufacturers for the purpose of
providing multiple sourcing requested by Compaq.
6.0 Royalty Payments
6.1 Calculation of Royalties Payable by Compaq. Compaq shall be
responsible for only one royalty on each Nordic HDD manufactured by Compaq
pursuant to its royalty-bearing license irrespective of the number of patents,
patent claims, copyrights, trademarks, trade names or other types of Licensed
Technology and Additional Developments that may pertain to such Future
Generation Product. Royalties paid shall be net of any returns.
6.2 Calculation of Royalties Payable by JTS. JTS shall be responsible
for only one royalty on each Nordic HDD sold to a third party [hereafter
sometimes referred to as a "Market Development Royalty"] pursuant to the royalty
provisions of this agreement. Royalties paid shall be net of any returns.
6.3 Payment of Royalties. Royalties shall be based on sales made in
any given calendar quarter as reflected in Compaq's or JTS invoices (as the case
may be) to its customers, as the case may be, in such calendar quarter. All
<PAGE> 13
royalty payments for each calendar quarter shall be made within sixty (60) days
subsequent to the end of such quarter, and shall be subject to any applicable
withholding tax requirements. Each of JTS and Compaq agrees to maintain accurate
and complete records showing Nordic HDDs sold by it and to comply with such
further requirements as set forth in the Record Keeping and Audit provisions of
this Agreement.
6.4 Proprietary Rights. Subject to the provisions of this Agreement and
any other written agreement between the parties hereto entered into after the
date hereof the parties agree that the following provisions shall govern the
parties intellectual property rights:
A. JTS's Rights to the Licensed Technology. Subject to the other express
terms of this Agreement, JTS shall retain all title and other rights (including
copyrights, patent rights, trade secret rights and other proprietary rights)
to the Licensed Technology.
B. Rights to JTS Additional Developments. JTS shall retain all title
and other rights (including copyrights, patent rights, trade secret rights and
other proprietary rights) to:
(i) the information, design and technology of property (including the
Licensed Products and Additional Developments) and all manufacturing processes
with respect thereto developed by JTS independently from Compaq, and all
modifications and derivative works of the foregoing made by JTS; and
(ii) all service marks, trademarks, tradenames, and any other
designations with respect to JTS products.
C. Rights to Compaq's Additional Developments. Compaq shall retain all
title and other rights (including copyrights, patent rights, trade secret
rights and other proprietary rights) to:
(i) the information, design and technology of property (including the
Licensed Products and Additional Developments) and all manufacturing processes
with respect thereto developed by Compaq independently from JTS, and all
modifications, improvements and derivative works of the foregoing made by each
of Compaq; and
(ii) all service marks, trademarks, tradenames, and any other
designations with respect to Compaq's products.
D. Joint Developments. From time to time during the term of this
Agreement the parties may agree in writing to develop products through a joint
project between each other using the technology owned and/or engineers employed
by each of them (a "Joint Development") to develop Future Generation Products.
Any technology or other intellectual property developed under a Joint
<PAGE> 14
Development shall be owned jointly by the parties, and the parties mutually
shall agree in writing upon the method(s) for commercial exploitation of such
technology. Royalties on Joint Developments shall be negotiated in the future.
In addition, any patents or copyrights resulting from any such Joint
Development shall be applied for and owned jointly by the parties. The
individual expenses incurred by either party in connection with any Joint
Development (e.g. engineering, development, prototypes, testing, travel,
lodging, allowances and any other expenses incurred in connection with the
project) shall be borne by the party incurring the expense. Notwithstanding
anything to the contrary contained herein, neither party shall transfer or
license any of its rights in or to any technology or other intellectual
property developed under a Joint Development without the written consent of the
other party, except pursuant to sublicenses permitted in this Agreement. To the
extent that Compaq and JTS engage in joint development in the course of
developing the Nordic HDDs, each party shall retain ownership in its own
development and there shall be no obligation to license or otherwise provide
such development to the other party, except as necessary to manufacture Nordic
HDDs for Compaq.
E. Markings. All Licensed Products shall bear such markings with
respect to patents (or patents pending) and/or trademarks, as shall be
reasonably requested by the licensing party to comply with applicable law or
otherwise required to protect its proprietary rights.
7.0 Limitation Of Liability.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY HEREUNDER NOR
ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES, OR AGENTS SHALL BE
LIABLE TO THE OTHER PARTY HEREUNDER OR TO ANY THIRD PARTY FOR ANY LOSS OF USE,
LOSS OF GOODWILL, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, INCIDENTAL,
SPECIAL, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST REVENUES OR PROFITS) OR
SIMILAR DAMAGES, WHETHER BASED ON TORT (INCLUDING WITHOUT LIMITATION,
NEGLIGENCE OR STRICT LIABILITY), CONTRACT, OR OTHER LEGAL OR EQUITABLE GROUNDS,
EVEN IF SUCH PARTY HAS BEEN ADVISED OR HAD REASON TO KNOW OF THE POSSIBILITY OF
SUCH DAMAGES.
8.0 Term And Termination
8.1 License Perpetual. Except as otherwise provided in Section 8.2
below, the term of this agreement and the licenses and immunities from suit
hereunder shall be perpetual.
8.2 Termination of Rights. If any party hereto shall commit a
material breach of any of the terms of this Agreement, or any of the related
purchasing documents, and such breach continues for thirty (30) days after
receipt of written notice specifying such breach in reasonable detail, then any
non-breaching party
<PAGE> 15
shall have the right to terminate all of the breaching party's rights hereunder
by delivery of written notice of such termination. Notwithstanding the foregoing
any such termination shall have no effect on the breaching party's duties and
obligations hereunder, which shall continue past such termination in full force
and effect. Compaq's rights to use JTS' technology and designs shall not be
reduced or diminished in the event of a Termination for default by JTS.
8.3 Bankruptcy, Etc. A party's rights (but not its obligations) under this
Agreement shall terminate automatically if any party attempts to assign this
Agreement, except under circumstances permitted hereunder, or hereto suspends
business, or files a voluntary petition pursuant to or purporting to be pursuant
to any reorganization of insolvency law of any jurisdiction, or an involuntary
petition pursuant to or purporting to be pursuant to any reorganization or
insolvency law of any jurisdiction or an involuntary petition pursuant to or
purporting to be pursuant to any reorganization of insolvency law of any
jurisdiction is filed and is not dismissed within sixty (60) days, or any party
makes an assignment for the benefit of creditors, or applies for or consents to
the appointment of a receiver or trustee of a substantial part of its property
or a receiver or trustee of a substantial part of its property is otherwise
appointed and is not removed within sixty (60) days.
9.0 Force Majeure And Damage Exclusions.
Notwithstanding any other provision of this Agreement:
A. Force Majeure. Either party shall be excused from any failure or delay
in performance resulting directly or indirectly from inability to obtain parts
or other necessary materials from usual sources of supply, transit failure or
delay, labor disputes, governmental orders or restrictions, fire, flood or other
acts of nature, accident, war, civil disturbance, or any other causes beyond
such party's reasonable control. A party affected by a force majeure shall
resume performance promptly upon cessation of same.
10.0 Warranties And Representations: Release
A. Of JTS. JTS represents and warrants that (i) JTS validly existing and in
good standing under the laws of the State of Delaware and having full power and
authority to carry on its business as it is now being conducted and to own or
lease the properties and assets it now owns or leases, and being duly qualified
to do business, and being in good standing, (ii) JTS has all necessary right,
power and authority to enter into this Agreement (iii) neither the execution and
delivery of this Agreement by JTS nor its performance hereunder will conflict
with or result in the breach of any of the terms or conditions of or constitute
a default under the charter documents of JTS or of any contract, agreement,
commitment, indenture, mortgage, note, bond, license or other instrument or
obligation to which it is a party or by which it or any of its property or
assets may be bound, (iv) this Agreement has been duly and validly executed by
JTS and
<PAGE> 16
constitutes the valid and binding obligation of JTS enforceable in accordance
with its terms (c) no consent, approval or authorization of, or declaration,
filing or registration with, an foreign, federal, state, or local governmental
or regulatory authority, or any other party, is required to be made by JTS in
connection with the execution, delivery and performance of this Agreement and
the transactions contemplated hereby. EXCEPT FOR THE REPRESENTATIONS AND
WARRANTIES SPECIFICALLY PROVIDED IN THIS AGREEMENT ALL OF THE ADDITIONAL
DEVELOPMENTS PROVIDED BY JTS HEREUNDER ARE PROVIDED "AS IS" AND JTS
EXPRESSLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, INCLUDING ANY EXPRESS OR
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
B. Of Compaq. Compaq represents and warrants that it has received a
copy of the TEAC agreement with JTS.
11.0 Record Keeping And Audit Rights
A. Reports. Each party hereto shall keep and maintain full and accurate
records relating to sale and manufacture of Nordic HDDs. To the extent that a
party is obligated to pay royalties, such party shall prepare and submit
quarterly reports to the other party no later than sixty (60) days following
the last business day of all calendar quarters, certified by an officer of such
party, specifying, at a minimum, the quantity of each royalty-bearing products
sold during the previous quarter and the royalty due for such royalty-bearing
products. The information contained in such reports will be retained in
confidence and access to such information shall be restricted to the finance
and legal groups. The obligations to provide royalty reports shall only apply
to royalty-bearing products. Each party shall retain such business records as
necessary to support the royalty reports for a period of three (3) years
following the end of a reporting period.
B. Audit. Each party agrees to allow mutually acceptable independent
auditors to audit and analyze appropriate accounting records to ensure
compliance with all terms of this Agreement. Any such audit shall be permitted
by the party to be audited within fifteen (15) days of receipt of a written
request by the party requesting such audit, during normal business hours, at
a time mutually agreed upon by the party to be audited. The cost of such an
audit will be borne by the party requesting the audit unless a material
discrepancy is found (underpayment of royalties for the quarter) or records are
not maintained and available in accordance with this section, in which case the
audited party agrees to pay the requesting party for the costs associated with
the audit, but in no event shall such costs exceed twenty thousand dollars
($20,000) for such audit.
C. Interest. In the event that there is an underpayment of royalties,
the underpaid royalties shall be promptly remitted with interest, such interest
accruing from the date such royalties should have been paid. The applicable
<PAGE> 17
interest rate shall be equal to the higher of twelve percent (12%) per annum or
at two percent (2%) over prime. The interest rate shall be compounded monthly.
12.0 Immunity From Suit
A JTS hereby grants to Compaq, its Subsidiaries and to its and their
customers, mediate and immediate, a personal, non-transferable immunity from
suit under any JTS Patents for the formation, combination, and use of any JTS
Nordic HDD with other hardware or software products. The foregoing immunity from
suit shall extend to an apparatus, method, or process used in the manufacture of
a Nordic HDD.
13.0 Additional Licenses
A JDD Firmware License. Subject to the provisions of this Agreement,
JTS hereby grants to Compaq a nonexclusive, transferable, worldwide, non-royalty
bearing, irrevocable license to:
(1) use and prepare derivative works of source code for JTS's firmware, on
equipment located within Compaq's control, such source code to be used
for internal purposes only;
(2) reproduce, perform, display, sublicense and distribute, in any HDD,
such firmware (in object code form) to third parties; each third party
shall have the right correspondingly to sublicense other third parties
along the chain of distribution to end users;
(3) reproduce, perform, display, sublicense and distribute, in any HDD,
Compaq prepared derivatives of the firmware (in object code form) to
third parties; each third party shall have the right correspondingly
to sublicense other third parties along the chain of distribution to
end users; and
(4) reproduce, perform, display, sublicense and distribute Compaq
derivations of the JTS firmware under a source code license agreement.
B License under JTS Patents
(1) JTS hereby grants to Compaq a nonexclusive, transferable, worldwide
license under JTS Patents to use, make, have made, lease, sell and
otherwise transfer any HDD with Compaq products, either alone or
connected to or in conjunction with other computer hardware or
software. All licenses granted under this Agreement
<PAGE> 18
shall be of sufficient scope to permit Compaq to exercise all rights
granted in this Agreement and shall include the right to grant
sublicenses of equivalent scope to Compaq's Subsidiaries, which
Subsidiaries may correspondingly sublicense other Subsidiaries.
Licenses to Subsidiaries shall be valid and subsisting for as long as
the parent has a valid and subsisting license and only for as long as
the parent has corporate control of the Subsidiary receiving a license
hereunder.
(2) JTS hereby grants to Compaq, its Subsidiaries and its and their
customers, mediate and immediate, a personal, non-transferable
immunity from suit under JTS Patents for the formation and use of any
Compaq product with other hardware or software products. The foregoing
immunity from suit extends to any apparatus, method, or process per se
if such apparatus, method, or process infringes a JTS Patent when used
for its intended purpose or is combined with a Compaq product.
C. JTS hereby grants Compaq a royalty-free, irrevocable, worldwide
license to use, publish, have published, copy, have copied, distribute, have
distributed, prepare derivative works and have such derivative works prepared
of any Documentation produced by JTS for any Nordic HDD.
D. In furtherance of Compaq's licenses granted in above, JTS agrees to
provide Compaq with magnetic copies of modifications, enhancements, versions,
version releases, updates, and bug fixes which JTS makes to its firmware. JTS
agrees to use its best efforts to inform Compaq of its plans to release major
modifications and version releases and of the anticipated release date to
permit Compaq to formulate corresponding release dates and to permit Compaq to
phase out its production of obsolete versions and updates. Magnetic copies of
major modifications and version releases shall be provided to Compaq at least
30 days prior to commercial release by JTS to other JTS customers or 30 days
prior to commercial release by JTS's licensees (whichever comes first).
Magnetic copies of minor bug fixes, updates, modifications, etc. shall be
provided to Compaq as soon as reasonably possible but in every event prior to
the expiration of sixty (60) days from commercial release by JTS or commercial
release by JTS's licensees.
14.0 Miscellaneous Provisions
A. EXPORT. Notwithstanding any rights, license or privileges specified in
this Agreement, each party agrees that it will not export any technology or
product provided by the other party hereunder or jointly developed hereunder,
or any part thereof, either directly or indirectly, without first obtaining any
required licenses to so export from the United States Government, and
<PAGE> 19
further agrees that it will comply with all laws, rules and regulations
applicable to the export or re-export of such technology or product.
B. INFRINGEMENT CLAIMS. Compaq and JTS shall notify each other of any
potential or actual infringement or misappropriation by any third party of any
patent, copyright or other proprietary right that forms part of the HDD
technology and shall provide each other with any available evidence of such
infringement or misappropriation. If the parties determine that they will
cooperate in an action relating to the foregoing, the parties shall jointly
take all reasonable steps necessary to enjoin and prevent such infringement or
misappropriation, including the institution and maintenance of legal or
equitable proceedings, and shall promptly execute all papers and perform
such other acts as may be reasonably required to join in any such suit, action
or proceeding, provided, however, that a party may, at its option, be
represented by counsel of its choice. Upon any such joinder, each party shall
pay the fees of its own separate counsel (if any) and shall bear fifty percent
(50%) of all other reasonable costs incurred in connection with such suit,
action or proceeding. If a party, in its reasonable business judgment,
concludes that the steps necessary to enjoin such infringement or
misappropriation are not economically justifiable under the circumstances, it
may decline to join in any action proposed or taken by the other party,
provided, however, that if the other party determines that it shall proceed in
such action, the declining party shall provide all reasonable assistance and
information, at its sole cost and expense, to the other party in support of
such action. Any amount recovered in any such suit, action or proceeding
brought by the parties jointly (whether recovered through judgment or
settlement) shall be allocated to Compaq and JTS, pro-rata, for reimbursement of
the reasonable expenses incurred by the parties in connection with such
proceedings in accordance with their cost-sharing arrangement set forth in this
section, and to the extent to which amounts recovered are in addition to the
amount of such expenses, such additional amounts shall be shared equally by the
parties. Any amount recovered by a party individually pursuing any such suit,
action or proceeding shall inure solely to the benefit of such party.
C. Third-Party Claims of Infringement to Technology. Each party agrees
to promptly notify the other party upon becoming aware of any suit or
proceeding brought against it by any third party which is based on a claim that
the HDD technology infringes any patent, copyright or other proprietary right.
The parties may, upon mutual agreement, cooperate in the defense against such
suit or proceeding, and in such case shall promptly execute all papers and
perform such other acts as may be reasonably required to join in such defense.
In such circumstance where the parties cooperate in a defense, each party
shall pay the fees of its own separate counsel (if any) in such defense, and
shall bear fifty percent (50%) of all other reasonable costs incurred in
connection with such suit, action or proceeding. In any event, each party shall
provide all reasonable assistance and information to the other party in support
thereof.
<PAGE> 20
D. Injunctive Relief. Each party acknowledges and agrees that in the
event of an unauthorized use, reproduction, distribution or disclosure of any
confidential information or data contained in either party's technology, an
adequate remedy at law would not be available; and, therefore, injunctive or
other equitable relief would be appropriate to restrain such use, reproduction,
distribution or disclosure, threatened or actual. Such relief shall be in
addition to any other remedies provided herein.
E. Breach of Exclusivity. JTS acknowledges and agrees that in the
event a license is granted to a third party in breach of the [*] , an
adequate remedy at law would not be available; and, therefore, injunctive or
other equitable relief would be appropriate to restrain any use, reproduction,
distribution or disclosure, threatened or actual in contravention of the [*] .
Such relief shall be in addition to any other remedies provided herein.
F. Other Remedies. In the event of a material breach of this
Agreement, the other party shall have such remedies for direct damages
(including out-of-pocket expenses and funds paid to JTS) to which it is
entitled by law.
G. Assignment. This Agreement and the licenses granted hereunder are
to a specific entity or legal person, which does not include corporate
subsidiaries, affiliates or parent company of either party, and except as set
forth herein, all rights hereunder are not assignable nor are the obligations
imposed delegable by either party without the prior written consent of the
other party. Notwithstanding anything to the contrary, neither party may assign
its patent license or immunity to another party unless the acquiring party
agrees to provide a patent license, to the other party to this Agreement, of
the same scope and on the same terms as set forth in this Agreement.
H. Execution of Assignments and Non-Disclosure Agreements by Contract
Employees. JTS agrees to have each of its contract employees (including
contractors, independent agents, temporary employees, etc.) execute an
assignment of all intellectual property rights, including an assignment of
copyrights, inventions, and patents and a waiver of moral rights prior to
employment or retention by JTS. Additionally, such Contractor employees shall
execute appropriate non-disclosure agreements which obligate them to retain the
confidential information of JTS and its customers and licensees in strictest
confidence.
I. Execution of Assignments, Non-Disclosure Agreements, and
Non-Solicitation Agreements by Employees. JTS agrees to have each of its
employees execute an assignment of all intellectual property rights, including
an assignment of copyrights, inventions, and patents and a waiver of moral
rights prior to employment or retention by JTS. Additionally, such employees
shall execute appropriate non-disclosure agreements which obligate them to
retain the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 21
confidential information of JTS and its customers and licensees in strictest
confidence. Such employees shall also execute an appropriate non-solicitation
agreement which prohibits the solicitation of JTS's employees by a former
employee.
J. Execution of Assignments, Non-Disclosure Agreements,
Non-Solicitation Agreements and Covenants Not to Compete by Officers and Key
Employees. JTS agrees to have each of its officers and key employees execute an
assignment of all intellectual property rights, including an assignment of
copyrights, inventions, and patents and a waiver of moral rights prior to
employment or retention by JTS. Additionally, such officer and key employees
shall execute appropriate non-disclosure agreements which obligate them to
retain the confidential information of JTS and its customers and licensees in
strictest confidence. Such officer and key employees shall also execute an
appropriate non-solicitation agreement which prohibits the solicitation of JTS'
employees by a former officer or key employee. In consideration for
Compaq's participation and as material inducement for Compaq participation in
this venture, JTS agrees to obtain, to the extent such agreements are
enforceable in the state or country where such employees reside, from its
current and future officers and key employees an agreement not to compete with
JTS' business interests for a period of fifteen (15) months following the
Effective Date of this Agreement.
15.0 Waiver.
The waiver by either party of any of its rights or any breaches of the
other party under this Agreement in a particular instance shall not serve as a
waiver of the same or different rights or breaches in subsequent instances. All
remedies, rights, undertakings and obligations hereunder shall be cumulative,
and none shall operate as a limitation of any other.
16.0 Section Heading and Language Interpretations: Business Days.
As used herein, "business day" shall mean each day other than Saturday,
Sunday and any day on which banks are nationally required to be closed in the
United States of America or Japan, or any other business holiday for either
party of which it has advised the other party in writing not less than 45 days
in advance. The descriptive headings in this Agreement are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement. All personal pronouns used in
this Agreement, whether used in the masculine, feminine or neuter genders shall
include all genders, the singular shall include the plural and vice versa and
shall refer solely to the parties signatory thereto unless otherwise
specifically provided. The use of the word "including" in this Agreement shall
be by way of example rather than by limitation.
17.0 Notices.
All notices, demands, consents, requests, approvals, and other
communications required or permitted hereunder shall be in writing and shall be
deemed effective only upon delivery (whether receipt is accepted or refused) at
the addresses set forth below (or at such other addresses within the United
<PAGE> 22
States of America as shall be given in writing by any party to the others in
accordance with this Section 10. Notices may be delivered by hand, United
States registered or certified mail, return receipt requested, bonded private
courier service or by telecopier (followed immediately in writing by bonded
private courier service).
To Compaq: Compaq Computer Corporation
20555 S.H. 249
Houston, Texas 77070
Attn: Purchasing Department
with copy to:
P.C. Storage Development
Compaq Computer Corporation
20555 S.H. 249
Houston, Texas 77070
and copy to:
Managing Attorney - Licensing and Technology
Compaq Computer Corporation
20555 S.H. 249
Houston, Texas 77070
To JTS: JT Storage, Inc.
1289 Anvilwood Avenue
Sunnyvale, California 94089
Attention: President
Telecopy Number: (408) 747-0849
18.0 Assignment
A. Except as specifically provided herein, no party hereto may assign
any of its rights (in whole or in part), or delegate any of its obligations (in
whole or in part), hereunder without the prior written consent of the other
parties, which consent shall not be unreasonably withheld. In the event of an
IPO, Compaq's rights hereunder will succeed to a successor by merger or
acquisition to Compaq following an IPO.
B. In the event of an assignment by JTS of any its rights or delegation
of its obligations, or in the event of a Change in Control of JTS and its
<PAGE> 23
operations, Compaq may at its sole option choose to terminate JTS' rights (but
not its obligations) under this Agreement.
19.0 Severability.
Whenever possible, each provision of this Agreement will be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
20.0 Governing Law.
This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and
performance of this Agreement shall be governed by, the laws of the State of
Texas, without giving effect to provisions thereof regarding conflict of laws.
21.0 Controlling Terms/Entire Agreement/Amendment.
This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and understanding
among the parties and supersede and preempt any prior understandings, agreements
or representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way. No provisions in the purchase
orders, acknowledgments or other business forms of either party which are
different from or in addition to the applicable terms set forth in this
Agreement shall be of any force or effect whatsoever unless it is acknowledged
to in writing by the other party expressly stating that each document supersedes
this Agreement as follows: "Notwithstanding any term of the Development
Agreement by and between JTS and dated June 16th, 1994." Any provision of this
Agreement may be amended only with the prior written consent of all of the
parties hereto.
22.0 Multiple Counterparts.
This Agreement may be executed on separate counterparts transmitted by
telecopy, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
23.0 Relationship of the Parties.
It is not the intent of the parties to create partnership or joint
venture or to assume partnership liability or responsibility by entering into
this Agreement. Each party hereto shall be deemed an independent contractor with
respect to the other party and neither party hereto shall have any right or
authority to assume or create any obligations on behalf of the other party
hereto or to make any representations on such other party's behalf. Accordingly,
the obligations of the parties with respect to the matters addressed herein
shall be limited to those specifically set forth in this Agreement or other
written agreements between the parties.
<PAGE> 24
24.0 Public Disclosure.
Neither party hereto shall make any public release of information
regarding the terms of this Agreement relating to the royalties due hereunder
unless (i) such party has obtained the written consent of the other party
regarding the form, content and timing of such disclosure or (ii) such
disclosure is required by applicable law; provided that in the event of any
disclosure mandated by law, each party shall consult with the other as to the
content of such disclosure.
25.0 Right of Set-Off.
If in the good faith belief of one of the parties hereto (the "Insured
Party"), it is entitled to indemnification, reimbursement or payment hereunder,
in addition to any other remedies which it may have available to it, the Insured
Party shall have the right to set off the entire amount thereof against any
amounts which the Injured Party shall owe to the other party from time to time
thereafter for any reason, including any royalties due or which become due
hereunder.
26.0 No Strict Construction.
The language used in this Agreement will be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of
strict construction will be applied against any party hereto.
27.0 Remedies.
Each of the parties confirms that damages at law may be an inadequate
remedy for a breach or threatened breach of this Agreement and agrees that, in
the event of a breach or threatened breach of any provisions hereof, the
respective rights and obligations hereunder shall be enforceable by specific
performance, injunction or other equitable remedy, but nothing herein contained
is intended to, nor shall it limit or affect, any rights at law or by statute or
otherwise of any party aggrieved as against any other party for breach or
threatened breach of any provision hereof, it being the intention by this
section to make clear the agreement of the parties that the respective rights
and obligations of the parties shall be enforceable in equity as well as at law
or otherwise.
<PAGE> 25
28.0 Preamble; Preliminary Recitals and Exhibits. The Preliminary Recitals set
forth in the Preamble hereto are hereby incorporated and made part of this
Agreement. Additionally, Exhibits A, B, and C are incorporated herein by
reference.
JT Storage COMPAQ COMPUTER CORP.
By: /s/ David B. Pearce By: /s/ Hugh Barnes
---------------------------- ---------------------------
David B. Pearce Hugh Barnes
President Sr. Vice President and
General Manager
Portable P.C. Division
Date: June 16, 1994 Date: 6/20/94
-------------------------- -------------------------
<PAGE> 26
EXHIBIT A
DEVELOPMENT PLAN
(Timeline with Nordic 1 and Nordic 2 Project Milestones)
<PAGE> 27
EXHIBIT B
PROJECT MILESTONES
<PAGE> 28
"NORDIC" DISK DRIVE PRODUCT DEVELOPMENT
MILESTONES
I. "NORDIC 1" 270 Mbyte, 7mm High Product
<TABLE>
<CAPTION>
ITEM DESCRIPTION START COMPLETE
- ---- ----------- ----- --------
<S> <C> <C> <C>
1 Prototype Build (20 Units) 06/07/94 08/07/94
2 Engineering Verification Test 08/08/94 08/26/94
3 Pre-production Build (100 Units) 06/07/94 10/19/94
4 Sample Units Available (5) 10/19/94
5 Design Verification Test 10/06/94 11/18/94
6 Qualification Start 11/18/94
7 Design Maturity Test 11/21/94 01/05/95
8 Pilot 1 Units Available 01/15/95
9 Submit Units for Compaq Approval 03/01/95
10 Compaq Release to Production 03/15/95
</TABLE>
II. "NORDIC 2" 540 Mbyte, 10mm High Product
<TABLE>
<CAPTION>
ITEM DESCRIPTION START COMPLETE
- ---- ----------- ----- --------
<S> <C> <C> <C>
1 Prototype Build (20 Units) 10/03/94 11/20/94
2 Engineering Verification Test 11/25/94 12/16/94
3 Pre-production Build (100 Units) 12/20/94 02/02/95
4 Sample Units Available (5) 02/02/95
5 Design Verification Test 02/05/95 03/03/95
6 Qualification Start 03/03/95
7 Design Maturity Test 03/05/95 03/31/95
8 Pilot 2 Units Available 04/01/95
9 Submit for Compaq Approval 03/31/95
10 Compaq Release to Production 04/15/95
</TABLE>
<PAGE> 29
EXHIBIT C
TECHNICAL SPECIFICATIONS
<PAGE> 30
COMPAQ COMPUTER CORPORATION
p/n TBD
title DRIVE, FIXED DISK, 270/540
rev X1
<PAGE> 31
1.0 SCOPE
This document specifies COMPAQ Computer Corporation's requirements for a fixed
disk drive assembly featuring:
Capacity 270/540 MB
Interface AT 16 BIT
Form Factor 3', 7mm/10mm
Special ATA Compliant
new connector and pinout
TBD
Unless otherwise stated herein, all references to COMPAQ shall mean Compaq
Computer Corporation, Purchasing Department.
Supplier shall provide COMPAQ, as required, current copies of schematics,
mechanical drawings, functional specifications, theory of operation, and product
manuals relevant to the drive design and test. Informational confidentiality
will be established in a separate nondisclosure agreement between the supplier
and COMPAQ.
Supplier shall provide COMPAQ with advance written notification and detail of
all probable design changes (hardware and firmware) and critical component
sourcing changes (heads, media, actuator, spin motor, castings, Isi, and pcb).
Supplier shall not proceed with the incorporation of any change to the design of
the drive or change of critical component suppliers, nor deviate from any
requirement of this specification without first obtaining specific written
authorization from COMPAQ.
(This area intentionally left blank)
<PAGE> 32
2.0 REFERENCED DOCUMENTS
2.1 APPLICABLE DOCUMENTS: The following documents form a part of this
specification to the extent specified herein. Unless otherwise
indicated, that document is of the issue in effect on the date of
invitation to bid or request for proposal.
101043 "Specification, ESD Identification and Handling." COMPAQ
Document.
101401 "Specification, Bag, Static Shielding." COMPAQ Document.
108225 "Specification, 16 Bit Interface, Hard Disk Drive." COMPAQ
Document.
130791 "Specification, Drive Packaging Requirements." COMPAQ
Document.
106233 "Specification, Standard Labling OEM Assemblies." COMPAQ
Document.
160762 "Specification, Compaq Adapted CAM/ATA 16 Bit Integrated Disk
Drive Interface." COMPAQ Document.
UL 94 "Test for Flammability of Plastic materials for Parts
in Devices and Appliances." Underwriters Laboratories, Inc.
UL 1950 "Information Technology Equipment Including Electrical
Business Equipment." Underwriters Laboratories, Inc.
CRF 47, "Title 47 of the Code of Federal Regulations, Part 15,
FCC Rules, Radio Part 15 Frequency Devices, Subpart B,
Unintentional Radiators.
C.I.S.P.R. "Limits and Methods of Measurement or Radio
Pub. 22 Interference Characteristics of Information Technology
Equipment.
CSA 22.2, "Safety of Information Technology Equipment Including
No. 950 Business Equipment, First Edition." Canadian Standards
Association.
EN 60 950 "Safety of Information Technology Equipment Including
Electrical Business Equipment." European Committee for
Electrotechnical Standardization.
ISO 7779 "Measurement of Airborne Noise Emitted by Computer to
Business Equipment." International Organization for
Standardization.
<PAGE> 33
International Organization for Standardization
<PAGE> 34
VDE 0805 "Safety of Information Technology Equipment Including
/05.90 Equipment." Business Verband Elektrotechniker Standard (VDE).
VDE 0871 "Radio Frequency Interference Suppression of Radio
Frequency Equipment
/6.78 for Industrial, Scientific, and Medical (ISM) and
Similar Purposes." Verband Deutscher Elektrotechniker Standard
(VDE).
2.2 ORDER OF PRECEDENCE: In a conflict between this document and the
references cited herein, this document shall take precedence.
(This area intentionally left blank)
<PAGE> 35
3.0 AGENCY APPROVALS
3.1 DOMESTIC SAFETY: The drive assembly shall be "Recognized" by
Underwriters Laboratories, Inc. under category for information
Technology Equipment Including Electrical Business Equipment (NWGQ2) in
accordance with the requirements in UL Standard for Safety, UL 1950;
and Canadian Standards Association (CSA) Certified in accordance with
the requirements in CSA Standard No. 950. The drives shall be marked
with the UL Recognition and CSA Certification marks.
3.2 INTERNATIONAL SAFETY: The drive assembly shall be Verband Deutscher
Elektrotechniker (VDE) approved in accordance with the requirements in
VDE 0805/05.90, or TUV approved in accordance with EN 69 950. The
drives shall be marked with the VDE or TUV component marking.
3.3 BEZELS: All drive bezels shall be constructed from UL "Recognized"
plastic (QMFZ2), which is flammability rated 94v-1 or less flammable
when tested in accordance with UL 94.
3.4 EMISSIONS REQUIREMENTS: When tested in the intended COMPAQ product, the
drive shall not increase the emissive level of that system to a level
greater than:
.3 db below the C.I.S.P.R. Publication 22 class B limit when tested at
three meters.
.6 db below VDE 0871/6.78 Class B limit when tested at ten meters.
.6 db below the CRF 47, Part 15 Class B limit when tested at three
meters.
Acceptance testing will be performed by COMPAQ Computer Corporation.
Test samples for acceptance will be retained by COMPAQ Computer
Corporation.
<PAGE> 36
4.0 FUNCTIONAL
4.1 Drive Configuration
Table 1
Configuration
FORMATTED CAPACITY
Physical 270/540 Megabytes
Logical TBD Megabytes
DATA CYLINDERS
Physical Cylinders TBD
Logical TBD
DATA HEADS/CYLINDER
Physical TBD
Logical TBD
SECTORS/TRACK
Physical sectors TBD
Logical sectors/trk TBD
DATA BYTES/SECTOR 512
SECTOR INTERLEAVE 1:1
ECC BYTES TBD
ENCODING METHOD TBD
<PAGE> 37
4.2 Drive Performance
TABLE 2
PERFORMANCE
SPIN UP TIME maximum
(to not busy) 20 Sec from Power Applied
LOGICAL SEEK TIMES
(busy to seek complete)
Typical Maximum
Track to Track TBD TBD
Average 15ms TBD
Full Stroke TBD TBD
AVERAGE LATENCY (maximum) 7.14ms
RPM 4200
Data Transfer Rate
Internal TBD
@ Interface 10 MB/s
<PAGE> 38
4.3 POWER
4.3.1 SUPPLY REQUIREMENTS: The drive shall meet all requirements of this
specification when supplied electrical power defined in Table 3.
Protection circuitry shall be incorporated to prevent damage or data
loss on disk during 5 volt and/or 12 volt dropout.
Table 4 specifies the maximum current allowed; typical current and
power requirements are provided for reference only.
TABLE 3
POWER SUPPLY
Nominal Voltage + 5 Volts
Tolerance +/- 5%
Tolerance @ spin-up +/- 5%
On Rise Time Less than 100 mSec
Off Fall Time Less than 5 Sec
Ripple (0-25) MHz) Less than 100 mVpk-pk
TABLE 4
POWER REQUIREMENTS
MODE +5 Volt Power
of amps watts
OPERATION rms (pk) rms (pk)
SPINDLE SPIN-UP TBD TBD
Standby TBD TBD
Sleep TBD0 TBD
<PAGE> 39
4.4 INTERFACE/CONTROLLER: The drive interface shall conform to the
requirements of COMPAQ Specification 108225-001C with the following
exceptions:
TBD
<PAGE> 40
4.4.2 IDENTIFY PARAMETERS: The drive will load the Sector Buffer with the
values specified in Table 5 when the Identify Command is issued. Refer
to COMPAQ Specification 108225-001-C for word definition.
