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Filed Pursuant to Rule 424(B)(3)
Registration Statement No. 333-17093
PROSPECTUS
39,392,046 SHARES
[JTS CORPORATION LOGO]
COMMON STOCK
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10,037,500 of the shares of Common Stock, $.001 par value ("Common Stock"),
of JTS Corporation (the "Company" or "JTS") offered hereby have been issued or
are issuable upon (i) the conversion of Series B Preferred Stock, $.001 par
value (the "Series B Preferred Stock"), or the exercise of Common Stock purchase
warrants (the "Investor Warrants"), issued or issuable upon conversion of the
Series B Preferred Stock, issued to GFL Advantage Fund Limited and Genesee Fund
Limited -- Portfolio B in a November 1996 private placement, (ii) the payment of
dividends on the outstanding shares of Series B Preferred Stock in Common Stock,
and (iii) the exercise of Common Stock purchase warrants (the "Finder's
Warrants" and together with the Investor Warrants, the "Warrants") issued to
Wharton Capital Corporation (together with GFL Advantage Fund Limited and
Genesee Fund Limited -- Portfolio B, the "Selling Security Holders") in
consideration for financial consulting services furnished in connection with the
November 1996 private placement. See "Description of Capital Stock." The
remainder of the Common Stock offered hereby is held by, or is issuable upon
conversion of warrants to purchase Common Stock held by, certain holders of
registration rights (the "Registration Rights Holders"). All of the shares are
being offered hereby by the Selling Security Holders and the Registration Rights
Holders or by pledges, donees, transferees or other successors in interest that
receive such shares as a gift, partnership distribution or other non-sale
related transfer from time to time on The American Stock Exchange, Inc.
("AMEX"), in privately negotiated transactions, or by a combination of such
methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The shares are being registered by the Company
pursuant to registration rights granted to certain of the Selling Security
Holders in connection with the November 1996 private placement and to the
Registration Rights Holders pursuant to that certain Registration Rights
Agreement dated February 3, 1995, as amended. The Selling Security Holders and
the Registration Rights Holders may effect such transactions by selling the
shares to or through broker-dealers and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holders, the Registration Rights Holders or the purchasers of
the shares for whom such broker-dealers may act as agent or to whom they sell as
principal or both. See "Selling Security Holders" and "Plan of Distribution."
The Common Stock is traded on AMEX under the symbol "JTS." The last reported
sales price of the Common Stock on AMEX on January 24, 1997 was $3.63 per share.
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THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $120,000. The aggregate proceeds to the
Selling Security Holders and the Registration Rights Holders from the Common
Stock will be the purchase price of the Common Stock sold less the aggregate
agents' commissions and underwriters' discounts, if any, and other expenses of
issuance and distribution not borne by the Company. See "Plan of Distribution."
The Company has agreed to indemnify certain Selling Security Holders and
the Registration Rights Holders and certain other persons against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act").
The Selling Security Holders, the Registration Rights Holders and any
broker-dealers or agents that participate with the Selling Security Holders in
the distribution of the shares of Common Stock offered hereby may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of such shares may
be deemed to be underwriting commissions or discounts under the Securities Act.
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January 23, 1997
THE DATE OF THIS PROSPECTUS IS JANUARY 23, 1997
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and financial statements and the
notes thereto appearing elsewhere in this Prospectus. This Prospectus Summary
and other parts of this Prospectus contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." Prospective investors should consider
carefully the information discussed under "Risk Factors."
THE COMPANY
For purposes of this Prospectus, Atari Corporation ("Atari") refers to the
pre-merger Atari and its multimedia entertainment operations. JTS Corporation
("JTS" or the "Company") refers to the pre- and post-merger JTS and its hard
disk drive operations.
JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS expects to begin volume production of
Nordic drives in the fourth quarter of fiscal 1997. JTS began volume production
of Palladium disk drives in October 1995. The Company markets its products to
original equipment manufacturers ("OEMs"), computer companies and second-tier
systems integrators for incorporation into their computer systems and
subsystems. The Company sells its products through a direct sales force
operating throughout the United States, Europe and Asia, as well as through
distributors in the United States, Europe, Latin America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995. In July 1996, the Company completed its merger (the
"Merger") with Atari. Since 1992, Atari has significantly downsized its
operations and going forward JTS' hard disk drive operation is expected to
represent a significant portion of the Company's business. To obtain a low-cost
manufacturing source of hard disk drives, JTS acquired 90% of the outstanding
stock of the hard disk drive division of Moduler Electronics (India) Pvt. Ltd.
("Moduler Electronics"), located in Madras, India in April 1996.
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.
COMPANY STRATEGY
In recent years, the computer industry has witnessed the emergence of
several trends that JTS believes will continue to drive demand for innovative
disk drive products. First, new data- and image-intensive applications are
generating increased demand for greater storage capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook computers comparable to those offered by desktops.
Lastly, the notebook computer industry is generally migrating towards lower
profile computing devices. The pressure to reduce the profiles, increase the
capacities and lower the costs of personal computers has presented manufacturers
with a substantial ongoing technical challenge.
JTS has undertaken several key initiatives to meet the challenges currently
facing hard disk drive manufacturers and to position the Company to become a
leading international supplier of hard disk drives to the notebook and desktop
computer markets. These key initiatives include the following:
ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable storage market for lower
profiles, greater storage capacities and lower costs, JTS has
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developed its Nordic family of 3-inch form factor disk drives. The disks used in
the 3-inch format have 82% greater recording area than disks used in 2.5-inch
drives, the current industry standard for notebook computers, offering nearly
double the storage capacity at the same areal densities. Nordic drives also
offer cost advantages per megabits of storage space over competing drives. The
design of the Nordic drives makes them the lowest profile disk drives currently
in the market.
FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital Corporation, as an alternate source for JTS' disk drives
incorporating Nordic technology. The Company is currently negotiating a head
component supply agreement pursuant to which JTS seeks to acquire and design
into its disk drives magneto-resistant ("MR") head component technology, which
allows data to be recorded at much higher track densities than metal in-gap
("MIG") or inductive thin-film head technology. JTS intends to continue to take
advantage of its management's considerable experience in the computer industry
to obtain access to other key computer industry participants.
DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design drives that satisfy the customers'
end-product requirements using efficient and low-cost manufacturing methods. JTS
is committed to the timely development of new products and the continuing
evaluation of new technologies. In this regard, JTS is presently designing into
each of its hard disk drive product families various high performance features,
such as MR heads, new application specific integrated circuit ("ASIC")/channel
technology and advanced head lifters.
ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities in
Madras, India, JTS intends to capitalize upon a low-cost and highly-skilled
labor force. JTS believes that labor costs in India are significantly lower than
labor costs in other countries where hard disk drives are commonly manufactured,
such as Singapore, Malaysia and Thailand. To leverage its low-cost labor force,
JTS manufactures certain labor-intensive components in-house rather than
purchases such components from outside suppliers. The Company also utilizes many
common components in its 3-inch and 3.5-inch form factor disk drives, thereby
reducing inventory requirements, creating significant assembling efficiencies
and obtaining cost advantages from volume purchases of materials.
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 to 13 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investment in the Common Stock include the following factors:
- The Company has a history of losses and there can be no assurance that it
will achieve profitability.
- The report by the Company's independent accountants contains an
explanatory paragraph regarding factors which raise substantial doubt
about the Company's ability to continue as a going concern.
- The Nordic family of 3-inch form factor disk drives has only recently
been introduced to the market, and there is uncertainty of its market
acceptance.
- The hard disk drive industry is intensely competitive, and there can be
no assurance that the Company will compete successfully with other disk
drive companies and computer companies with disk drive operations, all of
which have significantly greater resources than the Company.
The Company was incorporated in Delaware on February 3, 1994, and its
corporate headquarters are located at 166 Baypointe Parkway, San Jose,
California 95134, where the telephone number is (408) 468-1800.
Certain trademarks of the Company and other companies are used in this
Prospectus and are the property of their respective holders.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock outstanding before the Offering.......... 104,774,765 shares(1)
Common Stock offered by the Selling Security Holders
and the Registration Rights Holders................. 39,392,046 shares(2)
Common Stock to be outstanding after the Offering..... 144,166,811 shares(1)(2)
Use of proceeds....................................... The Company will not receive any of
the proceeds from the sale of Common
Stock by the Selling Security Holders
or the Registration Rights Holders.
AMEX Symbol........................................... JTS
</TABLE>
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(1) Excludes (i) 5,034,853 shares of Common Stock issuable upon exercise of
options outstanding as of October 31, 1996, of which 787,165 shares were
exercisable at such date at a weighted average exercise price of $0.36 per
share; (ii) 300,000 shares issuable upon exercise of warrants outstanding as
of October 31, 1996, at a weighted average exercise price of $0.25 per
share; (iii) 8,985,000 shares of Common Stock reserved for future issuance
under the Company's Amended and Restated 1995 Stock Option Plan; (iv)
450,000 shares of Common Stock reserved for future issuance under the
Company's 1996 Directors' Stock Option Plan; and (v) 2,596,414 shares of
Common Stock issuable upon conversion of the Company's 5 1/4% Convertible
Subordinated Debentures as of October 31, 1996.
(2) Based upon: (i) conversion of all of the Series B Preferred Stock at $3.6125
per share of Common Stock (which price is equal to the average closing bid
price for the five trading days preceding the sale and issuance of the
Series B Preferred Stock (the "Series B Closing")); (ii) exercise of all of
the Investor Warrants issuable upon conversion of the Series B Preferred
Stock and all of the Finder's Warrants at $3.6125 per share of Common Stock;
(iii) payment of dividends on the outstanding shares of Series B Preferred
Stock in Common Stock; (iv) further adjustment to the Series B Preferred
Stock conversion ratio due to anti-dilution adjustments; and (v) inclusion
of shares to be offered hereby by the Registration Rights Holders. See
"Description of Capital Stock."
RECENT DEVELOPMENTS
On January 22, 1997, the Company issued an aggregate of 25,000 shares of
non-voting Series C Preferred Stock from the Company's unissued authorized
Preferred Stock at a purchase price of $1,000.00 per share to certain investors
for an aggregate offering price of $25,000,000. Upon the earlier of 80 days
following the closing date of the sale of such shares of Series C Preferred
Stock and the date on which a registration statement (the "Series C Registration
Statement") with respect to the Common Stock issuable upon conversion of the
Series C Preferred Stock is declared effective, each share of Series C Preferred
Stock, together with any accrued but unpaid dividends, may be converted into
Common Stock at a conversion price equal to the lower of (i) 85% (subject to
adjustment) of the average lowest sales price of the Company's Common Stock for
the five trading days preceding the conversion date and (ii) the lower of (A)
$3.6125 and (B) the average lowest sales price of the Company's Common Stock for
the five trading days preceding the date on which the Series C Registration
Statement is declared effective. The holders of the Series C Preferred Stock are
entitled to certain mandatory and piggyback registration rights with respect to
the shares of Common Stock issuable upon conversion of such shares of Series C
Preferred Stock, as well as certain rights of redemption upon the occurrence of
certain specified events. The Company may redeem the outstanding shares of
Series C Preferred Stock under certain circumstances. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, each holder
of Series C Preferred Stock shall be entitled to a cash liquidation payment
prior and in preference to the Common Stock holders.
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SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED DECEMBER 31, ----------------------------
-------------------------------- SEPTEMBER 30, OCTOBER 27,
1993 1994 1995 1995(1) 1996(1)
-------- -------- -------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues...................... $ 29,108 $ 38,748 $ 14,626 $ 11,824 $ 35,056
Cost of revenues.................. 42,768 35,200 44,234 18,534 39,122
Operating loss(2)................. (47,499) (24,047) (53,665) (23,849) (128,007)
Net income (loss)................. (48,866) 9,394 (49,576) (21,881) (126,646)
Income (loss) per common share.... (0.85) 0.16 (0.78) (0.34) (1.55)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JANUARY 28, OCTOBER 27,
1993 1994 1995 1996(1) 1996(1)
-------- -------- -------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets.................... 51,388 113,188 65,126 58,595 42,420
Working capital (deficit)......... 33,896 92,670 55,084 48,417 (11,771)
Total assets...................... 74,833 131,042 77,569 70,175 108,618
Current liabilities............... 17,492 20,518 10,042 10,178 54,191
Long-term debt.................... 52,987 43,454 42,354 42,354 54,088
Stockholders' equity.............. 4,354 67,070 25,173 17,643 340
</TABLE>
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995(3) OCTOBER 27, 1996(3)
-------------------- -------------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
DATA:
Net revenues.......................................... $ 33,403 $ 68,821
Cost of revenues...................................... 77,860 83,865
Research and development expenses..................... 18,785 20,733
Selling, marketing, general and administrative
expenses........................................... 36,093 21,258
Operating loss(4)..................................... (99,335) (57,035)
Net loss.............................................. (96,997) (61,202)
Loss per common share................................. (0.94) (0.59)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:(3)
</TABLE>
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(1) The Merger was consummated on July 30, 1996 and it was accounted for as a
purchase of JTS by Atari. Subsequent to the Merger, JTS changed the fiscal
year of the company from a 52/53 week fiscal year ending on the Saturday
closest to December 31 to a 52/53 week fiscal year ending on the Sunday
closest to January 31. Accordingly, the Company's current fiscal year begins
on January 29, 1996 and the nine-month period for 1996 includes the results
of Atari's operations from January 29, 1996 through October 27, 1996 and
JTS' operations from July 31, 1996 through October 27, 1996.
(2) Includes an acquired in-process research and development cost of $110.0
million resulting from the Merger, a gain from the sale of marketable
securities of $3.9 million in 1996, a gain from the settlement of patent
litigation of $32.1 million in 1994 and a restructuring charge of $12.4
million in 1993.
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(3) The unaudited pro forma combined statements of operations data for the year
ended December 31, 1995 and for the nine month period ended October 27, 1996
give effect to the JTS Merger as if the merger was completed at the
beginning of the periods. The unaudited pro forma combined balance sheet has
been omitted as the transaction is reflected in the consolidated balance
sheet as of October 27, 1996, included elsewhere herein.
(4) Excludes a nonrecurring gain on the sale of a marketable security amounting
to $3.9 million and an acquired in-process research and development
amounting to $110.0 million in 1996. Such amounts are included in the
historical results of operations for the nine months ended October 27, 1996.
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RISK FACTORS
An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully before purchasing the Common Stock
offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; WORKING CAPITAL
DEFICIT; INDEPENDENT ACCOUNTANTS' REPORT WITH EXPLANATORY PARAGRAPH. JTS was
incorporated in February 1994 and did not commence production of hard disk
drives until October 1995. JTS experienced operating losses for its fiscal years
ended January 29, 1995 and January 28, 1996 of $5.2 million and $32.5 million,
respectively, which resulted from the substantial costs associated with the
design, development and marketing of new products, the establishment of
manufacturing operations and the development of a supplier base. On January 28,
1996, prior to the merger with Atari, JTS had a working capital deficit of $15.2
million and a negative net worth of $38.6 million. JTS has yet to generate
significant revenues and cannot assure that any level of future revenues will be
attained or that JTS will achieve or maintain successful operations in the
future. Such factors have raised substantial doubt about the ability of JTS to
continue its operations without achieving successful future operations or
obtaining financing to meet its working capital needs, neither of which can be
assured. The most recent report of independent public accountants on JTS'
financial statements includes an explanatory paragraph describing uncertainties
concerning the ability of JTS to continue as a going concern.
As of October 27, 1996, JTS had a working capital deficit of $11.8 million
and a net worth of $0.3 million. On a consolidated basis, JTS had net revenues
of $35.0 million and an operating loss of $128.0 million for the nine-month
period ended October 27, 1996 which includes the results of Atari's nine-month
operations through October 27, 1996 and JTS' operations from the merger date
(July 30, 1996) to October 27, 1996. On a pro forma combined basis, JTS and
Atari had net revenues of $68.8 million and an operating loss of $57.0 million
for the nine months ended October 27, 1996.
UNCERTAINTY OF MARKET ACCEPTANCE; LENGTHY SALES CYCLE. Since its inception
in February 1994, JTS has primarily engaged in research and development of its
core technology for hard disk drives. JTS' marketing strategy depends
significantly on its ability to establish distribution, licensing, product
development and other strategic relationships with major computer OEMs and on
the willingness and ability of these companies to utilize and to promote JTS'
hard disk drive technology and products. JTS' first commercial product line, the
Palladium family of hard disk drives, was introduced in September 1995 and is
targeted at the desktop personal computer market. JTS' second product line, the
Nordic family of hard disk drives, has been designed for notebook computers. See
"Business -- Products." There can be no assurance that any significant market
for either product family will develop. In particular, the Nordic drives use a
3-inch form factor, which JTS has only recently introduced to the industry. At
present, only a limited number of computer manufacturers are developing or have
plans to develop computers that may accommodate Nordic drives. If additional
computer manufacturers do not modify their existing products or develop new
products to accommodate 3-inch form factor disk drives, sales of Nordic disk
drives and, therefore, JTS' business, operating results and financial condition
would be materially adversely affected.
Qualifying hard disk drives for incorporation into a new computer product
requires JTS to work extensively with the customer and the customer's other
suppliers to meet product specifications. Customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with JTS' senior management, before making a purchasing decision.
Accordingly, JTS' products typically have a lengthy sales cycle during which JTS
may expend substantial financial resources and management time and effort with
no assurance that a sale will result.
NEED FOR ADDITIONAL FINANCING; POSSIBLE BREACH OF LOAN COVENANTS. The hard
disk drive business is extremely capital intensive, and JTS will need
significant additional financing resources in 1997 and over the next several
years for facilities expansion, capital expenditures, working capital, research
and development and vendor tooling. The issuance of equity or convertible debt
securities, upon conversion, would result in dilution of the voting control of
existing stockholders and could result in dilution to earnings per share. There
can be no assurance that additional funding will be available on terms
acceptable to JTS or at all. If JTS is unable to obtain sufficient capital, it
would be required to curtail its facilities expansion, capital expenditures,
working capital, research and development and vendor tooling expenditures, which
would materially adversely affect
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JTS' business, operating results and financial condition. In this regard, due to
delays in the receipt of additional financing, the Company took action in
September 1996 to conserve its cash resources by reducing the production of
drives planned for the third and fourth quarters of fiscal 1997. Furthermore,
certain equipment and receivables financing as well as term loans made to JTS
and Moduler Electronics are contingent on JTS' ability to comply with stringent
financial covenants. JTS' failure to comply with such covenants could result in
the loss of such financing sources. In this regard, Moduler Electronics has
failed to obtain certain debt and equity capital required under one of its loan
agreements. In addition, Moduler Electronics failed to obtain the lender's
consent under a loan agreement to the acquisition of Moduler Electronics by JTS.
Although consent may not have been required under the loan agreement and the
lending institution has continued to transact business with Moduler Electronics
and JTS, there can be no assurance that it will continue to do so in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
HIGHLY COMPETITIVE MARKET. The hard disk drive industry is intensely
competitive and dominated by a small number of large companies, including
Quantum Corporation ("Quantum"), Seagate, Western Digital and Maxtor Corporation
("Maxtor"). In addition, a number of computer companies, such as International
Business Machines Corp. ("IBM") and Toshiba Corporation ("Toshiba"), have
in-house or "captive" disk drive manufacturing operations that produce disk
drives for incorporation into their own computers as well as for sale to other
OEMs. Many of JTS' competitors have broader product lines than JTS, and all have
significantly greater financial, technical and marketing resources. Furthermore,
JTS has licensed key 3-inch form factor technology to Western Digital, a
competitor in the personal computer disk drive market that could become a
significant supplier of 3-inch form factor disk drives to Compaq and other OEMs.
See "Business -- Initial Efforts to Achieve Market Acceptance of Hard Disk Drive
Products." There can be no assurance that JTS will develop and manufacture
products on a timely basis with the quality and features necessary to compete
effectively. Generally, OEM customers for hard disk drives rely on a limited
number of suppliers. As a result, it may be necessary for JTS to displace
competitors to increase its net sales. In addition, JTS faces competition from
the manufacturing operations of its current and potential OEM customers, which
could initiate or increase internal production of hard disk drives and reduce or
cease purchasing from independent hard disk drive suppliers such as JTS.
Moreover, the hard disk drive industry is characterized by price erosion and
resulting pressure on gross margins. JTS expects that hard disk drive prices
will continue to decline and that competitors will offer products which meet or
exceed the performance capabilities of JTS' current products. Due to such
pricing pressures, JTS' future gross margins will substantially depend upon its
ability to control manufacturing costs, improve manufacturing yields and
introduce new products on a timely basis. Any increase in price competition
would have a material adverse effect on JTS' business, operating results and
financial condition. JTS may also experience competition from other forms of
data storage, including optical storage, flash memory and holographic storage.
