<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
COMMISSION FILE NUMBER 0-21085
---------------
JTS CORPORATION
(EXACT NAME AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0364572
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
166 BAYPOINTE PARKWAY, SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(408) 468-1800
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
---------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT
CLASS DECEMBER 1997[ 19]
- ----- ------------------
<S> <C>
[ ]
Common Stock...................................... 168,650,641
</TABLE>
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<PAGE> 2
JTS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTER................ 5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.................................................. 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................... 14
SIGNATURE..................................................................... 15
</TABLE>
2
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JTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 2,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $550, and
$1,800 held as restricted balances at November 2, 1997
and February 2, 1997, respectively) $ 1,986 $ 24,766
Accounts receivable, less allowance for doubtful
accounts of $4,292 and $1,615 at November 2, 1997 and
February 2, 1997, respectively 6,644 21,445
Inventories 7,463 17,750
Other current assets 1,006 2,341
--------- ---------
Total current assets 17,099 66,302
PROPERTY AND EQUIPMENT, net 26,440 27,674
ACQUIRED TECHNOLOGY, net -- 19,618
GOODWILL, net -- 16,673
OTHER ASSETS 383 450
--------- ---------
TOTAL $ 43,922 $ 130,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Bank line of credits $ 8,833 $ 10,540
Borrowings under factoring arrangement -- 2,981
Accounts payable 60,553 33,327
Accrued liabilities 23,836 16,415
Current portion of long-term obligations 3,152 1,967
--------- ---------
Total current liabilities 96,374 65,230
--------- ---------
LONG-TERM OBLIGATIONS 52,305 53,081
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $.001 par value --
authorized, 10,000,000 shares; outstanding, 16,813
and 40,000 shares at November 2, 1997 and
February 2, 1997, respectively -- --
Common stock, $.001 par value -- authorized,
250,000,000 shares; outstanding, 165,249,165 and
104,744,765 at November 2, 1997 and February 2, 1997,
respectively 165 105
Additional paid-in capital 364,317 349,961
Notes receivable from shareholders (2,460) (2,510)
Accumulated deficit (466,779) (335,150)
--------- ---------
Total stockholders' equity (deficit) (104,757) 12,406
--------- ---------
TOTAL $ 43,922 $ 130,717
========= =========
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
3
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JTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
NOVEMBER 2, OCTOBER 27, NOVEMBER 2, OCTOBER 27,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 23,981 $ 33,265 $ 125,806 $ 35,056
Cost of sales 33,269 34,877 (174,092) 39,122
------------------------ ------------------------
GROSS MARGIN (DEFICIT) ( 9,288) (1,612) (48,286) (4,066)
Acquired in-process research and development -- 110,012 -- 110,012
Repositioning charge 38,008 -- 38,008 --
Amortization of existing technology -- 1,962 2,388 1,962
Research and development expense 3,916 5,710 15,880 6,262
Selling, general and administrative expense 4,017 3,916 17,488 5,705
------------------------ ------------------------
Total operating expenses 45,941 156,477 73,764 163,063
------------------------ ------------------------
OPERATING LOSS (19,722) (123,212) 122,050 (128,007)
Exchange gains (loss) (9) 66 57 (604)
Other income (loss), net (3,187) (824) (3,959) 3,707
Interest income 13 53 336 673
Interest expense (2,043) (1,276) (6,038) (2,415)
------------------------ ------------------------
NET LOSS $ (60,455) $(125,193) $(130,654) $(126,646)
Preferred Stock Dividends (147) -- (975) --
------------------------ ------------------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS (60,602) (125,193) (131,629) (126,646)
------------------------ ------------------------
LOSS PER COMMON SHARE $ (0.39) $ (1.20) $ (1.04) $ (1.55)
======================== ========================
Weighted average number of shares used in 155,532 104,323 126,429 81,678
computations
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
4
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JTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
NOVEMBER 2, OCTOBER 27,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(23,759) $(10,081)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in JTS merger -- 684
Sale of marketable securities 16,460
Purchase of property and equipment (7,666) (11,125)