TABLE 5
IDENTIFY PARAMETERS
ATA mode
word hex value
00 TBD
01
02
03
04
05
06
07
08
09
10-19 serial number
20 TBD
21
22
23-26 Firmware revision
27-46 model number
47 TBD
48
49
50
<PAGE> 41
51
52
53
54 Number of current cyl
55 Number of current heads
56 Number of current sect/trk
57-58 Current capacity in sectors
59-127 Reserved
128-159 Vendor Unique
160-255 Reserved
<PAGE> 42
4.4.3 Track Format: The method of implementation of track formatting is at
the supplier's discretion providing that all requirements of this
specification are met.
4.4.4 Error Correction: The drive shall incorporate a mechanism to correct
burst data errors up to 11 bits "on the fly" in real time as they occur
with no impact to the drives performance. The drive shall also
incorporate a mechanism to correct double bust errors up to 11 bits
each, or a single 22 bit error. The total time for all error recovery
must not exceed 6 seconds.
(This area intentionally left blank)
<PAGE> 43
4.5 ENVIRONMENTAL: The drive shall comply with all requirements of this
specification when subjected to the environmental extremes of Table 5.
TABLE 5
ENVIRONMENTAL EXTREMES
<TABLE>
<CAPTION>
OPERATING NON-OPERATING UNITS
<S> <C> <C> <C>
TEMPERATURE 5 to 55 -40 to 60 deg C
GRADIENT 20 30 deg C/hr
ALTITUDE -1000 to 10k -1000 to 40k feet
HUMIDITY Relative 8 to 80 5 to 95 %
MAX WET BULB TEMP 40 56 deg C
E-FIELD @ LESS THAN 100 MHz 5 N/A v/m
B-FIELD @ LESS THAN 100 KHz 12.0 12.0 gauss
VIBRATION
Without Error 0.75 N/A g's 0-pk
Without Damage 1.0 4.0 g's 0-pk
SHOCK
Without Error 10 for 11 mS N/A g's pk
Without Damage 15 for 11 mS 150 for 11 mS g's pk
Without Damage 400 for 2mS g's pk
Without Damage 800 for 0.5 mS g's pk
</TABLE>
Compliance with vibration and shock limits specified is required but not
necessarily sufficient. Additional requirements may exist dependent on the
mounting/isolation system incorporated and will be provided in writing by
COMPAQ. Vibration is specified as constant g's over a frequency range of 5 to
400 Hertz applied continuously and directly to the drive frame from any
<PAGE> 44
direction. Shock is specified as a half-sine pulse applied directly to the drive
frame from any direction for the duration specified.
'Without Error" is the primary limit within which the drive will show no
performance degradation and will meet all requirements of this specification.
'Without Damage' is secondary limit within which the drive may exhibit a
temporary degradation in performance, but will return to specified performance
once 'Without Error' limits are re-established. Damage includes, but is not
limited to, the introduction of new media defects, the loss of data, or any
permanent deviation from the requirements of this specification.
(This area intentionally left blank)
<PAGE> 45
5.0 RELIABILITY
5.1 DEFECT REALLOCATION: The supplier shall incorporate sufficient process
controls to insure that all media defects are reallocated to available
spare sectors. This effectively provides a defect free drive not
requiring retry or correction algorithms for data recovery. The maximum
number of reallocated defects is 2 per formatted megabyte providing
that negligible performance degradation results when compared against
an identical drive with zero defects.
5.2 ERROR RATES: With all media defects reallocated, error rates shall not
exceed the following allowable limits:
NONRECOVERABLE DATA 1/10 13 bits transferred
RECOVERABLE 1/10 10 bits transferred
SEEK 1/10 7 seeks
DRIVE READY 1/50000 errors/power cycles
Non Recoverable Data Error is defined as any failure to read and
transfer correct data (from a prior host write operation) within 6
seconds, using all retry or correction mechanisms enabled.
A Recoverable Data Error is defined as any successful transfer of
correct data within 6 seconds after the first unsuccessful attempt to
read that data with all retry, error recovery, and error correction
mechanisms enabled.
A Seek Error is defined as any actuator positioning (or head settling)
fault which requires abnormal time for recovery. Seek Error Rate shall
not induce detectable performance degradation during either random or
sequential I/O benchmarks when compared against an equivalent drive
with no such faults.
A Drive Ready Error is defined as any failure of the drive to achieve
Ready status with full functionality for any reason.
<PAGE> 46
5.3 MEAN TIME BETWEEN FAILURE (MTBF): 350,000 Hours demonstrated
The supplier shall incorporate sufficient design margin, quality
control, and reliability test on drives supplied to COMPAQ to ensure
that failure rates do not exceed the following limits;
4.28% per Year (=42800 DPPM)
0.36% per Month (=3600 DPPM)
The following conditions and definitions apply: Time starts at COMPAQ
receipt and is independent of Power-On Hours. A sample size of 100 or
more is statistically significant. Environmental extremes specified
herein are not exceeded. Failure is defined as any deviation from
requirements specified herein.
Supplier shall perform an Ongoing Reliability Test representative of
typical or accelerated usage. Procedures are subject to COMPAQ
approval. Supplier shall provide test results to COMPAQ.
5.4 SERVICE LIFE: 5 Years minimum
<PAGE> 47
6.0 PHYSICAL
TABLE 6
PHYSICAL CHARACTERISTICS
Height 7/10 mm
Width 90 mm
Depth 120 mm
Weight 4.5/5.5 oz
6.1 ORIENTATION: The drive will meet all requirements of this specification
regardless of mounting orientation
6.2 LANDING ZONE: The drive will incorporate an actuator retract circuit, a
dedicated head landing zone, and an actuator latching mechanism which,
in combination, will insure that the heads will not physically
interfere with any data cylinder during or following motor spin-down.
6.3 ACOUSTICS: In accordance with ISO 7779, the overall sound power will be
less than 3.9 Bels with drive in idle mode and less than 4.2 Bels
during random seeks.
6.4 LED: none
(This area intentionally left blank)
<PAGE> 48
6.6 MOUNTING CONFIGURATION: Figure 1 details the dimensional requirements
of the drive as well as the approximate location of connectors and
jumpers (absolute location must be approved by COMPAQ).
FIGURE 1
DIMENSIONAL REQUIREMENTS
<PAGE> 49
6.7 CONNECTORS: TBD
<PAGE> 50
Reference Description
Pin Assignments and Connector Type TBD
<TABLE>
=============================================================================================================================
<S> <C> <C> <C>
xx -RESET xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx D7 xx D8
- -----------------------------------------------------------------------------------------------------------------------------
xx D6 xx D9
- -----------------------------------------------------------------------------------------------------------------------------
xx D5 xx D10
- -----------------------------------------------------------------------------------------------------------------------------
xx D4 xx D11
- -----------------------------------------------------------------------------------------------------------------------------
xx D3 xx D12
- -----------------------------------------------------------------------------------------------------------------------------
xx D2 xx D13
- -----------------------------------------------------------------------------------------------------------------------------
xx D1 xx D14
- -----------------------------------------------------------------------------------------------------------------------------
xx D0 xx D15
- -----------------------------------------------------------------------------------------------------------------------------
xx GROUND xx Pin removed (key)
- -----------------------------------------------------------------------------------------------------------------------------
xx DMARQ xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx -IOW xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx -IOR xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx IORDY xx SPINDLE
- -----------------------------------------------------------------------------------------------------------------------------
xx -DMACK xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx IRQ14 xx -IO16
- -----------------------------------------------------------------------------------------------------------------------------
xx A1 xx -PDIAG
- -----------------------------------------------------------------------------------------------------------------------------
xx AO xx A2
- -----------------------------------------------------------------------------------------------------------------------------
xx -CSO xx -CS1
- -----------------------------------------------------------------------------------------------------------------------------
xx -DASP xx GROUND
- -----------------------------------------------------------------------------------------------------------------------------
xx +5V LOGIC xx +5V MOTOR
- -----------------------------------------------------------------------------------------------------------------------------
xx GROUND xx RESERVED
- -----------------------------------------------------------------------------------------------------------------------------
xx GROUND xx +5V MOTOR
- -----------------------------------------------------------------------------------------------------------------------------
xx GROUND xx +5V LOGIC
</TABLE>
<PAGE> 51
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
xx GROUND xx RESERVED
=============================================================================================================================
</TABLE>
Refer to COMPAQ specification
108225-001 for signal definition
<PAGE> 52
6.8 OPTIONS
6.8.1 JUMPER OPTIONS: TBD
TABLE 9
JUMPER OPTIONS
TBD
(Shipped configuration shown in upper case)
<PAGE> 53
7.0 QUALITY ASSURANCE
Unless otherwise specified in the contract or purchase order, the
supplier shall be responsible for performing inspections and tests
sufficient to assure that the drives meet all requirements of this
specification. Drives ordered by COMPAQ shall be covered by a warranty
from the supplier that will be defined and agreed upon in the contract
or purchase order.
8.0 PREPARATION FOR DELIVERY
8.1 DRIVE MARKINGS: Each drive shall be clearly marked with the following
information:
Model Number
Serial Number
Required Agency Markings (UL, CSA, and VDE or TUV)
COMPAQ Part Number (TBD)
Configuration Code which uniquely identifies:
Media Supplier
Head Supplier
Printed Circuit Board Assembly
Firmware Revision
8.2 PACKAGING: Packing and wrapping materials shall be sufficient to
protect against damage or loss during shipment from the supplier or
destination specified in the purchase order.
8. SHIPPING CONTAINER MARKINGS: The shipping container shall be marked
with the COMPAQ Part Number, Revision Number, Purchaser Order Number
and the County contained. The shipping container must also be marked in
accordance with the requirements set forth by Underwriters
Laboratories, Inc.
Only one COMPAQ identification lot (one revision of a COMPAQ Part
Number on one Purchase Order Number) shall be permitted within the same
container.
<PAGE> 54
AMENDMENT TO DEVELOPMENT AGREEMENT
This Amendment is made effective as of the Effective Date between COMPAQ
COMPUTER CORPORATION, A Delaware corporation having a principal place of
business at 20555 S.H. 249, Houston, Texas 77070 (hereinafter "Compaq") and JT
STORAGE, INC., a Delaware corporation having a principal a place of business at
1289 Anvilwood Avenue, Sunnyvale, California 94089 (hereinafter "JTS") and
amends the Development Agreement between the parties of effective date of June
16, 1994 (hereinafter referred to as "Agreement").
PRELIMINARY RECITALS
WHEREAS, Compaq has paid to JTS consideration of Five Hundred Thousand U.S.
Dollars (U.S. $500,000.00) under the Agreement; and
WHEREAS, JTS has been negotiating with Western Digital Corporation ("WDC")
about entering into a Technology Transfer and License Agreement pursuant to
which, among other things, JTS will grant to WDC certain license and sublicense
rights with respect to JTS technology, including the Nordic Series design and
other technology referred to in the Agreement between JTS and Compaq; and
WHEREAS, JTS desires that Compaq release JTS from certain obligations in the
Agreement in order that JTS may finalize the Technology Transfer and License
Agreement; and
WHEREAS, Compaq desires to release JTS from such obligations if WDC will
provide equity funding to JTS and thereby make JTS a more viable entity and
further to enable WDC to become an alternate source of Nordic Series HDDs for
Compaq; and
WHEREAS, JTS has represented to Compaq that WDC will provide equity funding to
JTS and JTS agrees that it will not stand in the way of WDC being an alternate
source of Nordic Series HDDs to Compaq; and
WHEREAS, the parties are desirous of modifying the obligations of each other
that are in the Agreement, as described in this Amendment; and
NOW THEREFORE, in consideration of the premises and the mutual covenants and
undertakings hereinafter set forth, the parties hereto hereby agree as follows:
1.0 Definitions
1.1 Capitalized terms in this Amendment shall have the same meaning as given
them in the Agreement.
1.2 Delete Section 1.14 in its entirety and replace with the following:
"Nordic-Series" means any HDD with a width of between 3.25 and 3.75
inches and a height of 0.50 (five-tenths) inches or less, and all
Licensed Technology pertaining principally thereto.
1.3 Delete Section 1.18 in its entirety and replace with the following:
[*] means that period of exclusivity commencing on the date of a
publicly-announced delivery by Compaq of a revenue-bearing product
incorporating a Nordic Series HDD and extending for a period of [*]
thereafter, provided however, that such [*] shall not begin unless
and until the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 55
Nordic Series HDD that will be incorporated into the Compaq
product has been Accepted by Compaq.
1.4 The term [*] in the Agreement shall be replaced with the
term [*] .
1.5 The term "Nordic" in the Agreement shall be replaced with the term
"Nordic Series."
1.6 The "Effective Date" of this Amendment shall be February 3, 1995. The
amendments to Sections 2.1.e. and 2.1.f. of this Amendment shall, solely with
respect to JTS's obligations to TEAC, be retroactively effective as of June 16,
1994.
2.0 Development of Nordic Series HDDs
2.1 The parties agree to modify the Agreement as follows:
a. Delete Exhibits A, B, and C in their entirety and replace
within thirty (30) days of the effective date of this Amendment with new
Exhibits A, B, and C.
b. Delete Section 2.0.B of the Agreement in its entirety and
replace with the following:
JTS further agrees that the Nordic Series HDDs shall be
in strict conformance with the Nordic Technical
Specifications attached hereto as Exhibit C. To the
extent that JTS finds that any information in Exhibit C
will impact the Milestone Dates, Schedule, and/or
result in additional cost. JTS will notify Compaq in
writing within five (5) business days of the time that
Compaq provides JTS with the information which has
resulted in a change to the Milestone Dates, Schedule,
and/or additional cost. In the event that JTS does not
notify Compaq within five (5) days, then in such event,
the information furnished will be deemed to have no
impact on the Milestone Dates, Schedule, and/or cost of
the project.
c. Delete Section 2.0.C in its entirety and replace with the
following:
In consideration for JTS's agreement to design the
Nordic Series HDDs in conformance with the Development
Plan and the Project Milestones and in conformance with
the Nordic Technical Specifications; Compaq shall pay
five hundred thousand dollars (U.S. $500,000.00) as
non-recurring engineering charges ("NRE") to JTS for the
development of two (2) Nordic Series HDDs: [*] .
The NRE charges referred to above shall be
payable as follows:
One Hundred percent (100%) of NRE already paid
by Compaq by JTS.
d. In Section 2.0.E, second line down from the top, after the word
"that", insert the following:
, except for JTS's obligations under the Technology
Transfer and License Agreement with WDC.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 56
e. In Section 2.0.G, four lines down from the top, after the word
"Agreement," the phrase "except for any pre-existing obligation to TEAC and
JTS's obligations to WDC under the Technology Transfer and License Agreement."
f. Delete Section 2.0.H of the Agreement in its entirety and
replace instead with the following:
Except for any of JTS's pre-existing obligations to TEAC and
for the above-referenced Technology Transfer and License
Agreement with WDC, JTS agrees not to license the
Nordic Series design to a third party manufacturer. JTS
represents and warrants that the Technology Transfer and
License Agreement with WDC contains a prohibition against
WDC sublicensing the Licensed Technology to any third party
other than a WDC Subsidiary, as defined herein. "WDC
Subsidiary" is defined as an entity in which WDC holds at
least a fifty-one percent (51%) ownership, or, for WDC
manufacturing entities that are located in foreign
jurisdictions that require that the foreign entity own a
controlling interest, is controlled for all intent and
purposes by WDC and in which WDC holds at least a forty-nine
percent (49%) ownership, but only for so long as the
foregoing conditions are met.
g. Delete Section 2.0.J of the Agreement in its entirety and
replace with the following:
In consideration of the covenants and obligations set forth
in this Agreement, JTS agrees not to market any
particular Nordic Series HDD to any third party before such
Nordic Series HDD is Accepted by Compaq, and JTS further
agrees that it will not sell any Nordic Series HDDs [except
the Nordic three inch (3"), single disk, seven millimeter
(7mm) high, 270MByte HDD, the three inch (3"), dual disk,
ten and a half millimeter (10.5mm) high HDD with a capacity
of less than 700MBytes, and the three inch (3"), single
disk, ten and a half millimeter (10.5mm) high HDD with a
capacity of less than 350MBytes] to any third party for the
[*] . JTS shall be free to market Nordic Series HDDs to
third parties during the [*] provided however, that
marketing efforts shall not include the sale of Nordic
Series HDDs to such third parties in contravention of the
[*] . Additionally, JTS agrees that it will not sample
in quantities exceeding two (2) Nordic Series HDDs to any
third party during the [*]
h. In Section 2.0.K of the Agreement, delete all references to
[*] and replace with [*] Five lines down from the top, delete the phrase
"Nordic HDDs" and insert instead "HDDs."
i. Delete Section 2.0.L of the Agreement in its entirety and
replace with the following:
Upon expiration of the [*] and in consideration of the
covenants and obligations set forth in this Agreement,
Compaq will receive a royalty of [*] HDD for each Nordic
Series HDD sold to a third party, such royalty payable for
the initial Term of this Agreement. In the event that this
Agreement is extended beyond the initial Term, then in such
event, Compaq will receive a royalty of [*] HDD for each
Nordic Series HDD sold to a third party. Compaq agrees that
in the event that any third party, who is not licensed by
JTS, begins volume shipment of any Nordic Series equivalent
form factor and capacity HDDs, Company will renegotiate the
royalties of Section 2.0.L. in good faith. The foregoing
royalties shall be payable quarterly in accordance with the
provisions of this Agreement and subject to the audit
provision of
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE> 57
this Agreement. JTS agrees that WDC is obligated under
the above-referenced Technology Transfer and License
Agreement to pay to JTS the royalties described in the
following paragraph and further agrees that all such
royalties paid by WDC to JTS (hereinafter "WDC
Royalties") will be promptly paid by JTS to Compaq as
additional royalty under this Agreement. JTS hereby
grants to Compaq a perfected security interest in such
WDC Royalties and agrees to execute and file in
California and in Texas a Form UCC-1 with respect
thereto and all other documents and instruments as
Compaq may request to confirm or perfect such security
interest.
The royalty payable to WDC to JTS is as follows:
For so long as JTS is obligated to pay royalties to
Compaq for the sale of Nordic Series drives under this
Agreement, WDC shall pay to JTS, on a quarterly basis, a
royalty at a rate equivalent to the rate quoted in the
Development Agreement, not to exceed [*] per drive on
all sales of "Licensed Nordic Products" by WDC to any
third party other than Compaq (hereinafter referred to
as "Royalty Obligation"); provided, however, that at
such time as a third party competitor begins volume
shipment of any "3-Inch Disk Drive," such Royalty
Obligation will be reduced to a level to be negotiated
in good faith among WDC, JTS, and Compaq. Nothing in the
WDC/JTS Technology Transfer and License Agreement or in
this letter is intended to reduce or otherwise affect
JTS's obligation to Compaq to pay royalties to Compaq on
sales by JTS of Licensed Nordic Products. For purposes
of this letter and the WDC/JTS Technology Transfer and
License Agreement, "3-Inch Disk Drives" means every
magnetic-media storage system that includes control and
interfacing circuitry and hard disk assembly that
includes at least one magnetic rigid disk the diameter
of which is less than three and one-half inches (3 1/2")
and greater than two and three-quarters inches (2 3/4");
and "Licensed Nordic Products" means 3-Inch Disk Drives
that include the proprietary single-chip controller
currently embodied in JTS's Nordic Series design and any
derivative controller.
j. In Section 2.0.O of the Agreement, last line, delete "Nordic
HDDs" and insert instead "HDDs."
3.0 General
3.1 Other than as modified by this Amendment, all other terms and
conditions of the Agreement remain the same.
3.2 Whenever possible, each provision of this Amendment will be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Amendment is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or any other jurisdiction, but this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
3.3 Governing Law. This Amendment shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Amendment shall be governed by, the laws
of the State of Texas, without giving effect to provisions thereof regarding
conflict of laws.
3.4 This Amendment, together with the Agreement and those documents
expressly referred to therein, and the Corporate Purchase Agreement of June 21,
1994 between the parties herewith, embody the complete agreement
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE> 58
and understanding among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way. No
provisions in the purchase orders, acknowledgements or other business forms of
either party that are different from or in addition to the applicable terms set
forth in this Amendment shall be of any force or effect whatsoever unless it is
acknowledged to in writing by the other party expressly stating that such
document supersedes this Amendment as follows: "Notwithstanding any term of the
Development Agreement dated June 16, 1994 between the parties, as amended." Any
provision of this Amendment may be amended only with the prior written consent
of all of the parties hereto.
IN WITNESS WHEREOF, the persons signing below warrant that they are duly
authorized to sign for, an on behalf of, the respective parties. This
Amendment has been executed in duplicate originals.
JT STORAGE COMPAQ COMPUTER CORPORATION
By: /s/ David B. Pearce By: /s/ Hugh Barnes
-------------------------- ----------------------------
David E. Pearce Hugh Barnes
President Senior Vice President
General Manager
Portable PC Division
Date: February 3, 1995 Date: 2/8/95
-------------------------- ----------------------------
5
<PAGE> 59
[COMPAQ LETTERHEAD]
December 5, 1995
Mr. Lee Peterson
Vice President Sales & Marketing
JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Subject: Nordic Series Exclusivity Issue; Proposed Amendment 2 to our
Development Agreement of June 16, 1994, ("Agreement") as
amended by the Amendment dated February 3, 1995 ("Amendment 1")
Dear Lee:
Thank you for your letter of November 28, 1995. We seem to be close to agreement
on the issues. While Compaq remains willing to provide JTS relief from the
current [*] on Nordic Series products, we would
like to ensure (1) that Compaq's prices for Nordic Series products are not
permitted to increase as a result of increased royalties required of third
parties, and (2) that the proposed terms also apply to Western Digital
Corporation ("WDC"). Compaq proposes, therefore, to modify our Agreement, as
amended by Amendment 1 (collectively "Amended Agreement") substantially as
outlined in your letter of November 28, 1995, with additional provision to
address provided these concerns. Accordingly, we propose the following as
Amendment 2 to our Amended Agreement:
* Sections 2.0.G and 2.0.I of the Amended Agreement will remain in effect. In
addition, Compaq's prices for Nordic Series products will be the lesser of the
amounts permitted under these Sections or Compaq's current prices.
* For clarification, the phrase [*] , wherever it appears in the Amended
Agreement, shall be replaced by [*] . The [*] will commence upon the
date of delivery by JTS of a revenue-bearing product and extend for a period
of [*] thereafter.
Section 2.0.J of the Amended Agreement is simply entirely deleted to reflect
the elimination of the [*] restriction placed on JTS.
* The first sentence the first paragraph of Section 2.0.L of the Amended
Agreement is replaced with the following sentence: "Compaq will receive a
royalty of (a) [*] /HDD for each Nordic Series HDD sold to a third party
during the [*] , and (b) [*] /HDD for each Nordic Series HDD sold to a
third party after the [*] , such royalty payable for the initial Term of
this Agreement."
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 60
Mr. Lee Peterson -2- December 5, 1995
* The first sentence of the last paragraph of Section 2.0.L of the Amended
Agreement is replaced with the following sentence: "For so long as JTS is
obligated to pay royalties to Compaq for the sale of Nordic Series drives
under this Agreement, WDC will pay JTS, on a quarterly basis, a royalty at a
rate of (a) [*] /HDD for each Nordic Series HDD sold to a third party
other than Compaq during the [*] , and (b) [*] /HDD for each Nordic
Series HDD sold to a third party other than Compaq after the [*]
(collectively "Royalty Obligation"): provided, however, that at such time as
a third party competitor begins volume shipment of any "3-Inch Disk Drive,"
such Royalty Obligation will be reduced to a level to be negotiated in good
faith among WDC, JTS and Compaq.
* Capitalized terms in this letter shall have the same meaning given them in
the Amended Agreement. Other than as modified by this Amendment 2, all other
terms and conditions of the Amended Agreement remain the same.
Because we understand the importance of timing to JTS at this stage, JTS may
confirm its acceptance of the above by signing below and returning a counter
signed copy of this letter to me at the above address. This Amendment 2 shall
become effective upon JTS' acceptance and return of a countersigned copy of
this letter.
Very truly yours,
COMPAQ COMPUTER CORPORATION
/s/ James W. Hartzog
- -----------------------------
James W. Hertzog
Vice President AGREED TO:
Portable PC Division
JTS Corporation
By: /s/ D. T. Mitchell
---------------------------
Name: David T. Mitchell
Date: Dec. 15, 1995
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
<PAGE> 1
EXHIBIT 10.26
COMPAQ COMPUTER CORPORATION
PURCHASE AGREEMENT
This Purchase Agreement ("Agreement") is made by Compaq Computer
Corporation ("Buyer") and J.T. Storage Inc., ("Seller"), (JTS).
The terms and conditions contained in this Agreement shall govern
the purchase and sale of Product listed in Exhibit A ("Products and
Pricing"), conforming to Compaq specifications listed in Exhibit "B".
1. INTENT
A. Buyer intends to enter into a long term relationship with Seller. As
such, Seller is willing to cooperate with Buyer to further mutual long
term goals by sharing Product road map and technology directions.
Seller agrees to cooperate to achieve Buyer's long term program goals
such as shortening Product lead-times, increasing volume flexibility,
achieving Just-in-Time delivery, achieving ongoing cost reductions and
specific quality goals, and continuous quality improvement.
B. This Agreement is not a requirements contract and does not obligate
Buyer to purchase any minimum quantity of Product but only establishes
the terms and conditions for such purchase if and when they occur,
except as provided in Exhibit "A".
2. PURCHASE ORDERS
A. Buyer will purchase Products only by issuing purchase orders ("Order or
Orders") to Seller. Orders shall contain such things as quantity, price,
delivery date, part number, and revision level. Buyer shall make
commercially reasonable efforts to send written confirmation (except by
mutual agreement) of Orders within one (1) week after issuance. If
Seller fails to return the acknowledgment, Seller will be deemed to have
accepted any Order which conforms with the terms of this Agreement. No
additional or different provisions proposed by Seller shall apply unless
expressly agreed to in writing by Buyer. Buyer hereby gives notice of
its objection to any additional or different terms.
B. Seller agrees that all Buyer sites, subsidiaries, affiliated companies
and subcontractors, wherever located, shall be entitled to make
purchases under this Agreement.
3. TERM OF AGREEMENT
A. The term of this Agreement shall be sixty (60) months, commencing on
the date Buyer executes this Agreement ("Effective Date"). This
Agreement will be automatically renewed at the conclusion of the
initial sixty (60) month period for successive twelve (12) month
periods unless one of the parties indicates by written notice to the
other party not less than thirty (30) days prior to the end of any
such twelve (12) month period that it does not intend to renew the
Agreement. Notwithstanding the foregoing, the Agreement shall remain
in full force and effect and shall be applicable to any Order(s) issued
by Buyer to Seller during the term of this Agreement until any and all
obligations of the parties under such Order(s) have been fulfilled.
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<PAGE> 2
4. PRICING
A. The prices for the Products shall be set forth in Exhibit A and shall be for
the period set forth therein (the "Pricing Period").
B. Prices shall include all charges such as packaging, packing, crating,
storage, forwarding agent or brokerage fees, document fees, duties, and any
and all sales, use, excise and similar taxes.
C. Seller represents that the prices charged for any 3 1/2" product, qualified
by Compaq, will be [*] than prices charged to any other customer,
regardless of volume. Seller represents that prices charged for any 3" form
factor product, qualified by Compaq, will be [*] than prices charged to
any other customer, regardless of volume. In the event Seller provides
prices and/or terms for Products more favorable to another of its customers.
Buyer shall be entitled to a reduction retroactive to the date the prices
and/or terms were made available to other customers.
D. Seller shall maintain a vigorous cost reduction program to ensure that
pricing is competitive at all times. In the event that Buyer does not
consider Seller's pricing aggressive relative to the market during any
Pricing Period, Buyer shall have the right to request an immediate meeting
with Seller to renegotiate pricing.
E. Seller agrees to allow mutually acceptable independent auditors to inspect
the books and records of Seller from time to time as reasonably necessary to
confirm the representations contained in, and compliance with the terms of,
this Section 4, at Buyer's expense.
5. DELIVERY
A. Time shall be of the essence in meeting Buyer's requirements. Delivery
performance shall be measured by on-dock date at Buyer's specified ship-to
location (+/- 2 Days).
B. Unless otherwise set forth in the Order, title and risk of loss shall pass to
Buyer at Buyer's specified ship-to location.
C. If Seller delivers Product in advance of the specified delivery date, Buyer
may either return such Product at Seller's risk and expense for subsequent
delivery on the specified delivery date or retain such material and make
payment when it would have been due based on the specified delivery date.
D. Changes to delivery dates may only be made by Buyer's authorized purchasing
representatives. Buyer may, without cost or liability, issue change requests
for Product quantities and schedule dates in accordance with the Flexibility
Agreement attached as Exhibit D ("Flexibility Agreement"). Written
confirmation will be sent by Seller to Buyer within two (2) work days of
receiving a change request, and Buyer shall provide a confirming Order change
within ten (10) working days of receiving Seller's confirmation.
E. Seller shall notify Buyer in writing immediately if Seller has knowledge of
any event which could result in any change to the agreed delivery plan.
F. In the event that Product scheduled for delivery is more than two (2)
business days late, Buyer may request such Product to be shipped and
delivered via a different mode of transportation at sellers expense.
Alternatively, Buyer may purchase substitute Product elsewhere without
affecting other remedies Buyer may have and charge Seller any additional cost
incurred as a result.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
page 2
<PAGE> 3
6. PACKING, MARKING, AND SHIPPING INSTRUCTIONS
A. All Product shall be prepared and packed in a commercially reasonably
manner so as to secure the lowest transportation rates and meet
carrier's requirements or those set forth in the Product specification
attached as Exhibit B ("Specification").
B. Each shipping container shall be marked to show Buyer's Order number,
part number, revision level, lot number, and quantity contained therein.
A packing list showing the Order number shall be included in each
container.
C. Seller agrees to standardize the count multiples used in shipments.
7. QUALITY
A. Seller shall establish and/or maintain a quality improvement plan
acceptable to Buyer. Seller's Quality Improvement Plan is attached to
this Agreement as Exhibit C ("Quality Plan").
B. At Buyer's request, Seller will facilitate one-site visits and
inspections by Buyer during normal business hours. Buyer's inspections
shall in no way relieve Seller of its obligation to deliver conforming
Product or waive Buyer's right of inspection and acceptance at the time
the Products are delivered.
C. Seller agrees to provide relevant outgoing inspection, quality, and
reliability data upon Buyer's request.
D. Seller agrees to conform to the revision level stated on Buyer's Order.
E. Seller agrees to advise Buyer of any changes to process, materials, or
sources of supply and ensure that such changes do not compromise
specifications, quality, or reliability of Products ordered by Buyer.
8. INSPECTION AND ACCEPTANCE
A. Products purchased pursuant to this Agreement shall be subject to
inspection and test by Buyer at all times and places, including the
period of manufacture or development. Unless otherwise specified in the
Order, final inspection and acceptance of Product by Buyer shall be at
Buyer's facilities. Buyer reserves the right to reject Product which
does not conform to the specifications, drawings, samples or other
descriptions specified by Buyer. Buyer may, at its option, either return
defective or non-conforming Product for full credit of the purchase
price plus any transportation charges paid by Buyer, or require prompt
correction or replacement of defective or non-conforming Product, which
rights shall be in addition to such other rights as Buyer may have in
law or in equity. Product required to be corrected or replaced shall be
subject to the same inspection and warranty provisions of this Agreement
as Product originally delivered under any Order. Buyer may charge Seller
for costs of any above normal level of inspection.
page 3
<PAGE> 4
B. In the event Buyer returns Product back to Seller for correction or
replacement, Seller shall repair or replace all defective Product within
five (5) days of receipt of such Product. Seller will issue a "Return
Material Authorization" within twenty-four (24) hours of receipt. Seller
shall bear all risk and costs such as labor, material, inspection, and
shipping to and from Buyer's facilities. If Buyer incurs any such costs, it
may either recover them directly from Seller or set-off via a credit note
any amounts due to Seller. Seller agrees to provide failure analysis of
rejected material within five (5) days after receipt of rejected materials.
Seller will also provide a written corrective action report addressing the
steps that will be taken to eliminate the cause of the problem.
9. WARRANTY
A. Seller warrants that title to all Products delivered to Buyer under this
Agreement shall be free and clear of all liens, encumbrances, security
interests or other claims and that for a period of three (3) years from date
of acceptance of material by Buyer, that all Product shall be free from
defects in material, workmanship, and design. Seller further warrants that
all Product shall conform to applicable specifications, drawings, samples,
and descriptions referred to in this Agreement. The warranty for replaced or
repaired Product will be the same as the original Product.
B. Defective material discovered during Buyer's manufacturing or assembly
processes are not considered to be a warranty repair and shall be corrected
in accordance with paragraph 8.B.
C. Seller agrees that in case of epidemic failure (greater than 2% failure for
the same cause in any six (6) month period), Seller shall provide correction
or replacement in accordance with Paragraph 8.B.
D. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 9, NO WARRANTIES, EXPRESS OR
IMPLIED, STATUTORY OR OTHERWISE, ARE MADE WITH RESPECT TO THE PRODUCT
DELIVERED BY SELLER TO BUYER UNDER THIS AGREEMENT.
10. OUT OF WARRANTY REPAIRS and SPARE PARTS AVAILABILITY
A. Seller agrees to refurbish to a "like new" condition any out of warranty
Product at the refurbishment prices listed in Exhibit E ("Service, Repair,
and Refurbishment"). In addition, Seller agrees to make available for
purchase by Buyer replacement and repair parts for Products ("Spares") in
accordance with Exhibit E.
11. PAYMENT AND SET-OFF
A. Terms of payment shall be net 15 from the date of Seller's invoice provided
that Product has been received by Buyer for the period of six (6) months
from date of initial production shipment. After this period, terms of
payment shall be net 45 from the date of Seller's invoice provided that
Product has been received by Buyer. Payment of invoices shall not constitute
final acceptance of the Product.
B. Buyer retains the right to setoff rejections of Product or discrepancies on
paid invoices against future invoices.
C. Unless otherwise specified in Exhibit A or agreed to in writing by the
parties, payment shall be in U.S. dollars.
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<PAGE> 5
12. CHANGES
A. Buyer may from time to time change the specifications for the Products and
Seller agrees to make best efforts to comply. If changes result in a change
in Seller's costs or in the time for performance, an adjustment will be
made. Any adjustment must be in writing and must be requested within ten
(10) days of receipt by Seller of the notice of change.
B. No changes shall be made by Seller in the form, fit, or function of Products
purchased hereunder without Buyer's prior written approval.