If JTS' current and prospective customers and end users were to adopt such data
storage products as an alternative to JTS' products, JTS' business, operating
results and financial condition would be adversely affected. See
"Business -- Competition."
RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES. The hard disk drive
industry is characterized by rapid technological change and short product life
cycles. As a result, JTS must continually anticipate change and adapt its
products to meet demand for increased storage capacities. Although JTS intends
to engage in a continuous process of developing new products and production
techniques, there can be no assurance that JTS will anticipate advances in hard
disk drive technology and develop products incorporating such advances in a
timely manner to compete effectively against its competitors' new products. Due
to the rapid technological change and frequent development of new hard disk
drive products, it is common in the industry for the relative mix of customers
and products to change rapidly, even from quarter to quarter. For example, in
the first half of calendar 1996, the demand for 1 gigabyte 3.5-inch form factor
hard disk drives decreased dramatically due to increased availability of and
demand for larger capacity disk drives. As a result, pricing pressure on such
disk drives, including those marketed by JTS, increased and gross margins
decreased. Generally, new products have higher selling prices than more mature
products. Therefore, JTS' ability to introduce new products on a timely basis is
an important factor in achieving growth and profitability. In addition, JTS
anticipates continued changes in the requirements of its customers in the
computer industry. There can be no assurance that JTS will be able to develop,
manufacture and sell products that respond
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adequately to such changes or that future technological innovations will not
reduce demand for hard disk drives. JTS' business, operating results and
financial condition would be materially adversely affected if its development
efforts are unsuccessful, if the technologies that JTS has chosen not to develop
prove to be competitive alternatives or by trends toward competing technologies,
such as optical storage, flash memory and holographic storage. As JTS increases
its production and shipment of hard disk drives and expands its product line,
JTS' inventory levels will increase. Due to the rapid rate of change in JTS'
business, a large inventory poses the risk of inventory obsolescence which could
have a material adverse effect on JTS' business, operating results and financial
condition. In this regard, JTS anticipates incurring future inventory
allowances, the level of which will depend upon a number of factors, including
manufacturing yields, new product introductions, maturity or obsolescence of
product designs, inventory levels and competitive pressures.
AVAILABILITY OF COMPONENTS AND MATERIALS; DEPENDENCE ON SUPPLIERS. JTS
relies on a limited number of suppliers for many components and materials used
in its manufacturing processes, including recording disks, head stack components
and integrated circuits. At present, JTS does not have multiple suppliers for
all of its materials and component requirements, and there can be no assurance
that JTS will secure more than one source for all of its requirements in the
future or that its suppliers will be able to meet its requirements on a timely
basis or on acceptable terms. Furthermore, JTS does not have contractual
arrangements with any of its sole source suppliers. In particular, JTS presently
relies on sole source suppliers for controller ASICs, read channels, digital
signals wP and spindle motor drivers, and certain head stack components. Delays
in the receipt of certain components and materials have occurred in the past,
and there can be no assurance that delays will not occur in the future or that
suppliers will not extend lead times. Moreover, changing suppliers for certain
materials, such as spindle motors, could require requalification of JTS'
products with some or all of its customers. Requalification could prevent early
design-in wins or could prevent or delay continued participation in hard disk
drive programs for which JTS' products have been qualified. In addition, long
lead times are required to obtain many materials, such as integrated circuits
utilized in JTS' printed circuit board assemblies ("PCBAs"). Regardless of
whether these materials are available from established or new sources of supply,
long lead times could impede JTS' ability to quickly respond to changes in
demand and product requirements. Any limitations on, or delays in, the supply of
materials could disrupt JTS' production volume and could have a material adverse
effect on JTS' business, operating results and financial condition. In this
regard, in the fourth quarter of fiscal 1996, JTS experienced delays in
obtaining certain integrated circuits required in the assembly of PCBAs due to
the supplier's production problems, which resulted in a significant reduction in
JTS' production volume during such period. Such production problems were
corrected, but there can be no assurance that production problems of this type
or otherwise will not occur again in the future. Furthermore, a significant
increase in the price of one or more of these components or materials could
adversely affect JTS' business, operating results and financial condition. In
addition, there are only a limited number of providers of hard disk drive
manufacturing equipment, such as servo-writers, burn-in equipment and final test
equipment, and ordering additional equipment for replacement or expansion
involves long lead times, which limit the rate and flexibility of capacity
expansion. Failure to obtain such manufacturing equipment on a timely basis
could limit JTS' production of hard disk drives and adversely affect JTS'
business, operating results and financial condition. See
"Business -- Manufacturing."
CYCLICAL NATURE OF HARD DISK DRIVE AND COMPUTER INDUSTRIES. JTS' operating
results are dependent on the demand for hard disk drives, which in turn depends
on the demand for notebook and desktop personal computers. The hard disk drive
industry is cyclical and has experienced periods of oversupply, resulting in
significantly reduced demand for hard disk drives, as well as pricing pressures
and reduced production levels. The effect of these cycles has been magnified by
computer manufacturers' practice of ordering components, including hard disk
drives, in excess of their needs during periods of rapid growth. In recent
years, the disk drive industry has experienced significant growth, and JTS
intends to expand its capacity based on current and anticipated demand. There
can be no assurance that such growth will continue or that the level of demand
will not decline. In this regard, certain personal computer manufacturers have
announced reductions in anticipated revenue growth. A decline in demand for hard
disk drives would have a material adverse effect on JTS' business, operating
results and financial condition. Additionally, in the past some computer
manufacturers have experienced substantial financial difficulties due to the
cyclical nature of the computer industry and other factors. Any increased price
pressure in the personal computer industry could be passed through to personal
9
<PAGE> 10
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.
DEPENDENCE ON COMPAQ COMPUTER RELATIONSHIP; CUSTOMER CONCENTRATION. JTS'
strategy to commercialize its products and achieve market acceptance has focused
on the development of distribution, licensing, product development and other
strategic relationships with leading computer companies, other manufacturers of
computer peripherals and recognized distribution organizations. In this regard,
JTS entered into a Development Agreement with Compaq in 1994 pursuant to which
Compaq has agreed to design JTS' Nordic disk drives into at least one of
Compaq's products and to purchase a minimum number of Nordic hard disk drives
from JTS within two years following Compaq's acceptance of the first of such
products. In return, JTS granted Compaq certain pricing preferences and agreed
to pay royalties to Compaq on sales of Nordic disk drives to third parties
during the term of the agreement. Compaq was also granted a license to use the
Nordic designs to manufacture or to have manufactured Nordic drives on a
royalty-free basis in the event JTS fails to meet the agreed upon production
schedule or, if JTS is not in default under the agreement, to have Nordic drives
manufactured by third-parties upon payment of a royalty to JTS. The Development
Agreement also restricts JTS' ability to sublicense Nordic technology. The
Development Agreement has a five year term, which will automatically be renewed
under certain circumstances and may be terminated by either party only with
cause. In order to provide an alternate source of Nordic products, JTS entered
into a Technology Transfer and License Agreement with Western Digital pursuant
to which Western Digital has the right to manufacture and sell Nordic disk
drives to Compaq and others. If either of these agreements were to terminate
prematurely, JTS' efforts to establish market acceptance of its products and,
consequently, its business, operating results and financial condition would be
adversely affected. In the first half of calendar 1996, Compaq delayed
introduction of a notebook product line that incorporates the Company's hard
disk drives, which resulted in shipment delays by the Company to Compaq and
others. The Company may experience similar delays in the future. In fiscal 1996,
Olidata S.p.A., Connexe Peripherals, Ltd., Liuski International, Inc. and
Aashima Technology, B.V. accounted for approximately 34%, 12%, 11% and 10%,
respectively, of JTS' total revenue. For the first nine months of fiscal 1997,
Karma International AG, Markvision International, Peacock Systems GmbH and
FutureTech International, Inc. accounted for approximately 18%, 18%, 14% 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
"Business -- Initial Efforts to Achieve Market Acceptance of Hard Disk Drive
Products."
RELIANCE ON LICENSED TECHNOLOGY. JTS currently owns no patents (other than
those acquired from Atari in the Merger) and has obtained licenses to a
substantial portion of the technology used in its hard disk drives pursuant to
license agreements with TEAC Corporation ("TEAC"), Pont Peripherals Corporation
("Pont") (formerly DZU Corporation), and Western Digital. If such license
agreements were prematurely terminated or if JTS were enjoined from relying upon
such licenses due to JTS' alleged or actual breach of such agreements, JTS would
be prevented from manufacturing hard disk drives incorporating technology
subject to such licenses. As a result, JTS' business, operating results and
financial condition would be materially adversely affected. See
"Business -- Patents and Licenses."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. Although JTS attempts to
protect its intellectual property rights through patents, copyrights, trade
secrets and other measures, there can be no assurance that JTS will be able to
protect its technology adequately or that competitors will not be able to
develop similar technology independently. There can be no assurance that patents
will be issued with respect to JTS' pending patent applications or that any
future patents will be sufficiently broad to protect JTS' technology. There can
be no assurance that any future patent issued to JTS will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
adequate protection to JTS' products. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate JTS'
products or design
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<PAGE> 11
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, patents acquired in the Merger,
copyrights or other intellectual property rights, to protect JTS' trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or claims for indemnification resulting
from infringement claims. Such litigation, even if successful, could result in
substantial costs and diversion of resources and could have a material adverse
effect on JTS' business, operating results and financial condition.
Alternatively, if any claims are asserted against JTS, JTS may seek to obtain a
license under the third party's intellectual property rights or to seek to
design around such claims. There can be no assurance, however, that a license
will be available on reasonable terms or at all, and it could be expensive and
time consuming or prove impossible for JTS to design around such claims. Any of
such alternatives could materially and adversely affect JTS' business, results
of operations and financial condition.
Pursuant to the Merger, JTS has exclusive use of the "Atari" name and
"Fuji" logo in all areas other than coin-operated arcade video game use. JTS
also has a portfolio of other intellectual properties of Atari including
patents, trademarks, and copyrights associated with its video game and computer
businesses. JTS believes these patents, trademarks and other intellectual
property are important assets. As of December 31, 1995, Atari held over 150
patents in the United States and other jurisdictions which expire from 1996 to
2010 and had applications pending for three additional patents. There can be no
assurance that any of these patent rights will be upheld in the future or that
JTS will be able to preserve any of these intellectual property rights. Atari
has in the past received communications from third parties asserting rights to
certain of its intellectual property. Atari has also been involved in several
major lawsuits regarding its intellectual property, including a suit with
Nintendo of America, Inc. and its affiliates ("Nintendo") which was settled in
March 1994 and a suit with Sega which was settled in September 1994. In the
event any third party were to make a valid claim with respect to the Atari
division's intellectual property and a license were not available on
commercially reasonable terms, JTS' business, financial condition and results of
operations could be materially and adversely affected. Litigation, which has in
the past resulted and could in the future result in substantial costs and
diversion of resources, may also be necessary to enforce the Atari patents or
other intellectual property rights or to defend against third party infringement
claims. The occurrence of litigation relating to patent enforcement, patent
infringement or other intellectual property matters, regardless of the outcome,
could have a material adverse effect on JTS' business, financial condition and
results of operations.
EXPANSION OF MANUFACTURING CAPACITY. JTS' competitive position will depend
substantially on its ability to expand its manufacturing capacity. Accordingly,
JTS is continuing to make significant investments to expand such capacity,
particularly through the acquisition of capital equipment, facilities expansion
and the hiring and training of new personnel. JTS currently plans to add new
production lines at its existing manufacturing facility in Madras, India during
fiscal year 1997 that will utilize all available floor space at this facility.
There can be no assurance that JTS will be able to expand such capacity in a
timely manner, that the cost of such expansion will not exceed management's
current estimates, that such capacity will not exceed the demand for JTS
products or that such additional capacity will achieve satisfactory levels of
manufacturing efficiency in a timely manner or at all. For example, the
Company's failure to obtain a term loan when expected in 1995 resulted in the
postponement of planned facilities improvements at Moduler Electronics and,
consequently, the curtailment of manufacturing capacity expansion. In addition,
the expansion of manufacturing capacity will significantly increase JTS' fixed
costs. JTS' profitability will depend on its ability to utilize its
manufacturing capacity in an effective manner, and JTS' inability to fully
utilize its capacity would have a material adverse effect on JTS' business,
operating results and financial condition. See "Business -- Manufacturing."
DEPENDENCE ON SINGLE MANUFACTURING FACILITY. Substantially all of JTS'
manufacturing operations take place at Moduler Electronics in Madras, India.
Because JTS does not currently operate multiple facilities in different
geographic areas, a disruption of JTS' manufacturing operations resulting from
various factors, including sustained process abnormalities, human error,
government interventions or a natural disaster such as fire or flood, could
cause JTS to cease or limit its manufacturing operations and consequently would
have a
11
<PAGE> 12
material adverse effect on JTS' business, operating results and financial
condition. See "Business -- Manufacturing."
RISKS OF INTERNATIONAL SALES AND MANUFACTURING. In fiscal 1996 and the nine
months ended October 27, 1996, substantially all of JTS' net sales consisted of
products sold to customers in Europe, Asia and Latin America, and JTS
anticipates that a substantial percentage of its products will be sold to
customers outside of the United States for the foreseeable future. In the near
term, JTS expects to conduct substantially all of its manufacturing operations
in India, although JTS will evaluate alternative or additional locations from
time to time. Accordingly, JTS' operating results are subject to the risks of
doing business in a foreign country, including compliance with, or changes in,
the law and regulatory requirements of a foreign country, political instability,
local content rules, taxes, tariffs or other barriers, and transportation delays
and other interruptions. For example, the Indian government has granted JTS'
subsidiary, Moduler Electronics, a five year reduced tax rate which is expected
to expire in 2001. In addition, Moduler Electronics is located in the Madras
Export Processing Zone, where it currently enjoys an exemption from Indian taxes
on export profits. To date, JTS has obtained only minimal benefits from such tax
exemptions. Such exemptions may be terminated or additional taxes may be imposed
at any time, for political or economic reasons, in which event JTS may become
subject to significantly greater taxes on sales of disk drives outside of India
at rates currently of up to 46%. Furthermore, Moduler Electronics does not have
a long-term lease agreement, but rather occupies the Madras facility pursuant to
allotment letters from the Development Commissioner of the Madras Export
Processing Zone. Such benefits associated with conducting business in India,
which historically has experienced considerable political instability, are
subject to the vagaries of the Indian government and may be withdrawn at any
time. Although all of JTS' sales presently are made in U.S. dollars, there can
be no assurance that future international sales will not be denominated in
foreign currencies. Regardless of whether JTS' sales are denominated in foreign
currencies, JTS is, and will continue to be, subject to risks related to foreign
currency fluctuations. See "Business -- Manufacturing."
PRODUCTION YIELDS; PRODUCT QUALITY. The hard disk drive manufacturing
process is complex, and low production yields may result from a variety of
factors, including the introduction of new products, increased complexity in
product specifications, human error, the introduction of contaminants in the
manufacturing environment, equipment malfunction, use of defective materials and
components and inadequate testing. From time to time, JTS has experienced lower
than anticipated production yields as a result of such factors. Furthermore,
while JTS has implemented procedures to monitor the quality of the materials
received from its suppliers, there can be no assurance that materials will meet
JTS' specifications or that substandard materials will not adversely impact
production yields or cause other production problems. JTS' failure to maintain
high quality production standards or acceptable production yields would result
in loss of customers, delays in shipments, increased costs, cancellation of
orders and product returns for rework, any of which could have a material
adverse effect on JTS' business, operating results and financial condition. For
example, JTS' cost of sales for fiscal 1996 included a $4.3 million provision
for inventory allowances principally due to the costs for return of defective
products, scrapped material associated with unrepairable damage caused during
the assembly process and estimates of physical loss of inventory associated with
high volume manufacturing activities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
VARIABILITY OF OPERATING RESULTS. JTS' operating results are expected to be
subject to significant quarterly and annual fluctuations based upon a variety of
factors including market acceptance of JTS' products, timing of significant
orders, changes in pricing by JTS or its competitors, the timing of product
announcements by JTS, its customers or its competitors, changes in product mix,
manufacturing yields, order cancellations, modifications and quantity
adjustments and shipment reschedulings, the level of utilization of JTS'
production capacity, increases in production and engineering costs associated
with initial manufacture of new products, changes in the cost of or limitations
on availability of components and materials and customer returns. The impact of
these and other factors on JTS' revenues and operating results in any future
period cannot be predicted with certainty. JTS' expense levels are based, in
large part, on its expectations as to future revenues. Substantial advance
planning and commitment of financial and other resources is necessary for
expansion of manufacturing capacity, while JTS' sales are generally made
pursuant to purchase orders that are subject to cancellation, modification,
quantity reductions or rescheduling without significant penalties.
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<PAGE> 13
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."
MANAGEMENT OF GROWTH. JTS has recently experienced and may continue to
experience substantial growth in the number of its employees and the scope of
its operations. Such growth would further strain JTS' managerial, financial,
manufacturing and other resources. In addition, to manage its growth
effectively, JTS must implement additional operating, financial and management
information systems and hire and train additional personnel. In particular, JTS
must hire and train a significant number of additional personnel to operate the
highly complex capital equipment required by its manufacturing operations. There
can be no assurance that JTS will successfully implement additional systems in a
timely or efficient manner, hire and properly train a sufficient number of
qualified personnel or effectively manage such growth, and JTS' failure to do so
could have a material adverse effect on its business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Employees."
DEPENDENCE ON KEY MANAGEMENT PERSONNEL. JTS' operating results will depend
in significant part upon the continued contributions of its key management and
technical personnel, including Sirjang L. Tandon, its Chairman and Corporate
Technical Strategist, David T. Mitchell, its President and Chief Executive
Officer, Kenneth D. Wing, its Executive Vice President, Research and Development
Quality/Reliability, W. Virginia Walker, its Executive Vice President, Finance
and Administration, Chief Financial Officer and Secretary, and Steven L.
Kaczeus, its Chief Technical Officer, each of whom would be difficult to
replace. See "Management." JTS does not have an employment agreement with any of
these individuals, other than Mr. Wing. The loss of any of these key personnel
could have a material adverse effect on the business, operating results and
financial condition of JTS. In addition, JTS' future operating results will
depend in part upon its ability to attract, train, retain and motivate other
qualified management, technical, manufacturing, sales and support personnel for
its operations. Competition for such personnel is intense, and there can be no
assurance that JTS will be successful in attracting or retaining such personnel.
The loss of the services of existing personnel as well as the failure to recruit
additional personnel could materially adversely affect JTS' business, operating
results and financial condition. See "Business -- Employees."
PURCHASE ORDERS SUBJECT TO CANCELLATION, MODIFICATION AND
RESCHEDULING. JTS' sales are generally made pursuant to purchase orders that are
subject to cancellation, modification, quantity reductions or rescheduling
without significant penalties. Changes in forecasts, cancellations, rescheduling
and quantity reductions may result in excess inventory costs, inventory losses
and under-utilization of production capacity and could have a material adverse
effect on JTS' business, operating results and financial condition. As a result
of the foregoing, JTS' backlog as of any particular date may not be
representative of actual sales for any succeeding period.
RISK OF POTENTIAL LIABILITIES RELATED TO ATARI'S BUSINESS. In connection
with the restructuring of Atari's business in 1992 and 1993 and Atari's decision
in late 1995 to significantly downsize its Jaguar operations, Atari has
terminated and JTS plans to terminate numerous contracts and business
relationships, including several related to software development activities.
Although JTS does not regard such contracts or business relationships, either
individually or in the aggregate, as material, the termination of contracts and
relationships has, from time to time, resulted in litigation, diverting
management attention and financial resources. There can be no assurance that the
parties to such contracts will not commence or threaten to commence litigation
related to such contracts. Any such litigation or threatened litigation would
divert management attention and financial resources and could have a material
adverse effect on JTS' business, operating results and financial condition.
UTILIZATION OF NET OPERATING LOSSES. As of December 31, 1995, Atari had
federal net operating losses ("NOLs") and tax credit carryforwards in the amount
of approximately $166.8 million, and as of January 28, 1996, JTS had federal
NOLs of approximately $17.0 million. Under the Internal Revenue Code of 1986, as
amended (the "Code"), certain changes in the ownership or business of a
corporation that has NOLs or tax
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<PAGE> 14
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 constituted a change in ownership with respect to
JTS, thus substantially restricting the use of JTS' pre-Merger NOLs against
post-Merger income of the Company. In addition, the Merger or subsequent events
have constituted or likely will constitute an event which results in the
imposition of restrictions on the ability of the Company to utilize the
pre-Merger NOLs and tax credit carryforwards of Atari against the post-Merger
income and tax liability of the Company. There can be no assurance that the
Company will be able to utilize all or any of the pre-Merger NOLs or tax credit
carryforwards of Atari or JTS.