Borrowing by JTS (Prior to Merger) (30,000)
Sale of Real estate 10,000
-------- --------
Net cash used in investing activities (7,666) (13,981)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on promissory note (1,965)
Borrowings under line of credit and factoring liability (5,009) (417)
Repayment of borrowings (222)
Payment on capital leases (440) (215)
Issuance of common stock 118 1,471
Issuance of Preferred Stock 13,399
Repayment of shareholders loans 13
Bank Borrowing 807 4,042
-------- --------
Net cash provided by financing activities 8,666 2,866
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (21)
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,780) (21,196)
CASH AND CASH EQUIVALENTS:
Beginning of period 24,766 31,790
End of period $ 1,986 $ 10,594
OTHER CASH FLOW INFORMATION FROM CONTINUING
OPERATIONS
Interest paid $ 2,956 $ 3,102
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
5
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JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS
Corporation ("JTS") and the separate existence of Atari ceased. Although the
business combination resulted in Atari merging into the JTS legal entity, the
substance of the transaction was that Atari, as a public company with
substantially greater operating history and net worth owns approximately 62% of
the equity of the merged company. Therefore, for accounting purposes, the merger
was accounted for as a purchase of JTS by Atari. See Note 2.
Subsequent to the merger, the Company changed its fiscal year from a 52/53
week fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. Accordingly, the
Company's current fiscal year commenced on February 2, 1997 and the current
quarter ended on November 2, 1997.
Due to this fiscal year change, the end of the quarter does not coincide with
the end of the quarter of the previous year. The Company did not recast the
financial information for the prior fiscal year as management believes that
financial statements for the quarters of the preceding year are nearly
comparable to the quarters in the newly adopted fiscal year and that there are
no seasonal factors and other factors that could affect the comparability of the
information or trends reflected.
NOTE 2. MERGER WITH JTS CORPORATION ("JTS")
The following unaudited pro forma information shows the results of
operations for the nine months ended November 2, 1997 as if the JTS acquisition
had occurred at the beginning of the period at the purchase price established on
July 30, 1996. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of each of the
respective periods presented or of future operations of the combined companies.
The pro forma results for 1996 combine Atari's results for the nine month period
ended September 30, 1996 with JTS' nine month fiscal period (39 weeks) ended
October 27, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
NOVEMBER 2, OCTOBER 27,
1997 1996
----------- -----------
<S> <C> <C>
Revenue .................................... $ 125,806 $ 33,265)
Gross Margin (deficit)...................... (48,286) (1,612)
Net (loss) ................................. (131,629) $(125,193)
Net (loss) per share ....................... (1.04) (1.20)
Weighted average common shares outstanding.. 126,429 104,323
</TABLE>
6
<PAGE> 7
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 2 FEBRUARY 2
1997 1997
<S> <C> <C>
Finished goods......................... $3,298 $ 489
Raw materials and work-in-process...... $4,165 17,261
------ -------
Total............................. $7,463 $17,750
====== =======
</TABLE>
NOTE 4. INTANGIBLES
As a result of lack of market acceptance and limited financial
resources the Company has suspended support for the 3 inch mobile disk drives.
As such the Company written off the associated intangible assets totaling $33.7
million during the current quarter.
NOTE 5. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued FASB No. 128, "Earnings
per share." This statement becomes effective for periods ending after December
15, 1997. The Company will adopt the statement from its fourth quarter, ending
February 1, 1998. The impact of the statement is expected to be immaterial.
7
<PAGE> 8
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On July 30, 1996, Atari Corporation ("Atari") was merged into JTS Corporation
("JTS" or the "Company") and subsequent to the merger the company changed its
fiscal year from a 52/53 week fiscal year ending on the Saturday closest to
December 31 to a 52/53 week fiscal year ending on the Sunday closest to
January 31. The merger was accounted for as a purchase of JTS by Atari and as
such, the historical balance sheets and the statements of operations for the
three months in the prior year include Atari only.