13. TERMINATION FOR CAUSE
A. Seller may terminate this Agreement and/or any Order issued hereunder at any
time by written notice in the event Buyer:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and in the case of a breach which is capable of
remedy, fails to remedy same within thirty (30) days of notification of
said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors, or
a receiver or similar officer is appointed to take charge of all or a
part of the Buyer's assets and such condition is not cured within thirty
(30) days, or
B. Buyer may terminate this Agreement and/or any Order issued hereunder at any
time by written notice in the event Seller:
1. Fails to comply with any material provision of this Agreement or any
Order issued hereunder, and in the case of a breach which is capable of
remedy, fails to remedy same within thirty (30) days of notification of
said breach, or
2. Becomes insolvent or makes an assignment for the benefit of creditors, or
a receiver or similar officer is appointed to take charge of all or a
part of Seller's assets and such condition is not cured within thirty
(30) days, or
3. Assigns or attempts to assign, or subcontracts or attempts to
subcontract, any or all of its rights or obligations under this Agreement
or any Orders issued hereunder to a third party without Buyer's prior
written approval, or
4. Failure to agree on pricing for any Pricing Period.
C. Upon termination by Seller of the Agreement and/or any Order issued under
13A above, Buyer's entire liability shall be to purchase all finished goods,
work in progress, and Buyer unique materials that have been purchased within
lead time by Seller to fulfill Buyer's Order(s).
D. Upon termination by Buyer of the Agreement and/or any Order issued under 13B
above:
1. Buyer shall have the option to purchase any materials or work in progress
which Seller may have purchased or processed for the fulfillment of any
Order at Seller's cost plus a reasonable amount for any value already
added by Seller.
2. Buyer shall have no liability beyond payment for any balance due for
Products delivered by Seller before notice of termination.
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<PAGE> 6
14. TERMINATION FOR CONVENIENCE
A. Buyer may terminate this Agreement and/or any Order issued hereunder at
any time for any reason upon giving written notice of termination to the
Seller. Upon receipt of such notice, Seller shall immediately cease to
incur expenses pursuant to this Agreement and/or the Order that has been
terminated unless otherwise directed in the termination notice. Seller
shall also take all reasonable steps to mitigate the cost to Buyer for
terminating this Agreement and/or any Order. Within sixty (60) days from
the date of notice, Seller shall notify Buyer of costs incurred up to the
date of termination. In no event shall such cost exceed the unpaid balance:
1. Due for conforming material delivered prior to receipt of Buyer's
termination notice; and
2. Due on purchase orders previously issued in conformance with this
Agreement.
B. In addition to the foregoing, in the event that this Agreement is
terminated pursuant to this Paragraph, Buyer's entire liability shall be to
purchase all finished goods, work in progress, and Buyer unique materials
that have been purchased within lead time by Seller to fulfill Buyer's
Order(s).
15. LIMITATION OF LIABILITY
A. EXCEPT FOR A BREACH OF SECTION 19, 25 OR 26 OF THIS AGREEMENT, NEITHER
PARTY SHALL BE LIABLE FOR ANY CONSEQUENTIAL (INCLUDING, WITHOUT LIMITATION,
LOST PROFITS, UNLIQUIDATED INVENTORY, ETC.), INCIDENTAL, INDIRECT, SPECIAL,
ECONOMIC, OR PUNITIVE DAMAGES EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
16. FORCE MAJEURE
A. Neither party shall be liable for its failure to perform any of its
obligations hereunder during any period in which performance is delayed by
fire, flood, war, embargo, riot or the intervention of any government authority
("Force Majeure"), provided that the party suffering such delay immediately
notifies the other party of the delay. If, however, Seller's performance is
delayed for reasons set forth above for a cumulative period of fourteen (14)
calendar days or more, the Buyer, notwithstanding any other provision of this
Agreement to the contrary, may terminate this Agreement and/or any Order issued
hereunder by notice to Seller. In the event of such termination, Buyer's sole
liability, hereunder will be for the payment to Seller of any balance due and
owing for conforming Product delivered by Seller prior to Seller's notification
of delay to Buyer. In the event the parties do not terminate this Agreement
and/or Order due to a Force Majeure, the time for performance or cure will be
extended for a period equal to the duration of the Force Majeure.
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<PAGE> 7
17. PRODUCT NOTICES
A. Any notice given under this Agreement shall be in writing and will be
effective when delivered personally or deposited in the mail, postage prepaid
and addressed to the parties at their respective addresses set forth below,
or at any new address subsequently designated in writing by either party to
the other:
If to Seller: If to Buyer:
JTS CORPORATION COMPAQ COMPUTER CORPORATION
1289 Anvilwood Avenue P.O. BOX 692000
Sunnyvale, CA 94089 20555 S.H. 249
HOUSTON, TEXAS 77269-2000
ATTN.: David B. Pearce ATTN.:
with a copy to:
COMPAQ COMPUTER CORPORATION
P.O. BOX 692000
20555 S.H. 249
HOUSTON, TX 77269-2000
ATTN.: Division Counsel - Operations
18. COMPLIANCE WITH LAWS
A. All Product supplied and work performed under this Agreement shall comply
with all applicable laws and regulations in effect. In particular, Seller
agrees that its performance under this Agreement shall comply with all laws
governing its relationship with its employees, agents or subcontractors and
with the chlorofluorocarbon labeling requirements of the U.S. Clean Air Act
of 1990. Upon request, Seller agrees to certify compliance with such
applicable laws and regulations.
19. PATENT, COPYRIGHT AND TRADEMARK INDEMNITY
A. Seller shall defend, at its expense, any claim against Buyer alleging that
Products furnished under this Agreement infringe any patent, copyright or
trademark and shall pay all costs and damages awarded, provided Seller is
notified in writing of such claim and permitted to defend and compromise such
claim. If a final injunction against Buyer's use of the Products results from
such a claim (or, if Buyer reasonably believes such a claim is likely) Seller
shall, at its expense, and at Buyer's request, use commercially reasonable
efforts to obtain for Buyer the right to continue using the Product. In the
event that Seller cannot obtain such right for Buyer, Seller shall repurchase
all such Product from Buyer at the purchase price.
B. Seller warrants that there are no claims of infringement with respect to the
Product.
C. Seller is authorized to use Compaq logo and trademark only to the extent
necessary to meet the required specification for the Product(s). No other
rights with respect to Buyer's trademarks, trade names or brand names are
conferred, either expressly or by implication, upon Seller.
page 7
<PAGE> 8
20. CAPACITY PLANNING
A. Seller agrees to review forecasts provided by Buyer and advise Buyer if
Seller anticipates that he will be unable to achieve the requested volumes.
Buyer volume forecasts will be provided to Seller in accordance with Exhibit
A. Seller may from time to time request Buyer to review Buyer's forecast and
advise of any changes.
21. GRATUITIES
A. Each party represents that it has not offered nor given and will not offer
nor give any employee, agent, or representative of the other party any
gratuity with a view toward securing any business from the other party or
influencing such person with respect to the business between the parties.
22. INSURANCE AND STATUTORY OBLIGATIONS
A. If Seller's work under this Agreement requires access by Seller to any of
Buyer's premises or the premises of Buyer's customers or locations where
Buyer conducts business, or with material or equipment furnished by Buyer,
Seller shall take all necessary precautions to prevent the occurrence of any
injury to persons or property during the progress of such work and, except
to the extent that such injury is due solely and directly to Buyer's acts or
negligence, Seller shall indemnify Buyer against all loss which may result
in any way from any act or negligence of Seller, its employees, servants,
agents or subcontractors, and Seller shall maintain such insurance as shall
protect Buyer from such risks and from any statutory liabilities arising
therefrom and shall provide evidence of such insurance to Buyer upon
request.
23. INDEMNIFICATION
Seller agrees to protect, defend, indemnify and save Buyer harmless from all
sums, costs and expense which Buyer may incur or be obliged to pay as a
result of any and all loss, expense, damage, liability, claims, demands,
either at law or in equity, of every nature whatsoever in favor of any
person, including both Seller's and Buyer's employees, resulting from any
personal injury or death resulting from the use of any product sold to Buyer
by Seller hereunder, irrespective of whether Compaq or any other party is
found to have been negligent or strictly liable in connection with such
personal injury or death.
page 8
<PAGE> 9
24. CONFIDENTIAL INFORMATION
A. Each party recognizes that it may have previously entered or will in the
future enter into various agreements with the other party which obligates
it to maintain as confidential certain information disclosed to it by the
other party. To the extent that such information or any further
confidential information, which might include but is not limited to
business plans, forecasts, capacity, pricing, inventory levels, etc.
(collectively referred to hereinafter as "Information") is disclosed in
furtherance of this Agreement or any Order issued hereunder, such
information shall be so disclosed pursuant to the minimum terms and
conditions listed below; provided, however, the minimum terms and
conditions listed below shall in no way relieve the parties from any
obligation or modify such obligations previously agreed to in other
agreements. Both parties agree that this Agreement and any other
agreements regarding confidential information shall hereafter be
considered as coterminous, and shall expire no earlier than the date of
expiration or termination of this Agreement.
B. Both parties agree that the party receiving information will maintain such
information in confidence for a period of three (3) years from the date of
disclosure of such information, except when such disclosure is required by
law.
C. Each party shall protect the other party's information to the same extent
that it protects its own confidential and proprietary information and shall
take all reasonable precautions to prevent unauthorized disclosure to third
parties, except when such disclosure is required by law.
D. The parties acknowledge that the unauthorized disclosure of such
information will cause irreparable harm. Accordingly, the parties agree
that the injured party shall have the right to seek immediate injunctive
relief enjoining such unauthorized disclosure.
E. This provision shall not apply to information (1) known to the receiving
party at the time of receipt from the other party, (2) generally known or
available to the public through no act or failure to act by the receiving
party, (3) furnished to third parties by the disclosing party without
restriction on disclosure, or (4) furnished to the receiving party by a
third party as a matter of right and without restriction on disclosure.
F. Immediately upon termination of this Agreement or at the request of the
other party, each of the parties shall promptly return all materials in its
possession containing information of the other party.
25. COUNTRY OF ORIGIN
A. For each Product purchased under this Agreement, Seller shall furnish
Buyer with country of origin (manufacture), by quantity and part number
(Buyer's and Seller's) if necessary.
B. Seller agrees to provide necessary export documents and to facilitate
export of Product. Seller further agrees to assist Buyer's import of
Product as reasonably requested by Buyer.
page 9
<PAGE> 10
26. PROPERTY FURNISHED BY BUYER
A. Any tools, drawings, specifications, or other materials furnished by Buyer
for use by Seller in its performance under this Agreement or any Order issued
hereunder shall be identified and shall remain the property of Buyer and
shall be used by Seller only in its performance hereunder. Such property
shall be delivered, upon request, to destination specified by Buyer in good
condition, except for normal wear and tear.
27. GENERAL
A. Any obligations and duties which by their nature extend beyond the expiration
or earlier termination of this Agreement shall survive any such expiration or
termination and remain in effect.
B. If any provision or provisions of this Agreement shall be held to be invalid,
illegal or unenforceable, such provision shall be enforced to the fullest
extent permitted by applicable law and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
C. No action, except those regarding claims by third parties, or claims with
respect to patents, copyrights, trademarks or trade names or the unauthorized
disclosure of Confidential Information, regardless of form, arising out of
this Agreement may be brought by either party more than two (2) years after
the cause of action has arisen, or, in the case of non-payment, more than two
(2) years from the date the payment was due.
D. Any waiver of any kind by a party of a breach of this Agreement must be in
writing, shall be effective only to the extent set forth in such writing and
shall not operate or be construed as a waiver of any subsequent breach. Any
delay or omission in exercising any right, power or remedy pursuant to a
breach or default by a party shall not impair any right, power or remedy
which either party may have with respect to a future breach or default.
E. Seller hereby gives assurance to Buyer that it shall not export, re-export or
otherwise disclose, directly or indirectly, technical data received from
Buyer or the direct product of such technical data to any person or
destination when such export, re-export or disclosure is prohibited by the
laws of the United States or regulations of a Department of the United
States.
F. This Agreement is considered to be Compaq Confidential.
G. The entire Agreement between the parties is incorporated in this Agreement
and Appendices attached hereto, and it supersedes all prior discussions and
agreements between the parties relating to the subject matter hereof. This
Agreement can be modified only by a written amendment duly signed by persons
authorized to sign agreements on behalf of both parties, and shall not be
supplemented or modified by any course of dealing or trade usage. Variance
from or addition to the terms and conditions of this Agreement in any Order,
or other written notification from Seller will be of no effect.
H. THE CONSTRUCTION, VALIDITY, AND PERFORMANCE OF THIS AGREEMENT AND ANY ORDER
ISSUED UNDER IT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, U.S.A.
page 10
<PAGE> 11
28. [*]
IN WITNESS, THE AUTHORIZED REPRESENTATIVES OF THE PARTIES HAVE EXECUTED THIS
AGREEMENT.
For the Buyer For the Seller
/s/ JACK BAIKIC 6/21/94 /s/ DAVID B. PEARCE 6/21/94
________________________________ _______________________________
Signature (date) Signature (date)
JACK BAIKIC DAVID B. PEARCE
________________________________ _______________________________
Name Name
Director, Mass Storage
Corporate Procurement President
________________________________ _______________________________
Title Title
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
page 11
<PAGE> 12
EXHIBIT A
Other Terms and Conditions:
- *
- Pricing includes 3 year warranty.
- Reference Paragraph 4 for additional Pricing Terms and
Conditions
- *
* Certain information on this page has been omitted and Filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
page 13
<PAGE> 13
EXHIBIT B
SPECIFICATION
Buyer's specification number xxxxxx is incorporated by reference.
page 14
<PAGE> 14
EXHIBIT C
QUALITY AGREEMENT
A. Factory Performance Goals
- Supplier Attributable DPPM:
** To Be Negotiated **
B. Field Performance
- Demonstrated Continuous DPPM Improvement
C. Zero Purges/Products Holds
D. Failure Analysis Support
- On-site (all Compaq locations)
-- Detect verification and component level analysis
on a weekly basis
- Corporate
-- Root cause identification within 5 working days of
receipt of drives
E. Closed Loop Corrective Action Process (8-D)
- Required when Compaq goals not achieved
- Effective 8D Process consists of the following:
-- Use team approach
-- Describe the problem
-- Describe the cause
-- Containment Plan
-- Permanent C/A Plan
-- Verification of effectiveness
-- Prevent recurrence
-- Congratulate your team (recap)
- Corrective Action Process (8D)
-- Problem ID and action plan within 48 hours of
problem notification
-- Containment action implemented within 24 hours of
problem ID
-- Corrective action plan within 48 hours of root
cause ID
-- Problem closure verification within 24 hours of
corrective action
-- All actions executed to planned dates
-- All actions documented via 8D format
page 15
<PAGE> 15
F. Product/Process Change Notification
-- Written notification with data or samples within a
60-90 day window
G. Reporting
- Information NOT data
- Real time
-- 8D updates
-- PMP violations
-- Internal quality/reliability issues
- Weekly Summary
-- Failure analysis status
- Monthly
-- PMP
-- PCN qualification log
-- DPPM improvement plan
-- Failure analysis status log
H. Supplier agrees to implement Process Management Plan(s)
(PMP), prior to production release (Step 3) of Compaq 5-Step
Supplier Development Process. (Reference Compaq World Class
Supplier Process).
page 16
<PAGE> 16
World Class Supplier Process COMPAQ
--------------------------------------------------
PROCESS MANAGEMENT PLAN
- -------------------------------------------------------------------------------
Full Name
- -------------------------------------------------------------------------------
Full Numbers
- -------------------------------------------------------------------------------
Modulation
- -------------------------------------------------------------------------------
Compaq Procurement Managers
- -------------------------------------------------------------------------------
Supplier
- -------------------------------------------------------------------------------
Facility
- -------------------------------------------------------------------------------
Compaq Procurement Employees Plan Effective Date
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------
Procurement Engineer Date
- -------------------------------------------
Supplier Representative Date
Exhibit C
Page 17
<PAGE> 17
EXHIBIT D
FLEXIBILITY AGREEMENT
The following changes to volumes on existing purchase orders may be made without
cost or liability to Buyer.
<TABLE>
<CAPTION>
Number of days prior % increase* % decrease
to scheduled delivery dates
<S> <C> <C>
0 - 15
16 - 30
*
31 - 45
46+-
</TABLE>
* *
* Certain information on this page has been omitted and Filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
page 18
<PAGE> 18
EXHIBIT E
SERVICE, REPAIR, AND REFURBISHMENT
A. OUT OF WARRANTY REPAIRS
1. Seller agrees to refurbish to "like new" condition any
out of warranty Product at 50% of last price paid for
new product. This obligation shall be satisfied by
either refurbishing Product submitted by Buyer or
replacing such Product with refurbished Product of the
same part number. Returned Product shall be at the
latest revision level. "Like new" condition means
refurbished to meet the electrical and mechanical
requirements of the Buyer's applicable specifications
including the replacement of non-functioning parts.
2. Product submitted by Buyer for refurbishment will be in
reasonably good condition and repairable. In the event Product
submitted for refurbishment has been tampered with in an
attempt to repair it or has been damaged beyond repair, Seller
will not be obligated to make out of warranty repairs.
3. Seller agrees to provide monthly status reports indicating
quantities of units returned, units which aren't repairable,
and units for which no trouble was found.
4. Seller agrees, upon Buyer request, to provide repair training,
documentation, and spare parts to local service providers.
Local service providers will be selected by mutual agreement.
B. SPARE PARTS AVAILABILITY
1. Seller shall make available for purchase by Buyer replacement
and repair parts for Products ("Spares"). Spares for Products
shall be available for purchase at least five (5) years after
delivery of the last shipment of such Product. Spare parts
shall be of the latest revision.
Availability of Spares shall be as follows:
Repair cycle time - 25 days dock to dock
Rush - shipment of minimum quantity
within 24 hours
RMA issuance - within 4 hours
2. Buyer reserves the right to allocate supplier capacity to be
used for warranty repair in those situations where the
supplier's repair facilities are unable to meet Buyer's
warranty replacement/repair requirements.
3. Seller agrees to provide monthly status reports indicating
quantities of units returned, units which aren't repairable,
and units for which no trouble was found.
C. DOCUMENTATION
Seller agrees to provide Theory of Operations, schematics, sourced Bill
of Material, etc. sufficient to enable repair of product.
page 19
<PAGE> 19
D. LOCAL SERVICE SUPPORT
Seller will, at buyer's request, and by mutual consent, provide spare
parts and training for buyer's local service providers in buyer's
geographical sales regions.
page 20
<PAGE> 20
EXHIBIT F
[ * ]
page 21
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 21
[ * ]
page 22
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 22
[ * ]
page 23
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 23
EXHIBIT H
RATE SHEET FOR LOCAL WAREHOUSE
(HOUSTON LOCATION - EXEL LOGISTICS NORTH AMERICA)
SUMMARY OF RATES
Initial Monthly Storage: $2.50/pallet
Recurring Storage: $3.45/pallet
Handling In: $2.50/pallet
Handling Out: $2.50/pallet
Loose Case In: $.08/case
Lose Case Out: $.12/case
Palletization $5.00/pallet
(includes shrink-wrap, banding,
and cornerboards)
Pallets - Class B: $4.00/pallet
(in case Compaq supplied pallets
are not available)
Unloading Floor Loaded Containers: $100.00/20' container
(Flat rate includes Palletization $200.00/40' container
& Loose Case Handling Fees)
Ad Hoc Cycle Count/Physical $29.00/hour with 1/2
inventory: hour minimum
Value Added Services:
Notes:
- - No accessorial charges will be accepted.
- - No overtime labor charges will be accepted.
- - In/Out charges will be paid as incurred.
- - All rates are based on stacking pallets 2 high.
page 24
<PAGE> 24
EXHIBIT I
COMPAQ ASIA
Compaq Purchase Agreement Site Requirement (Singapore)
COMMODITY: Hard Drive
- - Quality Goal
Non-Admin LAR 100%
Admin LAR 100%
RI DPPM 0
Line DPPM As specified by Houston
Corporate
DTS Achieved DTS status for new
part after 5 lots of
consecutive shipment
- - Availability/Flexibility
On-Time deliveries (+/- 2 100% Compaq dock
Days)
MRS/JIT deliveries 100% Part Number
Buffer Stock 2 Weeks at Local Warehouse
- - Local sales and Engineering Support
Business and Engineering communication via local sales office
Dedicated Engineering support for in-house failure drives verifications
Monthly review and quarterly executive review
- - Repair Turn Around Time
All line rejects to be return for credit only. Supplier to arrange and
pay for the collection on weekly basis.
Incoming lot rejects: If Compaq decided to RTV, supplier to arrange and
pay for collection. If Compaq decided to sort and use due to urgency,
Compaq will bill the supplier at Compaq Asia's standard rework rate.
Failure analysis turn around time is 2 weeks for normal line fall-out.
Reliability and inspection failure that warrant 8-D will be as per the
8-D procedure.
Field return rejects - 1 to 1 exchange with 3 days turn-around time.
page 25
<PAGE> 25
[Chart: JTS Corporation Hard Drive Volume Forecast,
October, 1994 - June, 1995]
<PAGE> 1
EXHIBIT 10.27
TECHNOLOGY TRANSFER AND
LICENSE AGREEMENT
THIS TECHNOLOGY TRANSFER AND LICENSE AGREEMENT (this "Agreement") is made
this 3rd day of February, 1995, by and between WESTERN DIGITAL CORPORATION, a
Delaware corporation, having its principal place of business at 8105 Irvine
Center Drive, Irvine, California 92718 ("WDC"), and JT STORAGE, INC., a Delaware
corporation, having its principal place of business at 1289 Anvilwood Avenue,
Sunnyvale, California 94089 ("JTS"), with reference to the following facts:
WHEREAS, JTS has designed and developed new hard disk drive products in a
new form factor generally referred to as a 3-inch disk drive form factor, at
least one of which is currently ready for production and for which JTS currently
has a customer;
WHEREAS, WDC desires to acquire from JTS the information and rights
necessary to enable WDC to manufacture such new JTS disk drive products, as well
as certain related rights, all as set forth herein; and
WHEREAS, JTS is willing to transfer such information and rights to WDC in
consideration of the payment and other obligations of WDC hereunder.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "3-Inch Disk Drive" means every magnetic-media storage system that
includes control and interfacing circuitry, and a head-disk assembly that
includes at least one magnetic rigid disk the diameter of which is less than
three and one-half inches (3.50") and greater than two and three quarters inches
(2.75").
1.2 "Accessories" means any products that are not 3-Inch Disk Drives but
are sold in conjunction with or for uses incidental to a 3-Inch Disk Drive that
is a Licensed Product, such as carrying cases, docking modules, interface cards
and installation software and other items incidental to installation in a
computer or other value added subsystem; provided, however,
<PAGE> 2
Accessories shall not include any system incorporating a 3-Inch Disk Drive.
1.3 "Additional Developments" of a party hereto means any
improvements in, modifications on, or variations of any Licensed Nordic
Product; provided, however, that any such improvements, modifications and
variations that do not result in a change to any of the following
specifications of the affected Licensed Nordic Product shall be excluded from
the scope of the term Additional Developments: capacity per disk, data transfer
rate, mechanical form factor, and interface specifications.
1.4 "Captured Patents" of a party hereto means all Patents, issued
or issuing, on applications entitled to an effective filing date prior to
December 31, 1999, under which Patents or the applications therefor such party
or any of its Subsidiaries now has, or hereafter obtains, the right to grant
licenses of or within the scope granted herein. The Captured Patents of JTS
include, but are not limited to, the Patents and Patent applications listed on
Exhibit B attached hereto.
1.5 "Change in Control" means any circumstance in which (a) any
person, entity or group (as group is used in Section 13(d)(3) of the Exchange
Act of 1934, as amended) (other than pursuant to a venture capital financing)
acquires direct or indirect beneficial ownership (as defined in Rule 13d-3
under the Exchange Act of 1934, as amended) in the aggregate of securities of
JTS representing more than thirty percent (30%) of the total combined voting
power of JTS's then issued and outstanding voting securities; (b) the sale of
all or substantially all of the assets of JTS occurs to any person or entity
that is not a wholly-owned-subsidiary of JTS; (c) a part is liquidated; or (d)
an entity identified in Section 11.3 of this Agreement holds or otherwise
controls, directly or indirectly, a majority of the seats on the Board of
Directors of JTS as a result of an election contest.
1.6 "The Customer Sponsor" means the company identified in a letter
from JTS to WDC dated of even date herewith.
1.7 "Designated Product" means the first double disk Licensed
Nordic Product and its single disk version that results from the Technology
Transfer Program.
1.8 "Effective Date" means the effective date of this Agreement as
set forth in Section 10.1 below.
1.9 "Future Generation Licensed Nordic Products" means all Licensed
Nordic Products other than the Designated Product.
1.10 "JTS Chip" means the proprietary single-chip controller
identified by JTS as 541J included in the Designated Product, and any
derivative of such controller.
2
<PAGE> 3
1.11 "Licensed Nordic Products" mean every 3-Inch Disk Drive that
includes a JTS Chip or any derivative of a JTS Chip, including, without
limitation, the Designated Product.
1.12 "Licensed Products" mean (a) every 3-Inch Disk Drive and all
components thereof and (b) all Accessories.
1.13 "Other Licensed Technology" of a party hereto means all
technical information and intellectual property (other than Captured Patents
and trademarks and trade names), now owned or possessed by such party (or any
of its Subsidiaries) or hereafter conceived, developed or acquired by such party
(or any of its Subsidiaries), embodied or used, or intended to be embodied or
used, in the making or operation of any Licensed Nordic Product, including,
without limitation, copyrights, trade secrets, inventions, source codes, object
codes, flow charts, processes, techniques, specifications, drawings, parts
layouts, parts lists, technical information pertaining to manufacturing, parts,
circuitry, tooling and testing requirements, know-how, manuals and other
technical data and support documentation, whether or not patentable or
copyrightable.
1.14 "Patents" mean any and all patents of all countries of the
world, including utility patents, design patents, reissue patents, utility
models, inventors certificates and registrations, and any and all applications
therefor, including divisional, continuation, and reissue applications.
1.15 "Subsidiary" of a party hereto means any corporation, company
or other entity (a) in which such party holds at least fifty-one percent (51%)
ownership or (b) with respect to such party's manufacturing entities that are
located in foreign jurisdictions that require that the foreign entity own
a controlling interest, that is controlled for all intents and purposes by such
party and in which such party holds at least forty-nine percent (49%)
ownership, but only for so long as the foregoing conditions are met.
1.16 "Technology Transfer Program" means the program described in
Exhibit A, pursuant to which JTS will deliver to WDC information, rights,
documentation and other items relating to the Designated Product.
ARTICLE 2
LICENSES
2.1 Grant of Non-Exclusive Patent License by JTS. In consideration
of WDC entering into this Agreement, JTS hereby grants WDC the perpetual
non-exclusive worldwide right and license under the JTS Captured Patents to
make, have made, use, import and sell Licensed Products, and to make, have
made and use machines, tools, apparatus and equipment required in such
manufacture, and to dispose of such machines, tools, apparatus
3
<PAGE> 4
and equipment by sale or otherwise when no longer required in such manufacture;
provided, however, that such sale or disposal of such machines, tools,
apparatus and equipment shall carry no express or implied rights to make, use
or sell any Licensed Product.
2.2 Grant of Non-Exclusive Licensed Technology License by JTS. In
consideration of WDC entering into this Agreement, JTS hereby grants WDC the
perpetual non-exclusive worldwide right and license under JTS Other Licensed
Technology to make, have made, use, import and sell the Licensed Nordic
Products, and to make, have made and use machines, tools, apparatus and
equipment required in such manufacture, and to dispose of such machines, tools,
apparatus and equipment by sale or otherwise when no longer required in such
manufacture; provided, however, that such sale or disposal of such machines,
tools, apparatus and equipment shall carry no express or implied rights to
make, use or sell any Licensed Nordic Product.
2.3 Grant of Non-Exclusive Patent License by WDC. Subject to the
terms and conditions of this Agreement, WDC hereby grants JTS the perpetual
non-exclusive worldwide right and license under WDC Captured Patents to make,
have made, use, import and sell Licensed Products, and to make, have made and
use machines, tools, apparatus and equipment required in such manufacture, and
to dispose of such machines, tools, apparatus and equipment by sale or
otherwise when no longer required in such manufacture; provided, however, that
such sale or disposal of such machines, tools, apparatus and equipment shall
carry no express or implied rights to make, use or sell any Licensed Product.
2.4 Grant of Non-Exclusive License by WDC. Subject to the terms and
conditions of this Agreement, WDC grants JTS the perpetual non-exclusive
worldwide right and license under WDC Other Licensed Technology to make, have
made, use, import and sell Licensed Nordic Products, and to make, have made and
use machines, tools, apparatus and equipment required in such manufacture, and
to dispose of such machines, tools, apparatus and equipment by sale or
otherwise when no longer required in such manufacture; provided, however, that
such sale or disposal of such machines, tools, apparatus and equipment shall
carry no express or implied rights to make, use or sell any Licensed Nordic
Product.
2.5 Sublicensing. Except as separately agreed between WDC and the
Customer Sponsor, the licenses granted in this Article 2 shall not include the
right to sublicense to a third party; provided, however, that the licenses
granted in this Article 2 shall inure to the benefit of any subsidiary of a
party hereto during such period of time that such entity remains a Subsidiary
of such party.
4
<PAGE> 5
2.6 Additional Disclosure and Transfer Obligations.
(a) In addition to the information, documents, rights and other
tangible and intangible items required to be transferred and delivered to WDC
by JTS in accordance with the Technology Transfer Program, until the earlier of
(i) six (6) months after WDC commences volume production of a Licensed Nordic
Product or (ii) March 31, 1996, JTS shall, at JTS's sole expense, deliver,
transfer and disclose to WDC all other information, documents, rights and other
tangible and intangible items that constitute JTS Other Licensed Technology,
within a reasonable time before JTS (or any of its Subsidiaries) begins to sell
any Licensed Nordic Product containing such JTS Other Licensed Technology.
Thereafter, [*] JTS shall disclose to WDC all JTS Additional Developments
within a reasonable time before JTS (or any of its Subsidiaries) begins to
sell any Licensed Nordic Product containing such JTS Additional Developments,
and shall, at JTS's sole expense, deliver to WDC such appropriate documentation
in JTS's possession with respect thereto as may be reasonably requested by WDC
to enable WDC to incorporate such JTS Additional Developments into WDC's
manufacturing processes for 3-Inch Disk Drives.
(b) Until [*] WDC shall disclose to JTS all WDC Additional
Developments within a reasonable time before WDC (or any of its Subsidiaries)
begins to sell any Licensed Nordic Product containing such WDC Additional
Developments, and shall, at WDC's sole expense, deliver to JTS such appropriate
documentation in WDC's possession with respect thereto as may be reasonably
requested by JTS to enable JTS to incorporate such WDC Additional Developments
into JTS's manufacturing processes for 3-Inch Disk Drives.
ARTICLE 3
TECHNOLOGY TRANSFER PROGRAM
3.1 Transfer of Know-How Required to Manufacture the Licensed Nordic
Products. JTS shall deliver to WDC the information, documents, rights and other
tangible and intangible items that are necessary to enable WDC to manufacture
the Designated Product in accordance with the Technology Transfer Program. Any
material deviation from the Technology Transfer Program shall require the
mutual agreement of JTS and WDC. JTS shall be solely responsible for the
conduct of all phases of the Technology Transfer Program; provided, however,
JTS agrees to consult in good faith with WDC regarding all significant aspects
of the Technology Transfer Program. JTS shall focus the appropriate resources
to the successful and timely completion of the Program Schedule included in
Exhibit A attached hereto. Without WDC's prior written consent, which shall not
be
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
5
<PAGE> 6
unreasonably withheld, JTS shall not undertake any development or similar
projects for any third party prior to the earlier of (a) the date on which WDC
commences volume production of a Licensed Nordic Product or (b) January 1,
1996; provided, however, that JTS may continue to discharge its development and
other obligations under the Customer Sponsor Agreement, and nothing contained
herein shall limit or restrict JTS in respect of its performance of the
Customer Sponsor Agreement.
3.2 Access to Vendors. Without limiting the requirements set forth in
the Technology Transfer Program, JTS shall provide WDC with appropriate
documentation [*] . Upon reasonable notice and during normal business hours,
JTS shall further allow WDC reasonable access to JTS's engineering staff and
shall allow WDC's engineers to visit JTS's manufacturing and research facilities
for the purpose of receiving reasonable support of the Licensed Nordic Products
and all rights granted WDC under this Agreement.
3.3 Disclosures Not Required. Notwithstanding any other provision in
this Agreement, JTS shall not be required to disclose to WDC any of the
following information with respect to any JTS Chip: varilogic designs, circuit
designs and logic designs.
ARTICLE 4
PAYMENTS TO JTS
4.1 Technology Transfer Program Payments. In consideration of the
rights granted to WDC under this Agreement, WDC shall pay to JTS up to Six
Million Four Hundred Thousand Dollars ($6,400,000.00) in accordance with and
subject to the conditions set forth in the Payment Schedule included in Exhibit
A attached hereto. Whenever the Technology Transfer Program designates a
particular achievement or requirement of JTS as a condition to any payment, such
condition shall be satisfied only after WDC has verified to its reasonable
satisfaction that such achievement or requirement has been accomplished.
4.2 Transfer of Tangible Items. The parties acknowledge and agree
that the tangible items to be transferred to WDC incidental to the transfer of
technology pursuant to this
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
6
<PAGE> 7
Agreement have an aggregate value of less than [*] .
4.3 Royalties. For so long as JTS is obligated to pay a royalty to the
Customer Sponsor under the Customer Sponsor Agreement, WDC shall pay a royalty
to JTS, on a quarterly basis, at a rate equivalent to that set forth in the
Customer Sponsor Agreement, not to exceed [*] per covered product, on all
sales by WDC to any third party other than the Customer Sponsor of Licensed
Nordic Products; provided, however, that at such time as a third party
competitor begins volume shipment of any 3-Inch Disk Drive, WDC's royalty
obligations to JTS shall be reduced to a level to be negotiated in good faith
among WDC, JTS and the Customer Sponsor. Nothing in this Agreement shall reduce
or otherwise affect JTS's obligations to the Customer Sponsor to pay royalties
to the Customer Sponsor on sales by WDC of Licensed Nordic Products.
4.4 Payments and Reports. WDC shall submit royalty payments due pursuant
to Section 4.2 above on a quarterly basis no later than [*] following the
last business day of all calendar quarters, together with a quarterly report,
certified by an officer of WDC, specifying the quantity of the royalty-bearing
Licensed Nordic Product sold during the previous quarter and the royalty due for
such royalty-bearing Licensed Nordic Product. JTS shall certify to WDC from time
to time the prevailing royalty rates in effect under the Customer Sponsor
Agreement.
4.5 Reports Confidential. The information contained in the reports
delivered by WDC pursuant to Section 4.3 above shall be retained in confidence
and access to such information shall be restricted to the finance and legal
groups of JTS. The obligations to provide royalty reports shall only apply to
the royalty-bearing Licensed Nordic Products.
ARTICLE 5
JTS REPRESENTATIONS,
WARRANTIES AND COVENANTS
JTS hereby represents, warrants and covenants as follows:
5.1 Corporate Power. JTS has the corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
The execution, delivery and performance of this Agreement has been duly and
validly authorized by JTS, and upon the Effective Date, this Agreement will
constitute a valid and binding agreement of JTS.