CONTROL BY AFFILIATES; ANTI-TAKEOVER EFFECTS. Directors and executive
officers of the Company own approximately 31% of the outstanding shares of
Common Stock (assuming no exercise of options or warrants after October 31,
1996). As a result, these affiliates of JTS, acting together, have the ability
to exert significant influence over the election of directors and other
corporate actions affecting JTS. Certain provisions of the Certificate of
Incorporation and Bylaws of JTS and certain provisions of Delaware General
Corporation Law, including Section 203 thereof, may also discourage certain
transactions involving a change in control of JTS. In addition to the foregoing,
the ability of the Board of Directors of JTS to issue additional "blank check"
preferred stock without further stockholder approval could have the effect of
delaying, deferring or preventing a change in control of JTS. See "Principal and
Selling Stockholders" and "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices. As
of October 31, 1996, the Company had approximately 104,732,381 shares of Common
Stock outstanding. In February and August 1997, approximately 16,200,000 shares
and 12,500,000 shares of Common Stock, respectively, will become eligible for
sale in the public market pursuant to Rule 144 of the Securities Act upon
expiration of the two-year holding periods from the dates such shares were
issued. The holders of approximately 30,542,802 shares of Common Stock
(excluding the Selling Security Holders) are entitled to certain rights with
respect to registration of such shares under the Securities Act. JTS has
registered for sale on a Form S-8 Registration Statement under the Securities
Act an aggregate of 8,985,000 shares of Common Stock reserved for issuance under
JTS' Amended and Restated 1995 Stock Option Plan, 500,000 shares of Common Stock
reserved for issuance under JTS' 1996 Non-Employee Directors' Stock Option Plan,
and 900,000 shares of Common Stock reserved for issuance pursuant to the
exercise of options granted under Atari's 1986 Stock Option Plan which were
assumed by JTS in the Merger. Under Atari's 1986 Stock Option Plan, options to
purchase 225,800 shares of Common Stock are currently issued and outstanding.
See "Shares Eligible for Future Sale" and "Registration Rights."
LIQUIDITY; STOCK PRICE VOLATILITY. The trading price of the Common Stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, announcements of technological innovations or
new products by JTS or its competitors, general conditions in the hard disk
drive, computer or video game industries, changes in earnings estimates or
recommendations by analysts, or other events or factors. In addition, the public
stock markets have experienced extreme price and trading volume volatility in
recent months. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to the
operating performance of the specific companies. These broad market fluctuations
may adversely affect the market price of the Common Stock.
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<PAGE> 15
USE OF PROCEEDS
The shares of Common Stock offered by the Selling Security Holders and the
Registration Rights Holders may be sold from time to time to purchasers directly
by the Selling Security Holders or the Registration Rights Holders, respectively
acting as principals for their own accounts in one or more transactions at a
fixed price, which may be changed, or at varying prices determined at the time
of sale or at negotiated prices. Alternatively, the Selling Security Holders or
the Registration Rights Holders may from time to time offer the Common Stock
through underwriters, dealers or agents who may receive compensation in the form
of underwriting discounts, commissions or concessions from the Selling Security
Holders or the Registration Rights Holders, respectively, and/or the purchasers
of shares for whom they may act as agent. Sales may be made on AMEX or in
private transactions.
The Selling Security Holders, the Registration Rights Holders and any
underwriters, dealers or agents that participate in the distribution of the
Common Stock offered hereby may be deemed to be underwriters within the meaning
of the Securities Act and any discounts, commissions or concessions received by
them and any provided pursuant to the sale of shares by them might be deemed to
be underwriting discounts and commissions under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the Common Stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Common Stock may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is available and
is complied with.
The Company entered into agreements with certain of the Selling Security
Holders and the Registration Rights Holders to register their Common Stock under
applicable federal and state securities laws. The Company will pay substantially
all of the expenses incident to the offering and sale of the Common Stock to the
public, other than commissions, concessions and discounts of underwriters,
dealers or agents, if any. Such expenses (excluding such commissions and
discounts) are estimated to be $120,000. The registration agreements provide for
indemnification of such Selling Security Holders and Registration Rights Holders
and the Company to the extent permitted by law, for losses, claims, damages,
liabilities and expenses arising, under certain circumstances, out of any
registration of the Common Stock. See "Prospectus Summary -- Recent
Developments."
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its capital stock
since inception. However, pursuant to the Series B Preferred Stock Subscription
Agreements entered into between the Company and each of GFL Advantage Fund
Limited and Genesee Fund Limited -- Portfolio B (the "Subscription Agreements"),
the Company is obligated to pay 5% annual dividends on the outstanding shares of
Series B Preferred Stock, payable in cash or Common Stock (the "Series B
Dividends"). The Company intends to pay the Series B Dividends in Common Stock.
Furthermore, the Company may issue additional shares of preferred stock in the
future which require the payment of cash or stock dividends. Other than the
Series B Dividends, the Company presently intends to retain earnings, if any,
for use in its business, and does not anticipate paying cash dividends in the
foreseeable future. In addition, the Company's Certificate of Incorporation
restricts the Company's ability to issue dividends with respect to capital stock
that is junior in preference to the Series B Preferred Stock or to authorize the
issuance of capital stock that is senior in dividend preference to the Series B
Preferred Stock. See "Prospectus Summary -- Recent Developments" and
"Description of Capital Stock."
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 27, 1996.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(2)
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt............................... $ 2,242 $ 2,242
Bank line of credit................................................ 9,932 9,932
Long-term debt:
Total long-term debt............................................... $ 54,088 54,088
--------- ---------
Total debt...................................................... $ 66,262 66,262
--------- ---------
Stockholders' equity:
Preferred Stock: $0.001 par value, authorized 10,000,000 shares;
none issued and outstanding..................................... -- --
Common Stock: $0.001 par value, authorized 150,000,000 shares;
104,689,064 shares issued and outstanding(1) and 114,726,564
shares outstanding pro forma(2)................................. 1,047 1,147
Additional paid-in capital......................................... 310,875 325,776
Notes receivable, secured by common stock.......................... (2,510) (2,510)
Accumulated deficit................................................ (309,073) (309,073)
--------- ---------
Total stockholders' equity...................................... 340 15,340
--------- ---------
Total capitalization....................................... $ 66,602 $ 81,602
========= =========
</TABLE>
- ---------------
(1) Excludes (i) 5,034,853 shares of Common Stock issuable upon exercise of
options outstanding as of October 31, 1996, of which 787,165 shares were
exercisable at such date at a weighted average exercise price of $0.36 per
share; (ii) 300,000 shares issuable upon exercise of warrants outstanding as
of November 30, 1996, at a weighted average exercise price of $0.25 per
share; (iii) 8,985,000 shares of Common Stock reserved for future issuance
under the Company's Amended and Restated 1995 Stock Option Plan; (iv)
450,000 shares of Common Stock reserved for future issuance under the
Company's 1996 Directors' Stock Option Plan; and (v) 2,596,419 shares of
Common Stock issuable upon conversion of the Company's 5 1/4% Convertible
Subordinated Debentures as of October 31, 1996.
(2) Gives effect to: (i) the issuance of Series B Preferred Stock and (ii)
conversion of all of the Series B Preferred Stock at $3.6125 per share of
Common Stock (which price is equal to the average closing bid price for the
five trading days preceding the sale and issuance of the Series B Preferred
Stock (the "Series B Closing")); (iii) exercise of all of the Investor
Warrants issuable upon conversion of the Series B Preferred Stock and all of
the Finder's Warrants at $3.6125 per share of Common Stock; (iv) payment of
dividends on the outstanding shares of Series B Preferred Stock in Common
Stock; and (v) further adjustment to the Series B Preferred Stock conversion
ratio due to anti-dilution adjustments. See "Description of Capital Stock."
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<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Company's Common Stock was first traded on July 31, 1996 on AMEX under
the symbol "JTS." The following table sets forth, for the periods indicated, the
high and low closing prices per share for the Common Stock as reported on AMEX.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Year Ending February 2, 1997:
Third Quarter.............................................. $5.56 $3.25
Fourth Quarter (through January 24, 1997).................. $4.56 $3.00
</TABLE>
The closing price of the Common Stock on AMEX on January 24, 1997 was $3.63
per share. The Company had approximately 2,499 holders of record of its Common
Stock as of October 31, 1996.
17
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
The following historical selected consolidated financial data have been
derived from the historical consolidated financial statements of Atari prior to
its merger with JTS and the combined operations of Atari and JTS post merger and
should be read in conjunction with such consolidated financial statements and
notes thereto, included elsewhere herein, with the exception of the Consolidated
Statement of Operations Data prior to fiscal 1993 and the Consolidated Balance
Sheet Data prior to December 31, 1994, which were derived from historical
consolidated financial statements not included herein. The unaudited selected
historical financial data as of October 27, 1996 and for the nine month periods
ended September 30, 1995 and October 27, 1996 are derived from unaudited
consolidated financial statements of the Company and, in the opinion of the
Company, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information. The
unaudited Statement of Operations Data for the nine month period ended October
27, 1996 include the results of Atari's operations for the nine-month period
ended October 27, 1996 and of JTS' operations for the period from July 30, 1996
(the merger data) through October 27, 1996. Operating results for the interim
periods are not necessarily indicative of the results of the Company that may be
expected for the entire fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED DECEMBER 31, SEPTEMBER 30, OCTOBER 27,
---------------------------------------------------- ------------- -----------
1991 1992 1993 1994 1995 1995 1996(1)
-------- -------- -------- -------- -------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues...................... $257,992 $127,340 $ 29,108 $ 38,748 $ 14,626 $ 11,824 $ 35,056
Cost of revenues.................. 189,598 132,455 42,768 35,200 44,234 18,534 39,122
Acquired in-process research and
development..................... -- -- -- -- -- -- 110,012
Selling, marketing, general and
administrative expenses......... 71,744 47,669 16,538 21,820 18,647 12,587 5,705
Research and development
expenses........................ 15,333 9,171 4,876 5,775 5,410 4,552 6,262
Restructuring charges............. -- 17,053 12,425 -- -- -- --
Operating loss.................... (18,683) (79,008) (47,499) (24,047) (53,665) (23,849) (128,007)
Other income (expense), net(2).... 42,288 (4,145) (1,631) 33,441 3,507 1,968 1,361
Income (loss) from continuing
operations...................... 23,659 (82,719) (48,866) 9,394 (50,158) (21,881) (126,646)
Discontinued operations........... -- 9,000 -- -- -- -- --
Income (loss) before extraordinary
credit.......................... 23,659 (73,719) (48,866) 9,394 (50,158) (21,881) (126,646)
Extraordinary credit.............. 1,960 104 -- -- 582 -- --
Net income (loss)................. 25,619 (73,515) (48,866) 9,394 (49,576) (21,881) (126,646)
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing
operations...................... 0.41 (0.44) (0.85) 0.16 (0.79) (0.34) (1.55)
Income (loss) before extraordinary
credit.......................... 0.41 (0.29) (0.85) 0.16 (0.79) (0.34) (1.55)
Net income (loss)................. 0.44 (0.28) (0.85) 0.16 (0.78) (0.34) (1.55)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 28, OCTOBER 27,
---------------------------------------------------- ----------- -----------
1991 1992 1993 1994 1995 1996(1) 1996(1)
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets...................... $239,296 $105,551 $ 51,388 $113,188 $ 65,126 $ 58,595 $ 42,420
Working capital (deficit)........... 159,831 75,563 33,896 92,670 55,084 48,417 (11,771)
Total assets........................ 253,486 138,508 74,833 131,042 77,569 70,175 108,618
Current liabilities................. 79,465 32,988 17,492 20,518 10,042 10,178 54,191
Long-term debt...................... 48,492 53,937 52,987 43,454 42,354 42,354 54,088
Shareholders' equity................ 125,529 50,583 4,354 67,070 25,173 17,643 340
</TABLE>
- ---------------
(1) The Merger was consummated on July 30, 1996 and it was accounted for as a
purchase of JTS by Atari. Subsequent to the Merger, the fiscal year of the
Company was changed from a 52/53 week fiscal year ending on a 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 begins
on January 29, 1996 and the nine-month period for 1996 includes the results
of Atari's operations from January 29, 1996 through October 27, 1996 and
JTS' operations from July 30, 1996 through October 27, 1996.
(2) Includes a gain from the sale of marketable securities of $3.9 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.
18
<PAGE> 19
SELECTED PRO FORMA FINANCIAL DATA
The following table also sets forth the unaudited selected pro forma
financial data for the periods which are derived from the Unaudited Pro Forma
Combined Condensed Financial Statements (the "Pro Forma Financial Statements,")
included elsewhere herein. The pro forma combined condensed statement of
operations has been prepared as if the Merger, which was accounted for as a
purchase of JTS by Atari, were consummated at the beginning of the periods
presented. The pro forma combined condensed balance sheet has been omitted as
the merger is reflected in the consolidated balance sheet as of October 27,
1996, included elsewhere herein.
The unaudited selected pro forma financial data is provided for
illustrative purposes only and is not necessarily indicative of the combined
financial position or combined results of operations that would have been
reported had the Merger occurred on the dates indicated, nor do they represent a
forecast of the combined financial position or results of operations for any
future period. No pro forma adjustments have been included herein which reflect
potential effects of (a) administrative efficiencies which may be obtained by
combining Atari and JTS or (b) costs of restructuring, integrating or
consolidating the two companies. The unaudited selected pro forma financial data
should be read in conjunction with the Pro Forma Financial Statements and
related notes, and the historical financial statements and related notes of
Atari, JTS and Moduler Electronics which are included elsewhere in.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995(1) OCTOBER 27, 1996(1)
-------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
DATA:
Net revenues.......................................... $ 33,403 $ 68,821
Cost of revenues...................................... 77,860 83,865
Selling, marketing, general and administrative
expenses........................................... 36,093 21,258
Research and development expenses..................... 18,785 20,733
Operating loss(2)..................................... (99,335) (57,035)
Net loss.............................................. (96,997) (61,202)
Loss per common share................................. (0.94) (0.59)
</TABLE>
- ---------------
(1) The unaudited pro forma combined statements of operations data for the year
ended December 31, 1995 and for the nine month period ended October 27, 1996
give effect to the Merger as if the Merger was completed at the beginning of
the periods.
(2) Excludes nonrecurring gain on the sale of a marketable security amounting to
$3.9 million and an acquired in-process research and development amounting
to $110.0 million.
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, those
discussed in the section entitled "Risk Factors," and those discussed elsewhere
in this Prospectus.
On July 30, 1996, Atari was merged into JTS 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 nine months in the prior year and for the periods in the
current year prior to the three months ended October 27, 1996, include Atari
only. In addition, due to the change in year end Atari's balance sheet for the
end of transition period as of January 28, 1996 is included herein, as are
Atari's operating results for the one month period then ended.
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 periods presented.
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 month period ended September 30, 1995 with the
JTS unaudited pro forma combined results of operations for the nine month period
ended October 28, 1995 and for the current year which reflects the unaudited pro
forma financials that combine the historical results of operation of Atari and
JTS for the nine month period ended October 27, 1996. The liquidity and capital
resources discussion and analysis is based on the unaudited balance sheet of the
merged company as of October 27, 1996. Throughout this discussion, 'fiscal 1997'
refers to the fiscal year ending February 2, 1997.
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 notebook computers and desktop personal computers. The Company currently has
two disk drive product families in production, the 3-inch form factor "Nordic"
family for notebook computers and the 3.5-inch form factor "Palladium" family
for desktop personal computers. Total disk drives shipped to date have primarily
consisted of 3.5" Palladium drives. While JTS began shipment of Nordic disk
drives to Compaq began in the second quarter of fiscal 1997, volume shipments to
Compaq have not yet commenced. 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. 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 Palladium disk drives to
customers in the United States and Europe. All of JTS' products are manufactured
in Madras, India by its subsidiary, JTS Technology Ltd. (formerly Modular
Electronics (India) Pvt. Ltd.), which was acquired in April 1996 and employs
over 5,000 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. JTS has yet to generate
significant revenue from its disk drive business and cannot assure that any
level of future revenues will be attained or that JTS will achieve or maintain
successful operations in the future. Such factors have raised substantial doubt
about the ability of JTS to continue its operations without achieving successful
future operations or obtaining financing to meet its working capital needs,
neither of which can be assured. The fiscal year 1996 report of independent
public accountants on JTS' financial statements includes an explanatory
paragraph describing uncertainties concerning the ability of JTS to continue as
a going concern.
20
<PAGE> 21
Due primarily to lack of market acceptance of its video game console,
Jaguar, Atari has previously significantly downsized its video game 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. 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 competitive product
introductions. As a result of continued disappointing sales, management revised
estimates and wrote-down inventory by $5.0 million in the first quarter of 1996.
During July the company wrote-down an additional $3.3 million in inventory. The
prior business of Atari is now conducted through the Company's Atari division,
however the Atari division is not expected to represent a significant portion of
the Company's business.
ATARI YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Total revenues for Atari for 1995 were $14.6 million compared to $38.7
million for 1994. Sales of Jaguar and related products represented 68% and 76%
of total revenues for 1995 and 1994, respectively, and sales of other products
and royalties represented the balance of revenues in each such year. The
reduction in revenues was primarily the result of lower unit volumes of Jaguar
products and lower average selling prices of Jaguar and certain of its software
titles. In the first quarter of 1995, Atari reduced the suggested retail price
of Jaguar from its original price of $249.99 to $149.99. The current suggested
retail price of Jaguar is $99.99. As a result of the Jaguar price reductions,
the substantial curtailment of sales and marketing activities for Jaguar and the
substantial curtailment of efforts by Atari and independent software developers
to develop additional software titles for Jaguar, Atari expects sales of Jaguar
and related products to decline substantially in 1996 and thereafter.
Cost of revenues for 1995 was $44.2 million compared to $35.2 million for
1994. Included in cost of revenues for 1995 were accelerated amortization and
write-offs of capitalized game software development costs of $16.6 million and
inventory write-downs of $12.6 million primarily relating to Jaguar products. As
a result of these charges and lower selling prices for Jaguar products and
provisions for returns and allowances and price protection, gross margin for the
year was a loss of $29.6 million. For 1994, gross margin was $3.5 million, or
9.2% of revenues. Included in cost of revenues for 1994 were write-downs of
inventory of $3.6 million and amortization and the write-off of capitalized game
software development costs of $1.5 million. As of December 31, 1995, Atari had
approximately 100,000 units of the Jaguar console in inventory and there can be
no assurance that substantial additional write-downs will not be necessary.
Research and development expenses for 1995 were $5.4 million compared to
$5.8 million for 1994. During 1995 and 1994, a significant number of Atari
employees and consultants were devoted to developing hardware and software for
the Jaguar, and Atari contracted with third-party software developers to develop
Jaguar software titles. As a result of Jaguar's poor sales performance, in the
third and fourth quarters of 1995, Atari accelerated its amortization of
contracted software development which resulted in charges in those quarters of
$6.0 million and $10.6 million, respectively. At December 31, 1995 and 1994,
Atari had capitalized software development costs of $758,000 and $5.1 million,
respectively. In the fourth quarter of 1995, Atari eliminated its internal
Jaguar development teams and other development staff as titles for Jaguar were
completed.
Marketing and distribution expenses for 1995 were $12.7 million compared to
$14.7 million for 1994. Such costs included television and print media,
promotions and other activities to promote Jaguar.
General and administrative expenses for 1995 were $5.9 million compared to
$7.2 million for 1994. The decrease in such expenses was primarily a result of
staff reductions, reduced legal fees and other operating costs.
Atari experienced a gain on foreign currency exchange of $13,000 for 1995
compared to a gain of $1.2 million for 1994. These changes were a result of
lower foreign asset exposure and a greater percentage of sales made in U.S.
dollars which further reduced exposure to foreign currency transaction
fluctuations.
21
<PAGE> 22
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.
For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Debentures. In 1995, Atari repurchased a portion of the Atari
Debentures and realized a gain of $582,000. As of December 31, 1995, the
outstanding balance of these debentures was $42.4 million.
Interest income for 1995 and 1994 was $3.1 million and $2.0 million,
respectively. The increase in interest income was primarily attributable to
higher average cash balances in 1995.
As a result of Atari's operating losses, there was no provision for income
taxes in 1995. See Note 12 to the Atari Consolidated Financial Statements.
As a result of the factors discussed above, Atari reported a net loss for
1995 of $49.6 million compared to net income of $9.4 million in 1994.
JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
OCTOBER 27, 1996 AND THE NINE MONTHS ENDED OCTOBER 28, 1995
For the nine months ended October 27, 1996 pro forma combined results of
operations reflect a net loss of $61.2 million compared to a net loss of $47.0
for the nine months ended October 28, 1995. Such loss excludes the charge-off of
in-process research and development discussed in Note 3 of Notes to unaudited
pro forma condensed combined financial statements of JTS Corporation.
Total pro forma revenues for the nine month period ended October 27, 1996
amounted to $68.8 million compared to pro forma revenues of $17.8 million for
the same nine month period in the previous year. For the nine month period ended
October 27, 1996, the disk drive division shipped approximately 462,000 drives
and recognized revenues of $65.8 million compared to revenues for the same
period in the prior year of $5.9 million. Revenues for the Atari division
amounted to $2.9 million for the nine month period ended October 27, 1996
compared to the $11.8 million recognized by the division for the nine month
period ended September 30, 1995.
The pro forma gross margin deficit for the nine months ended October 27,
1996 was $15.0 million compared to a pro forma deficit of $10.2 million for the
nine months ended October 28, 1995. The gross margin deficit incurred by the
disk drive division for the nine months ended October 27, 1996 was $12.7 million
compared to a $3.5 million deficit incurred by the division for the same period
in the previous year. The Company first shipped disk drives in October 1995 and
has not yet reached production volumes which fully absorb all fixed production
costs. The gross margin deficit for the Atari division was $2.3 million for the
nine months ended October 27, 1996 compared to a deficit of $6.7 million for the
nine months ended September 30, 1995. Such reduction in the amount of the
deficit reflects lower sales volumes and includes inventory write-downs of $5.4
million and $8.0 million, respectively.
In order for JTS to realize positive gross margins in the future, the
Company will, among other things, have to control manufacturing costs, further
improve manufacturing yields and successfully introduce new products on a timely
basis, none of which can be assured.
Research and development expenses for the nine months ended October 27,
1996 were $20.7 million compared to research and development expenses of $13.2
million for the third quarter in the prior year, on a pro forma basis. Research
and development expenses for the disk drive division increased from $8.5 million
for the nine months in the prior year to $20.1 million for the nine month period
in the current year and the $11.6 million increase is principally due to a
significant increase in the number of employees in research and development
required to meet demand for timely product design. Research and development
expenses for the
22
<PAGE> 23
Atari division declined from $4.6 million for the nine months in 1995 to
$700,000 for the nine month period in the current years as a result of staff
reductions in development which took place in the fourth quarter of 1995.
On a pro forma basis selling, general and administrative expenses for the
nine months ended October 27, 1996 totaled $21.3 million, a $3.7 million decline
from the nine month period in the prior year. A decline of $9.6 million was
attributed to the Atari division and was due to reductions in staff and other
operating costs for the division. Selling, general and administrative expenses
for the disk drive division increased $5.9 million to $9.5 million for the nine
month period ending October 27, 1996 as a result of the expansion of JTS
operations and the commencement of marketing and sales efforts. JTS expects that
selling, general and administrative expenses will increase throughout fiscal
1997 in absolute dollars but that such expenses will decline as a percentage of
revenues.
LIQUIDITY AND CAPITAL RESOURCES
At October 27, 1996, JTS had cash and cash equivalents of $10.6 million, a
working capital deficit of $11.8 million and a net worth of $340,000.
At October 27, 1996, total debt, including bank credit lines and notes
payable was $66.3 million. JTS has a $5.0 million revolving Line of Credit with
Silicon Valley Bank which bears interest at the bank's prime rate plus .75% and
is due and payable on February 28, 1997. As of October 27, 1996, all amounts
available under this line were drawn. JTS also had equipment lease financing of
$4.2 million at October 27, 1996. There were $5.5 million of working capital
loans outstanding between JTS Technology and three Indian banks at interest
rates ranging from 13% to 15% as of October 27, 1996 as well as term loan
facilities with the Industrial Credit and Investment Corporation of India
Limited (ICICI) and the Shipping Credit and Investment Corporation of India
Limited (SICI) in the amount of $12.5 million at interest rates of LIBOR plus
2.75% and LIBOR plus 4%, respectively. At October 27, 1996, JTS Technology's
borrowings under these term loan facilities were $9.3 million, which is due in
2000 through 2002. Amounts borrowed under these loan agreements have been used
for working capital purposes, tooling, facilities expansion and purchases of
capital equipment.
Certain sources of financing are contingent on the Company's ability to
comply with stringent financial covenants. In this regard, certain debt and/or
equity capital was not obtained as required under one loan agreement. JTS has
informed the lender that it intends to provide such capital during the fourth
quarter of fiscal 1997. In addition, certain agreements require the lender's
consent to a merger 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 JTS' Indian subsidiary by JTS on April 4, 1996. Such consents
were not obtained, but the lending institution has continued to transact
business with the Company. JTS believes that such matters regarding the
agreements will not have a material adverse effect on JTS' business, operating
results or financial condition. However, there can be no assurance that JTS will
be able to renew or maintain its current financing facilities which would have a
material adverse effect on JTS' business.
At October 27, 1996, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued in 1987.
JTS has yet to generate significant revenues and cannot assure that any
level of future revenues will be attained or that JTS will achieve or maintain
successful operations in the future. The Company's accounts receivable are
heavily concentrated with a small number of customers. 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. Due to delays in the
receipt of additional financing, the Company took action in September 1996 to
conserve its cash resources by reducing the production of drives planned for the
third and fourth quarters of fiscal 1997.
The Company will need significant additional financing resources over the
next several years for facilities expansion, capital expenditures, working
capital, research and development and vendor tooling. For example, the Company
expects to spend approximately $7 million for vendor tooling and equipment to
expand
23
<PAGE> 24
manufacturing capacity for the remainder of fiscal 1997. In fiscal year 1998,
the Company plans approximately $45 million in capital expenditures related
primarily to equipment and facilities required to increase drive production
volumes. In addition, significant cash resources will be required to fund
purchases of inventory needed to achieve anticipated sales levels. Failure to
receive such cash resources will negatively impact the Company's ability to
manufacture its products at required levels.
In September 1996, the Company sold certain of its real estate acquired
from Atari in the merger to one of its board members for $10 million. The
property was sold at fair value, and the Company has an option to repurchase the
property one year from the date of sale for $10 million. Also, in early November
1996, the Company completed a $15 million private financing involving the sale
of its Series B Convertible Preferred Stock. JTS anticipates that with proceeds
from the sale of real estate and the preferred stock together with existing cash
it will be able to fund operations through the end of the current fiscal year,
including planned expense increases, working capital increases and capital
expenditures required to manufacture approximately 700,000 drives per quarter.
Thereafter, the Company anticipates that it will require additional funds to
finance its growth. The precise amount and timing of the Company's funding needs
cannot be determined at this time, and will depend upon a number of factors,
including the market demand for the 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 public
offering 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 December 31, 1995, Atari had federal net operating losses ("NOL's")
and tax credit carryforwards in the amount of approximately $166.8 million, and
as of January 28, 1996, JTS had federal NOL's of approximately $17.0 million.
Under the Internal Revenue Code of 1986, as amended (the "Code"), certain
changes in the ownership or business of a corporation that has NOL's or tax
credit carryforwards will result in the inability to use or the imposition of
significant restrictions on the use of such NOL's 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 thus
substantially restricting the use of JTS' pre-merger NOL's against post-merger
income of the Company. In addition, the merger or subsequent events have
constituted or likely will constitute an event which results in the imposition
of restrictions on the ability of the Company to utilize the pre-merger NOL's
and tax credit carryforwards of Atari against the post-merger income and tax
liability of the Company. There can be no assurance that the Company will be
able to utilize all or any of the pre-merger NOL's or tax credit carryforwards
of Atari or JTS. See "Prospectus Summary -- Recent Developments."
CHANGE IN COMPANY'S CERTIFYING ACCOUNTANT
Prior to the merger of Atari and JTS, Deloitte & Touche LLP had served as
Atari's independent accountants, and Arthur Andersen LLP had served as JTS'
independent accountants. Prior to the closing of the Merger, the management of
JTS had determined to engage Arthur Andersen LLP as the Company's independent
accountants after completion of the merger and had so notified Deloitte & Touche
LLP. On November 27, 1996, the Company's Board of Directors ratified
management's decision to engage Arthur Andersen LLP as the Company's independent
accountants for the fiscal year ending February 2, 1997.
The reports of Deloitte & Touche LLP on the financial statements of Atari
for the two fiscal years ended December 31, 1995 and 1994 did not contain an
adverse opinion or a disclaimer of opinion, nor were such reports qualified with
respect to any matter. There were no disagreements between the Company and
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or practice with respect to
Atari. A letter of Deloitte & Touche LLP, stating that Deloitte & Touche LLP
agrees with the foregoing statements, was submitted to the Securities and
Exchange Commission on December 2, 1996.
24
<PAGE> 25
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in this Prospectus. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in the Section
entitled "Risk Factors," those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," those discussed
elsewhere in this Prospectus.
JTS designs, manufactures and markets hard disk drives for use in notebook
computers and desktop personal computers. JTS currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS expects to begin volume production of
Nordic drives in the fourth quarter of fiscal 1997. JTS began volume production
of Palladium disk drives in October 1995. The Company markets its products to
OEMs, computer companies and second-tier systems integrators for incorporation
into their computer systems and subsystems. The Company sells its products
through a direct sales force operating throughout the United States, Europe and
Asia, as well as through distributors in the United States, Europe, Latin
America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995. In July 1996, the Company completed its merger (the
"Merger") with Atari Corporation ("Atari"). Since 1992, Atari has significantly
downsized its operations and going forward JTS hard disk drive operation is
expected to represent a significant portion of the Company's business. To obtain
a low-cost manufacturing source of hard disk drives, JTS acquired 90% of the
outstanding stock of the hard disk drive division of Moduler Electronics (India)
Pvt. Ltd. ("Moduler Electronics"), located in Madras, India in April 1996.
INDUSTRY BACKGROUND
Disk Drive Market
The hard disk drive industry is intensely competitive and is dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Toshiba and IBM,
have in-house or "captive" disk drive manufacturing operations that produce disk
drives for incorporation into their own computers as well as for sale to other
OEMs. In 1995, the top six disk drive vendors accounted for approximately 88% of
the unit market share.
In 1995, approximately 89 million hard disk drives were shipped,
representing a 30% increase over the prior year. Approximately 70 million, or
77%, of the hard disk drives shipped in 1995 were sold as part of desktop
personal computers, and approximately 11 million, or 12%, were sold as part of
notebook computers. In 1995, Seagate, Quantum and Western Digital controlled
approximately 61% of the desktop hard disk drive market share, and IBM and
Toshiba controlled approximately 70% of the notebook hard disk drive market
share.
Disk Drive Technology
All hard disk drives used in notebook and desktop personal computers
incorporate the same basic technology. One or more rigid disks are attached to a
spin motor assembly which rotates the disks at a constant speed within a sealed,
contamination-free enclosure. Typically, both surfaces of each disk are coated
with a thin layer of magnetic material. Magnetic heads record and retrieve data
from discrete magnetic domains located on pre-formatted concentric tracks in the
magnetic layers of the rotating disks. An actuator positions the head over the
proper track upon instructions from the drive's electronic circuitry. Most disk
drives are "intelligent" disk drives which incorporate an embedded ASIC
controller to manage communications with the computer. The magnetic heads
employed in disk drives have traditionally been based on inductive-head
technology which combines the read and write function within a single head. MR
head technology, which segregates the read and write function to different
elements of the head to optimize
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performance, has emerged recently as an alternative to inductive-head
technology. Management believes that the superior performance offered by MR
technology will make it the dominant head technology of the future.
The size of a hard disk drive is referred to as the drive's "form factor"
or "footprint." At present, the vast majority of personal desktop and notebook
computers incorporate disk drives with either 3.5-inch or 2.5-inch form factors.
The size of the form factor determines the size of the recording disk and,
hence, dictates the recording capacity of the disk drive. Disk drives with
smaller form factors must incorporate more disks and, therefore, more heads to
offer the same recording capacity as larger form factor drives. Because heads
and disks are the most expensive components in the hard disk drive, larger form
factor disk drives are relatively less expensive to manufacture than smaller
form factor drives with comparable recording capacities. As a result, 3.5-inch
drives are better suited for desktop personal computers, which are not subject
to the size constraints of notebook computers. In contrast, 2.5 inch drives,
because of their reduced size, power conservation features and lightweight
design, presently dominate the notebook computer market.
Emerging Industry Trends
In recent years, the computer industry has witnessed the emergence of
several trends that JTS believes will continue to drive demand for innovative
disk drive products. First, new data- and image-intensive applications are
generating increased demand for greater storage capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook computers comparable to those offered by desktops.
Lastly, the notebook computer industry is generally migrating towards lower
profile computing devices. The pressure to reduce the profiles, increase the
capacities and lower the costs of personal computers has presented manufacturers
with a substantial ongoing technical challenge.
JTS' STRATEGY
JTS has undertaken several key initiatives to meet the challenges currently
facing hard disk drive manufacturers and to position the Company to become a
leading international supplier of hard disk drives to the notebook and desktop
computer markets. These key initiatives include the following:
ESTABLISH 3-INCH FORM FACTOR TECHNOLOGY AS AN INDUSTRY STANDARD FOR
NOTEBOOK COMPUTERS. To address demand in the portable storage market for lower
profiles, greater storage capacities and lower costs, JTS has developed its
Nordic family of 3-inch form factor disk drives. The disks used in the 3-inch
format have 82% greater recording area than disks used in 2.5-inch drives, the
current industry standard for notebook computers, offering nearly double the
storage capacity at the same areal densities. Nordic drives also offer cost
advantages per megabit of storage space. The design of the Nordic drives makes
them the lowest profile disk drives currently in the market.
FORM STRATEGIC ALLIANCES WITH COMPAQ AND OTHER KEY PARTICIPANTS IN THE
COMPUTER INDUSTRY. As part of the Company's effort to gain rapid market
acceptance of the 3-inch form factor Nordic drives, JTS has entered into
agreements with Compaq, as a leading end-user of the 3-inch disk drives, and
Western Digital, as an alternate source for disk drives incorporating Nordic
technology. The Company is currently negotiating a head component supply
agreement pursuant to which JTS seeks to acquire and design into its disk drives
MR head component technology, which allows data to be recorded and read at much
higher track densities than MIG or inductive thin-film head technology. JTS
intends to establish similar arrangements with other major computer OEMs and
notebook manufacturers. The Company intends to continue to take advantage of its
management's considerable experience in the computer industry to obtain access
to other key computer industry participants.
DEVELOP INNOVATIVE DISK DRIVE TECHNOLOGY FOR NOTEBOOK AND DESKTOP PERSONAL
COMPUTERS. JTS expects to continue to develop and design into each of its
product families innovative and advanced hard disk drive technology which the
Company believes will enhance the performance characteristics and storage
capacities of its products. The Company intends to continue to work closely with
its customers and suppliers to design
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drives that satisfy the customers' end-product requirements using efficient and
low-cost manufacturing methods. JTS is committed to the timely development of
new products and the continuing evaluation of new technologies. In this regard,
JTS is presently designing into each of its hard disk drive product families
various high performance features, such as MR heads, new ASIC/channel technology
and advanced head lifters.
ACHIEVE LOW PRODUCT COST STRUCTURE. By locating manufacturing facilities in
Madras, India, JTS has capitalized on a low-cost and highly-skilled labor force.
JTS believes that labor costs in India are significantly lower than labor costs
in other countries where hard disk drives are commonly manufactured, such as
Singapore, Malaysia and Thailand. To leverage its low-cost labor force, JTS has
chosen to manufacture certain labor-intensive components in-house rather than
purchase such components from outside suppliers. The Company also uses many
common components in its 3-inch and 3.5-inch form factor disk drives, thereby
reducing inventory requirements, creating significant assembling efficiencies
and providing cost advantages from volume purchases of materials.
INITIAL EFFORTS TO ACHIEVE MARKET ACCEPTANCE OF HARD DISK DRIVE PRODUCTS
JTS believes that the most efficient means to introduce new technologies
and products into the market is by forming key strategic alliances with major
customers, suppliers and other disk drive manufacturers. The Company believes
that by working with major manufacturers in the development of its disk drives,
it can better understand and cater to the needs of the manufacturers' end
product. In addition, by forming alliances with suppliers and other disk
manufacturers the Company can reduce time to market as well as meet the quantity
and timing demands of its larger customers. In connection with the Company's
strategy of establishing JTS' Nordic family of disk drives as the standard for
notebook computers, the Company has entered into two key strategic alliances
with companies in the computer industry.
Compaq
In June 1994, JTS entered into a Development Agreement with Compaq pursuant
to which the two companies established a plan for the development of JTS' Nordic
family of disk drives. Pursuant to the terms of the Development Agreement,
Compaq has paid $500,000 to JTS for product development expenses, has agreed to
design JTS' Nordic disk drives into at least one of Compaq's products and has
agreed to purchase from JTS a minimum number of hard disk drives from JTS within
two years following Compaq's acceptance of the first of such products in June
1996. In addition, JTS has granted to Compaq certain pricing preferences and
agreed to pay royalties to Compaq on sales of Nordic disk drives to third
parties during the term of the agreement. Compaq has been granted a license to
use the Nordic designs to manufacture or to have manufactured Nordic drives on a
royalty-free basis in the event JTS fails to meet the agreed upon production
schedule or, if JTS is not in default under the agreement, to have Nordic drives
manufactured by third-parties upon payment of a royalty to JTS. The Development
Agreement also restricts JTS' ability to sublicense Nordic technology. The
Development Agreement has a five year term, which will automatically be renewed
under certain circumstances and may be terminated by either party only with
cause. The Company began shipments of Nordic disk drives to Compaq in June 1996.
Volume shipments of Nordic disk drives are expected to begin in the fourth
quarter of fiscal 1997. See "Risk Factors -- Dependence on Compaq Computer
Relationship; Customer Concentration."
Western Digital
In February 1995, JTS entered into a Technology Transfer and License
Agreement with Western Digital. Under the terms of the agreement, Western
Digital obtained manufacturing and marketing rights to JTS' 3-inch hard disk
drive products. In return, Western Digital is obligated to make payments to JTS
totalling $6.0 million upon the achievement of certain development milestones
and is licensed to act as an alternate source of Nordic drives to Compaq. As of
January 28, 1996, Western Digital had made milestone payments to JTS in the
aggregate amount of $5.3 million. In February 1995, Western Digital also made a
$4.1 million equity investment in JTS as part of the transaction. The parties
have reciprocal, royalty-free, cross-license agreements for future 3-inch drive
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch disk drive technology. The Technology Transfer and
License Agreement restricts
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JTS from sublicensing Nordic technology, under certain circumstances, until
1998. See "-- Patents and Licenses." JTS intends to establish similar
arrangements with other major computer OEMs and notebook computer manufacturers.
See "Risk Factors -- Dependence on Compaq Computer Relationship; Customer
Concentration."
PRODUCTS
JTS' disk drives are characterized by the following design features:
LOW-PROFILE AND FULLY-ENCAPSULATED DESIGN. JTS' hard disk drives have a
lower profile than competing hard disk drives with comparable form factors and
recording capacities. The low-profile design is made possible by the drive's
high level of electronic integration that permits placement of the printed
circuit board assembly ("PCBA") in the same plane as the recording disks (this
design is known as "board in the plane of the media" packaging). Most competing
drives place the PCBA under the drive mechanics which significantly increases
the height of the drive. JTS disk drives are fully-encapsulated with no exposed
PCBA and contain either a standard fixed drive connector or optional
multi-insertion connector. The encapsulated design eliminates the possibility of
damage to the PCBA due to electrostatic discharge and improves the
electromagnetic interference immunity of the drive.
SIMPLIFIED AND HIGHLY-INTEGRATED PLATFORM APPROACH. JTS' product families
share a simplified, highly-integrated platform approach characterized by a
reduced number of components. JTS believes that its PCBAs have the fewest
components in the industry due to JTS' use of highly-integrated ASIC
controllers. JTS believes this simplified platform approach combined with common
technology among its product families facilitates the introduction of new
technology and utilizes research personnel in a more efficient manner, thereby
reducing development costs.
COMMON COMPONENTRY. The Nordic and Palladium product families share a
substantial percentage of common electronic componentry which facilitates the
simultaneous development of products for the notebook and desktop computer
markets and reduces time to market for JTS products. For example, JTS' product
families share spindle motors, certain head stack components and controller
ASICs. Common componentry also simplifies inventory management and provides JTS
with purchasing-cost advantages.