The unaudited pro forma condensed combined statements of operations included
in footnote two to the financial statements give effect to the merger as if the
acquisition were completed at the beginning of the first quarter of 1996. The
following discussion and analysis is based on these pro forma condensed combined
statements for the prior year which combine the historical results of operations
of Atari for the nine months ended September 30, 1996 with the JTS unaudited pro
forma combined results of operations for the nine months ended October 27, 1996
respectively, and for the current year which reflects the actual results of the
merged company for the nine month period ended November 2, 1997. The liquidity
and capital resources discussion and analysis is based on the unaudited balance
sheet of the merged company as of November 2, 1997. Throughout this discussion,
"fiscal 1998" refers to the fiscal year ending February 1, 1998.
Since August 1995, when the Company commenced operating as a disk drive
company, the Company's quarterly revenues have fluctuated significantly. The
Company has generally been unable to obtain positive gross margins, and the
Company has incurred significant losses in every quarter. During most of fiscal
1998, the Company has operated without adequate working capital, which has had a
negative impact on its business, especially at a time when market conditions in
the hard disk drive industry have been extremely adverse, and thus have favored
the better capitalized competitors.
JTS AND ATARI BACKGROUND
The most significant portion of the Company's business today is its disk
drive division which designs, manufactures and markets hard disk drives for use
in desktop personal computers. The Company markets its disk drives to original
equipment manufacturers ("OEMs"), computer companies and second-tier systems
integrators for incorporation into their computer systems and subsystems, as
well as to distributors who resell the product to small integrators and through
retail channels. The Company sells its products through a direct sales force
operating throughout the United States, Europe and Asia, as well as through
distributors in the United States, Europe, Latin America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping its disk drives to customers in the
United States and Europe. All of JTS' products are manufactured in Chenai
(Madras), India by its subsidiary, JTS Technology Ltd. (formerly Modular
Electronics (India) Pvt. Ltd.), which was acquired in April 1996 and employs
over 5,500 individuals. 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.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 2, 1997 COMPARED TO
THE JTS AND ATARI ACTUAL COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED OCTOBER 27, 1996.
Revenues for the three months ended November 2, 1997 were $24 million.
Revenues from the disk drive division decreased from $32.1 million for the same
quarter in the prior year to $23.8 million for the current quarter. This revenue
decrease from lower volumes combined with lower average selling price per drive
in the current quarter. During the quarter ended November 2, 1997 the Company
shipped 201,000 disk drives, which primarily consisting of the 3.5-inch drives,
in capacities ranging from 1 gigabyte to 4.3 gigabytes. The revenue recognized
by the Company is after any adjustment required for excess inventory held by
distributors.
Sales to the top five customers for the three months ended November 2, 1997
were 42% of net sales and one customer had sales greater than 10% of total net
sales for the three month period. The Atari division revenues including royalty
income for the current quarter amounted to $0.2 million. Revenues for the third
quarter in the previous year totaled $33.3 million and included approximately
$1.2 million of Atari revenues.
The gross margin loss for the three month period ended November 2, 1997 was
$9.3 million compared to a deficit of $1.6 million for the third quarter of the
prior year. The portion of the current quarter's gross margin attributable to
the disk drive division was $9.5 million compared to a deficit of $1.7 million
incurred by the disk drive division in the three month period ended October 27,
1996. The decline in the gross margin resulted from the significant decrease in
market prices for all disk drive capacities though particularly the higher
capacity drives in conjunction with the write down of smaller capacity drives
and the related production materials on hand. The gross margin for the Atari
division for the current quarter ended November 2, 1997 was $0.2 million
compared to $0.1 million for the three month period ended October 27, 1996. The
improvement in the gross margin results from increased royalty revenue during
the quarter.