5.2 No Other Licenses. Except to the extent identified on Exhibit C
attached hereto, JTS has not granted to any third party any rights or interests
to the JTS Captured
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
7
<PAGE> 8
Patents, the Licensed Nordic Products or JTS Other Licensed Technology. Until
[*] neither JTS nor any of its Subsidiaries shall grant to any third party
any license under the JTS Captured Patents, JTS Other Licensed Technology or any
JTS Chip to sell 3-Inch Disk Drives made for or by such third party; provided,
however, that JTS and its Subsidiaries shall be entitled to (a) allow other
companies to manufacture 3-Inch Disk Drives to be sold by JTS or its
Subsidiaries; (b) grant manufacturing and sales licenses with respect to 3-Inch
Disk Drives to customers of JTS in connection with sales agreements between JTS
and its customers, but only to the extent such licenses are contingent upon the
inability or failure of JTS to supply such 3-Inch Disk Drives to its customers;
(c) include 3-Inch Disk Drives in the field of use in any patent license
included in a cross-license agreement that is reasonably required to resolve
third party patent infringement claims; and (d) on or after [*] transfer any
of its rights in any JTS Chip (by license or otherwise) to any third party. For
the term of this Agreement, neither JTS nor any of its Subsidiaries shall take
or fail to take any action that may restrict JTS's legal right to grant to WDC
the rights and licenses contemplated under this Agreement.
5.3 No Consents Required. As of the Effective Date, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereunder will require JTS or any of its Subsidiaries
to obtain any permits, authorizations or consents under current law from any
governmental body or from any other person, firm or corporation under any
existing agreement to which JTS or any of its Subsidiaries may be a party. The
execution, delivery and consummation of this Agreement will not result in the
breach of or give rise to cause for termination of any agreement to which JTS
or any of its Subsidiaries may be a party or, to JTS's knowledge, that
otherwise relates to the Captured Patents, Licensed Products or any JTS Other
Licensed Technology.
5.4 No Additional Obligations. Neither the execution, delivery and
performance of this Agreement by WDC nor the use of the licenses and other
rights granted WDC hereunder impose or will impose on WDC any royalty
obligation or other payment obligation of any kind pursuant to (a) any
agreement or understanding to which JTS is a party or (b) to the best of JTS's
knowledge, otherwise, except as expressly contemplated herein and in the
License Agreement of even date herewith between WDC and TEAC CORPORATION.
5.5 Current Technology. All material technical information and other
items deliverable pursuant to the Technology Transfer Program represent what
JTS believes in good faith to be the most current and best technology available
to JTS relating to 3-Inch Disk Drives.
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
8
<PAGE> 9
ARTICLE 6
WDC REPRESENTATIONS AND WARRANTIES
WDC hereby represents, warrants and covenants as follows:
6.1 Corporate Power. WDC has the corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
The execution, delivery and performance of this Agreement has been duly and
validly authorized by WDC, and upon the Effective Date, this Agreement will
constitute a valid and binding agreement of WDC.
6.2 No Consents Required. As of the Effective Date, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereunder will require WDC to obtain any permits,
authorizations or consents from any governmental body or from any other
person, firm or corporation, and such execution, delivery and consummation will
not result in the breach of or give rise to any termination of any agreement or
contract to which WDC may be a party.
6.3 Future Generation Licensed Nordic Products. WDC shall offer to
sell all Future Generation Licensed Nordic Products to the Customer Sponsor
before offering such products to any third party. Provided the Customer Sponsor
commits in a reasonably timely manner to purchase such Future Generation
Licensed Nordic Products from WDC or JTS, WDC shall refrain from selling such
products to any customer other than JTS or the Customer Sponsor for a period of
[*] commencing on [*] .
ARTICLE 7
IMMUNITY FROM SUIT
7.1 Immunity Granted by JTS. JTS, on behalf of itself and its
Subsidiaries, hereby grants to all third-party transferees of the Licensed
Products manufactured, leased, sold or otherwise transferred by WDC or its
Subsidiaries, an immunity from suit under JTS Captured Patents (a) for the
manufacture, use and sale of the Licensed Products; and (b) for the formation,
sale and use of any higher-level assembly that includes any Licensed Product,
whether or not such higher-level assembly includes other apparatus not
furnished by WDC or any of its Subsidiaries; provided, however, that such
immunity shall not extend to any apparatus that forms a part of such
higher-level assembly that is not furnished by WDC or its Subsidiaries. JTS, on
behalf of itself and its Subsidiaries, hereby grants to all third-party
transferees of the Licensed Nordic Products manufactured, leased, sold or
otherwise transferred by WDC or its Subsidiaries, an immunity from suit under
JTS Other Licensed Technology (a) for the manufacture, use and sale of the
Licensed
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
9
<PAGE> 10
Nordic Products; and (b) for the formation, sale and use of any higher-level
assembly that includes any Licensed Nordic Product, whether or not such
higher-level assembly includes other apparatus not furnished by WDC or any of
its Subsidiaries; provided, however, that such immunity shall not extend to any
apparatus that forms a part of such higher-level assembly that is not
furnished by WDC or its Subsidiaries.
7.2 Immunity Granted by WDC. WDC, on behalf of itself and its
Subsidiaries, hereby grants to all third-party transferees of the Licensed
Products manufactured, leased, sold or otherwise transferred by JTS or its
Subsidiaries, an immunity from suit under WDC Captured Patents (a) for the
manufacture, use and sale of Licensed Products; and (b) for the formation, sale
and use of any higher-level assembly that includes any Licensed Product,
whether or not such higher-level assembly includes other apparatus not
furnished by JTS or any of its Subsidiaries; provided, however, that such
immunity shall not extend to any apparatus that forms a part of such
higher-level assembly that is not furnished by JTS or its Subsidiaries. WDC, on
behalf of itself and its Subsidiaries, hereby grants to all third-party
transferees of the Licensed Nordic Products manufactured, leased, sold or
otherwise transferred by JTS or its Subsidiaries, an immunity from suit under
WDC Other Licensed Technology (a) for the manufacture, use and sale of the
Licensed Nordic Products; and (b) for the formation, sale and use of any
higher-level assembly that includes any Licensed Nordic Product, whether or not
such higher-level assembly includes other apparatus not furnished by JTS or any
of its Subsidiaries; provided, however, that such immunity shall not extend to
any apparatus that forms a part of such higher-level assembly that is not
furnished by JTS or its Subsidiaries.
ARTICLE 8
CONFIDENTIALITY
8.1 Confidential Information. JTS and WDC agree to undertake all
reasonable efforts to refrain, and to cause its Subsidiaries to refrain, from
disclosing any confidential proprietary information with respect to the
technology products governed by this Agreement. Each of the parties hereto
acknowledge that another party hereto may find it necessary to disclose
proprietary information in connection with the proper grant of sublicenses to
parties other than a party hereto to the extent permitted hereby. Under such
circumstances, JTS or WDC, as the case may be, may make such information
available to third parties to the limited extent necessary for such third party
to fulfill its supply or other permitted purposes, provided that such party
shall first obtain from the recipients a fully-executed confidentiality
agreement that is at least as restrictive as the confidentiality agreement
contained herein; provided, however, that the foregoing shall not restrict JTS's
or WDC's right to provide technical information and test data that
10
<PAGE> 11
is reasonably requested by customers in the ordinary course of business.
8.2 Public Domain. Neither JTS nor WDC shall be bound by the
provisions of Section 8.1 above with respect to information that (a) was
previously known to the recipient at the time of disclosure; (b) is in the
public domain at the time of disclosure; (c) becomes a part of the public
domain after the time of disclosure, other than through disclosure by the
recipient or some other third party that is under an agreement of
confidentiality with respect to the subject information or obtained the
information from the recipient; (d) is required to be disclosed by law; or
(e) is disclosed by a third party not bound by an agreement of confidentiality
with respect to such information that the third party did not obtain from the
recipient.
ARTICLE 9
RECORDKEEPING AND AUDIT RIGHTS
Each party shall keep and maintain full and accurate records relating
to the development, manufacture and sales of the Licensed Products. Each party
agrees to allow a mutually acceptable independent auditor to audit and analyze
appropriate records to ensure compliance with the terms of this Agreement. Any
such audit shall be permitted by the party to be audited within fifteen (15)
days of receipt of a written request by the party requesting such audit, during
normal business hours. The cost of such audit will be borne by the party
requesting the audit unless a material discrepancy is found or records are not
maintained and available in accordance with this Article, in which case the
audited party agrees to pay the requesting party for the costs associated with
the audit.
ARTICLE 10
TERM AND TERMINATION
10.1 Effective Date. This Agreement shall become effective upon
satisfaction of the following conditions, any of which may be waived by WDC in
its sole discretion:
(a) The execution and delivery of a license or similar
agreement, acceptable in form and substance to WDC, from TEAC CORPORATION in
favor of WDC with respect to 3-Inch Disk Drives (the "TEAC Agreement");
(b) The execution and delivery of a license or similar
agreement, acceptable in form and substance to WDC, from PONT PERIPHERALS
(formerly known as DZU CORPORATION) in favor of WDC with respect to 3-Inch
Disk Drives;
(c) The execution and delivery of an amendment to or other
arrangement affecting the Customer Sponsor
11
<PAGE> 12
Agreement, acceptable in form and substance to WDC, modifying such
agreement to the extent it may otherwise affect WDC's rights hereunder
and consenting to this Agreement; and
(d) The closing of the JTS equity financing on substantially the
terms and conditions identified in the Letter of Intent for Private
Placement of Equity Securities dated November 3, 1994 or otherwise on
terms and conditions acceptable to WDC.
The parties agree that if the Effective Date does not occur on or
before February 15, 1995, WDC may terminate this Agreement at any time before
the Effective Date occurs.
10.2 Term. Except to the extent provided in Section 10.3 below, the
term of this Agreement and the licenses and immunities from suit granted
hereunder shall be perpetual.
10.3 Early Termination. If any party hereto commits a material breach
of this Agreement, and such breach continues for thirty (30) days after receipt
of a written notice specifying such breach in reasonable detail, the
non-breaching party shall have the right to terminate all of the breaching
party's rights hereunder by delivery of written notice of such termination.
Notwithstanding the foregoing, any such termination shall have no effect on the
breaching party's duties and obligations hereunder, which shall continue in
full force and effect. WDC's rights hereunder shall not be reduced or
diminished in the event of a termination by WDC by reason of a material breach
of JTS. JTS's rights hereunder shall not be reduced or diminished in the event
of a termination by JTS by reason of a material breach by WDC.
ARTICLE 11
MISCELLANEOUS
11.1 Notices. Any notice, consent or approval required under this
Agreement shall be in writing sent by registered or certified mail, postage
prepaid, or by facsimile or cable (confirmed by such registered or certified
mail) and addressed as follows:
If to WDC: Western Digital Corporation
8105 Irvine Center Drive
Irvine, California 92718
Attn: General Counsel
Phone: (714) 932-5000
Facsimile: (714) 932-7820
12
<PAGE> 13
If to JTS: JT Storage, Inc.
1289 Anvilwood Avenue
Sunnyvale, California 94089
Attn: President
Phone: (408) 747-1315
Facsimile: (408) 747-0849
All notices shall be deemed to be effective on the earlier of actual
receipt or the fifth day after deposit in the U.S. first class mail, postage
prepaid, properly addressed to the party to whom such notice is directed.
Either party may change its address at which notice is to be received by
delivering notice to the other party in accordance with this Section.
11.2 Relationship of the Parties. Notwithstanding any provision
hereof, for all purposes of this Agreement each party shall be and act as an
independent contractor and not as a partner, joint venturer or agent of the
other and shall not bind nor attempt to bind the other to any contract.
11.3 Assignment. Neither party shall have the right or ability to
assign, transfer or sublicense any obligations or benefits under this Agreement
without the written consent of the other party, which consent shall not be
unreasonably withheld. A Change in Control of JTS shall constitute an
assignment for purposes of this Agreement, requiring the consent of WDC as set
forth in this Section, and, in the absence of such consent, the rights under
WDC Captured Patents and to WDC Additional Developments granted pursuant to
this Agreement shall terminate automatically, but WDC's rights under this
Agreement shall continue. Further, JTS shall not consent to an assignment,
transfer or sublicense of the JTS Captured Patents, the Licensed Nordic
Products and/or JTS Other Licensed Technology by TEAC CORPORATION and/or PONT
PERIPHERALS (formerly known as DZU CORPORATION) to SEAGATE TECHNOLOGY, CONNER,
QUANTUM CORPORATION, MAXTOR CORPORATION, IBM CORPORATION and/or HEWLETT-
PACKARD COMPANY.)
11.4 Waivers; Amendments. The waiver by either party of any of its
rights or any breaches of the other party under this Agreement in a particular
instance shall not be deemed to be a waiver of the same or different rights or
breaches in subsequent instances. Neither this Agreement nor any Exhibit
attached hereto may be amended or waived except by an instrument in writing
executed by the party against which enforcement is sought.
11.5 Governing Law. This Agreement shall be governed, construed and
interpreted in accordance with the laws of the State of California, without
regard to the choice of law rules thereof.
11.6 Entire Agreement. This Agreement and the Exhibits attached hereto
constitute the entire agreement of the parties
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<PAGE> 14
and supersede all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations between the parties with respect to
the subject matter hereof.
11.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed shall be deemed to be an original and
all of which together shall be deemed to be one and the same instrument.
11.8 Severability. If any provision of this Agreement shall be held
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect.
11.9 Attorneys' Fees. Should any party institute any action or
proceeding, including without limitation binding arbitration, to enforce this
Agreement or any provision hereof, the prevailing party in any such action or
proceeding shall be entitled to receive from the other all reasonable costs and
expenses, including attorneys' fees, incurred by the prevailing party in
connection with such action or proceeding.
11.10 Binding Arbitration. Any controversy or claim arising out of or
related to this Agreement, or any breach thereof (a "Dispute"), shall be
settled by binding arbitration, conducted by a single mutually agreed-upon
arbitrator, with the forum being Orange County, California. The arbitrator of
any Dispute shall be either a lawyer selected by the parties or a retired judge
selected by two lawyers (one of each such lawyer being designated for such
purpose by each party). Promptly after such Dispute arises, the parties shall
confer to select a lawyer who practices in or near Orange County, California to
serve as the arbitrator. If the parties cannot agree upon the selection of a
lawyer as the arbitrator, a retired judge who is a member of JAMS shall be
selected as the arbitrator. Such selection shall by made by the lawyers
designated by the parties. The arbitrator so selected shall make the
determination required on the basis of such procedures as such arbitrator, in
his or her sole judgment, deems appropriate and expeditious, taking into
account the nature of the issues, the amount in dispute and the positions
asserted by the parties. The arbitrator shall not be required to follow any
particular rules or procedure, it being the parties' intention to create a
flexible, practical, and expeditious method of resolving any Dispute hereunder.
Upon the written request of a party, the arbitrator shall issue a written
opinion of his or her findings of fact and conclusions of law. Upon receipt by
the requesting party of such a written opinion, such party shall have the right
within ten (10) days thereof to file with the arbitrator a motion to reconsider.
Thereupon, the arbitrator shall reconsider the issues raised by said motion and
either confirm or change his or her decision. The decision of such arbitrator
shall then be final, conclusive and binding, and shall not be subject to review
or challenge of any kind. The parties
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<PAGE> 15
intend that this agreement to arbitrate be valid, enforceable and irrevocable.
11.11 Time of the Essence. Time is of the essence of this Agreement.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
"WDC"
WESTERN DIGITAL CORPORATION,
a Delaware corporation
By: /s/ Marc Nussbaum for Kathryn A. Braun
---------------------------------------
Its:
--------------------------------------
"JTS"
JT STORAGE, INC., a Delaware corporation
By:
---------------------------------------
Its:
--------------------------------------
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
"WDC"
WESTERN DIGITAL CORPORATION,
a Delaware corporation
By:
---------------------------------------
Its:
--------------------------------------
"JTS"
JT STORAGE, INC., a Delaware corporation
By: /s/ David B. Pearce
---------------------------------------
Its: President
--------------------------------------
16
<PAGE> 18
LIST OF EXHIBITS
TO
TECHNOLOGY TRANSFER AND
LICENSE AGREEMENT
PAGE
----
EXHIBIT A TECHNOLOGY TRANSFER PROGRAM A1
SECTION A-1 DESIGNATED PRODUCT TECHNICAL A2
SPECIFICATIONS
SECTION A-2 PROGRAM SCHEDULE (DEVELOPMENT A4
PLAN)
SECTION A-3 PAYMENT SCHEDULE A7
SECTION A-4 DELIVERY SCHEDULE A9
SECTION A-5 JTS DELIVERABLES TO WDC QUALITY AND A10
RELIABILITY DEPARTMENT
SECTION A-6 JTS DELIVERABLES TO WDC NEW PRODUCT A13
INTRODUCTION AND ADVANCED MANUFACTURING
DEPARTMENT
SECTION A-7 JTS DELIVERABLES TO WDC DESIGN A14
ENGINEERING DEPARTMENT
SECTION A-8 JTS DELIVERABLES TO WDC TEST A18
ENGINEERING DEPARTMENT
SECTION A-9 JTS DELIVERABLES TO WDC PURCHASING A20
AND MATERIALS DEPARTMENT
EXHIBIT B NON-EXCLUSIVE LIST OF JTS CAPTURED B1
PATENTS
EXHIBIT C THIRD PARTY LICENSES AND RIGHTS C1
AFFECTING JTS TECHNOLOGY
<PAGE> 19
EXHIBIT A
TO
TECHNOLOGY TRANSFER AND
LICENSE AGREEMENT
TECHNOLOGY TRANSFER PROGRAM
---------------------------
This Technology Transfer Program sets forth the information, documents,
rights and other tangible and intangible items that JTS shall deliver to WDC
pursuant to Article 3 of this Agreement; the manner in which JTS shall deliver
such items to WDC; and the payments to which JTS shall be entitled in
consideration of its performance of this Agreement, including, without
limitation, the Technology Transfer Program. Any material deviation from the
Technology Transfer Program shall require the mutual written agreement of JTS
and WDC.
Page A1
<PAGE> 20
SECTION A-1: DESIGNATED PRODUCT TECHNICAL SPECIFICATIONS
In a timely manner following the execution of this Agreement, the
parties shall finalize the Technical Specifications for the Designated Product.
Set forth below are preliminary technical specifications for the Designated
Product, which may be modified by mutual agreement of the parties in accordance
with the above provision and the terms of this Agreement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
[*]
- -------------------------------------------------------------------------------
</TABLE>
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
Page A2
<PAGE> 21
-J541HP 'HIGH PERFORMANCE' ASIC FEATURES (.95u)
IDE INTERFACE:
[*]
DME INTERFACE:
[*]
SEQUENCER/DISK INTERFACE:
[*]
SERVO INTERFACE:
[*]
PROCESSOR INTERFACE:
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
A3
<PAGE> 22
[CHART: Nordic Program Timeline]
A4
<PAGE> 23
[Chart: Nordic Program Timeline]
A5
<PAGE> 24
[Chart: Nordic Program Timeline]
A6
<PAGE> 25
SECTION A-3: PAYMENT SCHEDULE
In consideration of the rights granted to WDC under this Agreement, WDC
shall pay to JTS up to Six Million Four Hundred Thousand Dollars $(6,400,000.00)
in accordance with and subject to the terms and conditions of the Technology
Transfer Program and the Payment Schedule set forth below:
<TABLE>
<CAPTION>
Date Payment Condition to Payment
---- ------- --------------------
<S> <C> <C>
Execution of this [*] None
Agreement
[*] [*] JTS successfully completes
Engineering Verification Test
("EVT") and reviews EVT with WDC
[*] [*] JTS delivers the Designated Product
to WDC*
If JTS delivers the Designated Product
between [*] and [*] , the payment
shall be [*] , unless the Designated
Product is an [*] Mbyte 3-Inch Disk
Drive, in which case the payment shall be
[*] *
If JTS delivers the Designated Product
after 09/30/95, the payment shall be
$500,000*
* If a change is made to the Technology
Transfer Program at the request of WDC
that causes a delay in JTS's delivery of
the Designated Product, the time deadlines
set forth herein shall be equitably
adjusted accordingly.
[*] [*] [*] following the date on which the
Company accepts from JTS working samples
of both an [*] Mbyte Licensed Nordic
Product and a [*] Mbyte Licensed
Nordic Product
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page A7
<PAGE> 26
<TABLE>
<S> <C> <C>
[*] [*] [*] following the date on which the Company commences
volume production of both an [*] Mbyte Licensed Nordic
Product and a [*] Mbyte Licensed Nordic Product
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page A8
<PAGE> 27
SECTION A-4: DELIVERY SCHEDULE
JTS shall deliver to WDC the following deliverables in accordance with
the Delivery Schedule set forth below:
<TABLE>
<CAPTION>
DELIVERY
DATE DELIVERABLE
-------- -----------
<S> <C> <C>
[*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page A9
<PAGE> 28
SECTION A-5: JTS DELIVERABLES TO WDC QUALITY AND RELIABILITY
DEPARTMENT
Promptly upon execution of this Agreement, JTS shall deliver to WDC's
Quality and Reliability Department copies or originals of the following
materials in JTS's possession. Thereafter, JTS shall deliver updates of such
materials on at least a [*] basis. All such deliveries shall be at
[*] sole expense. To facilitate this process, JTS and WDC shall review
these deliverables on a [*] basis.
MATERIALS QUALITY -- Required to assure incoming materials are suitable for
use in the production environment:
As of the date of this Agreement, the parties assume that all parts are
unique to WDC. All unique parts used in the drive shall conform to the
following requirements:
- Complete supplier surveys for suppliers not presently recognized
and a full list of all suppliers with approval status (AVL).
- Complete and approved first article reports on all part numbers
and suppliers. This includes, without limitation, a full
dimensional analysis, certifications, a supplier process flow
chart, and outgassing/CVR/NVR test reports as applicable.
- A formal inspection plan for all parts to assure proper incoming
or source inspection levels. This includes, without limitation,
AQL levels, cleanliness requirements, packaging requirements,
and any other special requirements that are unique to a specific
part.
- An analysis of all critical parameters by part number using a
Cp/CpK approach. This may be supplied by the supplier.
- A summary report of all incoming material discrepancies found
during the pilot build, by supplier, showing the resulting
Corrective Actions. This is intended to assist the supplier
quality engineering function during subsequent supplier audits
to assure continued high quality levels.
- A list of all inspection tooling (and drawings) showing:
- Fabrication supplier
- Inspection report
- Gage R&R report (must be [less-than symbol] 20%)
- Calibration plan and records
- Part number for which inspection tooling is used
PROCESS QUALITY -- Required to assure products meet required goals and to
assure continued process control during the production cycle:
- A set of all process audit procedures and a summary of the
results of these audits. The audit procedures should include the
following at a minimum:
- RSD
- Cleanroom particle count
- In-line cleaning equipment
- A list of tools and equipment used by QA in the process and
their respective GR&R evaluations ([less-than symbol] 20%).
- A list of all process "Critical to function" parameters and the
results of their evaluations using Cp/CpK methods.
- Documented methods of SPC to be used in the production line.
This includes, without limitation, the parameters, limits,
formats used (e.g., X and R charts), and results during the
pilot build phase.
- Yield report on the Final QA test function including a total
listing of failures and resulting corrective action. This
includes, without limitation, a copy of the FQA procedure and
any unique software that is required.
- Reports on all material found discrepant on the pilot production
line showing all corrective actions, risk assessments and
deviations to the product specification that allowed material to
be used.
PRODUCT RELIABILITY -- Required to assure products are qualified prior to the
start of production operations and to assure long-term compliance with product
specifications and customer expectations.
- A predicted MTBF analysis with supporting detail based on the
design that will go into production. This includes, without
limitation, an explanation of the calculation method and
environmental assumptions used.
- Completion of all EVT and LVT testing. This area requires test
suite correlation between JTS and WDC.
- A completed DVT report. This area requires test suite
evaluation and agreement on report contents between JTS and WDC.
- Demonstrated MTBF of at least 100,000 hours during the pilot
build phase with a listing of all failures and their corrective
action.
- A completed DMT report showing all failures, corrective action
and result of all regression testing. This area requires test
suite evaluation and agreement on report contents between JTS
and WDC.
- A completed and acceptable FIT report.
- Official copies of Regulatory Agency approvals for JTS,
including, without limitation, UL, CSA and TUV.
- A test report showing the product is compliant with FCC Class B
or better requirements.
- A reliability program plan that will be implemented during
continuous production build.
- A product assurance manual including:
- Final DMT report
- Regulatory agency approvals
- Final FIT report
- Successful completion of any customer specific tests. This
activity will be solely based on the OEM customers to whom the
drives will be shipped.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page A10
<PAGE> 29
SECTION A-6: JTS DELIVERABLES TO WDC NEW PRODUCT
INTRODUCTION AND ADVANCED MANUFACTURING
DEPARTMENT
Promptly upon execution of this Agreement, JTS shall deliver to WDC's
New Product Introduction and Advanced Manufacturing Department copies or
originals of the following materials in JTS's possession. Thereafter, JTS shall
deliver updates of such materials on at least a [*] basis. All such
deliveries shall be at [*] sole expense. To facilitate this process, JTS and
WDC shall review those deliverables [*] .
- All drive piece part drawings with critical-to-function ("CTF")
parameters identified and process capability ("CpK") figures
list
- All drive sub-assembly drawings and associated parts list
- Head gimbal assembly ("HGA") specification
- Disk specification
- Track map
- ESD requirements and a list of static sensitive components
- At least one (1) complete set of functional mechanical parts
and sub-assemblies, including labels, seals, etc.
- At least one (1) mechanically functional drive that is able to
spin-up
- Tolerance stack up analysis for the drive itself and all
subassemblies
- Head stack assembly ("HSA") shipping comb drawing and three (3)
samples
- Latest revision design drawings for all tools, including disk
install, head load, VCM install and cover install
- Tooling to tolerance study results
- Rights to fabricate/use tools that WDC finds desirable
- Permission to contact HGA vendors for answers to questions
- JTS contact for design questions
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
Page A11
<PAGE> 30
SECTION A-7: JTS DELIVERABLES TO WDC DESIGN ENGINEERING
DEPARTMENT
Promptly upon execution of this Agreement, JTS shall deliver to WDC's
Design Engineering Department copies or originals of the following materials in
JTS's possession. Thereafter, JTS shall deliver updates of such materials on at
least a [ * ] basis. All such deliveries shall be at [ * ] sole expense.
To facilitate this process, JTS and WDC shall review these deliverables on a
[ * ] basis.
1. ASSEMBLY DIAGRAM
2. MECHANICAL DESIGN
a. Spindle Motor
Specifications
Assembly diagram
Bearings (lube, preload, life, etc.)
NRRO
Seals
Magnets
Torque (start, running, etc.)
Design verification (testing)
b. ESA Design (Headstack Assembly)
Assembly diagram
Coil design
K-block design
Pivot design
Flax design and attachment
Adhesives/surface finish
Design verification/testing (inertia,
balance, resonance, etc.)
c. Track Map
Spread sheet
Verification
d. Enclosure Design
Base/cover design
Finish (E-coat, etc.)
Seals, gaskets, filters
Acoustics
Leakage
Clean-up time, particles count
* Certain information on this page has been omitted and Filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page A12
<PAGE> 31
e. Crash Stop/Latch Design
Design goals (latch force, life, G level, etc.)
Verification
f. VCM Design
Design goals
Magnet type & coating
Verification (flux, temperature, torque, linearity,
leakage, etc.)
g. Disk Clamp/Spacers
Design
Disk slip - temperature, shock
Disk distortion
h. Acoustics
Specifications
Verification
3. HEADS & MEDIA
Specifications
Fly height (Tolerance stack up, profile, specifications v.
actual)
Gram load
Characterization data
Saturation curves
747 curves
Stiction
CSS
Disk lube (thickness, etc.)
Corrosion
4. READ/WRITE CHANNEL
Specifications
Format v. zone (BPI, FCI)
OTC
Margin budget
Modeling analysis
Characterization data
Circuit description
Channel optimization (in drive test)
Page A13
<PAGE> 32
5. SERVO CHANNEL/ERROR BUDGE
Block diagram
Servo surface format
Circuit description
Calibration
Theory of operation
Modeling
Characterization data
6. PCB DESIGN
Chip description (vendor, location, process, die size, pkg.,
etc.)
Block diagram
Reset block diagram
7. INTERFACE/CONTROLLER DESIGN
Block Diagram
Operational description, features
Functions/timing diagrams
Silicon margin analysis
ESD
ECC description
Retry description
Buffer description
IDE bus timing
Data format description, zone layout, skew factors
8. FIRMWARE DESIGN
Command set
Power on sequence
Hard and soft reset handling
Master/slave operation
Power management
Defect management
Error recovery
Error code description
Firmware structure overview
Interrupt handling
Buffer/cache management
Native commands
Reserved cylinder map
9. CONTAMINATION CONTROL
Corrosion
Out gassing
Adhesives (list)
E-coat control parameters
Page A14
<PAGE> 33
Heat/solvent resistance
Cleaning process
10. DRIVE TESTING
Current consumption
Basic error rate
Four corner
Seek timing
Seek error rate
Thermal mapping
Vibration
Shock
Package drop
Temperature/humidity
Cold start
Power loss recovery
Altitude
Acoustics
Locked motor/actuator
Physical measurements
ESD
CSS
Over/under voltage
Power supply noice injection
Compatibility testing (FIT)
Page A15
<PAGE> 34
SECTION A-8: JTS DELIVERABLES TO WDC TEST ENGINEERING DEPARTMENT
Promptly upon execution of this Agreement, JTS shall deliver to WDC's
Test Engineering Department copies or originals of the following materials in
JTS's possession. Thereafter, JTS shall deliver updates of such materials on at
least a [*] basis. All such deliveries shall be at [*] sole expense. To
facilitate this process, JTS and WDC shall review these deliverables on a
[*] basis
- - Clock head specification
- - Head/disk assembly ("HDA") mechanical dimensions/data
- - HDA connector specification
- - Twenty-five (25) functional HDAs
- - One Hundred (100) functional drives assemblies (HDA + PWBA)
- - One (1) functional spindle motor
- - PWBA fabrication drawing
- - PWBA assembly drawing
- - PWBA schematics
- - PWBA CAD files
- - Five (5) PWBAs with functional motor spin control circuitry
- - Five (5) bare PWBs
- - Thirty (30) functional PWBAs
- - Product specification
- - Top level test specification
- - Engineering parts list
- - LSI device specifications
- - Servo diagnostic interface specification
- - Servo filed format specification
- - Servo requirements document
- - Spindle motor tables
- - Electrical design specification
- - Defect discovery specification
- - Recovery specifications (bi-modal heads, ECC recovery, etc.)
- - Surfact format specification
- - Drive T/F connector specification
- - Self-test description/specification
- - Preburn/final test description/source code
- - Test process plan
- - Head/media specification
- - HDA performance specification
- - Drive level test specification
* Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with respect
to the omitted portions.
Page A16
<PAGE> 35
SECTION A-9 JTS DELIVERABLES TO WDC PURCHASING AND
MATERIALS DEPARTMENT
Promptly upon execution of this Agreement, JTS shall deliver to WDC's
Purchasing and Materials Department copies or originals of the following
materials in JTS's possession. Thereafter, JTS shall deliver updates of such
materials on at least a [ * ] basis. All such deliveries shall be at [ * ]
sole expense. To facilitate this process, JTS and WDC shall review these
deliverables on a [ * ] basis.
- Complete costed bill of material ("BOM") reflecting the
following information (minimum):
- JTS part numbers
- JTS part descriptors
- All current hard tooled suppliers
- All targeted hard tooled suppliers
- Supplier part numbers
The above-referenced list should include piece parts, purchased
sub-assemblies and all packaging materials.
- Complete book of all parts, including the following information
by part number:
- Prints
- Schematics/specifications
- Documented supplier process flow charts
- Supplier quotes, with cost break points
- Tooling capacities at each supplier (which must support
WW volumes requirements for the first 12 months of
productions)
- Documented cleaning process
- Contact names, addresses and telephone numbers for each
supplier
- Supplier materials and process lead-times
- Copies of any supply agreements and/or contracts in
existence
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
Page A17
<PAGE> 36
- Of primary importance are any custom integrated
circuits and/or other components that may be sole
sourced. Ownership of design prints and/or mask rights
must be identified. Length of support agreements are
critical.
- Authorization for WDC to purchase against JTS
specifications at WDC's prerogative.
Page A18
<PAGE> 37
EXHIBIT B
TO
TECHNOLOGY TRANSFER AND
LICENSE AGREEMENT
NON-EXCLUSIVE LIST OF JTS CAPTURED PATENTS
PATENTS ISSUED:
<TABLE>
<CAPTION>
PATENT TITLE INVENTOR ISSUE DATE
- ---------- ---------------------------------------------------------------- --------------- ------------
<S> <C> <C> <C>
4,992,899 Low Inertia, Single Component Arm Actuator for Open-Loop Disk S. Kaczeus 02/12/91
Drives G. Kudo
4,949,202 Disk-Track for Locating Zero Track and Generating Timing for T. Kim 08/14/90
Index Signal
5,218,496 Magnetic Disk Drive with Reduced Disk-to-Disk Spacing and S. Kaczeus 06/08/93
Improved Actuator Design
</TABLE>
PATENT PENDING APPLICATIONS
<TABLE>
<CAPTION>
DOCKET # TITLE INVENTOR(S) FILE DATE
- ---------- ---------------------------------------------------------------- --------------- ------------
<S> <C> <C> <C>
[*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page B1
<PAGE> 38
<TABLE>
<CAPTION>
DOCKET # TITLE INVENTOR(S) FILE DATE
- ---------- ---------------------------------------------------------------- --------------- ------------
<S> <C> <C> <C>
[*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page B2
<PAGE> 39
EXHIBIT C
TO
TECHNOLOGY TRANSFER AND
LICENSE AGREEMENT
THIRD PARTY LICENSES AND RIGHTS AFFECTING JTS TECHNOLOGY
TEAC Corporation
Pont Peripherals (Formerly DZU Corporation)
Compaq Computer Corporation
Page C1
<PAGE> 1
Exhibit 10.31
[20 RUPEES NOTE]
[SEAL] [SEAL]
PERSONAL GUARANTEE
THIS DEED OF GUARANTEE executed at Mumbai on this 13th day of June 1996
by Shri Manohar Lal Tandon aged about 57 years, son of Shri Darbari Lal Tandon,
residing at 37, Merry Niketan, Mount Mary Road, Landra (West), Mumbai - 400 050
(hereinafter referred to as "the Guarantor" individually and collectively as
"the Guarantors" which expression shall unless it be repugnant to the subject
or context thereof, include their respective heirs, executors and
administrators) in favour of SCICI LIMITED, a public company incorporated under
the provisions of the Companies Act, 1956 and having its Registered Office at
141, Maker Tower-"F", Cuffe Parade, Mumbai 400005 (hereinafter referred
<PAGE> 2
5. The Guarantors hereby agree that, without the concurrence of the
Guarantors, the Borrower and SCICI shall be at liberty to vary, alter or
modify the terms and conditions of the Loan Agreement(s) and of the
security documents executed by the Borrower in favour of SCICI and in
particular to defer, postpone or revise the repayment of the Foreign
Currency Loan and/or the Rupee Loan and/or payment of interest and other
monies payable by the Borrower to SCICI on such terms and conditions as
may be considered necessary by SCICI including any increase in the rate
of interest. SCICI shall also be at liberty to absolutely dispense with
or release all or any of the security/securities furnished or required
to be furnished by the Borrower to SCICI to secure the said Foreign
Currency Loan and/or the Rupee Loan. The Guarantors agree that the
liability under this Guarantee shall in no manner be affected by any
such variations, alterations, modifications, waiver, dispensation with
or release of security, and that no further consent of the Guarantors is
required for giving effect to any such variation, alteration,
modification, waiver, dispensation with, or release of security.