Nordic Product Family
JTS' Nordic product family is designed for notebook computers. Nordic drives
measure 90mm wide, the same width as a floppy diskette, and are classified as
3-inch drives. The Nordic drives incorporate low-profile architecture, measuring
10.5mm high for the two-disk version and 12.5mm for the three-disk version.
Nordic drive capacity presently ranges from 1.0 gigabytes for the two-disk
version to 1.2 and 2.1 gigabytes for the three-disk version. The two- and
three-disk Nordic drives are significantly thinner than the two- and three-disk
2.5-inch drives (10.5mm and 12.5mm compared to 17mm and 19mm), while the surface
area of the recording disk in a Nordic drive is 82% greater than a 2.5-inch
disk. The greater surface area of the disk media used in the Nordic drives
allows for greater recording capacity using the same areal densities. Moreover,
the Nordic drives consume approximately the same amount of power as 2.5-inch
drives, making them well suited for battery operated applications. Nordic drives
are currently offered at prices that are competitive with the prices of 2.5-inch
drives.
The Nordic product family is being developed in conjunction with Western
Digital, which has entered into a Technology Transfer and License Agreement with
JTS obligating Western Digital to make milestone payments and to share
advancements in 3-inch technology and licensing Western Digital to serve as an
alternate source of Nordic products to Compaq. In addition, JTS has entered into
a Development Agreement with Compaq which committed Compaq to partially fund
Nordic development costs and obligates Compaq to purchase a minimum number of
disk drives over a two year period. Production and shipment to Compaq of Nordic
disk drives commenced in the second quarter of fiscal 1997. Volume shipments of
Nordic disk drives are expected to begin in the fourth quarter of fiscal 1997.
See "-- Initial Efforts to Achieve Market Acceptance of Hard Disk Drive
Products."
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Palladium Product Family
Palladium disk drives are 3.5-inch form factor drives designed for desktop
personal computers. The Palladium product family includes two- and three-disk
versions with capacities presently ranging from 1.2 gigabytes to 2.0 gigabytes.
The Palladium drives incorporate low-profile architecture similar to Nordic
drives, measuring 1/2 inch in height compared to competing drives that typically
measure 1 inch in height. The low profile design allows two disk drives to be
configured into the same space required for one competing 3.5-inch drive. JTS
began volume production and shipments of Palladium drives in September 1995.
MANUFACTURING
JTS' manufacturing strategy is to be a low-cost producer of hard disk
drives for the notebook and desktop personal computer markets by capitalizing on
low labor costs, common componentry and selective vertical integration. Due to
the common componentry of the Nordic and Palladium disk drives, JTS believes
that it enjoys considerable flexibility in managing inventory levels and meeting
its customers' production requirements. In addition, JTS believes that common
componentry reduces the amount of scrap materials in the manufacturing process
and facilitates the training of operators in producing new products, thus
reducing production costs. JTS' longer-term manufacturing strategy calls for
selective vertical integration to further reduce JTS' manufacturing costs by
capitalizing on the low-cost labor base in India. At present, JTS is vertically
integrated in certain labor intensive components, such as head stacks.
All of JTS' manufacturing operations are currently conducted at its
subsidiary, Moduler Electronics, located in Madras, India, which JTS acquired in
April 1996. Moduler Electronics was founded in 1986 by members of the family of
Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, as a
contract manufacturer of power supplies for computers and hard disk drive
subassemblies. In December 1994, Moduler Electronics received Indian government
approval to manufacture hard disk drives. At approximately the same time,
Moduler Electronics discontinued production of hard disk drive subassemblies for
customers other than JTS. In March 1995, JTS entered into a verbal agreement to
acquire the hard disk drive division of Moduler Electronics. JTS subsequently
assumed operational and management control of certain portions of the hard disk
drive business of Moduler Electronics. In April 1996, JTS purchased 90% of the
outstanding capital stock of Moduler Electronics. JTS has a right of first
refusal to purchase the remaining 10% equity interest in Moduler Electronics at
10% of the net book value of Moduler Electronics at the time of the purchase.
The Madras facility presently occupies 85,000 square feet. At this
facility, JTS is adding production lines and expanding its clean room
environment. JTS believes that locating its manufacturing operations in India is
an important element of its low-cost manufacturing strategy due to the
availability of a high-quality, low-cost technical labor pool. JTS believes that
labor costs in India are significantly lower than labor costs in other countries
where hard disk drives are commonly manufactured, such as Singapore, Malaysia
and Thailand. As of October 31, 1996, 5,547 individuals were employed at Moduler
Electronics. In 1995, Moduler Electronics was granted a five year "tax holiday"
which is expected to expire in 2001, with respect to sales of JTS' products in
and outside of India. In addition, Moduler Electronics is located in the Madras
Export Processing Zone and, therefore, enjoys a tax exemption with respect to
profits generated from sales outside of India. Such exemption may be terminated
or additional taxes may be imposed at any time, for political or economic
reasons, in which event JTS would become subject to significantly greater taxes
on sales of disk drives outside of India. Furthermore, JTS does not have a
long-term lease agreement, but rather occupies the Madras facility pursuant to
allotment letters from the Development Commissioner of the Madras Export
Processing Zone. Such benefits associated with conducting business in India,
which historically has experienced considerable political instability, are
subject to the vagaries of the Indian government and may be withdrawn at any
time.
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
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preliminary testing. To avoid contamination by dust and other particles which
may impair the functioning of the disk drive, most assembly takes place under
controlled "clean room" conditions. The final test group connects PCBAs to HDAs,
burns-in completed drives and performs final tests.
The principal components used in JTS' manufacturing process are disks,
heads and PCBAs. JTS has two qualified sources for PCBAs and is in the process
of qualifying alternate sources for disks and heads. JTS' Indian subsidiary
imports approximately 85% of the componentry used in the manufacture of its disk
drives from outside of India. In the past, JTS has experienced delays in
obtaining certain integrated circuits required in the assembly of PCBAs, and
there can be no assurance that such delays, or difficulties in obtaining those
or other components, will not occur in the future. JTS' inability to obtain
essential components or to qualify additional sources as necessary, if
prolonged, could have a material adverse effect on JTS' business, operating
results and financial condition.
JTS has developed a comprehensive quality assurance program. All
significant electrical and mechanical parts received from outside sources are
inspected or tested, normally on a sample basis, and testing and burn-in of
certain components and subassemblies occurs during assembly. In addition, JTS
performs several in-process quality checks and inspections, both in the PCBA and
HDA processes, and a final drive-level quality check prior to packaging.
Additional performance and reliability testing is done on a sample basis from
each week's production units in order to monitor quality levels and provide
corrective action to the factory processes. JTS generally warrants its products
against defects in design, materials and workmanship for three years. JTS
maintains in-house service facilities for refurbishment or repair of its
products in Madras, India. See "Risk Factors -- Availability of Components and
Materials; Dependence on Suppliers," "-- Expansion of Manufacturing Capacity,"
"Dependence on Single Manufacturing Capacity," "-- Risks of International Sales
and Manufacturing," and "-- Production Yields; Product Quality."
RESEARCH AND DEVELOPMENT
JTS operates in an industry characterized by rapid technological change and
short product life cycles. As a result, JTS' success will depend upon its
ability to develop new products, successfully introduce these products to the
market and ramp up production to meet customer demand. Accordingly, JTS is
committed to timely development of new products and the continuing evaluation of
new technologies. JTS' research and development efforts are presently
concentrated on broadening its existing 3.5- and 3-inch product lines and
introducing new generations of products with increased capacities and improved
performance at a lower cost. In this regard, JTS is presently designing various
high performance features, such as MR heads, new ASIC/channel technology and
advanced head lifters, into each of its hard disk drive product families. The
Company is currently negotiating a head component supply agreement pursuant to
which JTS seeks to acquire and design into its disk drives MR head component
technology, which allows data to be recorded and read at much higher track
densities than MIG or inductive thin-film head technology. JTS expects to begin
shipment of Palladium drives with recording capacities of up to 2.5 gigabytes
and Nordic drives with recording capacities of up to 1.8 gigabytes in the fourth
quarter of fiscal year 1997. As of October 31, 1996, JTS employed 372
individuals in engineering support and research and development.
SALES AND MARKETING; CUSTOMERS
JTS sells and markets its products through a direct sales force that
operates in the United States, Europe and Asia. In addition, JTS sells and
markets its products through an international network of distributors to OEMs,
VARs and systems integrators. The Company presently has sales offices throughout
the world that market JTS disk drives. International sales account for 81% of
revenues in fiscal 1996 and 40% of revenues for the first six months of fiscal
1997.
A limited number of customers account for a significant percentage of JTS'
total revenue. In fiscal 1996, Olidata S.p.A., Connexe Peripherals, Ltd., Liuski
International, Inc. and Aashima Technology, B.V. accounted for approximately
34%, 12%, 11% and 10%, respectively, of JTS' total revenues. For the first nine
months of fiscal 1997, Karma International, Markvision, Peacock Systems GmbH and
FutureTech International, Inc. accounted for approximately 18%, 18%, 14% and
14%, respectively, of JTS' total revenue. JTS
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expects that sales to a relatively small number of OEMs will account for a
substantial portion of its net revenues for the foreseeable future, although the
companies that comprise JTS' largest customers may change from period to period.
In particular, based on existing contracts with FutureTech and Compaq, JTS
expects that revenues from these companies will account for a substantial
percentage of JTS' revenues in the foreseeable future. The loss of, or decline
in orders from, one or more of JTS' key customers would have a material adverse
effect on JTS' business, operating results and financial condition.
BUSINESS OF ATARI DIVISION
Atari was incorporated under the laws of Nevada in May 1984. From 1984 to
1992, Atari designed, manufactured and marketed proprietary personal computers
and video games and related software. Over the past several years, Atari has
undergone significant change. In 1992 and 1993, Atari significantly downsized
operations, decided to exit the computer business and focused on its video game
business. As a result, revenues from computer products as a percentage of total
revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales
of entertainment systems and related software and peripheral products and the
receipt of royalties represented the balance of revenues in each such year.
These actions resulted in significant restructuring charges for closed
operations and write-downs of computer and certain video game inventories in
1992 and 1993. (See Note 14 to Atari Financial Statements for discussion of
segment information.)
While restructuring, Atari developed its 64-bit Jaguar interactive
multimedia entertainment system, which was introduced in selected markets in the
fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related
products were $9.9 million and $29.3 million, respectively, and represented 68%
and 76% of Atari's net revenues, respectively. These Jaguar sales were
substantially below Atari's expectations, and Atari's business and financial
results were materially adversely affected in 1995. Atari presently has a
substantial unsold inventory of Jaguar and related products and there can be no
assurance that such inventory can be sold at current prices.
By late 1995, Atari recognized that despite a significant commitment of
financial resources to the Jaguar and related products, it was unlikely that
Jaguar would ever become a broadly accepted video game console or that Jaguar
technology would be broadly adopted by software title developers. As a result,
Atari decided to significantly downsize its Jaguar operations. This downsizing
resulted in significant reductions in Atari's workforce, and significant
curtailment of research and development and sales and marketing activities for
Jaguar and related products. Accordingly, Atari decided to focus its efforts on
selling its inventory of Jaguar and related products and to emphasize its
existing licensing and development activities related to multimedia
entertainment software for various platforms. As a result of Atari's investment
in game design, and programming for its Jaguar software, Atari has ported
certain of its Jaguar titles to the IBM PC compatible platform. Atari intends to
publish and/or license these titles in 1996. In this regard, Atari commenced
shipment of the PC CD-ROM version of Tempest 2000 in Europe during the first
quarter of 1996. In 1996, Atari plans to continue its efforts to license titles
for its game library to third party publishers and to sell various properties
held for investment purposes.
PATENTS AND LICENSES
JTS currently owns no patents (other than those acquired from Atari in the
Merger) and has licensed in a substantial portion of the technology used in its
hard disk drives pursuant to license agreements with Pont, TEAC and Western
Digital. If such license agreements were prematurely terminated or if JTS were
enjoined from relying upon such licenses due to JTS' alleged or actual breach of
such agreements, JTS would be prevented from manufacturing disk drives
incorporating technology subject to such licenses. As a result, JTS' business,
operating results and financial condition would be materially adversely
affected. JTS has filed three United States patents applications. Although JTS
believes that patent protection could offer significant value, the rapidly
changing technology of the computer industry makes JTS' future success dependent
primarily upon the technical competence and creative skills of its personnel
rather than on patent protection.
A license with respect to certain key technology employed in JTS' Nordic
disk drives was granted to JTS by TEAC pursuant to a license agreement dated
February 4, 1994 (the "TEAC Agreement"). The TEAC
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Agreement also includes a cross-license with respect to Nordic technology
developed jointly by TEAC and JTS, which will be owned jointly by the two
companies, and granted certain rights to TEAC with respect to Nordic technology
developed independently by JTS, which will be owned solely by JTS. Under the
TEAC Agreement, JTS is obligated under certain circumstances to make royalty
payments to TEAC in connection with the sale of future generation disk drives
incorporating Nordic technology that is jointly developed by JTS and TEAC or
independently developed by TEAC. JTS is not obligated to make royalty payments
with respect to developments to Nordic technology made independently by JTS, but
JTS is obligated to license such developments to TEAC on a royalty-free basis.
The TEAC Agreement restricts JTS' ability to sublicense certain technology
licensed to JTS. Under the TEAC Agreement, JTS has granted TEAC certain pricing
preferences on purchases of Nordic drives. TEAC originally acquired its rights
in certain Nordic disk drive technology pursuant to the Agreed Order
Compromising Controversies dated February 4, 1994 (the "Order") governing the
distribution of the assets of Kalok Corporation. The Order imposes certain
restrictions on JTS' right to sublicense, manufacture and sell certain disk
drive technology of Kalok Corporation that was transferred to both TEAC and Pont
pursuant to the Order.
In June 1994, JTS entered into a Development Agreement with Compaq which
imposes certain restrictions on JTS' ability to sublicense Nordic technology to
third parties. In addition, the Development Agreement imposes a royalty
obligation upon JTS with respect to the sale of Nordic disk drives to third
parties during the term of the agreement. Moreover, Compaq has a right of first
refusal with respect to all production of Nordic drives until June 1997 and a
right of first refusal to license and/or acquire future JTS technologies and
products during the term of the agreement. JTS has also granted certain
non-exclusive manufacturing and marketing rights with respect to certain Nordic
technology and developments thereto within the term of the Development
Agreement.
In January 1995, JTS and Pont entered into a cross-licensing agreement (the
"Pont Agreement") pursuant to which JTS granted to Pont a royalty-free,
nonexclusive, perpetual license to use certain JTS and jointly-developed hard
disk drive technology, to make developments to such technology and to
manufacture and sell in certain territories hard disk drives incorporating such
technology. In return, Pont granted to JTS a royalty-free, nonexclusive,
perpetual license to use certain Pont and jointly-developed hard disk drive
technology, to make developments to such technology and to manufacture and sell
in certain territories hard disk drives incorporating such technology. In
addition, Pont was obligated to make certain royalty payments to JTS for a
limited period of time with respect to the sale of hard disk drives
incorporating certain JTS technology.
In February 1995, the TEAC Agreement, the Order, the Pont Agreement and the
Compaq Development Agreement were each amended to permit the license and
sublicense by JTS to Western Digital of certain rights in Nordic disk drive
technology. In addition, the amendment to the TEAC Agreement provides that JTS
will pay certain royalties to TEAC, under certain circumstances, upon the sale
of Nordic drives for a limited period of time. The Pont Agreement was also
amended to expand the territories in which JTS may manufacture and sell hard
disk drives incorporating technology subject to the agreement. JTS and Western
Digital concurrently entered into a Technology Transfer and License Agreement
pursuant to which Western Digital obtained certain manufacturing and marketing
rights to Nordic disk drive technology. The parties have reciprocal,
royalty-free, cross-license agreements for future Nordic technology
developments, and Western Digital has granted to JTS licenses on existing
patents covering its 3-inch hard disk drive technology.
The Company has exclusive use of the "Atari" name and "Fuji" logo in all
areas other than coin-operated arcade video game use. The Company also has a
portfolio of other intellectual properties including patents, trademarks, and
copyrights associated with the Atari video game and computer businesses. The
Company believes that such patents, trademarks and other intellectual property
are important assets. As of December 31, 1995, The Company held over 150 patents
in the United States and other jurisdictions relating to the business of the
Atari division which expire from 1996 to 2010 and had applications pending for
three additional patents. There can be no assurance that any of these patent
rights will be upheld in the future or that the Company will be able to preserve
any of the Atari division's other intellectual property rights. The occurrence
of litigation relating to patent infringement or other intellectual property
matters, regardless of the
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<PAGE> 33
outcome, could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The hard disk drive industry is intensely competitive and dominated by a
small number of large companies, including Quantum, Seagate, Western Digital and
Maxtor. In addition, a number of computer companies, such as Toshiba and IBM,
have in-house or "captive" disk drive manufacturing operations that produce disk
drives for incorporation into their own computers as well as for sale to other
OEMs. JTS believes that competition in the disk drive industry is based
primarily upon time to market, product availability, performance, product
capacity and price. JTS believes that it competes favorably with respect to each
of these factors. Many of JTS' competitors have broader product lines than JTS,
and all have significantly greater financial, technical and marketing resources.
There can be no assurance that JTS will be able to develop and manufacture
products on a timely basis with the quality and features necessary in order to
be competitive. High volume disk drive users typically utilize from two to four
suppliers but desire to limit the number of sources. As a result, it may be
necessary for JTS to displace competitors to increase its net sales. In
addition, JTS faces competition from the manufacturing operations of its current
and potential OEM customers, which could initiate or increase internal
production and reduce or cease purchasing from independent disk drive suppliers
such as JTS. Moreover, the hard disk drive industry is characterized by intense
price competition. If other disk manufacturers add significant capacity or
demand for disk drives decreases, the resulting pricing pressures could
adversely affect JTS' business, operating results and financial condition. JTS
has experienced pricing pressures in the past, and there can be no assurance
that JTS will not experience increased price competition in the future. Any
increase in price competition could have a material adverse effect on JTS'
business, operating results and financial condition. If JTS' current and
prospective customers and end users were to adopt alternative data storage
products, including optical storage, flash memory and holographic storage, JTS'
business, operating results and financial condition could be adversely affected.
BACKLOG
JTS' sales are generally made pursuant to purchase orders that are subject
to cancellation, modification, quantity reductions or rescheduling without
significant penalties. Changes in forecasts, cancellations, rescheduling and
quantity reductions may result in excess inventory costs, inventory losses and
under-utilization of production capacity and may have a material adverse effect
on JTS' business, operating results and financial condition. As a result of the
foregoing, JTS' backlog as of any particular date may not be representative of
actual sales for any succeeding period. As of October 27, 1996, JTS had a
backlog of approximately $90 million deliverable over the next five months.
Backlog on any given date is not necessarily indicative of total orders for a
given period, which may be more or less than expected.
EMPLOYEES
As of October 31, 1996, JTS (excluding the Atari division) had 5,752
full-time employees, of whom 176 were located in San Jose, California, 5,547
were located in Madras, India, 22 were located in the Far East and 7 were
located in Europe. Of the full-time employees, 4,771 are engaged in
manufacturing, 27 in marketing, sales and service, 372 in product development
and 38 in administration and finance. Due to disappointing sales of Jaguar and
related products, Atari reduced its workforce from 101 persons at December 31,
1994 to 73 persons at December 31, 1995 and to 17 persons at July 31, 1996. JTS
does not presently anticipate any further reductions in the Atari division's
workforce. As of October 31, 1996, the Atari division had approximately 11
employees in the United States, including three in engineering and product
development, six in marketing, sales and distribution and two in general
administration and management. In addition, the Atari division had six employees
outside the United States at October 31, 1996.
The market for well-trained employees with disk drive industry experience
is intensely competitive. JTS believes that its future success will depend on
its ability to continue to attract and retain a team of highly motivated and
skilled individuals. None of JTS' employees is represented by a labor
organization. JTS believes that its employee relations are good.
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<PAGE> 34
PROPERTIES
JTS presently leases facilities in San Jose, Sunnyvale and Santa Clara,
California, Madras, India, Singapore, Slough, England, Viannen, the Netherlands
and Taipei, Taiwan. JTS' executive and administrative headquarters are located
in a 52,000 square foot building in San Jose. The lease on this facility expires
in July 2000, and JTS has an option to renew for four years, subject to certain
restrictions.