Research and development expense for the three months ended November 2, 1997
was $3.8 million compared to research and development expenses of $5.7 million
for the third quarter in the prior year. The quarter over quarter decrease for
the disk drive division was $1.9 million, and was primarily attributed to
reductions in engineering staffing and suspension of support for the 3-inch
disk drive product. The Atari division research and development programs were
eliminated in the third quarter of the prior year. The Company expects that
research and development expenses will continue to decrease throughout fiscal
1998 in absolute dollars and decrease as a percent of sales.
Selling, general and administrative expenses for the three months ended
November 2, 1997 were $4.0 million, compared to $3.9 million selling, general
administrative expenses incurred during the third quarter of the previous year.
The expenses associated with the disk drive division increased from $2.7 million
to $3.8 million primarily resulting from the increased infrastructure associated
with the expansion of the division. JTS expects that selling, general and
administrative expenses will decrease marginally through the remainder of fiscal
1998 in absolute dollars and that such expenses will decline as a percentage of
revenues.
Repositioning charge of $38.0 million during the current quarter was related
to the Company's decision to suspend support for the 3-inch mobile disk drive
and consisted of $15.8 of goodwill, $17.9 million of existing technology, $1.8
million of capital assets, and $2.5 million of inventory commitments.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 2, 1997 COMPARED TO THE
JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
OCTOBER 27, 1996.
Revenues for the nine months ended November 2, 1997 were $125.8 million.
Revenues from the disk drive division increased from $65.8 million for the same
period in the prior year to $124.1 million in the first nine months of fiscal
1998. This increase in revenue is primarily the result of higher shipment
volumes in the current year to OEMs, small system integrators, and distributors.
For the nine months ended November 2, 1997 the Company shipped 1,052,000 disk
drives, which primarily consisting of the 3.5-inch drives, in capacities
ranging from 1 gigabyte to 4.3 gigabytes.
Sales to the top five customers for the nine months ended November 2, 1997
were 37.3% of net sales and 1 customer had sales greater than 10% of total net
sales for the nine month period. The Atari division revenues including royalty
income for the first three quarters amounted to $1.7 million. Pro forma combined
revenues for the first nine months in the previous year totaled $68.8 million
and included approximately $3.0 million of Atari revenues recorded for the nine
month period ended October 27, 1996.
9
<PAGE> 10
The gross margin loss for the nine month period ended November 2, 1997 was of
$48.3 million compared to a deficit of $15 million on a pro forma basis for the
first three quarters in the prior year. The portion of the current year to date
gross margin deficit attributable to the disk drive division was $50.0 million
compared to a deficit of $12.7 million incurred by the disk drive division in
the first nine months of financial 1996. The decline in the gross margin
resulted from the significant decrease in market prices for all disk drive
capacities in conjunction with significant write down of obsolete and surplus
drives, and the related production materials on hand. The gross margin for the
Atari division for the nine months ended November 2, 1997 was $1.7 million
compared to a deficit of $2.3 million for the nine month period ended
September 30, 1996. The improvement in the gross margin results from the sales
of the Jaguar product and inventory write offs included in the first quarter of
the prior year and the impact of royalty agreements signed during the first
quarter of 1998.
Research and development expense for the first nine months ended November 2,
1997 was $15.9 million compared to research and development expenses on a pro
forma basis of $20.7 million for the first nine months of the prior year. The
period over period decrease for the disk drive division was $4.2 million, and
was primarily attributed to reductions in engineering staffing and higher
development material expenditures in the prior year to support the development
of new hard disk drive platforms. The Atari division experienced a quarter over
quarter decline in research and development expenses of $0.6 million due to the
elimination of the game development team. The Company expects that research and
development expenses will continue to decrease throughout fiscal 1998 in
absolute dollars and decrease as a percent of sales.