6. SCICI shall have full liberty, without notice to the Guarantors and
without in any way affecting this guarantee, to exercise at any time and
in any manner any power or powers reserved to SCICI under the Loan
Agreement(s) to enforce or forbear to enforce payment of the Foreign
Currency Loan and/or Rupee Loan or any part thereof or interest or other
monies due to SCICI from the Borrower or any of the remedies or
securities available to SCICI, to enter into any composition or compound
with or to grant time or any other indulgence or facility to the
Borrower AND the Guarantors shall not be released by the exercise by
SCICI of their liberty in regard to the matters referred to above or by
any act or omission on the part of SCICI or by any other matter or thing
whatsoever which under the law relating to sureties would, but for this
provision, have the effect of so releasing the Guarantors AND the
Guarantors herby waive in favour of SCICI so far as may be necessary to
give effect to any of the provisions of this Guarantee, all the
suretyship and other rights which the Guarantors might otherwise be
entitled to enforce.
7. This Guarantee shall be enforceable against the Guarantors
notwithstanding that any security or securities comprised in any
instrument(s) executed or to be executed by the Borrower in favour of
SCICI shall, at the time when the proceedings are taken against the
Guarantors on this Guarantee, be outstanding or unrealised or lost.
8. The Guarantors hereby agree and give consent to the sale, mortgage on
prior, pari-passu or first charge basis, release etc., of any of its
assets by the Borrower from time to time as may be approved by SCICI or
the transfer of any of the assets of the Borrower from one unit to the
other or to the release or lease out by SCICI any or whole of the assets
charged to SCICI on such terms and conditions as SCICI may deem fit and
this may be treated as a standing and continuing consent for each and
every individual act of transfer, mortgage, release or lease of any of
such assets of the Borrower. The Guarantors hereby declare and agree
that no separate consent for each such transfer, mortgage, release or
lease of any of such assets would be necessary in future.
9. The Guarantors hereby agree and declare that the Borrower will be free
to avail of further loan/s or other facilities from SCICI or any other
financial institution or bank in addition to the Foreign Currency Loan
and/or the Rupee Loan and/or to secure the same during the subsistence
of this guarantee and in that event the guarantee herein contained will
not be affected or vitiated in any way whatsoever but will remain in
full force and effect and binding on the Guarantors.
<PAGE> 3
to as "SCICI" which expression shall, unless it be repugnant to the subject or
context thereof, include its successors and assigns).
WHEREAS
(1) MODULAR ELECTRONICS INDIA (P) LTD LIMITED, a company incorporated under
the provisions of the Companies Act, 1956 and having its Registered
office at 406 Dalamal Towers Nariman Point (hereinafter referred to as
"the Borrower") has requested SCICI to lend and advance to it a Foreign
Currency Loan of US$ 3 million (equivalent to Rs100 million at current
rates of exchange) for its proposed expansion scheme in Madras
-----------------------------------------------------------------------
(specify the project financed)
(2) SCICI has agreed to lend and advance to the Borrower the said Loan(s) on
the terms and conditions contained in the Foreign Currency Loan
Agreement dated the 13th day of June 1996 and in the Rupee Loan
Agreement (hereinafter referred to as "the Loan Agreement(s)") and
entered into between the Borrower and SCICI and the terms, conditions
and provisions whereof have been noted by the Guarantors.
(3) At the request of the Guarantors, SCICI has agreed to make to the
Borrower, disbursement(s)/interim disbursement(s) from out of the said
Foreign Currency Loan and/or the said Rupee Loan.
NOW THIS DEED WITNESSETH AS FOLLOWS:
In consideration of the premises, the Guarantors hereby unconditionally,
absolutely and irrevocably guarantee to and agree with SCICI as follows:
1. SCICI shall have the sole discretion -
i) to make disbursement(s) and/or interim disbursement(s) from out
of the Foreign Currency Loan and/or the Rupee Loan and/or
ii) to lend and advance to the Borrower, the Foreign Currency Loan
and/or the Rupee Loan, at such time, on such conditions and in
such manner as SCICI may decide.
2. The Borrower shall duly and punctually repay the said Loan(s) together
with all interest, liquidated damages, premium on prepayment or on
redemption, costs, expenses and other moneys in accordance with the Loan
Agreement(s) and perform and comply with all the other terms, conditions
and covenants continued in the said Loan Agreement(s).
3. In the event of any default on the part of the Borrower in
payment/repayment of any of the monies referred to above, or in the
event of any default on the part of the Borrower to comply with or
perform any of the terms, conditions and covenants contained in the Loan
Agreement(s), the Guarantors, shall, upon demand, forthwith pay to SCICI
without demur all the amounts payable by the Borrower under the Loan
Agreement(s). The Guarantors shall pay interest at the rate prevailing
for the short term loans of SCICI on the amounts so demanded from them
in the event there is any delay in their making the payment to SCICI in
terms of the notice of demand issued in this behalf by SCICI.
4. The Guarantors shall also indemnify and keep SCICI indemnified against
all losses, damages, costs, claims and expenses whatsoever which SCICI
may suffer, pay or incur by reason of or in connection with any such
default on the part of the Borrower/Guarantors including legal
proceedings taken against the Borrower and/or the Guarantors for
recovery of the monies referred to in Clause 2 and 3 above.
<PAGE> 4
20. Any demand for payment or notice under this Guarantee shall be
sufficiently given if sent by post to or left at the last known address
of the Guarantors or their heirs or executors or administrators as the
case may be. Such demand or notice is to be made or given, and shall be
assumed to have reached the addressee in the course of post, if given by
post, and no period of limitation shall commence to run in favour of the
Guarantors until after demand for payment in writing shall have been
made or given as aforesaid and in proving such notice when sent by post
it shall be sufficiently proved that the envelope containing the notice
was posted and a certificate by any of the responsible officers of SCICI
that to the best of his knowledge and belief, the envelope containing
the said notice was so posted, shall be conclusive as against the
Guarantors, even though it was returned unserved on account of refusal
of the Guarantors or otherwise.
21. The liability of the Guarantors hereunder shall not be affected by any
dispute between the Borrower and SCICI raised or pending before any
Court, Tribunal or Arbitrator(s) and the Guarantors shall remain liable
under these presents notwithstanding any orders passed therein.
22. The Guarantors agree and declare that the rights and powers conferred on
SCICI by these presents may be exercised against them jointly and/or
severally at the discretion of SCICI.
23. The Competent Court at Bombay shall have jurisdiction over any matter
arising out of these presents or in connection thereto.
IN WITNESS WHEREOF the Guarantors have hereunto set their hands on the day,
month and year first hereinabove written.
SIGNED AND DELIVERED )
by the withinnamed )
) /s/ M.L. Tandon
Shri/Smt M.L. TANDON )
----------------
SIGNED AND DELIVERED )
by the withinnamed )
)
Shri/Smt )
----------------
SIGNED AND DELIVERED )
by the withinnamed )
)
Shri/Smt )
----------------
[SEAL
R.S. DEVADIGA Before Me
NOTARY /s/ R.S. Devadiga 12/6/96
GREATER -----------------------
BOMBAY] R.S. DEVADIGA B.A.L.E.D.
NOTARY GREATER BOMBAY
<PAGE> 5
10. The rights of SCICI against the Guarantors shall remain in full force
and effect notwithstanding any arrangement which may be reached between
SCICI and the other Guarantor/s, if any, or notwithstanding the release
of that other or others from liability and notwithstanding that any time
hereafter the other Guarantor/s may cease for any reason whatsoever to
be liable to SCICI, SCICI shall be at liberty to require the performance
by the Guarantors of their obligations hereunder to the same extent in
all respects as if the Guarantors had at all times been solely liable to
perform the said obligations.
11. To give effect to this Guarantee, SCICI may act as though the
Guarantors were the principal debtors to SCICI.
12. The Guarantors hereby declare and agree that they have not received and
shall not, without the prior consent in writing of SCICI receive any
security or commission from the Borrower for giving this guarantee so
long any monies remain due and payable by the Borrower to SCICI under
the Loan Agreement(s).
13. The Guarantors shall not in the event of the liquidation of the
Borrower prove in competition with SCICI in the liquidation proceedings.
14. A certificate in writing signed by a duly authorised official of SCICI
shall be conclusive evidence against the Guarantors of the amount for
the time being due to SCICI from the Borrower in any action or
proceeding brought on this Guarantee against the Guarantors.
15. This Guarantee shall not be wholly or partially satisfied or exhausted
by any payments made to or settled with SCICI by the Borrower and shall
be valid and binding on the Guarantors and operative until repayment in
full of all monies due to SCICI under the Loan Agreement(s).
16. This Guarantee shall be irrevocable and the obligations of the
Guarantors hereunder shall not be conditional on the receipt of any
prior notice by the Guarantors or by the Borrowers and the demand or
notice by SCICI as provided in Clause 20 hereof shall be sufficient
notice to or demand on the Guarantors.
17. The liability of the Guarantors under this Guarantee shall not be
affected by -
i) any change in the constitution or winding up of the Borrower or
any absorption, merger or amalgamation of the Borrower with any
other company, corporation or concern; or
ii) any change in the management of the Borrower or take over of the
management of the Borrower by Central or State Government or by
any other authority; or
iii) acquisition or nationalisation of the Borrower and/or of any of
its undertaking(s) pursuant to any law; or
iv) any change in the constitution of SCICI.
18. This Guarantee shall be a continuing one and shall remain in full force
and effect till such time the Borrower repays in full the Foreign
Currency Loan and/or the Rupee Loan together with all interest, premium
on prepayment or on redemption, costs, expenses and other moneys that
may from time to time become due and payable and remain unpaid to SCICI
under the Loan Agreement.
19. The liability of the Guarantors hereunder shall not exceed the sum of
US$ 3 million (equivalent to Rs. 100 million at the current rates of
exchange) and Rs. XXXXXXX Pacs plus all interest, premium on prepayment
or on redemption, costs, expenses and other monies payable by the
Borrower to SCICI under the Loan Agreement(s).
<PAGE> 6
- -------------------------------------------------------------------------------
| |
| |
- -------------------------------------------------------------------------------
Company Assistance Serial
Code Number Number
FOREIGN CURRENCY LOAN AGREEMENT
BETWEEN
Moduler Electronic India (Private) Limited
("THE BORROWER")
AND
SCICI LIMITED
("SCICI")
<PAGE> 7
[TWENTY RUPEES NOTE]
12 JUNE 1996
MODULER ELECTRONICS
LOAN AGREEMENT
THIS AGREEMENT made at Mumbai on this 13th day of June, 1996 between
Moduler Electronics (India) Private Limited, a company within the meaning of
the Companies Act, 1956 and having its Registered Office at 406, Dalamal
Tower, Nariman Point - 400 021, India (hereinafter referred to as "the
Borrower", which expression shall, unless it be repugnant to the subject or
context thereof, include its successors and assigns):
AND
SCICI LIMITED, a public limited company incorporated under the
Companies Act, 1956 and having its Registered Office at 141, Maker Tower "F",
Cuffe Parade, Mumbai 400 005 (hereinafter referred to as "SCICI", which
expression shall, unless it be repugnant to the subject or context thereof,
include its successors and assigns).
<PAGE> 8
: 2 :
ARTICLE - 1
The Project financed by these presents, the amount of the Loan, the
applicable rate of interest, the security for the Loan and its amortization are
more particularly set out in Schedule 1 attached hereto.
ARTICLE - 2
DEFINITIONS
2.1 - The following terms shall have the meanings assigned below:
a) "Borrower" means the party to the Loan Agreement to which the
Loan is sanctioned and/or disbursed.
b) "Loan Agreement" means this particular Loan Agreement and all
schedules and amendments supplemental to the Loan Agreement.
c) "Loan" means the amount agreed to be provided under the Loan
Agreement as described in Schedule 1 or so much thereof as may
be outstanding from time to time.
d) "Project" means the Project as described in Schedule 1 hereto.
e) "Financing Plan" means the financing plan as described in
Schedule 1 hereto.
f) "Security" means the security more particularly described in
Schedule 1 hereto.
g) "Out-of-pocket expenses" means all expenses incurred in the
administration of the Loan during its currency.
All references in the singular in these presents shall be deemed to
include references in the plural wherever the context so requires or admits and
vice versa. Similarly all references to the masculine gender made under these
presents shall be deemed to include the feminine gender also.
The headings of various Articles and Clauses herein are inserted for
convenience of reference and are not deemed to affect the construction of the
relative provisions.
2.2 - The Loan hereby agreed to be granted by SCICI shall be subject to the
Borrower complying with the terms and conditions set out herein.
ARTICLE - 3
AMOUNT OF LOAN AND TERMS OF DISBURSEMENT
3.1 - Amount of Loan:
The Borrower agrees to borrow from SCICI and SCICI agrees to lend to
the Borrower, on the terms and conditions contained herein, the sum as
described in Schedule 1.
<PAGE> 9
: 3 :
3.2 - Terms of disbursement:
i) The Loan shall be disbursed by SCICI in one or more instalment(s)
as may be decided by SCICI subject to the Borrower complying with
the provisions of the Loan Agreement and the disbursement
procedure(s) stipulated by SCICI including production of evidences
and execution of documents required for disbursement and the
expenditure incurred on the Project being in accordance with the
details mentioned in the Loan Agreement.
ii) All disbursements shall be by cheque(s)/authorisation(s) and the
collection/remittance charges and all other costs thereto shall be
borne by the Borrower.
iii) Pending creation of security as stipulated in the Loan Agreement,
SCICI may disburse any amount of the Loan on such terms as it may
decide.
3.3 - Last date of Drawal:
Unless SCICI otherwise agrees, the right to make drawals from the Loan
shall cease on the last date as mentioned in Schedule 1.
ARTICLE - 4
MANAGEMENT FEE AND INTEREST
4.1 - Management fee: The Borrower shall pay to SCICI a lump sum Management
Fee as described in Schedule 1 on the rupee equivalent of the Loan as specified
by SCICI to the Borrower on the date of execution of these presents, which
shall not be refundable under any circumstances.
4.2 - Interest: The Borrower shall pay to SCICI interest on the principal
amount of the Loan outstanding from time to time, at the rate and on the dates
as specifically set out in Schedule 1. The interest shall accrue as from the
drawdown date mentioned in the notice of drawdown of Loan or part thereof as
the case may be in a form and manner stipulated by SCICI.
The rate of interest applicable to the Loan shall be a fixed rate of
interest and/or a floating rate as stipulated in Schedule 1 hereto.
In the case of floating rates of interest, the term LIBOR (London
InterBank Offered Rate) and other similarly quoted rates shall mean, in
relation to any period for which a rate of interest is to be determined under
this Agreement, the rate as notified by SCICI to the Borrower in relation to
the due dates of payment of the instalment of loan and interest from time to
time.
For the purpose of calculation of interest, each completed interest
period shall be regarded as an appropriate fraction of a year and each day in
such period which is not part of a complete interest period comprised therein
shall be regarded as 1/360th of a year.
Notwithstanding anything contained hereinbefore, for the purpose of
calculation of interest in respect of U.S. Dollar loans, each day shall be
regarded as 1/360th of a year.
<PAGE> 10
: 4 :
ARTICLE - 5
SECURITY
5.1 - SECURITY FOR THE LOAN:
i) The Loan together with all interest, premium on prepayment,
costs, expenses and other monies whatsoever stipulated in this
Loan Agreement shall be secured by first mortgage/hypothecation
or other charge on the assets as described in Schedule 1.
ii) Pending creation of the first mortgage, hypothecation or charge
as aforesaid, the Borrower shall furnish to SCICI an irrevocable
Power of Attorney and an undertaking to create such mortgage,
hypothecation or charge in such form as may be acceptable to
SCICI.
iii) The Borrower shall make out a good and marketable title to the
security to the satisfaction of SCICI and comply with all such
formalities as may be necessary or required for the said
purpose.
iv) The Borrower shall procure personal/corporate/bank guarantees
from such person(s) or bodies corporate, as set out in Schedule
I.
5.2 - ACQUISITION OF ADDITIONAL MOVEABLE/IMMOVABLE PROPERTIES:
So long as any monies remain due and outstanding to SCICI, the Borrower
undertakes to notify SCICI in writing at the end of each calendar year, a
summary of the amounts spent towards all its acquisitions of moveable and
immoveable properties and to make out a marketable title thereto as soon as
practicable to the satisfaction of SCICI and to create a charge in such form
and manner as may be decided by SCICI.
5.3 - INADEQUACY OF SECURITY:
If in the opinion of SCICI, the security offered by the Borrower is
found to be inadequate, the Borrower shall furnish such additional security
within such time as SCICI may stipulate.
5.4 - PAYMENT/REIMBURSEMENT OF EXPENSES:
The Borrower shall pay or reimburse all sums payable/paid by SCICI for
protection and maintenance of the security, cost of title investigation and
perfection of security and all other legal and out of pocket expenses including
travel and related expenses under these presents, within 30 days from the date
of notice of demand from SCICI. In default, all such sums shall be debited to
the Borrower's Loan Account (in equivalent rupees, if incurred in Foreign
Currency) and shall carry interest from the date of payment till such
reimbursement at the rate of 2.1% per annum over and above the applicable SPAR
(SCICI's Prime Advance Rate) + margin. The applicable SPAR for this purpose,
would be the one as prevailing at the time of default."
5.5 - RELEASE OF SECURITY:
SCICI shall release the security mortgaged, hypothecated or charged
when the entire amount of the Loan, together with interest and other sums
hereby agreed to be paid, are duly and fully repaid by the Borrower and all
other terms and conditions have been complied with by the Borrower.
<PAGE> 11
: 5 :
5.6 - Sale of assets of the Borrower:
If at any time during the currency of the Loan, the Borrower requests
SCICI for permission to sell by way of scrap or otherwise any of the assets
constituting the security, SCICI may at its discretion and on such terms and
conditions as it may deem fit, permit such sale.
Provided however SCICI shall have the liberty to refuse or withdraw
such permission in case the value realisable on sale is not to its
satisfaction.
ARTICLE - 6
INSURANCE
6.1 - The Borrower shall, at its own expense, during the currency of the
Loan, insure the assets constituting the security, with the widest security
cover available, against all risks including fire, pollution, tempest, cyclone,
flood, theft, explosion, earthquake, storm, strikes, riot and civil commotion,
marine risks, erection risks, war risks and against third party risks where
applicable.
The Borrower shall also take an appropriate cover under the Public
Liability Insurance Act, 1991 in case its activities involve the handling of
hazardous substances as defined in the Environment (Protection) Act, 1986.
6.2 - The insurance of the security referred to in 6.1 above shall be for
values in accordance with the norms prevailing for the insurance of the subject
matter described above and shall be either for its market value or the amount
outstanding in respect of the Loan whichever is higher or for replacement
values wherever appropriate.
In case the Public Liability Insurance Act, 1991 is applicable to the
Borrower, due compliance shall be ensured of Section 4 of the said Act by the
Borrower.
6.3 - The insurance of the security shall be kept in force throughout the
currency of the Loan by renewals from time to time as and when the covers
expire and the Borrower shall ensure that all premiums are paid in good time so
that the insurance covers do not lapse for non-payment of premium.
6.4 - All the policies of insurance shall be assigned in favour of SCICI
under the Common Seal of the Borrower and the Borrower shall ensure that the
Underwriters have noted the interest of SCICI under the policies, and custody
thereof shall be with SCICI.
In case there are other institutions participating in the financing of
the Project, the insurance policies shall be assigned by the Borrower under its
common seal in favour of all the said participating institutions including
SCICI. After the assignment has been noted by the insurance companies, the
custody of the original insurance policies shall be with ICICI on behalf of
itself and the participating institutions.
* The Borrower shall keep the insurance policies in its safe custody on behalf
of SCICI and furnish its Auditor's certificate to SCICI at the end of each
quarter including the numbers and values of all policies together with a
confirmation that the assignment of policies in favour of SCICI has also been
noted by the insurance company/companies and that there are no outstanding
premiums due in respect of the said policies. (*applicable only in the case of
finance companies.)
<PAGE> 12
: 6 :
6.5 - The Borrower shall promptly notify SCICI of the incidence of all claims
under the respective policies to the Underwriters and the prior written
approval of SCICI shall be sought for claiming any amounts under the policies.
While approval shall be granted by SCICI so long as the Borrower is not in
default, all claims shall be paid by the Underwriters directly to SCICI if the
Borrower is in default of its obligations under the Loan Agreement to SCICI.
6.6 - It is the paramount obligation of the Borrower to maintain the assets
constituting the security in good working condition and in a proper state of
repair or in a state as is enjoined by the respective policy conditions and in
the event of a casualty the Borrower shall do everything that is necessary for
the preservation of the security or for the restoration of the security to its
original condition, as the case may be, as if the Borrower were a prudent
uninsured owner of the said assets constituting the security.
ARTICLE - 7
PROJECT CHANGES AND UTILISATION OF THE LOAN
7.1 - Project:
i) Changes in the Project:
The Borrower shall promptly notify SCICI of any proposed change
in the nature of scope of the Project and of any event or
condition which might materially alter or delay completion of
the Project or result in substantial revision in the original
estimate of costs or which may cause the Borrower to abandon
the Project. No change in the nature of scope of the Project
shall be implemented or funds committed therefor without the
prior written approval of SCICI.
ii) Changes in the contract:
The Borrower shall obtain prior concurrence of SCICI to any
material modification or cancellation for the Borrower's
contracts such as its contracts with its machinery suppliers,
collaborators, builders, technical consultants and suppliers of
raw materials.
7.2 - Utilisation of the Loan:
The Borrower shall utilise the Loan for no other purpose than the one
for which the Loan has been sanctioned and furnish to SCICI its periodic
reports, at such intervals as may be stipulated by SCICI, showing the manner in
which the Loan monies have been utilised.
ARTICLE - 8
REPAYMENT
8.1 - The Borrower undertakes to repay the principal amount of the Loan in
accordance with the Amortization Schedule(s) set forth in Schedule 1 hereto.
8.2 - If, for any reason, the amount finally disbursed by SCICI out of the
Loan is less than the amount of the Loan, the Amortization Schedule shall be
revised by SCICI.
<PAGE> 13
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8.3 - Manner of discharge of obligations:
The Borrower shall discharge all its obligations under the Loan
Agreement in respect of the principal amount of loan, interest, liquidated
damages, premium on prepayment or on redemption, or any other charges in the
currency or currencies stipulated in the Loan Agreement.
8.4 - Option to call for payment in Rupees:
Without prejudice to any of the obligations of the Borrower in terms of
the Loan Agreement, and notwithstanding anything contained hereinbefore, SCICI
shall be entitled at its option to call upon the Borrower to make payments to
SCICI, whether of principal amount of the Loan, interest, liquidated damages,
premium on prepayment or on redemption or any other charges, if any, in
equivalent rupees in lieu of foreign currencies. For the purpose of this
article, the following conditions shall apply:
i) The rupee sum shall be determined by SCICI with reference to the
actual costs to SCICI (including all commission and other bank
charges and out-of-pocket expenses) in remitting the foreign
currencies on the due dates.
ii) The rupee sum shall be paid by the Borrower to SCICI at least
three working days in advance of the due dates to enable SCICI
to remit the foreign currencies on the due dates.
iii) The rupee sum shall be paid by the Borrower to SCICI in cash or
by cheque or bank draft drawn on a Scheduled Bank in Bombay and
the collection/remittance charge, if any, in respect thereof
will be borne by the Borrower.
iv) For the purpose of sub article (i) hereof, a statement signed by
the designated officer of SCICI, shall be sufficient evidence of
costs, commissions, expenses etc.
v) Any difference on account of fluctuation in the rates of
exchange of foreign currencies involved between the payment made
by the Borrower to SCICI and the actual costs to SCICI as
referred to in sub article (i) above shall be borne by or
credited to the Borrower as the case may be.
vi) In the event that for any reason SCICI shall decide not to
exercise the option of accepting payment in equivalent rupees in
the manner provided above, SCICI shall have the right to notify
the Borrower the place or places where the person or persons to
whom the payments in foreign currencies falling due thereafter
shall be made and all expenses involved in making payment in the
manner so notified shall be borne by the Borrower.
8.5 - Prepayment:
The Loan or any part thereof shall not be prepaid by the Borrower
except with the prior written approval of SCICI and on such terms and
conditions including prepayment premium as may be stipulated by SCICI.
<PAGE> 14
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8.6 - JUDGEMENT IN OTHER CURRENCY:
If any sum payable by the Borrower under these presents is ordered and
decreed to be paid to SCICI by a court of competent jurisdiction in a currency
other than the currency of this Agreement, the Borrower shall indemnify SCICI
to the extent of difference in exchange rates prevaling on the date of actual
payment resulting from the conversion of the decreed debt from the currency of
judgement to the currency of this Agreement.
The foregoing indemnity shall constitute a separate obligation of the
Borrower, distinct from its other obligations hereunder, and shall survive the
giving or making of any judgement or order in relation to all or any of such
other obligations.
8.7 - FORWARD COVER:
Before the due date of payment of any amount payable hereunder, if the
Borrower has taken a forward cover for the same it shall notify SCICI of its
utilisation at least 15 days in advance of the due date. In the event of the
Borrower failing to do so, SCICI shall at its option enter into a forward cover
on behalf of the Borrower and the same shall be binding on the Borrower.
8.8 - APPROPRIATION OF PAYMENTS:
i) All monies due and payable under the Loan Agreement and paid by
the Borrower shall be appropriated towards such dues in the
following order, viz, -
a) Reimbursement of out-of-pocket expenses;
b) Interest on arrears of interest;
c) Interest including additional interest(s);
d) Premium on prepayment of principal; and
e) Repayment of principal.
ii) Notwithstanding anything contained in sub article (i)
hereinabove, SCICI may, at its discretion, appropriate such
payments towards the dues, if any, payable by the Borrower in
respect of earlier Loan(s) availed of by the Borrower from SCICI
in the order specified in the relative Loan Agreement(s).
8.9 - PLACE AND MODE OF PAYMENT BY THE BORROWER:
All monies payable by the Borrower to SCICI shall be paid to SCICI at
such office(s) as may be specified by SCICI, by telegraphic, telex or mail
transfer to the account of such office(s) or by cheque or bank draft drawn in
favour of SCICI on a scheduled bank at Bombay or such other place or to such
other account as SCICI may notify to the Borrower and shall be so paid as to
enable SCICI to realise, at par, the amount on or before the relative due date.
Credit for all payments by cheque/bank draft shall be given only on the date of
realisation or on the relative due date, whichever is later.
If the due date in respect of any instalment of principal, interest and
all other monies payable under the Loan Agreement falls on a Saturday or a day
which is a bank holiday at the place where the payment is to be made, the
immediately preceding working day shall be the due date for such payment.
<PAGE> 15
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ARTICLE - 9
PREDISBURSEMENT CONDITIONS
9.1 - The obligation of SCICI to make disbursements under the Loan Agreement
shall be subject to the Borrower performing all its obligations and
undertakings under the Loan Agreement besides compliance by the Borrower with
the disbursement procedure stipulated by SCICI, such as submission of necessary
information and documents to the satisfaction of SCICI. Before seeking
disbursement, the Borrower shall furnish satisfactory evidence of having
complied with the following conditions:
i) STATUTORY APPROVALS:
The Borrower shall obtain all the requisite statutory approvals
and permissions as may be required from time to time in relation
to the Project.
ii) RAISING OF SHARE CAPITAL:
If so stipulated in Schedule 2 to this Loan Agreement the
Borrower shall raise share capital and the promoters shall
subscribe to such share capital to the extent stipulated by
SCICI.
iii) DOCUMENTS RELATED TO BORROWING POWER AND CREATION OF SECURITY:
The Borrower shall furnish to SCICI duly certified copies of the
resolutions together with certificates from the Income-tax
authorities, as specified in the Companies Act, 1956 and the
Income-tax Act, 1961, respectively, relating to the borrowing
powers of the Borrower and the creation of security in favour of
SCICI. The Borrower shall also furnish a certificate from its
Auditors confirming that this Loan together with the amounts
already borrowed by it, does not exceed the borrowing limits
sanctioned by the resolutions referred to above.
iv) BORROWING FROM OTHER INSTITUTION(S)/BANK(S):
The Borrower shall enter into effective agreement(s) with the
other participating institution(s) or bank(s) in the form and
substance satisfactory to SCICI for raising funds as per the
Financing Plan described in Schedule 1.
v) NON-EXISTENCE OF EVENT OF DEFAULT:
The Borrower shall satisfy SCICI that no event of default, as
defined in Article 14 of this Loan Agreement and with respect to
previous Loan Agreements, executed with SCICI, if any, and no
event, which with the lapse of time or notice as specified in
Article 14 of this Loan Agreement, shall become an event of
default, has happened or is continuing.
vi) COMPLIANCE WITH SPECIAL CONDITIONS:
The Borrower shall also comply with such special
pre-disbursement conditions as may be stipulated by SCICI at the
time of communication of the sanction of the Loan and which are
more specifically set out in Schedule 2 to this Agreement.
<PAGE> 16
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vii) DETAILED REVIEW OF THE PROGRESS:
a) SCICI shall have the right to satisfy itself that the
physical progress as well as expenditure incurred on the
Project are as per the original schedules.
b) SCICI shall have the right to review the cost of the
Project before final disbursement of the Loan. Pending
completion of the review, the Borrower shall obtain prior
approval of SCICI for utilising the amount of the Loan
equivalent to the contingency provision in the cost of the
Project.
viii) ARRANGEMENTS FOR MEETING SHORTFALL:
The Borrower shall assume the responsibility for making
arrangements and of bringing in additional funds in the form of
unsecured loans/deposits, satisfactory to SCICI, to meet the
shortfall, if any, that may arise in financing the Project
and/or working capital requirements due to overrun in the
Project cost or cash losses, without recourse to additional
assistance from SCICI.
The funds brought in to meet the shortfall shall not be
withdrawn without the prior written approval of SCICI during
the currency of the Loan.
ix) DISBURSEMENT SCHEDULE:
At least 15 days prior to the disbursement of the Loan or any
part thereof as required by the Borrower, the Borrower shall
furnish to SCICI a statement indicating the amount required to
be disbursed together with the purpose for which the said
amount shall be utilised.
ARTICLE -10
RIGHT TO APPOINT NOMINEE DIRECTOR
10.1 - SCICI during the currency of the Loan shall have the right to appoint
one or more nominees (hereinafter referred to as "Nominee Director(s)") on
the Board of Directors of the Borrower and if the Borrower's Articles do not
contain a provision for such appointment, the Borrower shall suitably amend its
Articles for the purpose. The following provisions shall apply to such
"Nominee Director(s)".
i) The Nominee Director(s) shall not be required to hold
qualification shares and shall not be liable to retire by
rotation.
ii) The Nominee Director(s) shall be entitled to all the rights and
privileges of other Directors including the sitting fees and
expenses as payable to other Directors.
Provided that if any such Nominee Director is an Officer of
SCICI, the sitting fees, expenses and all other monies in
relation to such Nominee Director shall accrue to SCICI and
the same shall accordingly be paid by the Borrower directly to
SCICI.
iii) Any expenditure incurred by SCICI or the Nominee Director(s)
in connection with his/their appointment or directorship shall
be borne by the Borrower.
<PAGE> 17
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10.2 - The Nominee Director(s) shall be appointed as a Member of the
Management Committee or other Committees of the Board, if so desired by SCICI.
10.3 - The Nominee Director(s) shall be entitled to receive all notices,
agenda, etc. and to attend all General Meetings and Board Meetings and Meetings
of any Committees of the Board of which he/they is/are member(s).
10.4 - If, at any time, the Nominee Director(s) is/are not able to attend a
meeting of the Board of Directors or any of its Committees of which he/they
is/are member(s), SCICI may depute an observer to attend the meeting. The
expenses incurred by SCICI in this connection shall be borne by the Borrower.
ARTICLE - 11
MANAGEMENT & RELATED MATTERS
11.1 - The Borrower shall not remove any person(s), by whatever name called,
exercising substantial powers of management of the affairs of the Borrower at
the time of execution of the Loan Agreement. The appointment/reappointment
including terms of appointment (or alteration in such terms) of such persons
shall be subject to the prior written approval of SCICI.
11.2 - The person(s) referred to in clause 11.1 above shall not be paid any
commission in any year unless all the dues of SCICI in that year have been paid
to the satisfaction of SCICI.
11.3 - The Borrower shall not pay any compensation to any of the person(s)
mentioned in Clause 11.1 above in the event of loss of his/their office(s) for
any reason whatsoever if there is a default in repayment of dues to SCICI.
11.4 - The Borrower shall obtain suitable undertakings for giving effect to
Clauses 11.2 and 11.3 above from the persons mentioned in Clause 11.1 above.
11.5 - The Borrower shall, as and when required by SCICI, appoint and change
to the satisfaction of SCICI, suitable technical, financial and executive staff
of proper qualifications and experience, for the key positions in its
organisation. The terms of such appointments including any changes therein,
shall be subject to prior written approval of SCICI.
11.6 - In case of default in payment of any dues to SCICI or if in the
opinion of SCICI the business of the Borrower is conducted in a manner opposed
to public policy or in a manner prejudicial to SCICI's interest, SCICI shall
have the right to review the management set up or organisation of the Borrower
and to require the Borrower to restructure it as may be considered necessary by
SCICI including the formation of Management Committees with such powers and
functions as may be considered suitable by SCICI.
11.7 - SCICI shall have the power at any time or times to order inspection of
the assets constituting the security by officers of SCICI or such other persons
as may be designated by SCICI in order to ensure their proper maintenance
during the period the Loan or any part thereof including interest thereon
remains outstanding and the Borrower shall facilitate such inspection and pay
all costs and expenses thereof with interest thereon at the lending rate for
short term loans of SCICI applicable to the Borrower at the time of default.
<PAGE> 18
: 12 :
11.8 - SCICI shall have the right to appoint, whenever it considers
necessary, any Chartered Accountants/Cost Accountants and auditors for carrying
out any specific assignment(s) or to examine the financial or cost accounting
system and procedures adopted by the Borrower for its working or as concurrent
or internal auditors, or for conducting a special audit of the Borrower. The
costs, charges and expenses including professional fees and travelling and
other expenses of such consultants or auditors shall be payable by the Borrower.