The Madras facility comprises approximately 85,000 square feet and is used
for all of JTS' manufacturing operations. The Madras facility is owned by the
Indian Government, and JTS currently pays $14,000 per month for its use. JTS
does not have a long-term lease agreement, but rather occupies the Madras
facility pursuant to allotment letters from the Development Commissioner of the
Madras Export Processing Zone. Such allotment letters authorize JTS to occupy
the premises so long as the space is used in the reasonable conduct of JTS'
business and rents are paid in a timely fashion. The allotment letters and other
benefits associated with conducting business in India, which historically has
experienced considerable political instability, are subject to the vagaries of
the Indian government and may be withdrawn at any time. JTS currently intends to
increase the size of the Madras facility by 65,000 square feet by the end of
fiscal 1997.
The Singapore office comprises approximately 1,500 square feet and is used
for JTS' purchasing operations in Southeast Asia. The lease for this facility
expires in October 1997. The Taiwan sales office has approximately 1,144 square
feet and is used for JTS' marketing and sales operations in Taiwan. The lease
for this facility expires in July 1997.
In addition, JTS leases a 7,200 square feet facility in Sunnyvale,
California under a lease which expires in 2001. JTS also leases a 20,200 square
feet warehouse facility in Santa Clara, California, a 33,600 square feet
international sales facility in Slough, England and a 19,400 square feet vacant
facility in Viannen, the Netherlands. Each of these leases was assumed by JTS
when it merged with Atari, and each facility is presently used primarily for the
Atari division's operations.
The following table summarizes the principal properties occupied by the
Company:
<TABLE>
<CAPTION>
EXPIRATION DATE
LOCATION SQUARE FOOTAGE OF LEASE
----------------------------------------------- -------------- ---------------
<S> <C> <C>
Administrative and Sales Offices:
San Jose, California......................... 52,000 July 2000
Sunnyvale, California........................ 7,200 2001
Slough, England.............................. 33,600 September 1997
Viannen, The Netherlands..................... 19,400 September 1996
Singapore.................................... 1,500 July 1997
Taiwan....................................... 1,144 July 1997
Manufacturing Facility:
Madras, India................................ 85,000 *
Warehouse Facility:
Santa Clara, California...................... 20,200 July 1999
</TABLE>
- ---------------
* Occupied pursuant to allotment letters provided certain conditions are
satisfied.
LEGAL PROCEEDINGS
The Company is a defendant in a civil action brought in the Superior Court
of the State of California in and for the County of Santa Clara by Citizen
America Corporation, a former supplier, in February 1994 seeking damages of
approximately $900,000 for alleged breach of contract and related claims. The
Company has filed a counter-suit alleging damages of approximately $8.3 million.
The Company is a defendant and counter claimant in a civil action for
alleged breach of contract brought in U.S. District Court for the Southern
District of New York, case number 95 Civ. 1935, by Tradewell, Inc., a New York
corporation, seeking specific performance for release of goods having a value of
$1.6 million. The
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<PAGE> 35
Company has counterclaimed seeking specific performance for the purchase of
media or, alternatively, damages in the amount of $3.3 million. As a result of a
partial resolution, the Company now seeks damages of approximately $2.5 million.
The Company is a defendant in a civil action brought in England titled
Bullfrog Production, Ltd., v. Atari Corporation, Case No. 1996 B No. 584, for
which Bullfrog obtained judgment against the Company in the amount of $250,000
plus interest and costs.
The Company is a plaintiff in a civil action brought in the Superior Court
of the State of California in and for the county of Santa Clara brought against
Philips Laser Magnetic Storage ("Philips") for breach of contract and breach of
implied covenant of good faith and fair dealing arising out of Philips' failure
to deliver goods to Atari. Philips has filed a counterclaim to the action for
goods sold and delivered and work in process for approximately $3 million.
The Company is a plaintiff in a civil action brought in the Superior Court
of the State of California in and for the County of Santa Clara and removed to
the United States District Court, Northern District of California brought
against Probe Entertainment Limited for breach of contract and related claims. A
counterclaim has been filed by Probe against the Company for alleged breach of
contract. In connection with this matter, Acclaim Entertainment, an affiliate of
Probe, is expected to file a claim against the Company in the near future
seeking damages in excess of $1.25 million.
On January 23, 1992, certain debenture holders filed an involuntary
bankruptcy petition against The Federated Group, Inc., a subsidiary of the
Company and formerly a subsidiary of Atari. The case was appealed to the Ninth
Circuit Court of Appeals, and a hearing for oral arguments was held on December
12, 1996. The parties are presently awaiting a ruling from the court.
JTS has been served with a complaint filed in the Superior Court of the
State of California in and for the County of Santa Clara by Venture Lending &
Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million. The Company and VLLI
have entered into a settlement agreement, but the action has not yet been
formally dismissed.
The Company is presently, and may become in the future, a defendant in
certain other actions relating to the downsizing of Atari's operations. The
above actions may include claims for attorneys fees and interest. The Company
believes that none of these claims will have an adverse effect on its business,
financial condition or results of operations.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of JTS as of the date of this Prospectus are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------- ---- ---------------------------------------
<S> <C> <C>
David T. Mitchell 54 Chief Executive Officer, President and
Director
Sirjang L. Tandon 54 Chairman of the Board of Directors and
Corporate Technical Strategist
W. Virginia Walker 51 Executive Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Kenneth D. Wing 48 Executive Vice President, Research &
Development Quality/Reliability
Amit Chokshi 41 Executive Vice President, Worldwide
Operations and Managing Director of
India Operations
Steven L. Kaczeus 62 Chief Technical Officer
Rick R. Brantmeyer 49 Senior Vice President, Sales and
Marketing
Jean D. Deleage 56 Director
Roger W. Johnson 62 Director
Lip-Bu Tan 36 Director
Jack Tramiel 68 Director
</TABLE>
MR. DAVID T. MITCHELL joined JTS in May 1995 as Chief Executive Officer and
President and is a member of the Board of Directors of JTS. Prior to joining
JTS, he served as President, Chief Operating Officer and a director of Conner
Peripherals, Inc. commencing in October 1992. Prior to that time, Mr. Mitchell
co-founded Seagate, where he served as President, Chief Operating Officer and
director.
MR. SIRJANG L. TANDON founded JTS in February 1994 and served as its
Chairman of the Board of Directors, Chief Executive Officer and President from
inception until May 1995. Since such time, he has served as Chairman of the
Board of Directors and Corporate Technical Strategist. Prior to founding JTS,
Mr. Tandon founded and was Chief Executive Officer of Tandon Corporation, a
personal computer manufacturing firm. Tandon Corporation filed a petition under
the Federal bankruptcy laws in 1993.
MS. W. VIRGINIA WALKER joined JTS in November 1995 as Executive Vice
President, Finance and Administration, Chief Financial Officer and Secretary.
Prior to joining JTS, Ms. Walker served as Vice President of Finance and
Administration and Chief Financial Officer of Scios Inc. from 1985 to 1995.
Prior to 1985, Ms. Walker served as Controller for Intersil Inc., a manufacturer
of integrated circuits and at that time a subsidiary of General Electric
Company.
MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President,
Research & Development Quality/Reliability. Prior to joining JTS, Mr. Wing
worked for 14 years at Seagate. During his tenure at Seagate, Mr. Wing served in
several capacities, including Vice President of Process Engineering, Vice
President of Quality, Vice President of Manufacturing Operations and Vice
President of Worldwide Automation. He holds a Bachelor of Science degree in
Science and Engineering and a Master of Science in Mechanical Engineering from
the University of Michigan.
MR. AMIT CHOKSHI joined JTS in June 1995 as Executive Vice President,
Worldwide Operations and Managing Director of India Operations. Prior to joining
JTS, Mr. Chokshi co-founded Dastek Corporation, a hard disk drive manufacturing
company, where he served as Vice President of Marketing/Sales and Operations
until December 1994. Mr. Chokshi has a Bachelor of Science degree in Statistical
Mathematics from Gujarat University, India.
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
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<PAGE> 37
under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master of Science
and Bachelor of Science in Mechanical Engineering from the University of
Bridgeport and University of Budapest, Hungary, respectively.
MR. RICK R. BRANTMEYER joined JTS in July 1996 as Senior Vice President,
Sale and Marketing. Prior to joining JTS, Mr. Brantmeyer served as Senior Vice
President, Sales and Marketing of Maxtor from July 1995 to June 1996. From April
1991 to July 1995, Mr. Brantmeyer worked at Western Digital in several
capacities, including Vice President, Marketing, Vice President, Key Accounts
and Vice President, Retail Sales.
MR. JEAN D. DELEAGE has served as a Director of JTS since 1995. He has been
a managing partner of Burr, Egan, Deleage & Co., a major venture capital firm in
San Francisco and Boston, since its formation in 1979. He has been a managing
general partner of Alta California Partners, L.P. since its formation in 1996.
He is (or has been) on the Board of Directors of many companies including Tandon
Corporation, Chiron Corporation, Versaflex Delivery Systems, SyQuest Technology,
Stratagene Cloning Systems and Interpore International. He was the founder of
Sofinnova, a venture capital organization in Paris, and in 1976 formed
Sofinnova, Inc. (the U.S. subsidiary of Sofinnova). He holds a Master's Degree
in Electrical Engineering from Ecole Superieure d'Electricite and a Ph.D. in
Economics from the Sorbonne. In 1984, he was awarded the Ordre National du
Merite, and in 1993, he was awarded the Legion of Honor from the French
government in recognition of his career accomplishments.
MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as
Administrator of the United States General Services Administration from July
1993 to March 1996. From 1984 to 1993, Mr. Johnson served as Chairman of the
Board and Chief Executive Officer of Western Digital. Mr. Johnson received a
Bachelor of Business Administration from Clarkson University and a Master of
Business Administration in Industrial Management from the University of
Massachusetts.
MR. LIP-BU TAN became a director of JTS in 1995. He has served as General
Partner of the Walden Group, a venture capital firm, since 1985. He is also the
founder and Chairman of Walden International Investment Group in Asia. Mr. Tan
received a Bachelor of Science degree from Nanyang University, Singapore, a
Master of Science in Nuclear Engineering from the Massachusetts Institute of
Technology and a Master of Business Administration from the University of San
Francisco, where he served on the Advisory Council and the Board of Trustees.
Mr. Tan is also a director of Creative Technology Ltd. and Premisys
Communications, Inc.
MR. JACK TRAMIEL became a director of JTS in June 1996 when Atari merged
with JTS. Mr. Tramiel and a group of associates purchased Atari Corporation May
1984 and Mr. Tramiel served as Atari's Chairman of the Board of Directors until
June 1996. Mr. Tramiel served as Atari's Chief Executive Officer from May 1984
through May 1988.
All directors hold office until the next annual meeting of stockholders at
which their term expires and until their successors have been duly elected and
qualified. Executive officers of JTS are appointed by and serve at the
discretion of the Board of Directors of JTS. There are no family relationships
among any of the directors, officers or key employees of JTS.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of JTS has an Audit Committee, a Compensation
Committee and a Non-Officer Stock Option Committee. The Audit Committee consists
of Messrs. Jack Tramiel and Roger W. Johnson. The Audit Committee makes
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of audits and other services provided by JTS'
independent auditors, and reviews and evaluates JTS' internal audit and control
functions.
JTS' Compensation Committee consists of Messrs. Jack Tramiel, Lip-Bu Tan
and Jean D. Deleage. The Compensation Committee makes recommendations concerning
salaries and incentive compensation, awards stock options to employees and
consultants under the Company's 1995 Stock Option Plan and otherwise determines
compensation levels and performs such other functions regarding compensation as
the Board may delegate.
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<PAGE> 38
JTS' Non-Officer Stock Option Committee consists of Mr. David T. Mitchell.
The Non-Officer Stock Option Committee administers the Company's 1995 Amended
and Restated Stock Option Plan, including the granting of any options under such
plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Board of Directors of JTS had no Compensation
Committee. Each of the members of the JTS Board of Directors during fiscal 1996
participated in deliberations concerning executive officer compensation. Mr.
David T. Mitchell, a member of JTS' Board of Directors, has served as Chief
Executive Officer and President of JTS since May 1995. Mr. Sirjang L. Tandon,
Chairman of JTS' Board of Directors, served as Chief Executive Officer and
President of JTS from February 1994 to May 1995.
DIRECTOR COMPENSATION
The members of JTS' Board of Directors do not currently receive any cash
compensation from JTS for their services as members of the Board of Directors or
any committee thereof. Roger W. Johnson, a director of JTS, provides consulting
services to JTS pursuant to a two-year agreement which compensates Mr. Johnson
in the amount of $2,000 per month. Mr. Johnson's consulting agreement expires in
April 1998.
In March 1996, the JTS Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of JTS Common Stock to non-employee directors of JTS
("Non-Employee Directors"). The maximum number of shares of JTS Common Stock
that may be issued pursuant to options granted under the Directors' Plan is
500,000. Pursuant to the express terms of the Directors' Plan, each Non-Employee
Director (other than a compensated Chairman of the Board) who is elected to the
JTS Board for the first time after adoption of the Directors' Plan and each
other Non-Employee Director (other than a compensated Chairman of the Board) who
is reelected to the JTS Board at or after the 1998 stockholders meeting will
automatically be granted an option to purchase 50,000 shares of Common Stock on
the date of his or her election or reelection to the Board. Thereafter, each
Non-Employee Director (other than a compensated Chairman of the Board) will
automatically be granted an option to purchase an additional 50,000 shares of
Common Stock under the Directors' Plan on the date any and all previous options
or stock purchases by such person, either under the Directors' Plan or
otherwise, become fully vested. Neither directors of JTS serving on the date the
Directors' Plan was adopted nor former directors of Atari appointed to the JTS
Board in connection with the Merger have received option grants under the
Directors' Plan nor will such individual's be eligible to receive such grants
until the 1998 stockholders' meeting.
Outstanding options under the Directors' Plan vest in two equal annual
installments measured from the date of grant. The exercise price of options
granted under the Directors' Plan shall equal the fair market value of the
Common Stock on the date of grant. No option granted under the Directors' Plan
may be exercised after the expiration of ten years from the date of grant.
Options granted under the Directors' Plan are generally non-transferable. The
Directors' Plan will terminate in March 2006, unless earlier terminated by the
Board.
In the event of the dissolution, liquidation or sale of substantially all
of the assets of JTS, a specified form of merger, consolidation or
reorganization involving JTS or an acquisition transaction resulting in the
change in control of the voting power of JTS' voting securities, options
outstanding under the Plan will automatically become fully vested and will
terminate if not exercised prior to such event.
38
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended January 28, 1996
and January 27, 1995, the compensation paid to or earned by JTS' Chief Executive
Officer and JTS' five other most highly compensated executive officers whose
total annual salary and bonuses exceeded $100,000 as of January 28, 1996
(together, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL --------------------------
COMPENSATION RESTRICTED SECURITIES
--------------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#)
- --------------------------------------------- ----- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
David T. Mitchell(2)......................... 1996 $ 226,972 -- -- --
President and Chief Executive Officer 1995 139,081 -- -- --
Sirjang L. Tandon(3)......................... 1996 176,923 -- -- --
Chairman of the Board of Directors and 1995 161,538 -- -- --
Corporate Technical Strategist
Kenneth D. Wing(4)........................... 1996 199,835 -- -- 100,000
Executive Vice President, Research & 1995 103,790 -- -- --
Development Quality/Reliability
Amit Chokshi(5).............................. 1996 104,327 -- -- 200,000
Executive Vice President, Worldwide 1995 -- -- -- --
Operations and Managing Director of India
Operations
Steven L. Kaczeus............................ 1996 168,191 -- -- 242,500
Chief Technical Officer 1995 187,231 -- -- --
David B. Pearce(6)........................... 1996 206,192 -- -- 8,750
Former executive officer 1995 203,308 -- -- --
</TABLE>
- ---------------
(1) Mr. Mitchell, Mr. Wing and Mr. Pearce purchased 2,000,000, 300,000 and
450,000 shares of restricted Common Stock of JTS, respectively, during
fiscal 1996 at a per share price of $0.25. The dollar value to the
purchasers of each such purchase, net of the consideration paid by the
purchasers, was zero on the date of each such purchase. No dividends have
been paid or are expected to be paid with respect to the Common Stock
purchased by such individuals.
(2) Mr. Mitchell became Chief Executive Officer of JTS in May 1995. Mr. Mitchell
purchased 2,000,000 shares of restricted JTS Common Stock in fiscal 1996 at
a price of $0.25 per share, 250,000 shares of which were immediately vested.
The remaining 1,750,000 shares are subject to a right of repurchase by JTS
which lapses as to 1/48th of such shares monthly, commencing on January 5,
1996.
(3) Mr. Tandon served as Chief Executive Officer of JTS from February 1994 to
May 1995.
(4) Mr. Wing became Executive Vice President, Research & Development
Quality/Reliability of JTS in July 1995. Mr. Wing purchased 300,000 shares
of JTS Common Stock in fiscal 1996 at a price of $0.25 per share. Such
shares are subject to a right of repurchase by JTS which lapsed with respect
to one-eighth of such shares on January 1996 and as to 1/48th of such shares
monthly thereafter. The Company has made a loan to Mr. Wing which is
forgivable over a 2-year period, of which $80,000 of loan principal and
accrued interest has been forgiven on January 1, 1996 and $80,000 of loan
principal and accrued interest will be forgiven on January 1, 1997. See
"Employment Agreement."
(5) Mr. Chokshi became Executive Vice President, Worldwide Operations and
Managing Director of India Operations of JTS in June 1995.
(6) Mr. Pearce served as the Company's Chief Executive Officer from inception to
March, 1996. Mr. Pearce purchased 450,000 shares of restricted Common Stock
in fiscal 1996 at a price of $0.25 per share, 253,125 shares of which were
immediately vested. The remaining 196,875 shares were subject to a right of
repurchase by JTS which lapses with respect to 1/42nd of such shares monthly
commencing January 15, 1996. At the time of termination of Mr. Pearce's
employment with the Company in March 1996, an
39
<PAGE> 40
aggregate of 267,187 shares of his Common Stock had vested. JTS repurchased
the remaining 182,813 shares at the $0.25 per share purchase price.
EMPLOYMENT AGREEMENT
In June 1995, Kenneth D. Wing, Executive Vice President, Research &
Development Quality/Reliability of JTS, entered into an employment agreement
with JTS which provides for an annual base salary of $225,000, eligibility for
annual bonuses and severance package that, under certain circumstances, provides
that Mr. Wing will continue to receive his base salary until June 1997 in the
event he is terminated prior to such time. In addition, the employment agreement
provides for a $160,000 loan which was forgiven as to 50% of principal and
interest accrued thereon in January 1996 and shall be forgiven as to the
remainder in January 1997, provided Mr. Wing's employment with JTS continues
through such time.
1995 STOCK OPTION PLAN
In April 1996, JTS amended and restated its 1995 Stock Option Plan (the
"1995 Plan"), which was adopted in March 1995. Under the 1995 Plan, as amended
and restated, an aggregate of 9,000,000 shares of JTS Common Stock have been
reserved for issuance upon exercise of options granted to employees, officers
and directors of an consultants to JTS. As of October 31, 1996, options to
purchase 3,999,674 shares of JTS Common Stock had been granted under the 1995
Plan. The 1995 Plan will terminate in February 2006, unless sooner terminated by
the Board of Directors.
The 1995 Plan provides for the grant of both incentive stock options
intended to qualify as such under Section 422 of the Code and nonstatutory stock
options. The Compensation Committee of the Board of Directors administers the
1995 Plan. The Board of Directors has also established a Non-Officer Stock
Option Committee, consisting of David T. Mitchell, JTS' President, Chief
Executive Officer and Director, with authority to grant sock options to persons
who are not at the time of the grant of the options subject to Section 16 of the
Exchange Act. As used herein with respect to the 1995 Plan, the JTS Board refers
to the Compensation Committee, the Non-Officer Stock Option Committee as well as
to the Board of Directors of JTS. The JTS Board has the authority to select the
persons to whom grants are to be made, to designate the number of shares to be
covered by each option, to establish vesting schedules, to specify the type of
consideration to be paid upon exercise and, subject to certain restrictions, to
specify other terms of the options. The maximum term of options granted under
the 1995 Plan is ten years. Options granted under the 1995 Plan generally are
nontransferable and generally expire three months after the termination of an
optionee's employment, directorship or consulting relationship with JTS. In
general, if an optionee becomes permanently disabled or dies while employed or
retained by JTS, such person's options generally may be exercised up to 12
months after his or her disability and up to 18 months after his or her death.
The exercise price of incentive stock options granted under the 1995 Plan
must equal at least the fair market value of JTS' Common Stock on the date of
grant. The exercise price of nonstatutory stock options granted under the 1995
Plan must equal at least 85% of the fair market value of JTS' Common Stock on
the date of grant. The exercise price of incentive stock options granted to any
person who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant and the terms of these options
cannot exceed five years. Options under the 1995 Plan typically become
exercisable over four years, as to one-eighth of the shares subject to such
options six months after the date of grant an as to 1/48th of such shares each
month thereafter.