Selling, general and administrative expenses for the nine months ended
November 2, 1997 were $17.5 million, including $16.6 million from the disk drive
division, compared to $15.4 million pro forma selling, general administrative
expenses incurred during the first nine months of the previous year which
included $9.5 million from the disk drive division. The $7.1 million increase
incurred by the disk drive division resulted primarily from increases in the
provision for bad and doubtful debts, an increase in over all staff numbers
associated with the growth of the Company and increased sales and marketing
programs focusing on increasing sales through the distribution channel to the
end user. Selling, general and administrative expenses for the Atari division
declined $5 million as a result of staff reductions, reduced rent and other
reductions in operating costs for the division. JTS expects that selling,
general and administrative expenses will decrease marginally through the
remainder of fiscal 1998 in absolute dollars but that such expenses will decline
as a percentage of revenues.
Repositioning charge of $38.0 million during the current year was related to
the Company's decision to suspend support for the 3-inch mobile disk drive and
consisted of $15.8 of goodwill, $17.9 million of existing technology, $1.8
million of capital assets, and $2.5 million of inventory commitments.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
At November 2, 1997, JTS had cash and cash equivalents of $2 million, a
working capital deficit of $79.3 million and a negative net worth of $104.8
million.
At November 2, 1997, total debt, including bank credit lines and notes
payable was $64.3 million. This included $4.7 million of working capital loans
outstanding between JTS Technology and three Indian banks at an interest rate of
12% as of November 2, 1997. In addition, the above amount includes term loan
facilities with the Industrial Credit and Investment Corporation of India
Limited (ICICI) and the Shipping Credit and Investment Corporation of India
Limited (SICI) in the amount of $12.9 million at interest rates of LIBOR plus
2.75% and LIBOR plus 4%, respectively. At November 2, 1997, JTS Technology's
borrowings under these term loan facilities were $12 million. The loans are
repayable quarterly, commencing at various points in time in fiscal 1998 and
1999 with final payments through to 2002. Amounts borrowed under these loan
agreements have been used for working capital purposes, tooling, facilities
expansion and purchases of capital equipment.
At November 2, 1997, the Company had $42.4 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued in 1987 by
Atari Corporation. The debentures pay interest annually, each April, with the
next interest payment due in April 1998.
JTS cannot assure that any level of future revenues will be attained or that
JTS will achieve or maintain successful operations in the future. The Company's
accounts receivable are heavily concentrated with a small number of customers.
If any large customer of the Company became unable to pay its debts to the
Company, liquidity would be adversely affected. In the event the Company is
unable to increase sales or maintain production yields at acceptable levels
there would be a significant adverse impact on liquidity. This would require the
Company to either obtain additional capital from external sources or to curtail
its capital, research and development and working capital expenditures. Such
curtailment could adversely affect the Company's operations and competitive
position.
The Company will need significant additional financing resources over the
next several years for facilities expansion, capital expenditures, working
capital, research and development and vendor tooling. In addition, significant
cash resources will be required to fund purchases of inventory needed to achieve
anticipated sales levels. Failure to receive such cash resources will negatively
impact the Company's ability to manufacture its products at required levels.
The Company anticipates that it will require additional funds to finance its
growth. The precise amount and timing of the Company's funding needs cannot be
determined at this time, and will depend upon a number of factors, including the
market demand for the purchase of its products, the progress of the Company's
product development efforts and the Company's inventory and accounts receivable
management. The Company currently expects that it would seek to obtain such
funds from additional borrowing arrangements and/or private or public offerings
of debt and equity securities. There can be no assurance that funds required by
the Company in the future will be available on terms satisfactory to the Company
or at all.
As of November 2, 1997, the Company has Federal and State net operating loss
("NOL") carryforwards of approximately $250 million and $94 million,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $2.1 million and $1.0 million, respectively, all
of which will expire on various dates through 2012.