11.9 - The Borrower shall constitute such committees with such composition
and functions as may be required by SCICI for the functioning of different
aspects of its operations.
11.10 - The Borrower shall give SCICI prior intimation of any
transfer/transmission of its shares that is likely to result in a change in
excess of two per cent in its share holding pattern and/or a change in the
composition of its Board of Directors or in its management.
11.11 - The Borrower undertakes to broad-base its Board of Directors in
consultation with and to the satisfaction of SCICI, if called upon to do so
by SCICI.
ARTICLE - 12
GENERAL COVENANTS
THE BORROWER SHALL:
12.1 - undertake to obtain all documents, both legal and technical, from the
appropriate parties or any other competent authority, essential for
registration of the security and arrange for mortgaging the same to SCICI in
accordance with the provisions of the Companies Act, 1956, Transfer of Property
Act, 1882, and other applicable statutes;
12.2 - obtain all the necessary consents and approvals from statutory or
other authorities required under the laws in force from time to time as
applicable to the Borrower and the Project covered by the Loan Agreement;
12.3 - agree and undertake to always maintain the security as stipulated by
SCICI for the Loan under these presents;
12.4 - bring to the notice of SCICI, underwriters, insurers and appropriate
authorities any accident or damage to the security, and/or affecting the
Borrower's operations immediately upon its receiving such information and the
Borrower shall take necessary steps at its own cost to ensure that the security
is restored to its original condition of fitness;
12.5 - not convert itself from a Public Limited company to a Private Limited
company during the currency of the Loan.
12.6 - not encumber the security offered to SCICI for this Loan or for any
other assistance without the prior written approval of SCICI;
12.7 - utilise in the first instance all monies received from its operations
or otherwise for repayment of the Loan, interest and other sums due to SCICI;
12.8 - undertake not to engage in any transaction which in the opinion of
SCICI is of a speculative or unsound character;
<PAGE> 19
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12.9 - intimate to SCICI, on 30th September and 31st March every year, the
particulars of any financial assistance including corporate guarantee provided
by it to other companies, Directors or bodies corporate whether or not under
the same management in terms of the provisions of the Companies Act, 1956;
12.10 - not undertake any new project, by acquisition, diversification,
modernisation or substantial expansion of the Project described herein or
acquire any asset on lease without the prior written approval of SCICI during
the currency of the Loan;
12.11 - not issue any debentures, raise any loans, accept any deposits from
public, issue any equity or preference capital other than as stipulated or
change its capital structure or create any charge on the security and on any
other properties and assets or give any guarantees without the prior written
approval of SCICI. This provision shall not apply to normal trade guarantees or
temporary loans and advances granted to staff or contractors or suppliers in
the ordinary course of business or to the raising of unsecured loans,
overdrafts, cash credit or other facilities from banks in the ordinary course
of business.
12.12 - not prepay any unsecured loan(s) and deposits availed of by it from
any other party without the prior written approval of SCICI;
12.13 - not pay any commission to its promoters, directors, managers or other
persons for furnishing guarantees, counter guarantees or indemnities or for
undertaking any other liability in connection with any financial assistance
obtained for or by the Borrower or in connection with any other obligation
undertaken for or by the Borrower for the purposes of the Project;
12.14 - promptly inform SCICI if it has notice of any application for winding
up having been made or any statutory notice of winding up under the provisions
of the Companies Act, 1956, or any other notice under any other Act or
otherwise of any suit or other legal process intended to be filed or initiated
against the Borrower and affecting the title to the properties of the Borrower
or if a Receiver is appointed of any of its properties or business or
undertaking;
12.15 - promptly inform SCICI of the happening of any labour strikes,
lockouts, shut-downs, fires or other similar happenings likely to have an
adverse effect on the Borrower's profits or business with an explanation of the
reasons therefor;
12.16 - submit its duly audited annual accounts, within six months from the
close of its accounting year. In case statutory audit is not likely to be
completed during this period, the Borrower shall get its accounts audited by an
independent firm of Chartered Accountants and furnish the same to SCICI within
the time specified;
12.17 - not declare any dividend to the equity shareholders except from out of
the current year's profits. The dividend declared shall not be in excess of 15%
or the average of three years dividend whichever is lower without the prior
written approval of SCICI which shall not be unreasonably withheld. However no
such dividend shall be declared if any dues or liabilities remain to be paid or
discharged to SCICI as on the contemplated date of declaration of such dividend;
12.18 - not form any subsidiary or permit any company to become its subsidiary
without the prior written approval of SCICI;
12.19 - carry out such alterations to its Memorandum and Articles of
Association as may be deemed necessary in the opinion of SCICI to safeguard the
interests of
<PAGE> 20
12.20 - not undertake or permit any merger, consolidation, reorganisation,
scheme or arrangement or compromise with its creditors or shareholders or
effect any scheme of amalgamation or reconstruction without the prior written
approval of SCICI;
12.21 - not make any investments by way of deposits, loans, share capital etc,
in any concern, without the prior written approval of SCICI. Provided that if
the Borrower is not in default, SCICI may allow the Borrower to deploy funds in
short term investments. The Borrower shall, however, submit periodic reports of
such investments in such form and manner as may be stipulated by SCICI.
12.22 - not revalue its assets at any time during the currency of the Loan
without the prior written approval of SCICI;
12.23 - at its expense when called upon by SCICI, undertake fresh valuation of
the assets constituting the security and upon a shortfall in security being
perceived in the opinion of SCICI on such valuation, furnish such additional
security within the time stipulated by the SCICI, including the assignment of
hire/other income;
12.24 - promptly notify and furnish to SCICI information in respect of any
casualty or other accident or damage to the security and the other assets;
12.25 - ensure, during the currency of the Loan, the maintenance of proper
accounting and cost control system satisfactory to SCICI to reflect truly and
fairly the financial position of the Borrower and the results of its operations
including the progress of the Project. Such records and books shall be open to
examination by SCICI through any authorised representative of SCICI;
12.26 - provide, if SCICI so requires, information relating to the
administration, management and financial condition of the Borrower.
12.27 - if after the date of this Agreement by reason of any change in law, or
in its interpretation or administration, there is any increase in the cost to
SCICI whether by way of tax expenses or otherwise of funding, or maintaining
the Loan and or performing any of its obligations hereunder, the same shall be
borne by the Borrower. The amounts payable hereunder shall, for the purpose of
Article 8.9 be treated as "Out-of-Pocket Expenses."
ARTICLE - 13
OTHER PROJECT SPECIFIC COVENANTS
13.1 - The Loan hereby granted shall also be subject to the Borrower complying
with the conditions set out in Schedule 2.
<PAGE> 21
: 15 :
ARTICLE - 14
EVENTS OF DEFAULT
14.1 - The following, either singly or collectively, shall constitute an
"Event of Default" for the purpose of enforcing the security, recalling the
Loan and such other articles SCICI may take under these presents:
i) REFUSAL TO DISBURSE LOAN BY THE PARTICIPATING LENDER:
The participating lender, with whom the Borrower intends to
enter into an agreement for financial assistance, has refused to
disburse its Loan or any part thereof or has recalled its Loan
under its Loan Agreement with the Borrower.
ii) FAILURE IN THE IMPLEMENTATION OF THE PROJECT:
The Borrower has failed to implement and operate the Project
with due diligence and efficiency and in accordance with sound
engineering, technical, administrative, financial, managerial
and industrial standards and business practices with qualified
and experienced management and personnel and in accordance with
the Financing Plan and has failed to cause the financing
specified in the Financing Plan to be applied exclusively to the
Project and/or has, in the opinion of SCICI, made substantive
changes in the project without prior written approval of SCICI.
iii) DEFAULT IN PAYMENT OF INTEREST, PRINCIPAL AND OTHER DUES:
Default has been committed by the Borrower in payment of any
instalment of interest on the Loan or in the repayment of one or
more instalment of the principal of the Loan on the due date(s)
or in the payment of any other monies payable by the Borrower to
SCICI.
iv) INABILITY TO PAY DEBTS:
There is reasonable apprehension in the opinion of SCICI that
the Borrower is unable to pay its debts or proceedings for
taking it into liquidation, either voluntarily or compulsorily,
may be or have commenced.
v) INADEQUATE INSURANCE AND SECURITY:
(a) The assets offered to SCICI as security for the Loan
have not been kept insured by the Borrower or depreciate
in value to such an extent that, in the opinion of
SCICI, further security to the satisfaction of SCICI
should be given and on advising the Borrower to that
effect, such security has not been given to SCICI
forthwith.
(b) Failure of the Borrower to create mortgage/charge on the
assets constituting the security within the time
stipulated by SCICI in Schedule 2 hereto.
<PAGE> 22
: 16 :
vi) Sale, disposal or removal of assets:
The assets constituting the security of the Borrower are sold, disposed
of, charged, encumbered, alienated, or deliberately damaged or destroyed
without the prior written approval of SCICI.
vii) Proceedings against Borrower:
The Borrower has voluntarily or involuntarily become the subject of
proceedings under any bankruptcy or insolvency law or the Borrower is
voluntarily or involuntarily dissolved/liquidated.
viii) Liquidation or dissolution of the company:
The Borrower has taken or suffered to be taken any action for its
reorganisation, liquidation or dissolution.
ix) Appointment of receiver or liquidator:
A receiver or liquidator has been appointed or allowed to be appointed
of all or any part of the undertaking of the Borrower.
x) Attachment or distraint on mortgaged security:
An attachment or distraint has been made of the mortgaged security or
legal proceedings have been taken or commenced for recovery of any dues
from the Borrower or if the security has become subject to forfeiture.
xi) Non-Submission of periodic monitoring reports:
The Borrower has failed to submit to SCICI its periodic performance
monitoring report in the form and manner and within the time as
specified by SCICI.
xii) Supply of misleading information:
Any information given by the Borrower in its application for the Loan,
in the reports and other information furnished by the Borrower in
accordance with the reporting system and the warranties given/deemed to
have been given by the Borrower to SCICI is/are misleading or incorrect
in any material aspect.
xiii) Failure of inform change in shareholding pattern, etc.
Failure of the Borrower to give prior information to SCICI of change in
its shareholding pattern, composition of its Board of Directors or in
its management in terms of Article 11.10 above
xiv) Default in performance of other covenants and conditions:
Default has occurred in the performance of any covenant, condition or
agreement on the part of the Borrower under these presents, Deed of
Mortgage/Hypothecation and any other agreement and such default has
continued for a period of thirty days after notice in writing thereof
has been given to the Borrower by SCICI.
<PAGE> 23
: 17 :
xiv) Extra-ordinary circumstances:
Extra-ordinary circumstances have occurred which, in
the opinion of SCICI, make it improbable for the project
to be implemented and for the Borrower to fulfil its
obligations under the Loan Agreement.
The decision of SCICI as to whether or not the Borrower
has committed a breach of the terms and conditions of
these presents shall be final and binding upon the
Borrower.
14.2 - Notice to SCICI on the happening of an event of default:
If any event of default or any event which, after the notice of such
default, or lapse of time, or both, would constitute an event of default, has
happened, the Borrower shall forthwith give notice thereof to SCICI in writing
specifying the nature of such event of default, or of such event.
14.3 - Consequences of default: On the happening of any event of default,
SCICI shall be entitled to exercise any or all of the following remedies
without prejudice to each other:
i) Penal Interest:
(a) Without prejudice to any of the obligations of the
Borrower in terms of the Loan Agreement, in the event of
default by the Borrower in making payment in discharge of
any of its obligations under the Loan Agreement on the due
dates, then, notwithstanding anything to the contrary
contained in the Loan Agreement, the liability of the
Borrower thereafter in respect of such amounts shall be
either in Rupees or in Foreign Currency at the option of
SCICI which shall be determined and notified by SCICI to
the Borrower.
(b) In case of the aforesaid liability remaining in foreign
currency, the Borrower shall pay on the defaulted amounts
a penal interest at the rate of 2.1% per annum over and
above the applicable interest rate for this Loan.
In case of the aforesaid liability being Rupee-tied,
interest at the 2.1% per annum over and above the SPAR +
4% (please fill in the applicable margin). Whereas the
applicable SPAR for the purpose would be as prevailing on
the date of default.
ii) Enforcement of security:
If one or more of the events specified in Article 14.1 above
happen(s), SCICI by a notice in writing to the Borrower, shall
declare the principal and all interest, costs, expenses and
other monies whatsoever stipulated herein to be due and payable
forthwith and the security created in terms of Article 5.1 above
shall become enforceable and it shall be lawful for SCICI
(notwithstanding anything to the contrary contained herein) to
enter into possession of the security and to exercise the
control of an owner in using/operating the said security. SCICI
shall also have the unfettered right of disposal of the security
and to take such steps as may be necessary for recovering the
entire amount due under these presents.
<PAGE> 24
: 18 :
The decision of SCICI as to whether or not the Borrower has
committed any breach of the terms and conditions of these
presents or the Deed of Mortgage/Hypothecation and other
assurances shall be binding on the Borrower.
iii) CONVERSION RIGHT:
If an event of default occurs in terms of Article 14.1 (iii)
above, then SCICI shall have the right to convert (which right
is hereinafter referred to as "the conversion right") at its
option the whole of the defaulted amount of the Loan, interest
and other sums referred to in 14.1 (iii) above or a part thereof
into fully paid-up equity shares of the Borrower, at par, in the
manner specified in a notice in writing to be given by SCICI to
the Borrower (which notice is hereinafter referred to as the
"notice of conversion") prior to the date on which the
conversion is to take effect, which date shall be specified in
the said notice (which date is hereinafter referred to as the
"date of conversion").
On receipt of notice of conversion, the Borrower shall allot and
issue the requisite number of fully paid-up equity shares to
SCICI as from the date of conversion and SCICI shall accept the
same in satisfaction of the principal amount of the Loan to the
extent so converted. The part of the Loan so converted shall
cease to carry interest as from the date of conversion and the
Loan shall stand correspondingly reduced. Upon such conversion,
the instalments of the Loan payable after the date of conversion
as per Schedule 1 hereto shall be reduced proportionately by the
amounts of the Loan so converted. The equity shares so allotted
and issued to SCICI shall carry, from the date of conversion,
the right to receive proportionately the dividends and other
distributions declared or to be declared in respect of the
equity capital of the Borrower. Save as aforesaid, the said
shares shall rank pari passu with the existing equity shares of
the Borrower in all respects. The Borrower shall, at all times,
maintain sufficient unissued equity shares for the above
purpose.
The conversion right reserved as aforesaid may be exercised by
the SCICI on one or more occasions during the currency of the
Loan.
If at any time on or after service of the notice on the Borrower
as above, the Borrower issues bonus or rights shares in any
proportion, then SCICI shall be entitled to be allotted such
further equity shares in the same proportion and in the same
manner as SCICI would have been eligible for had SCICI exercised
the aforesaid conversion right in full before such issue of
bonus or rights shares. The Borrower shall pass requisite
resolution in terms of Section 81(1-A) of the Companies Act,
1956 to enable it to issue to SCICI such bonus or rights shares
at such time and in such form as may be required by SCICI.
The bonus or rights shares shall be so issued and reserved for
allotment by the Borrower and the amount thereof determined
after taking into account the entitlement referred to above.
The Borrower shall not, except with the prior written approval
of SCICI prepay the Loan or any part thereof and unless SCICI
otherwise agrees, the Borrower shall not:
<PAGE> 25
: 19 :
(a) raise or increase its share capital;
(b) modify in any way the rights attached to its share
capital of any class;
(c) consolidate or subdivide any equity shares (except with
proper adjustment to the basis of conversion)
(d) reduce its share capital or any share premium account;
(e) grant any option to subscribe for shares in its equity
capital or any right to convert any obligation into such
capital to persons other than the public financial
institutions as defined in Section 4A of the Companies
Act, 1956;
(f) issue any bonus shares by capitalising its undistributed
profits or reserves.
In case of the Borrower being a listed company, the Borrower
assures and undertakes that in the event of the SCICI exercising
the right of conversion as aforesaid, the Borrower shall get the
equity shares which shall be issued to the SCICI as a result of
the conversion, listed with the same Stock Exchange(s) where its
equity shares are listed.
iv) WHOLE TIME DIRECTORS:
On the happening of any of the Events of Default, in addition to
the rights specified in Article 10 above, SCICI shall be
entitled to appoint and remove from time to time whole-time
Director(s) on the Board of Directors of the Borrower (such
Director(s) are hereinafter referred to as "the whole-time
Nominee Director(s)"). Such whole time Nominee Director(s) shall
exercise such powers and duties as may be approved by SCICI and
have such rights as are usually exercised by or are available to
a whole-time Director, in the management of the affairs of the
Borrower. Such Whole-time Nominee Director(s) shall not be
required to hold qualification shares nor be liable to retire by
rotation and shall be entitled to receive such remuneration,
fees, commission and monies as may be approved by SCICI. Such
Whole-time Nominee Director(s) shall have the right to receive
notices of and attend all General Meetings and Board Meetings or
any committee(s) of the Borrower of which they are members. Any
expense that may be incurred by SCICI or such whole time Nominee
Director(s) in connection with their appointment or directorship
shall be paid or reimbursed by the Borrower to SCICI, or as the
case may be, to such Whole time Nominee Director(s).
v) PROVISION FOR ADDITIONAL SECURITY:
If the Borrower fails to provide and maintain the security as
stipulated by SCICI for the Loan, SCICI may call upon the
Borrower forthwith to furnish additional security acceptable to
SCICI for the amount of the deficiency. If however, the Borrower
fails to furnish such additional security within 30 days of
demand, SCICI shall be entitled to demand forthwith payment of
the entire amount of the Loan or any part thereof and in default
of such payment enforce the security. The Borrower agrees that
all the expenses, if any, to be incurred by SCICI in enforcing
the said security shall be added to the amount secured by the
said mortgage to be recovered by SCICI from the Borrower along
with the principal sum and interest in terms of these presents
and other securities as may be furnished by the Borrower to
SCICI.
<PAGE> 26
: 20 :
vi) Maintenance of secured assets:
If the Borrower does not provide and maintain the security as
stipulated by SCICI for the Loan, within 30 days from a demand
being made in this behalf by SCICI, or fails to effect such
repairs to the satisfaction of SCICI, whose opinion in this
behalf shall be final and binding on the Borrower, SCICI shall
have the necessary powers to carry out such repairs as may, in
its opinion, be necessary at its cost and recover all such costs
from the Borrower together with interest thereon at the lending
rate for short term loans of SCICI applicable to the Borrower.
If the Borrower fails to repay all the said amounts as herein
stipulated the same shall be added to the amount secured by the
mortgage without prejudice to SCICI's rights as to the recovery
of the principal sum and interest and other moneys due under the
Loan.
vii) Maintenance of Insurance cover:
If the Borrower fails to maintain the insurance of the assets
constituting the security as specifically set out in Article 6
above, SCICI shall have the right to maintain the cover at its
own cost and the expenses incurred shall be payable by the
Borrower together with the interest at the lending rate for
short term loans of SCICI applicable to the Borrower and in
case the Borrower fails to reimburse the same immediately on
demand made by SCICI, the amount shall be added to the amount
secured by the mortgage.
ARTICLE - 15
MISCELLANEOUS
15.5 - Borrower's warranties:
Except to the extent already disclosed in writing by the Borrower to
SCICI, the Borrower shall be deemed to have assured, confirmed and undertaken
as follows:
i) Due payment of public and other demands:
The Borrower is not in arrears of any public demands such as
income tax, corporation tax and all other taxes and revenues or
any other statutory dues payable to the Central or State
Government(s) or any local or other authority.
ii) Conflict with Memorandum and Articles of Association:
Nothing in the Loan Agreement conflicts with the Memorandum and
Articles of Association of the Borrower.
15.2 - Working Capital:
i) The Borrower shall make satisfactory arrangements with its
Bankers for meeting its working capital requirements and shall
furnish confirmatory advices from its Bankers in this regard to
SCICI.
<PAGE> 27
: 21 :
ii) The Borrower agrees that SCICI may, at its discretion, withhold
disbursement of the amount of the Loan equivalent to the
provision against margin money for working capital in the cost
of the Project, until such time the Project is completed and the
build-up of working capital commences.
15.3 - Suspension, Restoration and Termination:
i) Suspension:
Further access by the Borrower to the use of the Loan may be
suspended or terminated by SCICI: -
a) Upon failure by the Borrower to carry out all or any of
the terms of the Loan Agreement or on the happening of
any Event of Default referred to in Article 14.1 above.
b) If any extraordinary situation makes it improbable that
the Borrower would be able to perform its obligations
under the Loan Agreement.
c) If the Borrower takes or permits to be taken any action
or proceedings whereby any of its properties shall or
may be assigned or, in any manner, transferred or
delivered to any receiver, assignee, liquidator or other
person whether appointed by the Borrower or by any Court
of Law whereby such property shall or may be distributed
among the creditors of the Borrower or the Borrower
suffers any charge to be created over its properties in
any legal proceedings.
d) If any change in the Borrower's set-up has taken place
which would adversely affect the conduct of the
Borrower's business or the financial position or the
efficiency of the Borrower's management or personnel or
the execution of the Project in the opinion of SCICI
(which shall be final and binding on the Borrower).
e) If for any reason there is any suspension or
cancellation in the credit facility to SCICI from which
the Loan is funded.
ii) Restoration:
The right of the Borrower to make drawals from the Loan shall
continue to be suspended until SCICI notifies the Borrower that
the right to make withdrawals has been restored.
iii) Termination:
If any of the events described above is also specifically in
Article 14.1 above, has been continuing or if the Borrower has
not withdrawn the Loan by the date referred to in Article 3.3
above or such later date as may be agreed to by SCICI then, in
such event, SCICI may, by notice in writing to the Borrower,
terminate the right of the Borrower to make drawals. Upon such
notice, the undrawn amount of the Loan shall stand cancelled.
Notwithstanding any cancellation, suspension
<PAGE> 28
: 22 :
or termination pursuant to the aforesaid provisions, all the
provisions under these presents shall continue to be in full
force and effect as herein specifically provided.
15.4 - Service of notice:
Any notice or request to be given or made to SCICI, to the Borrower or
to any other party shall be in writing. Such notice or request shall be deemed
to have been given or made when it is delivered by hand or despatched by mail
or telegram to the party to which it is required to be given or made at such
party's designated address.
15.5 - Evidence of debt:
i) SCICI shall maintain, in accordance with its usual practice,
accounts evidencing the amounts from time to time lent by and
owing to it under these presents.
ii) SCICI shall maintain in its books a control account or accounts
in which shall be recorded:
a) the amount of any advance made under these presents by
SCICI.
b) the amount of any principal or interest due or to become
due from the Borrower to SCICI under these presents.
c) the amount of any sum received or recovered by SCICI
under these presents and/or security documents executed
in favour of SCICI.
In any legal action or proceedings arising out of or in
connection with this Loan Agreement, the entries made in
the accounts maintained pursuant to sub- clauses (i) and
(ii) above shall be prima-facie evidence of the
existence and the extent of obligations of the Borrower
as therein recorded.
15.6 - Benefit of this Loan Agreement:
This Loan Agreement shall be binding upon and enure to the benefit of
each party hereto and its successors and assigns.
15.7 - Jurisdiction:
The Competent Court at MUMBAI shall have jurisdiction in the matters
arising out of these presents or any other documents connected with these
presents and executed between SCICI and the Borrower and the laws of India
shall apply.
The submission to the above jurisdiction shall not be construed as
limiting the right of SCICI to take proceedings against the Borrower in any
other jurisdiction that seems fit to SCICI and nor shall the taking of
proceedings in any one or more jurisdiction preclude the taking of proceedings
in any other jurisdiction, whether concurrently or not.
<PAGE> 29
: 23 :
15.8 - Stamp duty:
The expenses of providing the proper stamp duty and other costs of an
incidental to the execution of these presents shall be borne by the Borrower.
15.9 - Waiver not to impair the rights of SCICI:
No delay in exercising or omission to exercise any right, power or
remedy accruing to SCICI upon any default under these presents,
security documents and/or any other agreement or document shall impair any such
right, power or remedy or shall be construed to be a waiver thereof or any
acquiescence in such default, nor shall the action or inaction of SCICI in
respect of any default or any acquiescence by it in any default, affect or
impair any right, power or remedy of SCICI in respect of any other default.
ARTICLE - 16
EFFECTIVE DATE OF AGREEMENT
This Agreement shall become binding on the Borrower and SCICI on and
from the date first above written. It shall be in force till all the monies due
and payable under this Agreement or such supplementary or amending agreements
as may be entered into between the Borrower and SCICI are fully paid off.
<PAGE> 30
: 24 :
- -------------------------------------------------------------------------------
| |
| |
- -------------------------------------------------------------------------------
Company Assistance Serial
Code Number Number
SCHEDULE - 1
THE PROJECT
Modular Electronics India (P)Ltd proposes to undertake an expansion scheme to
increase the installed capacity for manufacture of 3.5" hard disk drives (HDDs)
from 5 lac number per annum (Inpa) to 121npa at its existing facilities to
Madras Export Processing, Madras.
FINANCING PLAN
<TABLE>
<CAPTION>
Cost of Project Rs. 692.0 million
Means of financing
- ------------------
<S> <C> <C>
Share capital 199.0
FCL
- ICICI 260.0
- SCICI 100.0 360.0
-----
Unsecured loans 129.6
Internal accruals 131.9
Subsidy 8.5
-----
829.0
</TABLE>
The Borrower shall implement the project/scheme within the overall project cost
and in accordance with the financing plan as set out in this Schedule and
shall commence commercial production after implementation of the project on or
before March 31, 1997 ("the completion date").
<PAGE> 31
: 25 :
<TABLE>
<CAPTION>
NO. & REPAYMENT PERIODICITY
SCHEUDLE OF PERIOD
AMOUNT OF LOAN RATE OF INTEREST INSTALMENTS FROM TO
<S> <C> <C>
The aggregate amount of the
Loan will comprise of:
(A) A sum to the maximum of ___ per cent per annum* on the #________________ _____ _____
________________ only loan outstanding from time to
time, payable monthly/quarterly/
half-yearly on the ______ day of
________________________________
________________________________
and _________________ each year.
(B) A sum to the maximum of ___ per cent per annum* on the [infinity symbol]________________ _____ _____
________________ only loan outstanding from time to
time, payable monthly/quarterly/
half-yearly on the ______ day of
________________________________
________________________________
and _________________ each year.
(C) A sum to the maximum of 4% per cent over six month @ 12 quarterly ________________
US$ 3 million only LIBOR first quarter last quarter
________________________________ of the year 1998 of the year 2000
_____ payable quarterly on the
_____ day of
To be indicated at the time of
disbursement and _______________
each year.
(D) A sum to the maximum of ___ per cent over ____________ = ________________ _____ _____
________________ only ________________________________
________________________________
_____ payable monthly/quarterly/
half-yearly on the ______ day of
________________________________
________________________________
and _________________ each year.
</TABLE>
# See page 28 for Amortisation Schedule/[infinity symbol] See page 29 for
Amortisation Schedule
@ See page 30 for Amortisation Schedule/= See page 31 for Amortisation Schedule
- --------------------------------------------------------------------------------
* The words per annum in the Schedule is with reference to a year of 360 days.
Refer article 4.2 at page 3.
<PAGE> 32
: 26 :
ADDITIONAL INTEREST: 1.05 per cent per annum on the amount of the loan
disbursed from the date of first disbursement until
creation of security on all assets specified herein
and until submission of satisfactory proof thereof to
SCICI.
* ____ per cent per annum on the loan outstanding from
time to time until the Borrower's shares are listed on
any recognised stock exchange or on the OTC Exchange of
India.
"Where Borrowers are Companies, security creation on both movable and immovable
properties would be considered complete, when the Registrar of Companies (ROC)
affixes his stamp on the relative forms and accompanying instruments with the
word "REGISTERED" under his signature with the date and a copy thereof is
delivered to the Borrower and the chargeholder". In the alternative the
Borrower may produce the Certificate of registration issued by the ROC office.
Additional interest for non-creation of security would cease to accrue only
upon receipt of the forms as aforesaid.
*(delete if inapplicable)
LAST DATE OF DRAWAL: January 15, 1997
MANAGEMENT FEE: 1.05 per cent on the rupee equivalent of the Loan as
specified by SCICI to the Borrower on date of
execution of these presents.
SECURITY FOR THE LOAN
(A) The Loan together with all interest, premium on prepayment, costs,
expenses and other monies whatsoever stipulated in this Loan Agreement shall be
secured by first mortgage/hypothecation or other charge on the following:
All the immoveable properties of the Borrower including Land(s) bearing
survey no(s). _________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
and situate at ________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
including building(s), factory site(s), godown(s), warehouse(s) and
appurtenances thereof;
and/or
All moveable properties of the Borrower including its plant and
machinery. ___________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
together with machinery spares, tools and accessories, located at the
Borrower's premises at Units 6, 23, 34, 35, 36, 37, 38, 45, 46, 51, 52
<PAGE> 33
: 27 :
53,54,55,56 at Madras Export Processing Zone, Phase I as units 4F and 4G at
Madras Export Processing Zone, Phase II and the Borrower's vehicles and other
moveables, both present and future, and its current assets and receivables
(save and except specified moveables which are charged or may require to be
charged only with the prior written approval of SCICI in favour of lenders of
working capital).
(B) The Borrower shall procure a Personal Guarantee from _____________________
Limited/Smt/Shri ___________________, Smt/Shri _________________________, and
Shri M L TANDON in a form and manner satisfactory to SCICI.
(C) ____________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
The mortgages/charges referred to above in favour of SCICI will rank
pari passu with the mortgages/charges created/to be created by the Borrower in
favour of The Industrial Credit and Investment Corporation of India Limited
(ICICI).
The custody of the documents related to the security referred herein
shall be with ICICI on behalf of itself and all the participating institutions
in the Project.
SPECIAL BANK ACCOUNT:
The Borrower shall:
(a) Keep the drawals from the Loan in a special account in the name of the
Borrower with a Scheduled Bank to be approved by SCICI, the payments
from which accounts shall be subject to verification by any person
authorised in this behalf by SCICI. The Borrower shall also obtain and
furnish to SCICI a letter (in a form approved by SCICI) from the said
bank foregoing its right of set-off or lien in respect of such account.
(b) Keep such records as may be required by SCICI to facilitate verification
of the entries in the said account. The Borrower shall also authorise
the said bank to furnish to SCICI, as and when required by it, certified
true copy of the said account with details for verification by SCICI, at
the expense of the Borrower.
(c) Not transfer the Loan or any portion thereof from the said special
account for being kept in call or any deposit in any bank without
obtaining the prior written approval of SCICI.
<PAGE> 34
: 28 :
Repayment:
(a) During the implementation period of the project, the loan shall be
repayable on demand being made by SCICI at any time.
(b) SCICI shall have a right to conduct a review of the project before
completion of the project and the Borrower agrees that:-
(i) If as a result of such review, SCICI determines that the
Borrower has implemented/is likely to implement the
project within the project cost and in accordance with
the Financial Plan and has commenced/likely to commence
commercial production by the completion date, the
Borrower shall repay the Loan in 12 quarterly
instalments commencing from first quarter of 1998 and
ending on last quarter of 2000.
(ii) If, however, as result of such review, SCICI
determines that the Borrower has not implemented/nor is
likely to implement the Project within the Project cost
and/or in accordance with the Financing Plan and/or the
Borrower has not commenced/nor is likely to commence
commercial production after implementation of the
proposed scheme by the completion date, SCICI shall have
the right to revise the repayment schedule and stipulate
such additional conditions (including strengthening of
the management set up, change in means of financing,
raising of additional equity capital/other interest free
unsecured funds from the promoters) as SCICI in its
absolute discretion deem fit and to require the Borrower
to take such measures as may be stipulated by SCICI in
the light of the revised cost of the Project/means of
financing/date of completion of project. Unless
otherwise agreed to by SCICI the loan would continue to
be repayable on demand until the Borrower complies with
the stipulated terms and conditions to the satisfaction
of SCICI and commence commercial production. Upon such
compliance of the conditions and commencement of
commercial production, the Borrower shall repay the
loans in accordance with the repayment schedule as may
be stipulated by SCICI, which repayment schedule shall
be final and binding on the Borrower.
<PAGE> 35
: 29 :
AMORTISATION SCHEDULE#
Due Date Amount*
- --------------------------------------------------------------------------------
* The Borrower shall execute a Note of Amendment for crystallisation of the
amortisation schedule after disbursement of the Loan indicated above, if
necessary.
<PAGE> 36
: 30 :
AMORTISATION SCHEDULE [infinity symbol]
Due Date Amount*
- --------------------------------------------------------------------------------
* The Borrower shall execute a Note of Amendment for crystallisation of the
amortisation schedule after disbursement of the Loan indicated above, if
necessary.
<PAGE> 37
: 31 :
AMORTISATION SCHEDULE@
Due Date Amount*
TO BE INDICATED AT THE TIME OF DISBURSEMENT
- ---------------------------------------------------------------------------
* The Borrower shall execute a Note of Amendment for crystallisation of the
amortisation schedule after disbursement of the Loan indicated above, if
necessary.
<PAGE> 38
: 32 :
AMORTISATION SCHEDULE [infinity symbol]
Due Date Amount*
- -------------------------------------------------------------------------------
* The Borrower shall execute a Note of Amendment for crystallisation of the
amortisation schedule after disbursement of the Loan indicated above, if
necessary.
<PAGE> 39
: 33 :
SCHEDULE - 2
SPECIAL CONDITIONS
(Project Specific)
1. Any surcharge levied on loans drawn for import of capital goods, if any,
shall be recovered from the Borrower in addition to the interest as
mentioned above excluding interest tax, if payable in terms of Reserve
Bank of India guidelines or any other rules, regulations, law etc. that
may be applicable from time to time.
2. The Borrower shall, out of the envisaged cash accruals of Rs. 222
million during the one year period ending March 31, 1997, utilise a sum
of Rs. 197.7 million for meeting a part of the cost of the Project
and/or other requirements of funds.
3. The Borrower shall raise Rs. 199 million by issue of Equity Shares to
promoters to the satisfaction of SCICI for meeting a part of the cost of
the Project and/other requirements of funds.
4. Before the loan become effective,
a) the Borrower shall raise at least 50% of the abovementioned
equity capital of Rs. 199 million i.e., at least Rs. 99.5 million, to
the satisfaction of SCICI for meeting a pert of the cost of the project.
b) the Borrower shall raise at least 50% of the above mentioned
unsecured loans of Rs. 129.6 million, i.e. at least Rs. 64.8 million, to
the satisfaction of SCICI for meeting a part of the cost of the project.
5. The Borrower shall obtain State Subsidy of Rs. 8.5 million for meeting a
part of the cost of the project. In the event the Borrower is unable to
obtain the subsidy, it shall raise funds on terms satisfactory to SCICI
to meet the shortfall.
6. The Borrower shall raise unsecured loan of Rs. 129.6 million, to the
satisfaction of SCICI for meeting a part of the cost of the project. The
unsecured loans, shall not carry any interest till the Borrower
commences payment of dividend. Thereafter, the interest on such loan
shall be equal to the interest on secured loans or the percentage of
dividend, whichever is lower.