The 1995 Plan and options outstanding thereunder will be appropriates
adjusted as to the class and the maximum number of shares subject to the 1995
Plan and the class, number of shares and price pre share of stock subject to
such outstanding options in the event of stock splits, stock dividends,
recapitalizations and similar events. Under the 1995 Plan, the Board of
Directors has discretion in connection with a merger, consolidation or
liquidation involving JTS to provide that outstanding options shall be
terminated or shall be assumed or otherwise continued or to provide for the
accelerated vesting of outstanding options.
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<PAGE> 41
401(K) PLAN
On January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving
Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively
bargained employees and employees who are nonresident aliens with no United
States source income. Pursuant to the 401(k) Plan, employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
matching contributions and profit sharing contributions to the Plan by JTS on
behalf of all participants. JTS has not made any such contributions to date. The
401(k) Plan is intended to qualify under Section 401 of the Code so that
contributions by employees or by JTS to the 401(k) Plan, and income earned on
plan contributions, are not taxable to employees until withdrawn, and
contributions by JTS, if any, are deductible by JTS.
OPTION GRANTS IN FISCAL YEAR 1996
The following table contains information concerning the grant of stock
options under the 1995 Plan to each Named Executive Officer during fiscal 1996:
<TABLE>
<CAPTION>
POTENTIALLY
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------------- ANNUAL RATES OF
PERCENTAGE OF STOCK
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES IN EXERCISE OR OPTION TERMS(3)
OPTIONS FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) YEAR(%)(2) ($/SH) DATE 5%($) 10%($)
- ------------------- ------------- ------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
David T. Mitchell -- -- -- -- -- --
Sirjang L. Tandon -- -- -- -- -- --
Kenneth D. Wing 100,000 2.5% $0.25 11/29/2005 $31,907 $64,844
Amit Chokshi 100,000 2.5 0.25 6/7/2005 31,907 64,844
100,000 2.5 0.25 11/29/2005 31,907 64,844
Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 77,375 157,245
David B. Pearce 8,750 0.2 0.25 6/7/2005 2,792 5,674
</TABLE>
- ---------------
(1) Under the 1995 Plan, options granted to employees vest at the rate of
one-eighth at the end of six months and an additional 1/48 per month until
all options have become vested at the end of four years' service. In the
event an option was granted to an existing employee of JTS (rather than a
newly-hired employee), such option shall vest at the rate described above
based on the grant date of such option.
(2) Based on total grants of options to purchase 3,999,674 shares of Common
Stock.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years), and is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate
compounded annual for the entire term of the option and the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.
41
<PAGE> 42
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the exercise of
stock options by the Named Executive Officers during the fiscal year ended
January 28, 1996 and the number and value of securities underlying unexercised
options held by the Named Executive Officers as of January 28, 1996:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
YEAR-END(#)(1) YEAR-END($)(1)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- -------- ---------------- --------------
<S> <C> <C> <C> <C>
David T. Mitchell -- -- -- --
Sirjang L. Tandon -- -- -- --
Kenneth D. Wing -- -- 0/100,000 $0/$0
Amit Chokshi -- -- 33,333/66,667(2) 0/0
22,916/71,084(3) 0/0
Steven L. Kaczeus -- -- 125,313/117,187 0/0
David B. Pearce -- -- 8,750/0 0/0
</TABLE>
- ---------------
(1) Fair market value of Common Stock at January 28, 1996 ($0.25), minus the
exercise price of the options ($0.25), multiplied by the number of shares
underlying the options.
(2) Options granted to Amit Chokshi on June 7, 1995.
(3) Options granted to Amit Chokshi on November 29, 1995.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the DGCL, JTS' Certificate of Incorporation provides that
no director of JTS will be personally liable to JTS or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to JTS or to its
stockholders, (ii) for acts or omissions not made in good faith or which
involved intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit. In addition, JTS' Bylaws
provide that any director or executive officer who was or is a party or is
threatened to be made a party to any action or proceeding by reason of his or
her services to JTS will be indemnified to the fullest extent permitted by the
DGCL.
JTS has entered into indemnification agreements with each of its directors
and executive officers under which JTS has agreed to indemnify each of them
against expenses and losses incurred for claims brought against them by reason
of their being a director or officer of JTS. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
There is no pending litigation or proceeding involving a director or
officer of JTS as to which indemnification is being sought, nor is JTS aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
42
<PAGE> 43
CERTAIN TRANSACTIONS
Since JTS' inception in February 1994, JTS has maintained significant
business relationships with Moduler Electronics, Tantec Magnetics, Inc., a
California corporation ("Tantec"), and Maazda Travel, Inc. ("Maazda"). Mr.
Sirjang L. Tandon, JTS' Chairman and Corporate Technical Strategist, or members
of his immediate family, directly or indirectly own controlling equity interests
in both Tantec and Maazda and owned a controlling interest in Moduler
Electronics prior to JTS' acquisition of a 90% interest in Moduler. In fiscal
1996, Moduler Electronics provided subassembly and final assembly manufacturing
services to JTS for which JTS had made aggregate payments to Moduler Electronics
of approximately $13.0 million, and JTS has provided certain equipment on
consignment to Moduler Electronics with an aggregate value of approximately $4.4
million. Tantec has provided certain hard disk drive component parts, test
equipment and services to JTS for which JTS had made aggregate payments to
Tantec of approximately $366,000 and $295,000 in fiscal 1995 and 1996,
respectively, and JTS sold certain hard disk drives to Tantec with an aggregate
value of approximately $653,000 in fiscal 1996. During fiscal 1996, JTS made
aggregate payments to Maazda, JTS' principal travel agent, of approximately
$100,000.
From February 1994 to February 1995, JTS received bridge loans aggregating
approximately $2.9 million from certain significant JTS stockholders evidenced
by secured convertible notes (the "First Financing Notes"). The First Financing
Notes accrued interest at a rate of 8.5% per annum. All of the First Financing
Notes were canceled and the principal outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with the JTS Series A
Preferred Stock financing in February 1995 (the "First Series A Financing"). JTS
sold an aggregate of 16,200,000 shares of JTS Series A Preferred Stock in the
First Series A Financing for a purchase price of $1.00 per share in exchange for
cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred
Stock in the First Series A Financing included the following:
<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<S> <C> <C> <C>
Entities affiliated with Burr, Egan,
Deleage & Co.(1)..................... 2,500,000 $1,673,374 $ 826,626
Entities affiliated with Sofinnova
Management, L.P.(2).................. 1,000,000 709,349 290,651
Steven L. Kaczeus(3)................... 223,511 -- 223,511
</TABLE>
- ---------------
(1) Jean D. Deleage, a director of JTS, is Managing General Partner of Burr,
Egan, Deleage & Co. ("Burr Egan").
(2) Alain L. Azan is a Managing General Partner of three funds affiliated with
Sofinnova Management, L.P. ("Sofinnova").
(3) Steven L. Kaczeus is the Chief Technical Officer of JTS.
In connection with the First Series A Financing and pursuant to that
certain Debt Cancellation Agreement, dated as of February 3, 1995, by and among
JTS, Tantec and Mr. Tandon, JTS issued 2,202,227 shares of JTS Series A
Preferred Stock to Tantec in exchange for the cancellation of $2,202,227 of
indebtedness owed by JTS to Tantec.
In June 1995, JTS received bridge loans aggregating approximately $2.75
million from certain significant JTS stockholders, evidenced by secured
convertible notes (the "Second Financing Notes"). The Second Financing Notes
accrued interest at a rate of 8% per annum. All of the Second Financing Notes
were canceled and the principal amount outstanding thereunder was converted into
shares of JTS Series A Preferred Stock in connection with a JTS Series A
Preferred Stock financing in August 1995 (the "Second Series A Financing"). JTS
sold an aggregate of 12,496,370 shares of JTS Series A Preferred Stock in the
Second
43
<PAGE> 44
Series A Financing for a purchase price of $1.00 per share in exchange for cash
and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the
Second Series A Financing included the following:
<TABLE>
<CAPTION>
AMOUNT OF
INDEBTEDNESS
SHARES OF JTS SERIES A CANCELED
PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($)
- --------------------------------------- ----------------------- ---------------------- ----------
<S> <C> <C> <C>
Entities affiliated with the Walden
Group of Venture Capital Funds(1).... 3,000,000 $3,000,000 --
Entities affiliated with Burr Egan..... 1,437,500 437,500 1,000,000
David T. Mitchell(2)................... 1,010,196 -- 1,010,196
Entities affiliated with Sofinnova..... 500,000 500,000 --
Steven L. Kaczeus...................... 37,000 37,000 --
</TABLE>
- ---------------
(1) Lip-Bu Tan, a director of JTS, is a General Partner of the Walden Group.
(2) David T. Mitchell is the President, Chief Executive Officer and a member of
the Board of Directors of JTS.
In July 1995, JTS loaned $160,000 to Kenneth D. Wing, Executive Vice
President, Research & Development Quality/Reliability, pursuant to the terms of
Mr. Wing's employment agreement. Of such loan amount, $80,000 of principal (and
interest accrued thereon) were forgiven on January 1, 1996, and, subject to Mr.
Wing's continued employment with JTS, any remaining amounts owed under such loan
will be forgiven on January 1, 1997.
During fiscal 1996, in connection with the Technology Transfer and
Licensing Agreement between JTS and Western Digital, JTS provided certain hard
disk drive components to Western Digital, a principal stockholder of JTS, with
an aggregate value of approximately $358,000. In addition, JTS received
aggregate milestone payments of approximately $5.3 million from Western Digital
in fiscal 1996. See "Business -- Initial Efforts to Achieve Market Acceptance of
Hard Disk Drive Products."
In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D.
Wing, Virginia Walker, JTS' Executive Vice President, Finance and Administration
and Chief Financial Officer, and David B. Pearce in connection with the purchase
by such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and
450,000 shares of JTS Common Stock, respectively, at a purchase price of $0.25
per share. Each purchaser executed a restricted stock purchase agreement (each,
a "Restricted Stock Purchase Agreement") granting JTS a right of repurchase as
to such shares in the event the purchasers' employment with JTS terminates. With
respect to Mr. Mitchell, 250,000 shares of the JTS Common Stock purchased were
immediately vested, and JTS' repurchase right lapses monthly with respect to the
remainder of such shares at the rate of 1/48th per month. With respect to the
shares purchased by Mr. Wing, JTS' repurchase right lapsed as to one-eighth of
such shares in January 1996 and as to 1/48th of such shares monthly thereafter.
With respect to the shares purchased by Ms. Walker, JTS' repurchase right lapsed
as to one-eighth of such shares in May 1996 and as to 1/48th of such shares
monthly thereafter. With respect to the shares purchased by Mr. Pearce, 253,125
shares of the JTS Common Stock purchased were immediately vested and 14,063
additional shares had vested at the time Mr. Pearce's employment with JTS
terminated. In March 1996, JTS repurchased 182,812 shares of JTS Common Stock
from Mr. Pearce. In addition, the Restricted Stock Purchase Agreements provide
that JTS' repurchase right shall lapse entirely upon certain events following a
change in control of JTS.
From January 1996 to April 1996, JTS received an aggregate of approximately
$2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"),
from certain significant stockholders of JTS. The Bridge Notes accrued interest
at a rate of 10% per annum and were canceled after principal and accrued
44
<PAGE> 45
interest were paid in full in July 1996. Individuals and entities to whom Bridge
Notes were issued included the following:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF
STOCKHOLDER(S) BRIDGE NOTE ($)
---------------------------------------------------- -------------------
<S> <C>
Tantec.............................................. $ 1,000,000
Entities affiliated with Burr Egan.................. 260,000
Entities affiliated with the Walden Group of Venture
Capital Funds..................................... 200,000
Entities affiliated with Sofinnova.................. 99,900
</TABLE>
In April 1996, JTS acquired a 90% interest in Moduler Electronics in
exchange for issuing 1,911,673 shares of JTS Series A Preferred Stock (which
converted into Common Stock on a one-for-one basis upon the closing of the
Merger) and a warrant to purchase 750,000 shares of JTS Common Stock at an
exercise price of $0.25 per share to Lunenburg S.A., an affiliate of Sirjang L.
Tandon. Such warrant is immediately exercisable as to 500,000 shares and becomes
exercisable as to 250,000 shares when certain credit facilities in India are
made available to Moduler Electronics in the amount of at least $29 million. JTS
has a right of first refusal to purchase the remaining 10% equity interest in
Moduler Electronics, owned by a family member of Sirjang Lal Tandon, at 10% of
the net book value of Moduler Electronics at the time of the purchase.
A family member of Sirjang Lal Tandon, JTS' Chairman and Corporate
Technical Strategist, has guaranteed the secured short term borrowings and
secured long term loans of Moduler Electronics furnished by certain Indian
banks. See Notes 4 and 5 to the Financial Statements to the Hard Disk Drive
Division of Moduler Electronics (India) Private Ltd.
In September 1996, JTS and Jack Tramiel, a director of the Company, entered
into that certain Agreement for Purchase and Sale of Real Property with
Repurchase Option and related documents, pursuant to which JTS sold to Mr.
Tramiel certain properties in Texas and Southern California in exchange for
$10,000,000. The properties had been acquired by the Company in connection with
its merger with Atari in July 1996. Mr. Tramiel was a director of Atari prior to
the Merger. The property was sold to Mr. Tramiel at fair value and the Company
has an option to repurchase the property one year from the date of sale for
$10,000,000.
JTS believes that all of the transactions set forth above were made on
terms no less favorable to JTS than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between JTS and its
officers, directors and principal stockholders and their affiliates will be
approved by a majority of the JTS Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of Directors,
and have been and will be on terms no less favorable to JTS than could be
obtained from unaffiliated third parties.
45
<PAGE> 46
PRINCIPAL STOCKHOLDERS AND SELLING SECURITYHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1996 (unless otherwise
noted) held by (i) each person who is known by the Company to own beneficially
more than 5% of the outstanding shares of Common Stock, (ii) each director and
Named Executive Officer of the Company, (iii) the Selling Security Holders, (iv)
the Registration Rights Holders and (v) all directors and executive officers of
the Company as a group. Unless otherwise indicated below, to the knowledge of
the Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law. None of the Selling Security Holders is
currently an affiliate of the Company or has had a material relationship with
the Company during the last three years. Except as otherwise provided below, the
address of each person listed below is c/o the Company, 166 Baypointe Parkway,
San Jose, California 95134.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING
--------------------------- ---------------------------
NUMBER(1)(2) PERCENT(3) NUMBER(1)(2) PERCENT(3)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
SELLING SECURITY HOLDERS:
GFL Advantage Fund Limited(4)............. 3,806,227 3.6% 0 0
Genesee Fund Limited -- Portfolio B(4).... 761,245 * 0 0
Wharton Capital Corporation(5)............ 37,500 * 0 0
Jawahar L. Tandon(6)...................... 337,778 * 0 0
Devinder & Usha Tandon(7)................. 337,778 * 0 0
J. & S. Tandon, LLC....................... 1,013,335 * 0 0
D. & U. Tandon, LLC....................... 1,013,336 * 0 0
Jean Deleage(8)........................... 3,937,500 3.8% 0 0
Brentwood Associates VI, L.P.............. 2,602,083 2.5% 0 0
B. Kipling & Mary Ann Hagopian(9)......... 75,000 * 0 0
Mr. & Mrs. Pennington(10)................. 75,000 * 0 0
Roger C. Davisson(11)..................... 25,000 * 0 0
Jos Henkens(12)........................... 3,826,424 3.7% 0 0
Richard J. Testa.......................... 20,000 * 0 0
Jasper A. Welch........................... 10,000 * 0 0
Robert Easton............................. 10,000 * 0 0
P. Andrew McLane(13)...................... 100,000 * 0 0
C. Kevin Landry........................... 325,000 * 0 0
TA Associates Money Purchase Pension Plan
& Trust FBO Katherine Cromwell(14)...... 25,000 * 0 0
Jacqueline C. Morby....................... 37,500 * 0 0
S. N. Venture Capital, Inc................ 250,000 * 0 0
Alain Azan(15)............................ 1,500,000 1.4% 0 0
Needham Capital Partners L.P.(16)......... 525,000.... * 0 0
Steve Kaczeus, Sr......................... 260,511.... * 0 0
Mario Rosati(17).......................... 59,000 * 0 0
Richard D. DeGolia(18).................... 18,500 * 0 0
William Elmore............................ 25,000 * 0 0
Roger H. Lustberg......................... 48,000 * 0 0
James A. Hamilton......................... 38,750 * 0 0
Jeffrey L. DuRocher(19)................... 200,250 * 0 0
Michael P. Whalen......................... 22,250 * 0 0
James L. Loss............................. 8,750 * 0 0
Thomas Harnsberger........................ 7,000 * 0 0
L. Andrew Gifford......................... 3,500 * 0 0
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING
--------------------------- ---------------------------
NUMBER(1)(2) PERCENT(3) NUMBER(1)(2) PERCENT(3)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Martin J. Thompson........................ 3,500 * 0 0
J. Frederick Simmons...................... 30,000 * 0 0
William M. Wardlaw........................ 19,000 * 0 0
William H. Emer........................... 15,000 * 0 0
Timothy F. Sylvester...................... 1,000 * 0 0
Lip-Bu Tan(20)............................ 3,000,000 2.9% 0 0
Richard C. DeGolia and Sallie V.D.
DeGolia................................. 6,500 * 0 0
Marie-Helene Habert-Dassault.............. 100,000 * 0 0
Gilde Investment Management(21)........... 544,500 * 0 0
Teddy Hadlono............................. 5,000 * 0 0
Greg Kudo................................. 20,000 * 0 0
David T. Mitchell(22)..................... 1,010,196 * 0 0
SBCB Holdings............................. 1,000,000 * 0 0
Goldman Sachs International............... 4,100,000 3.9% 0 0
Lanenberg S.A............................. 2,411,673 2.3% 0 0
Venture Leasing and Lending Inc........... 346,432 * 0 0
Total Shares.................... 33,959,518
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS:
Jack Tramiel(23).......................... 12,490,616 11.9% 12,490,616 11.9%
TimeWarner................................ 8,670,000 8.3% 8,670,000 8.3%
Warner Communications, Inc.
75 Rockefeller Plaza
New York, NY 10019
Sirjang L. Tandon(24)..................... 7,761,673 7.4% 7,761,673 7.4%
David T. Mitchell(25)..................... 4,010,196 3.8% 4,010,196 3.8%
Jean D. Deleage(26)....................... 3,937,500 3.8% 3,937,500 3.7%
Lip-Bu Tan(27)............................ 3,000,000 2.7% 2,800,000 2.7%
Leonard Tramiel(28)....................... 5,213,946 4.9% 5,213,946 4.9%
Steven L. Kaczeus(29)..................... 417,386 * 417,386 *
Kenneth D. Wing(30)....................... 302,083 * 302,083 *
David B. Pearce........................... 260,000 * 260,000 *
Amit Chokshi(31).......................... 29,166 * 29,166 *
Roger W. Johnson.......................... -- * -- *
All current directors and executive
officers as a group (11 persons)(32).... 32,163,098 30.7% 32,163,098 30.7%
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock
47
<PAGE> 48
subject to options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding, including for purposes of computing the percentage of the
person holding such option, but not for purposes of computing the
percentage of any other holder.
(3) Based on 104,732,381 shares of Common Stock outstanding as of October 31,
1996.
(4) Beneficial ownership is shown as of November 5, 1996. Beneficial ownership
is based upon: (i) conversion of all of the Series B Preferred Stock at
$3.6125 per share of Common Stock (which price is equal to the average
closing bid price for the five days preceding the Series B Closing); and
(ii) exercise of all of the Investor Warrants issuable upon conversion of
the Series B Preferred Stock at $3.6125 per share of Common Stock. The sale
and issuance of the Series B Preferred Stock occurred on November 5, 1996.
See "Description of Capital Stock." The Certificate of Designations
provides that GFL Advantage Fund Limited and Genesee Fund Limited-Portfolio
B may not convert the Preferred Stock at any time to acquire a number of
shares of Common Stock in excess of that number which would result in
beneficial ownership of more than 4.9% of the Company's outstanding Common
Stock at any time.
(5) Beneficial ownership is shown as of November 5, 1996 and consists of 37,500
shares of Common Stock issuable upon exercise of the Finder's Warrants,
which are immediately exercisable. The Finder's Warrants were issued on
November 5, 1996.
(6) Consists of 337,778 shares held by Jawahar L. Tandon as trustee of the
Jawahar L. Tandon Irrevocable Trust, as amended.
(7) Consists of 337,778 shares held by Devinder L. Tandon, MD & Usha Tandon as
trustees of the Devinder & Usha Tandon Family Trust, as amended.