11
<PAGE> 12
Under the Internal Revenue Code of 1986, as amended, certain changes in the
ownership or business of a corporation that has Federal 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 liabilities of the Company. The merger between
Atari and JTS constituted a change in ownership with respect to JTS and
accordingly, restricts the use of JTS' pre-merger NOLs against post-merger
income of the Company to the maximum of $12.5 million per year, unless
previously expired. In addition, subsequent events may result in the imposition
of restrictions on the ability of the Company to utilize its NOLs and tax credit
carryforwards. There can be no assurance that the Company will be able to
utilize all or any of its NOL's or tax credit carryforwards.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant and counter claimant in a civil action for the
alleged breach of contract brought in U.S. District Court for the Southern
District of New York, case number 95 Civ. 1935, by Tradewell, Inc. a New York
corporation, seeking specific performance for release of goods having value of
$1.6 million. The Company counterclaimed seeking specific performance for the
purchase of media or, alternatively, damages in the amount of $3.3 million. The
matter was settled in August 1997, and pursuant to the settlement agreement
Tradewell Inc. agreed to pay $425,000 over time to the Company.
The Company is a defendant in a civil action for alleged breach of written
contract brought in the Municipal Court of California, County of Santa Clara,
case no. DC96339801, by Bryma Technologies, seeking $15,000 and attorney's
fees for Atari's cancellation of Bryma's "Child Locator" development product.
The Company is awaiting a trial date.
The Company is a defendant in a civil action for alleged breach of
contract, negligent misrepresentations, suppression of facts and other relief
brought in the Superior Court of the State of California, County of Santa
Clara, case no. CV765828 seeking $235,000 by Creative Talents, SDN, a Malaysian
corporation.
The Company is a defendant in a civil action brought for alleged breach of
contract brought in the Superior Court of California, County of Santa Clara,
case no. CV758563 seeking $194,707.04 by Extron Contract Manufacturing Co.
On January 23, 1992, a certain debenture holders filed an involuntary
bankruptcy petition against The Federated Group, Inc. a subsidiary of the
Company and formerly a subsidiary of Atari Corporation. The case was appealed by
the Company to the Ninth Circuit of Appeals, and a hearing for oral arguments
was held on December 12, 1996. The case was reversed and remanded to the
Bankruptcy court whose decision placed the Federated Group Inc. into Bankruptcy
proceedings on December 4, 1997.
The Company is a defendant in a civil action brought for alleged breach of
contract brought for alleged breach of Lease in the Superior Court of
California, County of Santa Clara, case no. CV758843 seeking $70,578 by Yercaf
N.V., a Delaware corporation.
The Company is the plaintiff in a civil action brought for breach of
contract in the District Court of Harris County, Texas, 113th Judicial
District, case no. 97-46725 seeking damages in the amount of $878,703.43
against Barron America, Inc.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Municipal Court of California, County of San Diego, case no
595700 seeking $13,855 by Capital Electronics, Inc.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Santa Clara, case no
CV769466 seeking $373,981 by DPMS, Inc. dba Danco Machine.
On January 3, 1997, Dusseldorf Securities, Limited ("DSL") and Greystone
Capital, Ltd., ("GCL"), through counsel, made a letter demand of the Company for
payment of $1,250,000 allegedly due under a letter agreement between DSL and the
Company dated December 21, 1996 (the "Agreement"). DSL and GCL claim that the
Company owes $1,250,000 as fees for a January 1997 private placement of the
Company's preferred stock which was not completed through DSL or GCL. On
February 26, 1997, DSL and GCL filed suit against the Company in Los Angeles
County Superior Court, No. 8C166450, entitled Dusseldorf Securities, Limited v.
JTS Corporation. The original lawsuit asserted claims for breach of contract,
breach of warranty, and misrepresentation against the Company and asserts those
and other tort claims against Michael Arnouse, an individual not affiliated with
the Company, through whom it is alleged the Company completed a private
placement of its securities. The action against Arnouse has been dismissed for
lack of jurisdiction. The original complaint has been amended to include
contract, fraud and other tort claims by Greystone Properties, Ltd. against JTS,
based on the same basic facts as the original complaint. An application for writ
of attachment was filed and argued on May 9, 1997; the application was denied.