7. The Borrower shall obtain sanction for its requirement of power for the
project from State Electricity Board(s) to the satisfaction of SCICI.
<PAGE> 40
: 34 :
8. The Borrower shall make arrangements for meeting its requirement of
water for its schemes to the satisfaction of SCICI.
9. The Borrower shall suitably amend its Article of Association to provide
for appointment of nominee director by SCICI on the Board of the
Company.
<PAGE> 41
: 35 :
<PAGE> 42
: 36 :
<PAGE> 43
: 37 :
IN WITNESS WHEREOF THE Borrower has caused its Common Seal to be affixed hereto
and to the duplicate hereof and SCICI has caused this Agreement to be exercised
on the day, month and year first above written and as hereafter appearing:
* The COMMON SEAL OF withinnamed
Moduler Electronics India (Pvt) Ltd
____________________________________
____________________________________
was affixed pursuant to the Board
Resolution passed in that behalf on
the 6th day of June 1996 in the
presence of Shri M L Tandon and
Shri Bhupendra V. Shah, Directors
____________________________________
____________________________________
____________________________________
who have subscribed their signatures
hereto in token thereof and in the
presence of ________________________
____________________________________
who has countersigned hereto as
Authorised Signatory.
* As per Borrower's Articles of
Association.
SIGNED, AND DELIVERED by the
withinnamed SCICI LIMITED By
the hand of Shri K. V. UNNI
its Authorised Signatory.
<PAGE> 1
Exhibit 10. 32
[STATE BANK OF TRAVANCORE LETTERHEAD]
(Associate of the State Bank of India)
Moduler Electronics (I) Pvt. Ltd. Page No: 1 of 4
No: DGM/M/Adv/1755 November 11, 1995
The Managing Director,
M/s Moduler Electronics (I) Pvt. Ltd.,
406, Dalamal Tower, Nariman Point,
Bombay 400 021
Dear Sir,
SANCTION OF CREDIT FACILITIES
With reference to request for sanction of an ad hoc Letter of Credit Limit last
resting with your letter dated 6th November 1995, we are glad to inform you the
sanction of an ad hoc letter of credit limit of Rs. 200 lacs subject to the
terms and conditions contained in the annexure.
2. Please advise us in advance the date on which you would be calling on us for
executing the documents to enable us to keep the same ready. Please also note to
forward an authenticated copy of your Board Resolution empowering the Company to
avail the advance and also detailing the persons empowered to execute the
documents and witness the affixing of the common seal. Please also forward to us
a copy of your Memorandum and Articles of Association duly certified as being
amended upto date.
3. Please note that the facilities would be released only on your:
i. Undertaking to raise the capital to Rs. 220 lacs before 31st March 1996;
ii. Submitting a monthly cash flow statement for the period from November
1995 to March 1996 and there being sufficient cash flow to meet the LC
liability;
Cont'd...
[SEAL - BANK OF TRAVANCORE]
<PAGE> 2
Page No: 2 of 4
iii. Undertaking to submit to the Bank before 30th November 1995, the details
called for vide our letter No: DGM/M/Adv/ 1254 dated 28th September
1995;
iv. Agreeing to create charge over the current assets of the Company on a
pari-passu basis with the existing bankers and also to create second
charge over the fixed assets, first charge being in favour of ICICI;
v. Undertaking to follow up with the other banks in the consortium for
earlier sanction of the assessed limits;
4. By sanction of this facility the Bank does not commit itself to sanction the
other fund based limits requested by you. You are therefore requested to manage
your cash flow to meet the LC liability on time.
5. Please sign and retransmit the duplicate of this letter as a token of having
accepted the terms and conditions.
Yours faithfully,
/s/ [ASST GEN MGR]
- -------------------------
ASSISTANT GENERAL MANAGER
<PAGE> 3
[LETTERHEAD -- STATE BANK OF TRAVANCORE]
Page No: 3 of 4
TERMS AND CONDITIONS
LETTER OF CREDIT (DEMAND/USANCE): - FOREIGN/INLAND
LIMIT : Rs. 150.00 Lacs (over and above the existing
limit of Rs. 200 lacs) on an ad hoc basis.
TENOR : Sight/usance upto 90 days.
PURPOSE : For opening of LC covering purchase of
raw materials/spares.
SECURITY : 1. Documents of title to goods covered by the LC
2. Counter/Omnibus counter guarantee of the
Company to be obtained.
3. Extension of charge over current assets.
-COLLATERAL : i. Second charge over the entire fixed assets
of the Company, both present and future -
first charge being with ICICI.
ii. Personal guarantee [Bhri Manohar Lal Tandon.]
MARGIN : Inland : 10%
Import : 10% or as per RBI stipulation from
time to time, whichever is higher.
COMMISSION : As per FEDAI rules.
PERIOD OF SANCTION : One year from the date of sanction.
OTHER STIPULATIONS :
1. The import letters of credit will be opened only against valid import
licenses held by the Company, wherever applicable as permitted by the Import
Trade Control authorities from time to time.
2. The application for opening the LC should be suitably stamped in accordance
with the Stamp Act.
3. The Company should keep sufficient funds/DP in the cash credit account. Bills
received under letter of credit should be promptly retired by the Company (on
presentation/due dates) within the sanctioned working capital facilities and no
additional drawings/limits will be permitted/granted for the purpose of retiring
the bills received under any of the letters of credit established by the Bank on
their behalf. The Company should also furnish the Bank with an irrevocable
letter of authority for debiting their account straight away with the amount of
the bills drawn under LCs together with all bank charges. The LCs will be opened
by the
[SEAL -- STATE BANK OF TRAVANCORE]
<PAGE> 4
Page No: 4 of 4
Bank without in any manner implying a commitment to allow additional credit
facilities to the Company to retire the bills covered under the LCs.
4. In this connection, it is possible that the bills drawn under the LC are
received but the relative goods are not yet received. In such cases, lien for
the full amount of the outstanding bills as aforesaid would be earmarked against
the advance value of the total stocks including the documents of title to goods
received under the letter of credit.
5. In respect of letters of credit established on the Company's behalf providing
for drawing of usance bills drawn and accepted under the Bank's letter of
credit, drawing power will be earmarked (deducted) against advance value of
stocks and other eligible securities.
6. Stocks covered by these usance bills/drafts should be kept separately by the
Company and the value of such goods should also be declared in the monthly stock
statements submitted by the Company. The Company will not, however, be entitled
for DP against stock received under LCs until the relative bills are paid by
them.
7. By sanction of this ad hoc letter of credit the Bank does not commit to
sanction the other credit facilities requested by the Company.
8. This document is part of the letter addressed to you conveying the sanction
of the facilities.
[STAMP]
<PAGE> 5
[CURRENCIES]
[SEAL]
[STAMP]
FORM 'K' (SPECIAL)
- ------------------
STATE BANK OF TRAVANCORE
INDUSTRIAL FINANCE BRANCH
MADRAS
This hypothecation agreement made at Bombay this Thirteenth day of November
1995 between M/s Moduler Electronics (I) Pvt. Ltd. a company incorporated in
India and having its registered office at 406, Dalamal Tower, Nariman Point,
Bombay, 400 021 (hereinafter called "the Company" in which expression are
included unless such inclusion is excluded by or repugnant to the context its
successors-in-interest and official liquidators) and the STATE BANK OF
TRAVANCORE, a corporation constituted by
<PAGE> 6
[CURRENCIES]
[SEAL]
[STAMP]
the State Bank of India Subsidiary Banks Act 1959 and having its Head Office at
Thiruvananthapuram and a branch at INDUSTRIAL FINANCE BRANCH, KILPAUK MADRAS 600
010 (hereinafter called the Bank in which expression are included unless such
inclusion is excluded by or repugnant to the context its successors-in-interest)
WHEREAS the company has requested the Bank to grant
a credit limit for establishing Letter of Credit on its behalf from
time to time in respect of their import/purchase of raw materials to an extent
not exceeding the sum of Rs. 1,50,00,000/= (Rupees One Crore Fifty Lacs Only)
at any one time required by the company in the ordinary course of its business
and for the purpose of carrying on the same which the company hereby expressly
admits and acknowledges.
<PAGE> 7
WHEREAS the Bank has at the request and on the faith of the said
admission and acknowledgment of the company agreed to grant to the company the
aforesaid credit limits in addition to the credit facilities already granted by
the Bank to the Company and to be secured as herein provided.
NOW IT IS AGREED BY THE COMPANY AS FOLLOWS:
1st In consideration of the Bank having agreed to grant to the Company
a limit for establishing Letter of Credit on its behalf from time to time in
respect of their import/purchase of raw materials but to an extent not
exceeding the sum of Rs. 1,50,00,000/= (Rupees One Crore Fifty Lacs Only)
outstanding at any one time the Company hereby covenants with Bank to pay and
make good to the Bank on demand all such monies as may be paid by the Bank or
as the Bank may become liable to pay under or by virtue or in respect of any
guarantees and/or Letters of Credit that may be issued by the Bank under the
said limits as aforesaid and also at all time hereafter to indemnify and keep
indemnified the Bank against all actions proceedings claims and demands duties
penalties taxes losses damages costs (as between Attorney and Client) charges
expenses and other liabilities whatsoever that may be brought or made against
or sustained or incurred by the Bank (and whether paid by the Bank or not) in
consequence of the Bank having agreed to issue such guarantees and/or establish
Letters of Credit as aforesaid or otherwise howsoever in relation thereto and
also to pay and make good to the Bank on Demand any such liabilities as
aforesaid and that this covenant and obligations thereunder shall not be deemed
to be satisfied or become inoperative by reason of the cessation at any time of
any such guarantees and/or Letters of Credit that may be issued/established by
the Bank as aforesaid but shall continue in force or revive in the event of any
subsequent additions, renewals/extensions thereof and shall remain in full force
and effect until any such guarantees and/or Letters of Credit or any subsequent
additions/renewals/extensions thereof expire by the efflux of time mentioned in
any such guarantees and/or Letters of Credit as aforesaid.
2nd The whole of the Company's stocks of Raw Materials and Finished
Goods and other raw materials and stores whether raw or in process of
manufacture and all articles manufactured therefrom which now or hereafter
from time to time during this security shall be brought into store or be in or
about the Company's godowns or premises at BDF Block V, Units 37 & 38, Madras
Export Processing Zone, Tambaram, Madras - 600045 or wherever else the same may
be (including any such goods in course of transit or delivery) (all hereinafter
called "the said goods") shall continue to remain further hypothecated to the
Bank and constitute security for the payment by the Company to the Bank on
demand of all moneys at any time payable by the Company to the Bank in respect
of the said limits for issuance of guarantees and/or for establishment of
Letters of Credit and also as security for the payment and discharges of all
indebtedness or
<PAGE> 8
liability of the Company to the Bank in respect to any bills of exchange,
promissory Notes or instruments at any time drawn made accepted or endorsed by
the Company solely or jointly with others which the Bank may discount or become
interested in together with all interest discount commission charges costs
(between Attorney and Client) and expenses payable to or incurred by the Bank
in relation thereto.
3rd The Company will at all times maintain a sufficient quantity of
the said goods of such market value as to provide such margin of security as
may be required by the Bank and will forthwith whenever necessary provide
further goods (approved by the Bank) to restore such margin or pay the Bank the
equivalent in cash.
4th All the said goods shall be kept at the Company's risk and
expenses in good condition and fully insured against loss or damages as may be
required by the Bank.
5th The Bank or its Agents and Nominees shall be entitled at all times
without notice to the Company but at the company's risk and expenses and if so
required as Attorney for and in the name of the Company to enter any place
where the said goods may be and where the books of the account of the company
are kept and inspect value insure superintend disposal and/or take
particulars of all or any of the said goods and inspect value and check any
statements accounts reports and information and also on any default of the
Company in payment and discharge of any moneys and liabilities hereby secured
or the performance of any obligation of the Company to the Bank or the
occurrence of any circumstances in the opinion of the Bank endangering this
security to take possession of recover receive appoint receivers or remove
and/or sell (either by public auction or private contract) despatch for
realisation or otherwise dispose of or deal with all or any of the said goods
and generally to enforce realise settle compromise submit to arbitration or deal
in any manner with the security and to complete any engagements and carry on
the business of the Company through agents' Managers or otherwise without being
found to exercise any of these powers or being liable for any loss in the
exercise thereof and without prejudice to the Bank's rights and remedies of suit
or otherwise under this Agrement or otherwise and notwithstanding there may be
pending suit or other proceedings and the Company hereby undertakes to give
immediate possession to the Bank on demand of the said goods as and when
required by the Bank and to transfer and deliver to the Bank all relative bills
contracts securities documents and papers and agrees to accept the Bank's
accounts of receipts from sales and realisation as sufficient proof of amounts
realised and relative expenses and to pay on demand any shortfall or
deficiency thereby shown provided that the Company may subject to the
provisions of this Agreement and with the approval of the Bank sell the said
goods from time to time in due course of business subject to the
<PAGE> 9
margin of security required by the Bank being fully maintained and on the terms
of payment or delivery to the Bank of the proceeds thereof or documents therefor
immediately on receipt of the same time to time in due course of business
subject to the margin of security required by the Bank being fully maintained
on the express undertaking that the said goods and proceeds thereof and
documents therefor are always kept distinguishable as the Bank's exclusive
property specifically appropriated to this security to be dealt with only under
the directions of the Bank and the Company shall not (except with the previous
consent of the bank in writing) create any mortgage charge lien or encumbrance
upon or over the same or any part thereof except to the Bank nor suffer any such
mortgage charge lien or encumbrance to affect the same or any part thereof nor
do or allow anything that may prejudice this security.
6th The Company will carry on business efficiently and will furnish
(either monthly or often) all statements inventories reports returns
certificates accounts documents particulars and information in respect of the
said goods as the Bank may require verified and certified in the manner
prescribed by the Bank and will execute all documents and do all acts and
things which the Bank may require to give effect to this Agreement and the
Company authorises the Bank through its Agents and Nominees as Attorney for and
in the name of the Company to do whatever the Company may be required to do
under this Agreement.
7th The Bank shall be entitled at all times to apply any other moneys
or securities or property in its hands standing to the credit of or belonging
to the Company by sale or otherwise in or towards payment and discharge of any
moneys and liabilities for the time being due and owing hereunder to the Bank
and to recover at any time from the Company by suit or otherwise the balance
remaining payable to the Bank in respect of such moneys and liabilities
notwithstanding that all or any of the securities held by the Bank may not have
been realised.
8th This Agreement shall operate as a continuing security for all
moneys indebtedness and liabilities aforesaid notwithstanding any partial
payments.
9th Nothing hereby shall prejudice or affect any general or special
lien to which the Bank is or may be by law or otherwise entitled or any rights
or remedies of the Bank in respect or any present or future security guarantee
obligation or decree for any indebtedness or liabilities of the Company to the
Bank or shall preclude the Bank from enforcing or having recourse to the
security under the Agreement without enforcing or having recourse in the first
instance to any other security held by the Bank from the Company and the Bank
shall be entitled to sue on any of such security without being bound to sue on
all such securities.
<PAGE> 10
10th It is declared that all the said goods presently hypothecated as
aforesaid are the absolute property of the Company at the sole disposal of the
Company and free from any prior charge or encumbances and that all future goods
to be hypothecated hereunder shall be likewise the unencumbered absolute and
disposable property of the Company except for the said charge created as
aforesaid.
In WITNESS WHEREOF the Company has caused its Common Seal to be
hereunto affixed and Shri D. Ashok Kannan, Deputy Manager of the Bank and as
such one of the authorised officers of the Bank for and on behalf of the Bank
has hereunto set his hand the day and year first above written.
Dated at Bombay 13th Day of November 1995.
BORROWERS
The Common Seal of M/s Moduler
Electronics (I) Pvt. Ltd. hath
hereto been affixed in pursuance
of a resolution of its Board of
Directors passed at the meeting
held on 13th Nov 1995, in the
presence of S/ Shri D. Ashok Kannan
and Shri Biron R. Shah, Directors
of the Company respectively
who have hereunto affixed their
signatures in token of their
presence at the affixing of the
seal.
Place: Bombay
Date: 13th November 1995
<PAGE> 11
[CURRENCY]
[SEAL]
[STAMP]
DEBT ACKNOWLEDGMENT CUM LINKING LETTER
From
M/s M/s Moduler Electronics (I) Pvt. Ltd.,
406, Dalamal Tower,
Nariman Point, Bombay 400 021
To
The Asst General Manager,
State Bank of e,
Industrial Finance Branch,
Madras - 10
Dear Sir,
Since you have granted additional Letter of Credit Limit of Rs.1,50,00,000/=
(Rupees One Crore Fifty Lacs Only) in addition to the existing Letter of Credit
facility of Rs. 2,00,00,000/= (Rupees Two Crores Only) We have today executed
and handed over to you the following documents for the additional Letter of
Credit facility of Rs. 1,50,00,000/= (Rupees One Crore Fifty Lacs Only)
sanctioned to us.
[STAMP]
- -------------------------------
<PAGE> 12
1. Form K (Special) dated 13th November 1995 for Rs. 1,50,00,000/=
2. Deed of Hypothecation dated 13th November 1995.
We hereby declare that the above documents executed by us today are additional
and not in substitution of the following documents
1. Form K (Special) dated 18th February 1995 for Rs. 2,00,00,000/=
executed by us on the dates mentioned therein and We acknowledge for the
purpose of Section 18 of the Limitation Act 36 of 1963 and any like limitation
law in order to preclude any question of limitation that We are liable to you
for payment of the outstanding amount in respect of all present and future
indebtedness and liabilities under the Cash Credit Account, interalia, secured
by the aforesaid documents together with interest, costs, charges and expenses
in terms thereof and the said documents shall remain in force with all relative
securities, agreements and obligations.
Yours faithfully, [STAMP]
------------------------------------
The Common Seal of M/s Moduler
Electronics (I) Pvt. Ltd. hath
hereunto been affixed in pursuance
of a resolution of its Board of
Directors passed at the meeting
held on 13th Nov 1995, in the
presence of S/ Shri M.L. Tandon
and Shri Biron R. Shah, Directors of
the Company
who have hereunto affixed their
signatures in token of their
presence at the affixing of the
seal.
Place: Bombay /s/
-----------------------------------
Date: 13th November 1995 /s/
-----------------------------------
<PAGE> 13
[Currency]
[Stamp]
[Seal]
DEED OF HYPOTHECATION
This deed of hypothecation executed at Bombay this the Thirteenth Day of
November, One Thousand Nine Hundred Ninety Five by M/s Moduler Electronics (I)
Pvt. Ltd. a company incorporated in India and having its registered office at
406, Dalamal Tower, Nariman Point, Bombay 400 021 (hereinafter referred to as
"the Company" which expression shall, unless excluded by or repugnant to the
context, include its successors and assigns) of the one part and the State Bank
of e, a Bank constituted under the Provisions of the State Bank of
India (Subsidiary Banks) Act 1959, having its Head Office at Thiruvananthapuram,
Kerala and a Branch at 816/ 817, Poonamalle High Road, Kilpauk, Madras 600 010
(hereinafter for brevity sake referred to as "the Bank" which expression shall
unless the context or subject otherwise requires include its successors or
assigns) of the other part.
[Stamp]
<PAGE> 14
[Currency]
[Stamp]
[Seal]
STATE BANK OF TRAVANCORE
WHEREAS
(1) By the loan agreement dated the Thirteenth day of November, One Thousand
Nine Hundred Ninety Five (referred to as "the said agreement") made between the
Company of the one part and the bank of the other part, interalia the Bank has
agreed to grant the Company financial assistance by way of a Letter of Credit
limit to the extent of Rs. 3,50,00,000/= (Rupees Three Crore Fifty Lacs only)
(hereinafter referred to as the "financial assistance" which expression shall
include any interim disbursement(s) that may be sanctioned against the said
financial assistance) for the purposes and on the terms and conditions set out
therein.
(ii) The bank has called upon the Company and the Company has agreed to execute
these presents, as security for the repayment of the financial assistance of Rs.
3,50,00,000/= (Rupees Three Crore Fifty Lacs Only) agreed to be lent and
advanced by the Bank to the Company, the payment of interest, additional
charges, expenses and other moneys payable to the bank by the Company under the
said agreement.
[Stamp]
<PAGE> 15
NOW THESE PRESENTS WITNESS THAT IN CONSIDERATION OF THE BANK having agreed to
grant the said financial assistance for the purposes and on the terms and
conditions set out in the said Agreement, the Company hereby agrees and declares
as follows:
1. That all the fixed assets of the Company movable and immovable assets (save
and except book debts) which now or hereafter from time to time acquired during
the continuance of this agreement, shall be brought into, stored or to be stored
in or about its premises, factories godowns and elsewhere and wherever they are
whether stationary or in transit (hereinafter collectively referred to as the
"said goods") short particulars whereof are given in the first schedule
hereunder written/enclosed as a separate annexure are hereby hypothecated to the
bank as security for all the amounts payable by the Company to the bank under
the said Agreement. PROVIDED THAT the charge of the Bank shall rank second with
the charges created and/or to be created by the Company in favour of the
Bank/Financial Institutions specified in the second schedule hereunder written
and for the purpose therein mentioned, PROVIDED FURTHER THAT the charge in
favour of the Bank on the said goods shall be subject to the charge or charges
created and/or to be created by the Company in favour of its Bankers on its
stocks of raw materials, semi finished and finished goods and consumable stores
and book debts and such other movables as may be permitted by the Bank in
writing to secure borrowings for working capital requirements.
2. That the Company shall, at its own expense, keep the said goods in marketable
and good condition, and insure and keep insured the said goods in accordance
with the provision of the said Agreement and shall duly pay all premia or other
sums payable for that purpose unless otherwise agreed to by the lenders. The
insurance in respect of the said goods shall be taken in the joint names of the
Company and the bank and any other institutions having an insurable interest in
the properties of the Company and acceptable to the bank and the Company shall
deposit and keep deposited with the Bank and/or other institutions as may be
approved by the Bank the insurance policies and renewals thereof.
PROVIDED that the insurance in respect of the goods charged to the Company's
bankers as approved by the Bank shall be taken out in such a manner as may be
desired by such bankers/financial institutions and the policy or policies of
insurance or any renewals thereof may be retained by the Bank/financial
institutions.
In the event of failure on the part of the Company to insure the said goods as
herein provided and/or to pay the insurance premia or other sums referred to
above, the Bank may, but shall not be obliged to, insure and/or pay the
insurance premia and the Company shall, on receipt of a notice
[STAMP]
<PAGE> 16
or demand from the Bank, reimburse the Bank the expenditure incurred by them,
together with interest at the rate stipulated by the bank from the date of the
payment by the Bank and the said sums shall, till payments, be considered to be
loan to the Company by the Bank.
3. That a nominee of the Bank shall, without any notice and at the risk and
expense of the Company, be entitled at all times to enter any place where the
said goods may be stored and arrange to insure, inspect its value, superintend
disposal and/or take particulars of all or any part of the said goods, check any
statement, accounts, reports and information and also on any default, of the
Company in the performance of any obligations of the Company to the bank or any
breach by the Company of any of the terms and conditions stipulated in the said
agreement, to take charge and/or possession of, seize, recover, receive, appoint
receivers or remove and/or sell by public auction or private contract despatch
for realisation or otherwise, dispose of or deal with all or any part of the
said goods and to enforce, realise, settle, compromise and deal with any rights
or claims relating thereto without being bound to exercise any of these powers
or being liable for any loss in the exercise thereof and without prejudice to
the Bank's rights and remedies of suit or otherwise and notwithstanding that
there may be any pending suit or other proceeding, the company shall give
immediate possession of the said goods to the nominee of the Bank on demand and
to transfer and deliver to the Bank all relative bills, contracts, securities
and documents and the Company shall accept the Bank's account of sales and
realisations as sufficient proof of accounts realised and relative expenses and
pay to the Bank any shortfall or deficiency thereby shown.
4. That all the said goods and all realisations and insurance proceeds thereof
and all documents under this security shall always be kept distinguishable and
held as exclusive property of the Bank, specifically appropriated to this
security, subject to the rights of the Company's bankers and other financial
institutions herein provided, and shall be dealt with only under the directions
of the Bank and that the Company shall not, except as provided in the said
agreement, create any mortgage, charge, lien or encumbrance upon or over the
same or any part thereof nor do or allow anything to be done that may prejudice
this security; provided always that until otherwise directed by the Bank, the
Company shall be at liberty in the ordinary course of business to sell all or
any of the said goods but that the Company shall, if so required by the Bank, on
any and every such sale pay to the Bank the net proceeds of sale in
satisfaction, so far as the same will extend, of the moneys then due and payable
by the Company to the Bank under the said Agreement.
[Stamp]
<PAGE> 17
5. That the Company shall, whenever required by the Bank give full particulars
to the Bank of all the assets of the Company (including the said goods) and
shall furnish and verify all statements, reports, returns, certificates and
information from time to time and as required by the Bank, and make, furnish and
execute all necessary documents to give effect to this security.
6. The Company agrees and undertakes to execute such other deeds or documents as
may be required by the Bank to further perfect, protect and/or enforce the
security created hereunder and if it fails to do the same within the time, if
any, allowed by the Bank for the purpose, the Bank is hereby irrevocably
appointed and authorised to act as the Power of Attorney holders of the Company
and take further documents as may be found necessary and take any steps as may
be found required, for preservation, enforcement and realisation of the security
hereunder and the Company shall be liable to bear the expenses that may be
incurred in this connection.
7. That this security shall be a continuing security and shall not be affected
by any change in the constitution of the Company or by winding up (voluntary or
otherwise) or by any merger or amalgamation of the Company with any other
company, society or person etc..
8. That the Company hereby declares that the said goods are the absolute
property of the Company at the sole disposal of the Company and, subject to the
charge or charges created and/or to be created as provided in clause I thereof,
free from any prior charge or encumbrance and future goods shall like wise be
unencumbered, absolute and disposable property of the Company.
9. That the Company doth hereby agree and undertake that it will, if not already
executed prior to the execution of these presents at its own cost procure the
execution and registration, if necessary, of the pari-passu inter-se Agreement
by the financial institution and the Bank mentioned in the second schedule
hereto to ensure that the security created hereunder shall rank pari-passu
inter-se without any preference or priority of one over the other or others of
them for all purposes and to all intents and also providing that moneys
resulting from the enforcement of realisation of the said security or any of
them shall, (subject to the prior charge(s) of the Company's bankers over
specified moveables and trade debts for securing borrowings for working capital
requirements) be distributed and shared amongst the Bank/financial institutions
without any preference or priority of one over the other or others of them for
all purposes and to all intents and including therein specifically the
provisions regarding insurance, custody of insurance policies, custody of title
deeds, prohibition prepayment by the Company, acceleration of repayment of debts
and other usual terms, provisions and stipulations as may be agreed to by the
Bank/financial institutions.
[Stamp]
<PAGE> 18
10. That nothing herein shall prejudice any rights or remedies of the Bank in
respect of any present or future security, guarantee, obligation or decree for
any indebtedness or liability of the Company to the Bank.
THE FIRST SCHEDULE HEREINABOVE REFERRED TO SHORT PARTICULARS OF GOODS
The whole of the moveable assets of the Company (save and except book debts)
including moveable plant and machinery, implements, fittings, spare parts,
accessories, tools, stores inventories, typewriters, motor vehicles, all type of
transport equipments, office furniture including computers, stocks of raw
materials, finished and semi finished goods, other goods and uncalled capital
from time to time acquired which now or hereinafter from time to time during the
continuance of this Agreement shall be brought into, stored or to be stored in
or about its premises, factories, godowns and elsewhere and wherever they are,
whether stationary or in transit.
THE SECOND SCHEDULE HEREINABOVE REFERRED TO
All the fixed assets of the Company both moveable and immoveable presently
charged to ICICI as first charge holder.
In witness whereof the Company has caused its Common Seal to be hereunto affixed
the day and year first hereinabove written.
[Stamp]
[Signature]
The Common Seal of M/s Moduler
Electronics (I) Pvt. Ltd. hath
hereunto been affixed in pursuance
of a resolution of its Board of
Directors passed at the meeting
held on 13th Nov. 1995, in the
presence of S/ Shri M.L. Tandon
and Shri Biren R. Shah, Directors
of the Company who have hereunto
affixed their signatures in token
of their presence at the affixing
of the seal.
[Signatures]
Place: Bombay
Date: 13th November 1995
<PAGE> 1
Exhibit 10.33
[LETTERHEAD MEMORANDUM INDIAN BANK]
MEPZ BRANCH
EXPONK KADAPERI
2368301 2368251 MADRAS-45.
__/80/95 05.09.95
M/s Moduler Electronics (I) P Ltd.
406, Dalamal Towers,
Nariman Point,
Bombay - 400021.
Dear Sirs,
We are pleased to inform you that the following facilities have been sanctioned
to you for a period up to 11.08.96.
<TABLE>
<CAPTION>
Facility Limit Margin Interest
- -------- ----- ------ --------
<S> <C> <C> <C>
(Rs.in lacs)
Packing credit 300.00 25% 13% p.a. up to 180 days
(increased from
Rs.200.00 lacs) 15% beyond 180 days up to 270 days
PLR + 3.5% p.a. beyond 270 days
up to 360 days
FBN/FBP (90 days) 1412.50 Nil 13% pa up to 90 days
(increased from
Rs.350.00 lacs) 15% p.a. beyond 90 days up to 180 days
Import LC 875.00 10% Commission as per FEDAI Rules
(DA 90/xxx 180 days)
(Increased from
Rs.400.00 lacs)
Guarantee 10.00 Perf.Gtee-10% Commn as per ru
customs 50%
Excise money-
25% cash and bal
75% by primary
collateral security
</TABLE>
Securities:
1. Primary:
PC AND FBN/FBP: Joint documentation. Paripassu I charge on stocks of raw
materials stocks in process and finished goods for the PC
facility and export receivables for FBM/FBP. EDGC Cover for PC
and FBP.
LC Against XXXXX stamped LC agreement and hypothecation of goods
covered XXn under the LC
Guarantee Counter guarantee by the company.
<PAGE> 2
[LETTERHEAD MEMORANDUM INDIAN BANK] MEPZ BRANCH
KADAPERI
MADRAS-45.
05.09.95
- 2 -
2. Collateral
a. Assets: Paripassu II charge on the existing Plant &
Machinery with WDV of Rs.97.35 lacs as on 31.03.94.
Paripassu XXII charge on the imported Plant &
Machinery estimated at a cost of Rs.910.00 lacs acquired
for the HDD project. (I charge to ICICI)
b. Guarantee: Personal guarantee of Mr M.L. Tandon
Terms and conditions:
1. The satisfactory credit reports on the buyers should be obtained for FBP.
2. Stocks should be insured adequately with bank clause.
3. Operations will be allowed strictly based on the QIS statements. The
company should submit QIS Statements and other select operations data
regularly.
4. The paid-up capital of the company should be increased to Rs.220.00 lacs
before 30.09.95 and auditors certificate to this effect to be submitted.
5. Unsecured loan of Rs.641.00 lacs is to be brought in by the promoters as per
ICICI appraisal and auditors certificate to be submitted to this effect.
6. ECGC Policy and buyerwise limit is to be obtained for FBP limits wherever
applicable.
We reserve XX to ourselves the right to cancel/suspend/reduce any or all the
facilities sanctioned to the company and to alter/amend/vary X the terms and
conditions of our sanction including rate of interest at our sole discretion
without assigning any reason whatsoever.
Please arrange for the Board resolution and execution of the documents for the
revised limits.
Please send us the duplicate copy of this letter duly signed by you in token
of having accepted the above terms and conditions.
Yours faithfully,
/s/
- ----------------------------------
CHIEF MANAGER
<PAGE> 3
P.C.: 23-144
D-I Place Bombay
Rs. 300,00,000- 13.10.1995
ON DEMAND I/We promise to pay INDIAN BANK or their order within their
Office at Madras Export Processing Zone Madras 45 the sum of Rupees Three
crores only for value received, with interest thereon at the rate of 1
percent over the official rate of the RESERVE BANK OF INDIA with a minimum of
13 percent per annum from the date to date of payment in full with quarterly
rests, or at such rates and rests as may be revised as per the instructions of
the Reserve Bank of India from time to time.
Common seal affixed in the presence of Two Directors of the company as per Board
Resolution dt. 26.09.95.
[SEAL] [STAMP]
[SIGNATURES] [SIGNATURES]
<PAGE> 4
P.C.: 23-144
D-I Place Bombay
Rs. 14,12,50,000- 13.10.1995
ON DEMAND I/We promise to pay INDIAN BANK or their order within their
Office at Madras Export Processing Zone Madras-45 the sum of Rupees Fourteen
crores twelve lacs and fifty thousand only for value received, with interest
thereon at the rate of 1 percent over the official rate of the RESERVE BANK OF
INDIA with a minimum of 13 percent per annum from the date to date of payment
in full with quarterly rests, or at such rates and rests as may be revised as
per the instructions of the Reserve Bank of India from time to time.
Common seal affixed in the presence of Two Directors of the company as per
Board Resolution dt. 26.09.95.
[SEAL]
[SIGNATURES] [SIGNATURES]
<PAGE> 5
[STAMP]
[SEAL]
[STAMP]
(Document not to be attested)
Place Bombay
Date 13.10.'95
To
The Manager
Indian Bank
Madras Export Processing Zone
Dear Sir,
Sub: Cheques, Bills, hundies and other instruments with or without
government securities, share certificates, railway receipts,
bills of lading and documents constituting title to goods
attached, lodged with you for collection and/or discount and/or
purchase from time to time.
In consideration of your collecting and/or discounting and/or
purchasing or agreeing to collect, discount and/or purchase all cheques, bills,
hundies and other instruments with or without government securities and share
certificates or other documents including railway receipts, bills of lading or
other documents constituting title to goods now lodged or which may at any time
or from time to time lodged by me/us to you:
I/We beg to tenner herewith my/our joint and several pronote for Rs.
14,12,50,000- (Rupees Fourteen crores twelve lacs and fifty thousands only) as
cover for the arrangement.
I/We agree that all such collection, discount or purchase of cheques,
bills, hundies and other instruments until further altered or specifically
otherwise provided for shall be upon the following terms and conditions,
1. You may, at your option but at my/our costs, risk and
responsibility in all respects appoint an agent who shall be my/our agent to
collect.
2. You or the agent at your or his option, may send for collection or
payment or discount on my/our account at my/our entire costs, risk and
responsibility by post or by other manner to another agent or to the drawee
thereof any cheques, bills, hundies or other instruments with or without share
certificates, government securities or other documents including railway
receipts, bills of lading or other documents constituting title to goods
attached, I/We agree that such other agent or the drawee shall be deemed to be
my/our agent for collection at my/our entire risk and responsibility in all
respects.
3. You or an agent may at your or his option but at my/our risk and
responsibility reserve in exchange for cheques, bills, hundies and other
instruments, cheques, bank drafts or other mandates for payments in lieu of
cash.
[STAMP]
<PAGE> 6
4. Receipts by you or by an agent of cheques, bank drafts, or other
mandates for payments as above and the loss, mutilation or dishonour thereof
and/or of other securities of any descriptions is not to prejudice your rights
on any cheques, bills, hundies, or other instruments in case of dishonour or
non-payment as the case may be, nor shall any proceedings taken thereon or you
granting time or entering into any arrangements with any parties to such
cheques, bills, hundies or other instruments (and I/we hereby consent to your
so granting time or entering into arrangements) prejudice or affect your
absolute recourse to me/us under the arrangement.
5. Should you or an agent receive, in exchange for such cheques, bills,
hundies or other instruments, payment by an instrument which you or the agent
cannot conveniently collect through normal channels it is clearly understood
that such instruments may be collected in any manner and by any agency
(including despath to the drawee) at my/our entire risk and responsibility and
the agent or agents (including the drawee) employed in such collection shall
be considered fully as my/our agent or agents.
6. I/we hereby agree that all bills, and/or documents including railway
receipts, bills of lading and documents of title to goods which I/we may from
time to time hand you for purchase or discount or against which you make me/us
advances, and the goods, government securities and shares thereby represented
and the proceeds thereof, are to be held by you as a continuing security for the
payment on demand of the said bills so purchased handed over or discounted and
of all advances, banking accommodation and/or expenses which you may make,
afford or incur to or for me/us in connection therewith and all others
liabilities to you present and future, and you are to be at liberty to exercise
all my/our rights (if any) as unpaid sellers of the said goods, government
securities and shares and without further reference to me/us to sell, insure,
warehouse, or otherwise deal with the said goods or to sell deal with government
securities and shares as though you are the absolute owners thereof and you are
expressly authorised by me/us to refuse to deliver goods covered by the bills
(whatever be tenor) except against payment. I/We agree that your accounts of
sale and accounts of your expenses shall be accepted by me/us as conclusive
evidence of the correctness of the matter therein written and I/we declare that
this Agreement and your rights hereunder shall in no way be affected by my/our
death or any change in my/our name, style or constitution.
7. I/We further agree that you and your agents shall be exempt from
all liabilities for any loss or damage due to deterioration of goods or loss
howsoever caused to me/us arising from any telegraphic or cable error,
irregularity, delay, mistake, omission or misinterpretation, or otherwise
howsoever.
8. I/We also agree that you are entitled to treat every scrip of
governments securities and shares and every document constituting title to
goods including railway receipts, bills of lading, etc. handed in by me/us to
you as genuine without any further enquiry and that I/we agree to indemnify you
and keep you indemnified against any loss caused to you by reason of the said
documents subsequently turning out to be forged and not genuine and also
against any loss caused to you by the misdelivery or wrong delivery by the
Railway and Postal authorities of the government securities and shares and
goods comprised in the documents and railway receipts for any reason whatsoever.
9. I/We agree and undertake that the amount advanced will be used only
for the purpose/purposes mentioned in the borrower's proposal and for which it
has been sanctioned and I/we further agree that notwithstanding anything
contained in this agreement, you shall have the right to recall the entire
amount advanced together with interest and other charges or any part thereof in
case the amount advanced is/has been used for any purpose other than for which
it has been sanctioned or if you apprehend or you have reason to believe that
I/We have violated or am/are violating the condition.
10. I/We further agree that in respect of foreign bills
purchased/negotiated/advance against FOBC made by you, the provisions of the
rules of Foreign exchange Dealers' Association of India, the Uniform customs
and Practice for Documentary Credits and/or the Uniform Rules for Collection of
International Chamber of Commerce and the directives of the RBI, current as on
the date of purchase/negotiation shall be binding on me/us.
[STAMP]
<PAGE> 7
11. I/We further agree that
i) In consideration of your making a provisional advance of Rs.
14,12,50,000 against the foreign bills for collection expressed to be made
payable in foreign currency tendered from time to time the bills will be drawn
by me/us in favour of yourself naming yourself as payee for due and valid
consideration and such advances shall be at the sole discretion of yourself:
ii) In respect of money lent and advanced or agreed to be lent and
advanced, it is agreed that you being a holder for value will be entitled to
appropriate the proceeds of the bills towards the provisional advances made by
you to me/us as hereinabove mentioned;
iii) You, on converting foreign currency amount to Indian Rupees either
on realisation or at any point of time, will pay over to or recover from me/us
the difference in the rupee amount i.e. the difference between the Rupee amount
advanced and the rupee equivalent arrived at, while converting foreign currency
into Indian Rupee currency, after deducting the costs and expenses incurred by
the Bank in respect thereof and the moneys which shall then be owing on the
securities of these presents.
Dated this 13th day of October, 1995.
Common seal affixed in the presence [STAMP]
of Two Directors of the company as [SIGNATURES]
per Board Resolution Dt. 26.09.95.
- -------------------------------------------------------------------------------
In case of inland Bills/cheques purchased limit, delete clauses nos. 10 and 11
under the signature of borrower.
<PAGE> 8
[STAMP]
From:
Moduler Electronics (India) Ltd
406 Dalamal Towers, Nariman Point,
Bombay - 400021
To
Indian Bank
Madras Export Processing Zone branch
Madras - 45
Dear Sirs,
In consideration of Indian Bank Madras Export Processing Zone branch at
my/our request signed and/or agreed to sign, as and when required by me/us
guarantee in favour of various authorities and departments of the Central and
State Governments, Semi-Government bodies, local or public bodies or authorities
or various other persons, companies, corporations or bodies Corporate whom I/we
may specify from time to time but so that the total amount of the liabilities
outstanding under all such guarantees does not at any one point of time exceed
a sum of Rs. 10,00,000- and subject to your right to refuse to issue any
guarantee of which you do not approve or to refuse to issue any further
guarantees at any time. The expression "such guarantees" shall unless
repugnant to the context or meaning thereof be deemed to include any renewals
of extensions or modification of all or such guarantees.
1. That the Bank shall be entitled to act in accordance with
guarantees executed and/or to be executed by it within the sanctioned limit of
Rs. 10,00,000- (Rupees Ten lacs only) as aforesaid and to make payments
thereunder without any further consent and inspite of any directions or
contrary directions given by us or any of us.
2. That I/We shall pay on demand and without demur pay to the Bank all
amounts which the Bank may be called upon to pay from time to time under the
said guarantees executed and/or to be executed and all other moneys arising out
of the said guarantees or any of them with interest thereon and all costs,
charges (including Bank Charges) and expenses of the Bank.
3. That I/We shall indemnify, on demand and without demur and keep
indemnified the Bank from and against all actions, losses, claims, demands,
duties, penalties, damages, costs, charges, expenses and other liabilities
whatsoever which may be brought or made against or sustained or incurred by the
Bank (and whether paid by the Bank or not) in consequence of the Bank having
executed the said guarantees or any of them or otherwise howsoever in relation
thereto.
4. That the Bank shall as its sole discretion and without reference to
me/us admit or compromise and pay or submit to arbitration or dispute or resist
any claim or demand
[STAMP]
<PAGE> 9
- --------- against the Bank under or in respect of the said guarantees my/our
counter-guarantee being available to the Bank in respect of any action which
may be taken against the Bank and I/we also agree to pay the Bank on demand
with interest at 21.75% p.a. or at such other rates as may be prescribed by the
Bank from time to time all such moneys as I/we may be liable to pay under this
counter-guarantee and that the Bank may proceed against and recover from any of
my/our property as including any credit balance held by the Bank or any
security for the time being held by the Bank on our account by sale or
otherwise and to allocate and apply the net proceeds of sale and realisation
thereof and any other moneys in the Bank's hands standing to my/our
credit/belonging to me/us on any account whatsoever independently the one or
the other in such order and in such manner as the Bank may think fit in or
towards payment of any amount payable be me/us to the Bank in terms of this
deed.
5. I/We do hereby put on record and confirm that on demand from the
beneficiary under the said guarantees the bank will be entitled in its absolute
and unfettered discretion except in the event of the Bank being restrained by
an order or injunction to make payment of whole or part of the amount of the
said guarantee or any of them as it may be called upon to do by such
beneficiary without going into the question of validity propriety or legality
of the said demand and without any reference to me/us and that I/we shall not
have any right to question in any way whatsoever the Bank's making such payment
and I/we shall always be bound by it. Any request of demand made to or upon
you by the beneficiary or beneficiaries of all or any of such guarantees for
payment/s of any sum or sums of money shall be sufficient authority from me/us
to the Bank for making such payment/s.
6. This counter guarantee will extend to any extension of the
guarantee/s for which I/we may from time to time and which the Bank may agree
to grant at my/our request subject to the Bank's absolute right and discretion
whether to extend the guarantee/s or not and without costing any obligations on
the bank for extending the said guarantee/s.
7. This guarantee shall be continuing security binding on me/us, our
successors and assigns and shall remain valid until all the guarantees issued
hereunder are duly cancelled and returned to the Bank and further that it shall
not be considered as wholly or partially satisfied or exhausted by any
payment/s made by me/us from time to time to the beneficiary of the guarantees.
8. This counter-guarantee is without prejudice to and in addition to
any other security or securities held or which may be held by the Bank
hereafter on account or in relation to the said guarantees.
9. The giving or granting of time or any extension thereof to me/us or
the neglect, omission or forbearance on the part of the Bank in requiring or
enforcing payment of any moneys due hereunder or any other variations,
modifications or amendments to any agreement between me/us and the Bank shall
not in any way prejudice limit, restrict or affect this guarantee as we shall
be considered as principal debtors in respect of all the guarantees covered
herein above.
10. This counter guarantee and indemnity shall be irrevocable and shall
be binding on me/us and each of us jointly and severally and also on my/our
respective heirs, executors, administrators, estates and effects jointly and
severally/our successors and assigns (whether statutory or contractual).
11. I/We and each of us shall be liable hereunder to you jointly and
each severally. On the death of any one or more of us, his heirs, executors,
administrators, legal representatives, estates and effects (as the case may be)
shall be liable jointly and severally with the survivor or survivors.
12. The liability incurred by us and each of us hereunder shall not in
any way be prejudiced or affected by any change in our partnership firm whether
by death or retire-
[STAMP]
<PAGE> 10
ment or insolvency of any partner or by admission of any new partner or
partners or otherwise howsoever even though the firm may become a sole
proprietory concern, and all the partners for the time being of the firm or the
sole proprietor and his/their respective heirs, executors, administrators,
legal representatives, estates and effects, as the case may be, shall be liable
to you hereunder, jointly and severally.
The common seal of M/s Moduler Electronics (India) Ltd was
hereunto affixed pursuant to a resolution passed by the Board of Director at
their meeting held on ----------------- in the presence of ------------------ a
director of the company who has affixed his signature hereto.
Common seal affixed in the presence [STAMP]
of Two Directors of the company as [SIGNATURES]
per Board Resolution Dt. 26.09.95.
Place: Bombay
Date: 13.10.95
<PAGE> 11
[STAMP]
THIS AGREEMENT MADE this 13th day of October 1995 by and between
Moduler Electronics (India) Ltd. hereinafter called the "Borrower" which
expression, wherever the context so requires or admits shall be deemed to
include its/his heirs, executors, administrators, assigns and attorneys of the
one part and INDIAN BANK, a body corporate, constituted under the Banking
Companies (Acquisition & Transfer of Undertakings) Act, 1970, carrying on the
business of Banking and having its Head Office at 31, Rajaji Salai, Madras-1,
hereinafter called the Bank, which term shall mean and include its successors
and assigns.
WHEREAS the Borrower is already enjoying the financial assistance/has
requested for granting of financial assistance under Import LC limit up to a
maximum amount of Rs. 875 lacs and
WHEREAS the Borrower in the course of his business has requested for
additional financial assistance (1) for purposes of purchase of goods on credit
under Letters of Credit with the condition attached thereto to the effect that
such delivery of goods shall be against acceptance of usance bills drawn
thereunder opened by the Bank in favour of suppliers (2) on the Bank issuing
guarantees in connection with purchase/sale of goods from time to time (3) and
for purchase of goods on credit under bills to be drawn on the Borrower and to
be co-accepted with the Bank.
WHEREAS the Bank has agreed to grant to the Borrower such facilities up
to a limit of Rs. 875 lacs to purchase goods on credit basis under (1) letters
of credit with DA usance drafts drawn thereunder and/or (2) Guarantees in
favour of purchasers/sellers of goods on credit to make payment of amounts in
the event of default of payment by the Borrower and/or (3) co-acceptance
facilities as aforesaid to be secured by the goods and/or documents of title
goods hypothecated and/or to be hypothecated to the Bank-the words goods shall
mean and include all goods, stock-in-trade, merchandise goods, vehicles of
every type and description.
It is hereby agreed between the Borrower and the Bank as follows:
1. That an account styled as Import LC shall be opened in the books of
the Bank at their TEPI branch or at any other branch of the Bank at the request
of the Borrower with a limit of Rs. 875 lacs.
[STAMP]
<PAGE> 12
2. ---------------------------------------------------------
as prescribed and that may be prescribed by the Bank from time to time in the
matter of issuing letters of credit with DA usance drawn thereunder and/or
guarantees and/or co-acceptance of bills as stated herein.
3. That the Bank shall at its absolute discretion issue letters of
credit and/or guarantees and/or co-acceptance of bills as stated above as it
thinks fit subject to the terms, conditions, covenants and limitations
hereinafter contained.
4. That the Bank shall be liable to pay the amount of (a) usance
drafts covered by the letters of credit (b) guarantees (c) bills co-accepted by
the Bank from time to time provided the delivery of goods so purchased on
credit from time to time are made by suppliers of goods against acceptance of
the said usance drafts drawn for the actual amounts due being the price of
goods excluding charges like handling charges and transport charges and other
charges by whatever name they are called as may be levied by suppliers of goods.
5. That the Borrower before requesting the Bank for issuing of
guarantee on his behalf in favour of suppliers/purchasers of goods on credit
to the Borrower, the Borrower shall in writing furnish all information such as
supplier's/purchaser's name, nature of goods, quantity of goods, actual price
of goods, the place from where the goods are to be supplied/purchased, nature
of transport by which goods will be brought/sent, time within which the goods
will be received/delivered and such other information as may be required by the
Bank from time to time. In the absence of such information, the Bank shall not
be bound to issue the guarantees/co-accept the bills.
6. All goods now lying or hereafter stored at the godowns and yards
and premises in --------- or lying at any other godown, wheresoever or in
respect of which the Borrower can make any deposit, pledge, hypothecation or
charge wherever they may be and/or received at all times and from time to time
as per arrangements herein entered, the Borrower hereby agrees to hypothecate
goods and therefore the same are hereby hypothecated and charged to the Bank by
way of first charge and the term/word "goods" occuring in the clauses in this
agreement shall wherever the context so requires mean and include goods covered
by the documents of title to goods covered by such documents.
7. The Borrower hereby agrees and undertakes that it/he shall be
liable to pay all amounts due to sellers/purchasers as and when they fall due
and at no time, it/he shall default in making payments of full amounts due
from time to time and in the event of failure on its/his part of its/his own
accord and/or on demand by the Bank, the Bank shall on account of the
obligations entered into on behalf of the Borrower in terms of this agreement
without further reference or without any demur on any count either as notified
by the Borrower or anybody on its/his behalf or anybody claiming under it/him,
shall pay to the debit of Borrower's account amounts due as determined with
interest if any on account of non-payments by the borrower in time or on due
dates. On account of payment of the amounts so made, the Borrower shall
immediately provide at least sufficient funds by crediting the required funds
into its/his account without fail to enable the Bank for adjustment of the same
towards its/his liability with it. All amounts so paid by the Bank with
interest at -------% p.a., above the Reserve Bank of India rate with a minimum
of -------% p.a., or at such rate or rates as may be stipulated by Reserve Bank
of India shall be liable to be calculated on daily debit balances and charged
against the account of the Borrower on the last working day of every English
calendar quarter so long as the account shall remain open and shall be paid by
the Borrower on demand by the Bank along with any other moneys, costs, charges,
expenses, outgoings and sums of money whatsoever.
8. The Borrower shall display at a conspicuous place at the godown/s
or place of the borrower, a board notifying to whomsoever it may concern, that
the goods are under hypothecation in favour of the Bank.
[STAMP]
<PAGE> 13
9. The Borrower engages to hold the goods as Trustee for and on behalf
of the Bank and in event of the said goods or any portion thereof being sold
and delivered before full payment of the balance due under this Agreement, the
proceeds of such sale shall be received by the Borrower as Trustee for the Bank
and paid to the Bank without fail as and when received by it/him.
10. The Borrower shall keep and maintain a register of the goods in
which shall be entered particulars of goods received and delivered and the
balance at any time and the market value of the same. The said register and
the goods wherever they are, shall be open for inspection at all time by the
Manager of the Bank or any officer authorised by any official of the Bank who
may for that purpose enter upon any premises where the goods are lying without
any obstruction or objection being raised by the Borrower. The Borrower shall
daily or weekly or at such intervals as may be fixed from time to time by the
Bank, furnish to the Bank a statement of all the entries which have been made in
the register the previous day or during the previous week or the previous
intervening period as the case may be as and when the Bank calls upon the
Borrower to do so. Failure or omission or delay on the part of the Borrower to
submit such statements as called upon by the Bank shall in no way prejudice the
rights of the Bank under this Agreement. The Borrower shall segregate goods
and stocks covered by this Agreement from other goods and stocks in a way that
it should be possible at all times for the Bank to identify the goods and
stocks under hypothecation.
11. The Borrower shall insure the goods for the full market value
against risks of fire, war, riots and civil commotion or any other risk etc.,
as directed by the Bank and deliver the policies in respect thereof to the Bank
duly assigned in the Bank's name, failing which the Bank shall be entitled to
insure the goods and debit the amount and expenses so incurred to the
Borrower's account. The proceeds, if any, of such policies shall be applied
towards liquidation of the balance due to the Bank.
12. The Borrower may be permitted to avail of the facility up to the
maximum limit fixed herein and in terms of the guarantee/LCs issued/bills
co-accepted from time to time and the terms and conditions of the
guarantee/LC/co-accepted bills shall be read part and parcel of these presents
subject to clause 15 of this Agreement.
13. The Bank shall be at liberty to have the goods valued by an
appraiser appointed by the Bank and the fees and expenses of such appraisement
shall be debited to the Borrower's account.
14. The Borrower agrees and undertakes not to have advance from any
other Bank or from any body else on the goods hypothecated and charged to the
Bank and they shall be stored separately and apart from any other goods in the
godowns.
15. The Bank shall be entitled to advance and/or pay any amounts as are
necessary for the purpose of safeguarding its interest including payment of
duties to customs and/or other authorities in connection with the goods covered
by the LC/guarantee/bills co-accepted, to the debit of the borrower's account
and the Borrower shall be liable to pay the amounts so advanced and/or paid by
the Bank with interest and other charges, expenses etc., as levied from time to
time by the Bank. The security created in terms of these presents shall be
available for the repayment of all such amounts debited to the account of the
borrower from time to time and the limit/s to that extent shall be deemed to
stand enhanced.
16. The Borrower hereby declares and agrees that the Bank shall be
entitled to get the goods cleared with the help of any agency like clearing
agents, in the event of any necessity as felt by the Bank at the absolute cost,
risk and responsibility of the Borrower.
17. That the Bank shall be at liberty to withdraw the facilities herein
provided at any time and without any prior notice and without assigning any
reason even though the limit herein fixed is in force and the Borrower shall
not be entitled to claim any amount from the Bank as compensation, damages or
otherwise on that account.
[STAMP]
<PAGE> 14
18. ---------------------------------------------------
Borrower holding such goods as agent and trustee for the Bank. In the event of
the Borrower failing to pay on demand the balance or any other moneys due to
the Bank under or by virtue of this agreement or in the event of the Borrower
failing to observe or perform any of the terms and conditions hereof or in the
event of the Borrower becoming bankrupt or being wound up for committing any
act of insolvency or if for any reason the Bank thinks that the security is in
jeopardy; the Borrower undertake to deliver to the Bank on demand made by the
Bank the said goods without raising any objection, to enable the Bank, to sell
or otherwise dispose of the same for the purpose of realisation of the balance
due, and the Bank shall also be entitled at any time to take possession of the
said goods wherever they may be found and for that purpose enter upon the
premises where such goods are lying and the Borrower or his agent shall be
obliged to deliver possession of the said goods to the Bank. It shall be
lawful to the Bank ------ or at any time thereafter and without any notice to
the Borrower (without prejudice to the right of the Bank to use the Borrower or
realise any other security held) absolutely to sell or otherwise dispose of
either by public auction or private contract/treaty, all or any of the goods
hypothecated and charge to it and to apply the net proceeds of such sale
towards the -------- of the principal and interest moneys due to the Bank on the
said ------------ account with further interest thereon at ---------- p.a.,
together with all costs and charges incurred or to be incurred by the Bank
- ------ obtained by the books of the Bank signed by the Manager or other duly
authorised officer therefor for the time being which the Borrower hereby agrees
to accept as sufficient proof of the correctness thereof without production of
any other vouchers or paper; that if the net sale proceeds together with the
net proceeds of the policies referred in clause 11 shall be insufficient to
cover the amount so found due, the Borrower promises forthwith on production to
it/him of the account so to be prepared and signed as aforesaid, to pay any
further balance which may appear to be due by the Borrower thereon.
19. In the event of there being a surplus in such proceeds it shall be
lawful for the Bank to apply the said surplus as far as same shall extend in or
towards payment or liquidation of any other moneys due from the Borrower by way
of loans, discount of bills, letters of credit, guarantee, charges or of any
other demand legal or equitable against the Borrower or any other indebtedness,
future or contingent and whether matured or not, due solely or in conjunction
with any other person or persons which the law of set off or mutual credit would
in any case admit together with interest on the said claims at such rates as the
said documents provide, and any Bank charges thereon and after adjustment of
all liabilities as stated above, the surplus if any shall be held by the Bank
at the disposal of the Borrower.
20. If the Borrower fails to pay on demand or if in the opinion of the
Bank or any of its concerned officers its/his financial position has suffered,
or if anything has happened to shake or reduce its/his credit, the Bank shall
have the right of adjusting any balance to the credit of Borrower in any
account whatsoever to the amount due from it/him.
21. Nothing herein contained shall operate or be deemed to negative,
qualify or otherwise prejudicially affect the Bank's rights or remedies (which
it is expressly agreed the Bank shall have) in respect of any present or future
securities, guarantees, obligations or decree for any indebtedness or liability
of the Borrower to the Bank whether the said securities referred to herein are
renewed, altered or varied to any manner.
22. The Borrower shall pay all costs, charges and expenses incurred by
the Bank in the negotiation, execution or carrying into effect of this
Agreement or in relation to the exercise or any power of sale or other power or
in relation to any act, deeds matter or thing arising out of this Agreement and
incidental thereto and shall also pay interest thereon at the rate aforesaid
and in the matter aforesaid.
23. This Agreement shall operate as a continuing security for the
balance ultimately due to the Bank and it is not to be considered as closed for
the purpose of this security and the security is not to be considered as
exhausted by reason of the account
[STAMP]
<PAGE> 15
____________ being brought to credit at any time or from time to time or if all
moneys due or owing to the Bank having been paid in full the balance is at
credit and the Bank's rights are not to be prejudiced in any manner even if the
account be overdrawn beyond the limit herein fixed and the security shall
continue in operation till this agreement is cancelled either by the Bank or by
mutual consent in writing of parties as hereinbefore mentioned.
24. The Borrower hereby declares and agrees that the finances provided
from time to time in terms of this agreement shall be applied by the Borrower
only for purpose as mentioned hereinabove and no part of it shall be applied by
him/it for any other purpose or any other activity of the Borrower.
25. The Borrower further declares and agrees that he/it shall not be
entitled to dispose of all or any of its assets, rights or interest which will
result in the transfer of ownership or will have the effect of ultimately
transferring its ownership to any other or others without the written consent
of the Bank.
26. The Borrower hereby further declares and agrees that he/it shall be
deemed to have committed breach of this agreement among other conditions if the
Borrower takes any steps on account of which division of funds at any time
provided by the Bank is made by the Borrower and decision of the Bank in the
matter whether there has been or is diversion of funds as stated herein is made
or not shall be binding on the Borrower.
In witness whereof the Borrower and the Bank have hereunto affixed
their respective hands the day and year above written at Bombay.
SCHEDULE
Common seal affixed [STAMP]
in the presence of [SIGNATURES]
Two Directors of
the company as per
Board Resolution
Dt. 26.09.95.
<PAGE> 16
[CURRENCY]
[STAMP]
[STAMP]
PERSONAL GUARANTEE
THE DEED OF GUARANTEE executed at Bombay this 11th day of October 1994
by Shri M.L. Tandon residing at 37, Merry Niketan, Mt. Mary Road, Bandra (W),
Bombay 400 050 (hereinafter referred to as "the Guarantor", which expression
shall, unless it be repugnant to the subject or context thereof, include his
heirs, executors and administrators)
in favour of
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED, a public
company incorporated under the Indian Companies Act, 1913 (7 of 1913) and
having its Registered Office at 163, Backbay Reclamation, Bombay 400 020 and a
Zonal Office at Zenith House, K. Khadye Marg, Mahalaxmi, Bombay 400 034
(hereinafter referred to as "the Lender", which expression shall, unless it be
repugnant to the subject or context thereof, include its successors and assigns)
<PAGE> 17
2
WHEREAS
(1) Moduler Electronics (I) Pvt. Limited, a Company within the
meaning of the Companies Act, 1956 and having its Registered
Office at 406, Dalamal Towers, Nariman Point, Bombay 400 021
(hereinafter referred to as "the Borrower") has requested the
Lender to lend and advance to it Foreign Currency Loan
aggregating US $25,50,000 equivalent to Rs.803 lacs (Rupees
Eight Hundred and three lacs only) for its Project at Madras
Export Processing Zone, Madras for the manufacture of Hard Disk
Drives.
(2) The Lender has agreed in principle to lend and advance to the
Borrower sums as set out in the Schedule hereto aggregating US$
25,50,000 equivalent to Rs.803 lacs (hereinafter referred to as
"the Loan") on the terms and conditions contained in the Loan
Agreement dated the 11th day of October 1994 entered into
between the Borrower and the Lender (hereinafter referred to as
"the Loan Agreement").
<PAGE> 18
3
(3) One of the terms of the Loan Agreement is that the Loan along
with interest, costs and charges would be secured inter alia by
an irrevocable unconditional guarantee of the guarantors.
NOW THIS DEED WITNESSETH AS FOLLOWS
In consideration of the premises, the Guarantor hereby unconditionally,
absolutely and irrevocably guarantees to and agrees with the Lender as follows:
1. The Lender shall have the sole discretion --
(i) to make disbursement(s) and/or interim disbursement(s) to
the Borrower from out of the Loans at such time, on such
conditions and in such manner as the Lender may decide.
2. The Borrower shall duly and punctually repay the Loans,
together with all interest, liquidated damages, front end fees,
premia on prepayment or on redemption, costs, expenses, and
other monies in accordance with the Loan Agreement and perform
and comply with all the other terms, conditions and covenants
contained in the Loan Agreement.
<PAGE> 19
4
3. In the event of any default on the part of the Borrower in
payment/repayment of any of the moneys referred to above, or in the event of
any default on the part of the Borrower to comply with or perform any of the
terms, conditions and covenants contained in the Loan Agreement, the Guarantor
shall, upon demand, forthwith pay to the Lender without demur all the amounts
payable by the Borrower under the Loan Agreement.
4. The Guarantor shall also indemnify and keep the Lender indemnified
against all losses, damages, costs, claims and expenses whatsoever which the
Lender may suffer, pay or incur by reason of or in connection with any such
default on the part of the Borrower including legal proceedings taken against
the Borrower and/or the Guarantor for recovery of the moneys referred to in
Clause 2 above.
5. The Guarantor hereby agrees that, without the concurrence of the
Guarantor, the Borrower and Lender shall be at liberty to vary, alter or modify
the terms and conditions of the Loan Agreement and of the security documents
executed by the Borrower in favour of the Lender and in particular to defer,
postpone or revise the repayment of the Loans and/or payment of interest and
other monies payable by the Borrower to the Lender on such terms and conditions
as may be considered necessary by the Lender including any increase in the rate
of interest. The Lender shall also be at liberty to absolutely dispense with
or release all or any of the security/securities furnished or required to be
furnished by the Borrower to the Lender to secure the Loans. The Guarantor
agrees that the liability under this Guarantee shall in no manner be affected
by any such variations, alterations, modifications, waiver, dispensation with
or release of security, and that no further consent of the Guarantor is
required for giving effect to any such variation, alteration, modification,
waiver, dispensation with, or release of security.
6. The Lender shall have full liberty, without notice to the
Guarantor and without in any way affecting this guarantee, to exercise at any
time and in any manner any power or powers reserved to the Lender under the
Loan Agreement, to enforce or forbear to enforce payment of the Loans or any
part thereof or interest or other moneys due to the Lender from the Borrower or
any of the remedies or securities available to the Lender, to enter into any
composition or compound with or to grant time or any other indulgence or
facility to the Borrower AND the Guarantor shall not be released by the
exercise by the Lender of its liberty in regard to the matters referred to
above or by any act or omission on the part of the Lender or by any other
matter or thing whatsoever which under the law relating to sureties would but
for this provision have the effect of so releasing the Guarantor AND the
Guarantor hereby waives in favour of the Lender so far as may be necessary to
give effect to any of the provisions of this Guarantee, all the suretyship
and other rights which the Guarantor might otherwise be entitled to enforce.
<PAGE> 20
5
7. This Guarantee shall be enforceable against the Guarantor
notwithstanding that any security or securities comprised in any instrument(s)
executed or to be executed by the Borrower in favour of the Lender shall, at
the time when the proceedings are taken against the Guarantor on this
Guarantee, be outstanding or unrealised or lost.
8. The Guarantor hereby agrees and gives consent to the sale,
mortgage on prior, pari-passu or second charge basis, release etc., of any of
the assets by the Borrower from time to time as may be approved by the Lender
or the transfer of any of the assets of the Borrower from one unit to the other
or to the release or lease out by the Lender any or whole of the assets charged
to the Lender on such terms and conditions as the Lender may deem fit and this
may be treated as a standing and continuing consent for each and every
individual act of transfer, mortgage, release or lease of any of such assets of
the Borrower. The Guarantor hereby declares and agrees that no separate
consent for each such transfer, mortgage, release or lease any of such assets
would be necessary in future.
9. The Guarantor hereby agrees and declares that the Borrower will be
free to avail of further loans or other facilities from the Lender or any other
financial institution or bank in addition to the Loans and/or to secure the
same during the subsistence of this guarantee and in that event the guarantee
herein contained will not be affected or vitiated in any way whatsoever but
will remain in full force and effect and binding on the Guarantor.
10. The rights of the Lender against the Guarantor shall remain in
full force and effect notwithstanding any arrangement which may be reached
between the Lender and the other Guarantor/s, if any, or notwithstanding the
release of that other or others from liability and notwithstanding that any
time hereafter the other Guarantor/s may cease for any reason whatsoever to be
liable to the Lender, the Lender shall be at liberty to require the performance
by the Guarantor of its obligations hereunder to the same extent in all
respects as if the Guarantor had at all times been solely liable to perform
the said obligations.
11. To give effect to this Guarantee, the Lender may act as though the
Guarantor was the principal debtor to the Lender.
12. The Guarantor hereby declares and agrees that he has not received
and shall not, without the prior consent in writing of the Lender receive any
security or commission from the Borrower for giving this guarantee so long as
any monies remain due and payable by the Borrower to the Lender under the Loan
Agreement.
13. The Guarantor shall not in the event of the liquidation of the
Borrower prove in competition with the Lender in the liquidation proceedings.
<PAGE> 21
6
14. A certificate in writing signed by a duly authorised official of
the Lender shall be conclusive evidence against the Guarantor of the amount for
the time being due to the Lender from the Borrower in any action or proceeding
brought on this Guarantee against the Guarantor.
15. This Guarantee shall not be wholly or partially satisfied or
exhausted by any payments made to or settled with the Lender by the Borrower
and shall be valid and binding on the Guarantor and operative until repayment
in full of all moneys due to the Lender under the Loan Agreement.
16. This Guarantee shall be irrevocable and the obligations of the
Guarantor hereunder shall not be conditional on the receipt of any prior notice
by the Guarantor or by the Borrower and the demand or notice by the Lender as
provided in Clause 20 hereof shall be sufficient notice to or demand on the
Guarantor.
17. The liability of the Guarantor under this Guarantee shall not be
affected by --
i) any change in the constitution or winding up of the Borrower
or any absorption, merger or amalgamation of the Borrower
with any other company, corporation or concern; or
ii) any change in the management of the Borrower or take over of
the management of the Borrower by Central or State Government
or by any other authority; or
iii) acquisition or nationalisation of the Borrower and/or of any
of its undertaking(s) pursuant to any law; or
iv) any change in the constitution of the Lender.
18. This Guarantee shall be a continuing one and shall remain in full
force and effect till such time the Borrower repays in full the Loans together
with all interest, liquidated damages, front end fees, premia on prepayment or
on redemption, costs, expenses and other monies that may from time to time
become due and payable and remain unpaid to the Lender under the Loan Agreement.
19. The liability of the Guarantor hereunder shall not exceed the sum
of US$ 25,50,000 equivalent to Rs.803 lacs, plus all interest, liquidated
damages, front end fees, premia on prepayment or on redemption, costs, expenses
and other monies payable by the Borrower to the Lender under the Loan Agreement.
<PAGE> 22
7
20. Any demand for payment or notice under this Guarantee shall be
sufficiently given if sent by post to or left at the last known address of the
Guarantor or his successors or assigns, as the case may be, such demand or
notice is to be made or given, and shall be assumed to have reached the
addressee in the course of post, if given by post, and no period of limitation
shall commence to run in favour of the Guarantor until after demand for payment
in writing shall have been made or given as aforesaid and in proving such
notice when sent by post it shall be sufficiently proved that the envelope
containing the notice was posted and a certificate by any of the responsible
officers of the Lender that to the best of his knowledge and belief, the
envelope containing the said notice was so posted shall be conclusive as
against the Guarantor, even though it was returned unserved on account of
refusal of the Guarantor(s) or otherwise.
21. Notwithstanding anything contained herein, this guarantee shall be
binding on the Guarantor till the Borrower creates the stipulated security in
Article III of the said Loan Agreement.
IN WITNESS WHEREOF the Guarantor has hereunto set his hand on the day
and year first hereinabove written.
<PAGE> 23
8
SCHEDULE
PARTICULARS OF LOAN
<TABLE>
<CAPTION>
Requested Equivalent
Name of the Lender Currency Amount Rs. in lacs
- ------------------ --------- ---------- -----------
<S> <C> <C> <C>
The Industrial Credit and US$ $16,50,375 520
Investment Corporation of SGD 12,85,000 266
India Limited (ICICI) BEF 2,15,900 2
163, Backbay Reclamation YEN 46,87,500 15
Bombay 400 020
---
TOTAL 803
===
SIGNED AND DELIVERED )
)
by the within named ) [SIGNATURE]
)
Shri M.L. Tandon )
</TABLE>