The Company has filed counterclaims for breach of contract and fraud. Discovery
is proceeding and a trial has been set for June 1, 1998.
The Company is a defendant in a civil action brought as a Complaint for
Money in the Superior Court of California, County of Santa Clara, case no. CV
768323 seeking $61,167.32 by Fireman's Fund Insurance Companies.
The Company is a plaintiff in a civil action brought in the Superior Court
of California, County of Santa Clara and removed to the United States District
Court, Northern District of California, San Jose Division, case no C97-20669
PVT/ARB seeking $98,849.87 from defendant Steve Harris, an individual.
The Company has settled a civil suit brought in the Superior Court of
California, County of San Diego, case no. 72147 by Kabool, Inc.
The Company is a defendant in a civil action brought for alleged breach of
contract and common counts in the Municipal Court of California, County of
Santa Clara, case no. DC97 354833 seeking $12,110.80 by Lenthor Engineering,
Inc., a California corporation.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Santa Clara, case no. CV
770226 seeking $100,570.10 by Magnebit Holding Corporation, a California
corporation.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Riverside, case no.
304042 seeking $2,648,555 by Magnecomp Corporation, a California corporation.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Santa Clara, case no.
CV 769985 seeking $45,254.97 by Mountz, Inc., a California corporation.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Los Angeles, case no.
CV BC179327 seeking $1,967,986 by NMB Technologies, Inc., a California
corporation. This case has been settled.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Santa Clara, case no.
CV769538 seeking $137,735.51 by Polcraft, Inc.
The Company is a plaintiff and cross-defendant 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 good to Atari Corporation. Philips has filed
a counterclaim to the action for goods sold and delivered and work in process
for approximately $3,000,000. This case has been settled and the parties are
drafting formal documents.
The Company is a defendant in a civil action brought for alleged breach of
contract in the Superior Court of California, County of Orange, case no. 786105
seeking $48,062.55 by Roberts, Mealer & Associates, Inc. aka Roberts, Mealer &
Company.
The Company is a defendant in a claim brought by Zion Technology, Corp. in
the Superior Court of the State of California in and for the County of Santa
Clara, case no CV765828. The plaintiff seeks damages in the amount of $297,000.
The Company is a Plaintiff in a civil action brought for non payment for
goods delivered in the English High Court of England, Case No. 1997 seeking
$208,000 by BV International Limited.
The Company is a Plaintiff in a civil action brought for Breach of Contract
in the House of Lords (England), HRS/js/26768 seeking $533,000 by The
Electronics Boutique Stores (VIC) Limited.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex-27 Financial Data Schedule
(b) Reports on Form 8-K -- None
13
<PAGE> 14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
JTS CORPORATION
----------------------------------------
(Registrant)
Date: December 22, 1997
By /s/ JOSEPH A. PREZIOSO
------------------------------------
Joseph A. Prezioso
Executive Vice President
Finance & Administration
Chief Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Ex-27 Financial Data Schedule
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> AUG-04-1997
<PERIOD-END> NOV-02-1997
<CASH> 1,986
<SECURITIES> 0
<RECEIVABLES> 10,936
<ALLOWANCES> (4,292)
<INVENTORY> 7,463
<CURRENT-ASSETS> 17,099
<PP&E> 35,056
<DEPRECIATION> (8,616)
<TOTAL-ASSETS> 43,922
<CURRENT-LIABILITIES> (96,374)
<BONDS> (42,354)
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,922
<SALES> 23,981
<TOTAL-REVENUES> 23,981
<CGS> 32,269
<TOTAL-COSTS> 32,269
<OTHER-EXPENSES> 45,941
<LOSS-PROVISION> 300
<INTEREST-EXPENSE> 2,043
<INCOME-PRETAX> (60,602)
<INCOME-TAX> 0
<INCOME-CONTINUING> (60,602)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (60,602)
<EPS-PRIMARY> $(0.59)
<EPS-DILUTED> 0
</TABLE>