(8) Includes 3,896,550 shares and 40,950 shares of Common Stock held by Alta V
Limited Partnership and Custom 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, L.P. and Customs House Partners, L.P. Mr.
Deleage and the general partners of Alta V Management Partners, L.P. and
Customs House Partners disclaim beneficial ownership of such shares except
to the extent of their proportionate partnership interests therein.
(9) Consists of 75,000 shares held by B. Kipling & Mary Ann Hagopian as
trustees of the B. Kipling & Mary Ann Hagopian Trustees UTD 3/25/88 as
amended.
(10) Consists of 75,000 shares held by Timothy M. Pennington, III & Melissa J.
Pennington as trustees of the Pennington Family Revocable Trust DTD
5/23/84, as amended.
(11) Consists of 75,000 shares held by Roger C. Davisson as trustee of the
Davisson Family Trust DTD 11/29/94, as amended.
(12) Consists of 1,576,424 shares and 2,250,000 shares of Common Stock held by
Advanced Technology Ventures III and Advanced Technology Ventures IV,
respectively. Mr. Henkens is a general partner of Advanced Technology
Ventures III and Advanced Technology Ventures IV. Certain shares held in
the name of Advanced Technology may be distributed to and sold by certain
limited partners of Advanced Technology, each of whom beneficially holds
less than 1% of the outstanding shares of Common Stock.
(13) Consists of 100,000 shares held by P. Andrew McLane and is being gifted to
the McLane Harper Charitable Foundation as of this filing.
(14) Consists of 25,000 shares held by Katherine Cromwell as trustee of the TA
Associates Money Purchase Pension Plan & Trust, as amended.
(15) Includes 800,000 and 700,000 shares of Common Stock held by C.V. Sofinnova
Ventures Partners III and C.V. Sofinnova Ventures Partners II,
respectively. Alain Azan is a general partner of Sofinnova Management,
L.P., the general partner of C.V. Sofinnova Ventures Partners III and C.V.
Sofinnova Ventures Partners II 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.
48
<PAGE> 49
(16) Includes 333,333 and 191,667 shares of Common Stock held by Needham Capital
SBIC, L.P. and Needham Capital Partners, L.P., respectively. Needham
Capital Partners, L.P. has investment and voting power with respect to the
shares held by each of the foregoing investment funds.
(17) Includes 31,500, 6,000 and 22,500 shares of Common Stock held by WS
Investment Company 95A, Atherton Ventures and WS Investment Company 95B,
respectively. Mr. Rosati has investment and voting power with respect to
the shares held by each of the foregoing investment funds. Mr. Rosati
disclaims beneficial ownership of such shares except to the extent of his
proportionate partnership interests therein.
(18) Consists of 12,500 and 6,000 shares of Common Stock held by the WSGR
Retirement Plan U/A DTD 02/01/88, of which Mr. DeGolia is the beneficiary,
and Mr. DeGolia, respectively.
(19) Consists of 2,500 shares of Common Stock held by Jeffrey L. DuRocher and
35,000, 31,500, 31,500, 25,000, 15,250, 9,750, 4,000, 20,000, 10,500,
4,500, 4,500 and 6,250 shares of Common Stock held by Jeffrey L. DuRocher
as trustee of the Riordan & McKenzie Profit Sharing and Savings Plan FBO
Jeffrey B. DuRocher; FBO Carl W. McKenzie; FBO Richard J. Welch; FBO
Lawrence C. Weeks; FBO Cynthia M. Dunnett; FBO Jeffrey L. Glassman; FBO
Louise LaMothe; FBO Janis B. Salin; FBO Martin J. Thompson; FBO Kenneth D.
Klein; FBO Scott R. Miller; FBO James L. Loss, as amended, respectively.
Jeffrey L. DuRocher has investment and voting power with respect to the
shares held by each of the foregoing investment funds. Mr. DuRocher
disclaims beneficial ownership of such shares except to the extent of his
proportionate partnership interests therein.
(20) Includes 700,000, 600,000, 500,000, 300,000, 200,000, 200,000, 200,000,
200,000 and 100,000 shares of Common Stock held by Walden Capital Partners
II, L.P.; International Venture Capital Investment Corporation; Walden
Investors; BI Walden Ventures Kedua Sdn Bhd; Seed Ventures II Limited; OWW
Pacrim Investments Ltd; OCBC, Wearnes & Walden Investments (Singapore)
Ltd.; Walden Ventures and Walden Technology Ventures II, L.P.,
respectively. Lip-Bu Tan, a director of JTS has investment and voting power
with respect to the shares held by each of the foregoing investment funds.
Mr. Tan disclaims beneficial ownership of such shares except to the extent
of his proportionate partnership interests therein.
(21) Includes 272,250, 272,250 and 5,500 shares of Common Stock held by Gilde IV
B.V., Gilde Investment Fund B.V., and One Liberty Fund III, L.P.,
respectively. Gilde Investment Management has investment and voting power
with respect to the shares held by each of the foregoing investment funds.
(22) Mr. Mitchell and Jintamai K. Mitchell beneficially own 4,010,196 shares of
Common Stock as trustees of the Mitchell 1990 Rev. Trust UTA 3390, as
amended. Of such shares, 1,010,196 are being offered hereby.
(23) Includes 11,597,315 shares held by Mr. Tramiel's wife. Also includes
155,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
benefit of Mr. Tramiel's minor grandchildren. Also includes 4,000 shares
issuable pursuant to options exercisable within 60 days of October 31,
1996.
(24) Includes 2,411,673 shares of Common Stock held by Lunenburg S.A. Sirjang L.
Tandon, a director of JTS, may have shared voting power over the shares
held by Lunenberg S.A. Also includes 4,350,000 shares of Common Stock held
by the Tandon Family Partnership, of which Mr. Tandon is a general partner.
Mr. Tandon disclaims beneficial ownership of the shares held by Lunenberg
S.A. and the Tandon Family Partnership except to the extent of his
proportionate partnership and shareholder interests therein.
(25) Please refer to (21).
(26) Please refer to (8).
(27) Please refer to (18).
(28) Includes 55,000 shares issuable pursuant to options exercisable within 60
days of October 31, 1996, and 40,000 shares held of record by Mr. Tramiel's
wife, Preeva Tramiel. Of the remaining 5,158,946 shares of Common Stock,
4,000,000 shares are pledged as collateral under a loan agreement with Mr.
Tramiel's father, Jack Tramiel, a director of the Company.
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<PAGE> 50
(29) Includes 156,875 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(30) Includes 166,666 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(31) Includes 29,166 shares issuable pursuant to options exercisable within 60
days of October 31, 1996.
(32) Includes 32,184,767 shares of Common Stock held by executive officers,
directors and entities affiliated with certain directors and includes
options to purchase 179,166 shares of Common Stock held by executive
officers that are exercisable within 60 days of October 31, 1996. See
footnotes (6), (7), (8), (9), (10), (12), (13) and (14).
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, 9,985,000 shares of undesignated, "blank check" preferred
stock, $.001 par value per share, and 15,000 shares of Series B Preferred Stock.
The following summary of certain provisions of the capital stock of the
Company does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Company's Certificate of Incorporation and
Bylaws which are included as exhibits to the Registration Statement of which
this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of October 31, 1996, there were outstanding 104,732,381 shares of Common
Stock held of record by approximately 2,499 stockholders, options to purchase
5,034,853 shares of Common Stock, and warrants to purchase 300,000 shares of
Common Stock. Upon the completion of this offering, assuming full conversion of
the Series B Preferred Stock, full exercise of the Warrants, payment of the
Series B Dividends in Common Stock, and certain anti-dilution adjustments to the
Series B Preferred Stock conversion ratio and assuming no exercise of
outstanding stock options or outstanding warrants after October 31, 1996, the
Company will have 114,732,381 shares of Common Stock outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. However, the Subscription Agreements restrict the
payment of dividends with respect to capital stock of the Company that is junior
to the Series B Preferred Stock, including the Common Stock. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the payment of the liquidation preference of the Series B
Preferred Stock and any other series of preferred stock that the Company may
designate and issue in the future. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of Series B Preferred
Stock and any other series of preferred stock that the Company may designate and
issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 9,985,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any such series. The issuance of preferred stock could adversely
affect the rights and powers, including voting rights, of holders of Common
Stock and the availability of earnings and assets for dividends, other
distributions and payments upon liquidation to the holders of Common Stock. The
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of the Company. In certain circumstances, such
issuances could have the effect of decreasing the market price of the Common
Stock.
Of the 10,000,000 shares of preferred stock authorized for issuance by the
Company, 15,000 shares have been designated as Series B Preferred Stock, all of
which are outstanding. The holders of Series B Preferred Stock have the right to
convert all or a portion of the Series B Preferred Stock into units consisting
of Common Stock and Investor Warrants at the earlier of the date of
effectiveness of this Registration Statement or eighty days after the issuance
and sale of the Series B Preferred Stock (the "Series B Closing"). The Series B
Preferred Stock, together with any accrued and unpaid dividends, may be
converted into Common Stock at a conversion price (the "Initial Conversion
Price") equal to the lower of (i) 85% of the average
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<PAGE> 52
lowest trading price for the five days immediately preceding the conversion
notice date; or (ii) 100% of the average closing bid price for the five days
preceding the Series B Closing. In addition, for every 10 shares of Common Stock
issued upon conversion of the Series B Preferred Stock, the holder thereof shall
be entitled to receive an Investor Warrant to purchase one share of Common
Stock. See "Warrants". The Series B Preferred Stock is convertible at the option
of the Company at any time after three years from the date of the Series B
Closing.
The Initial Conversion Price of the Series B Preferred Stock is subject to
proportional adjustment for stock splits, stock dividends, recapitalizations and
the like. The Initial Conversion Price is subject to further adjustment in the
event that (i) the Registration Statement is not declared effective within 80
days of the Series B Closing, (ii) the Registration Statement ceases to remain
effective for a specified period, or (iii) the conversion rights of the holders
of the Series B Preferred Stock are suspended for any reason.
The Series B Preferred Stock, together with any accrued and unpaid
dividends, may be redeemed by the Company in whole or in part at any time after
six months following the Series B Closing at a price equal to the market value
of the Common Stock, assuming conversion of the Series B Preferred Stock at the
then prevailing conversion price at the time of redemption.
The holders of the Series B Preferred Stock may cause the Company to
repurchase all or any portion of the holders' Series B Preferred Stock upon the
occurrence of certain events, including the absence of closing bid prices for
the Common Stock for ten consecutive trading days, the failure of the Common
Stock to be listed for trading on AMEX, the New York Stock Exchange or the
Nasdaq National Market, the Company's default in the performance of any material
obligations under the transaction documents relating to the sale of Series B
Preferred Stock, the inability of the holders of Series B Preferred Stock to use
this Registration Statement for a period of 30 or more days after it is declared
effective, and any merger of the Company in which stockholders of the Company do
not hold at least 51% of the stock of the surviving company or in which the
stock of the surviving company is not listed for trading on AMEX, the New York
Stock Exchange or Nasdaq National Market. Such repurchase will be for cash at
the market value of the Common Stock into which the Series B Preferred Stock
could be converted at the time of repurchase, plus accrued dividends and
interest. See "Prospectus Summary -- Recent Developments."
WARRANTS
Investor Warrants
The holders of Series B Preferred Stock have the right to convert all or a
portion of the Series B Preferred Stock into units consisting of Common Stock
and Investor Warrants. For every 10 shares of Common Stock issued upon
conversion of the Series B Preferred Stock, the holder thereof shall be entitled
to receive an Investor Warrant to purchase one share of Common Stock. Each
Investor Warrant is exercisable for one share of Common Stock at 110% of the
lower of the average closing bid price of the Company's Common Stock for the
five days immediately preceding (i) the conversion notice date or (ii) the
Series B Closing. The Investor Warrants are exercisable in full or in part at
any time or from time to time for up to three years after the issuance date of
the Investor Warrants. The exercise price of the Investor Warrants is subject to
adjustment under certain circumstances, including dividends, stock splits,
reorganizations, reclassification, and consolidations. The holders may elect to
exercise the Investor Warrants, in whole or in part by receiving shares of
Common Stock equal to the net issuance value upon surrender of the Investor
Warrants.
Finder's Warrants
In connection with the issuance of Series B Preferred Stock to GFL
Advantage Fund Limited and Genesee Fund Limited -- Portfolio B in a November
1996 private placement, the Company issued 37,500 Finder's Warrants to Wharton
Capital Corporation in consideration for financial consulting services furnished
to the Company. Each Finder's Warrant is exercisable for one share of Common
Stock at $4.2625 per share, which price is equal to 110% of the closing price of
the Company's Common Stock on the issuance date of the Finder's Warrants. The
Finder's Warrants are exercisable in full or in part at any time or from time to
time through November 5, 1999. The exercise price of the Finder's Warrants is
subject to adjustment under certain
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<PAGE> 53
circumstances, including dividends, stock splits, reorganizations,
reclassifications and consolidations. The holders of the Finder's Warrants may
elect to exercise the Finder's Warrants in whole or in part by receiving shares
of Common Stock equal to the net issuance value upon surrender of the Finder's
Warrants.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement, dated February 3, 1995, by and
among the Company and the undersigned holders of Common Stock, as amended (the
"Registration Rights Agreement"), the holders of 30,542,802 shares of Common
Stock are entitled to certain rights with respect to the registration of the
Common Stock under the Securities Act. Under the terms of the Registration
Rights Agreement, the Company is obligated to register the shares of Common
Stock held by such holders under the Securities Act upon the request of the
holders and the satisfaction of certain conditions, including a proposed
aggregate offering price of at least $500,000. Furthermore, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or the account of any holder of securities of the Company, the
holders are entitled to written notice of such registration and are entitled to
include, at the Company's expense, such shares of their Common Stock in such
registration, provided, among other conditions, that the underwriters of any
such offering have the right to limit the number of shares included in such
registration. All fees, costs and expenses of such registrations (other than
underwriting discounts and commissions and legal expenses of such holders) will
be borne by the Company.
In addition, pursuant to registration rights agreements between the Company
and certain of the Selling Security Holders, such holders are entitled to
certain registration rights with respect to the Common Stock issuable upon
conversion of their shares of Series B Preferred Stock and upon exercise of
their Warrants under the Securities Act. Such registration rights will only
become available to the Selling Security Holders if the Company fails to
maintain the effectiveness of this Registration Statement as required by the
registration rights agreements. See "Prospectus Summary -- Recent Developments."
DELAWARE TAKEOVER STATUTE AND CERTAIN CHARTER PROVISIONS
The Company is subject to Section 203 of the DGCL, which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (a)
by persons who are directors and also officers and (b) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) at or subsequent to such time, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation by
the interested stockholder; or (v) the receipt by the interested stockholder of
the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested stockholder as any entity or person owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person.
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<PAGE> 54
The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called meeting and may not be effected by
written consent. In addition, the Company's Certificate of Incorporation and
Bylaws provide that only the Chairman of the Board of Directors, the Chief
Executive Officer or the Board of Directors pursuant to a resolution adopted by
at least two directors are permitted to call a special meeting of stockholders.
These and other provisions, including the creation of "blank check" preferred
stock, could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing change in the management of the Company. See
"Risk Factors -- Control by Affiliates; Anti-takeover Effects."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation contains certain provisions
permitted under Delaware Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in certain circumstances
involving certain wrongful acts, such as (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derives an improper personal
benefit. These provisions do not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief, such as an injunction or
rescission, in the event of a breach of director's fiduciary duty. These
provisions will not alter a director's liability under federal securities laws.
The Company's Certificate of Incorporation also contains provisions indemnifying
the directors and officers of the Company to the fullest extent permitted by
Delaware General Corporation Law. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors.
TRANSFER AGENT
The transfer agent for the Common Stock of the Company is Registrar and
Transfer Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. As of October 31, 1996, the Company
had approximately 104,732,381 shares of Common Stock outstanding. In February
and August 1997, approximately 16,200,000 shares and 12,500,000 shares of Common
Stock, respectively, will become eligible for sale in the public market pursuant
to Rule 144 of the Securities Act upon expiration of the two-year holding period
from the dates such shares were issued. The holders of approximately 30,542,802
shares of Common Stock are entitled to certain rights with respect to
registration of such shares under the Securities Act. JTS has registered for
sale on a Form S-8 Registration Statement under the Securities Act an aggregate
of 8,985,000 shares of Common Stock reserved for issuance under JTS' Amended and
Restated 1995 Stock Option Plan, 500,000 shares of Common Stock reserved for
issuance under JTS' 1996 Non-Employee Directors' Stock Option Plan, and 900,000
shares of Common Stock reserved for issuance pursuant to the exercise of options
granted under Atari's 1986 Stock Option Plan which were assumed by JTS in the
Merger. Under Atari's 1986 Stock Option Plan, options to purchase 225,800 shares
of Common Stock are currently issued and outstanding. See "Prospectus
Summary -- Recent Developments."
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<PAGE> 55
PLAN OF DISTRIBUTION
The Company has been advised by the Selling Security Holders and the
Registration Rights Holders that they intend to sell all or a portion of the
shares of Common Stock offered hereby from time to time on AMEX, in privately
negotiated transactions or otherwise and that sales will be made at fixed prices
that may be changed, at market prices prevailing at the times of such sales, at
prices related to such market prices or at negotiated prices. The Selling
Security Holders and the Registration Rights Holders may also make private sales
directly or through a broker or brokers, who may act as agent or as principal.
In connection with any sales, the Selling Security Holders, the Registration
Rights Holders and any brokers participating in such sales may be deemed to be
underwriters within the meaning of the Securities Act. The Company will receive
no part of the proceeds of sales made hereunder.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Security Holders or the Registration Rights Holders
(and, if they act as agent for the purchaser of such shares of Common Stock,
from such purchaser). Brokerage fees may be paid by the Selling Security Holders
or the Registration Rights Holders, which may be in excess of usual and
customary brokerage fees. Broker-dealers may agree with the Selling Security
Holders or the Registration Rights Holders to sell a specified number of shares
of Common Stock at a stipulated price, and, to the extent such a broker-dealer
is unable to do so acting as agent for the Selling Security Holders or the
Registration Rights Holders, respectively, to purchase as principal any unsold
shares at the price required to fulfill the broker-dealer's commitment to the
Selling Security Holders or the Registration Rights Holders, respectively.
Broker-dealers who acquire shares of Common Stock as principal may thereafter
resell such shares from time to time in transactions (which may involve crosses
and block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) on AMEX in
privately negotiated transactions or otherwise at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such market prices or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed as
described above.
The Company and certain of the Selling Security Holders and the
Registration Rights Holders have each agreed to indemnify the other against
certain liabilities, including certain liabilities under the Securities Act.
Any shares of Common Stock covered by this Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under that Rule
rather than pursuant to this Prospectus.
There can be no assurance that any of the Selling Security Holders or the
Registration Rights Holders will sell any or all of the shares of Common Stock
offered by them hereunder. See "Prospectus Summary -- Recent Developments."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of JTS Corporation (formerly Atari
Corporation) and its subsidiaries as of December 31, 1995 and 1994 and for each
of the three years in the period ended December 31, 1995 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and have been included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of JTS Corporation (pre merger) and The Hard Disk
Drive Division of Moduler Electronics (India) Private Limited included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, to the extent and for the periods indicated in their reports, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports. Reference is made to said reports which include an
explanatory paragraph describing uncertainties concerning the ability of the
Company to continue as a going concern discussed in Note 1 to the financial
statements.
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ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are necessarily incomplete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. All material terms of the subject
matter relating to any such statements or contracts are set forth in this
Prospectus. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and
exhibits. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the New York Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and the Chicago Regional
Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and copies of all or any part thereof may be obtained from
the Public Reference Branch of the Commission upon payment of certain fees
prescribed by the Commission.
The Company is subject to the informational requirements of the Exchange
Act of 1934, as amended, and, in accordance therewith, files annual and
quarterly reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information may be inspected and copied
at the public reference facilities maintained by the Commission at the address
set forth above, and at the regional offices maintained by the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048, and 500 West Madison
Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained at prescribed rates from the public reference facilities of the
Commission at the address noted above. The Common Stock of the Company is traded
on AMEX. Reports, proxy statements and other information concerning the Company
may be inspected at AMEX, at 86 Trinity Place, New York, NY 10006-1881.
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JTS CORPORATION AND
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JTS CORPORATION (FORMERLY 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 October 27, 1996, January 28, 1996 and
December 31, 1995................................................................... F-15
Unaudited Consolidated Statements of Operations for the Nine Months Ended October 27,
1996 and September 30, 1995 and for the Transition Period........................... F-16
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended October 27,
1996 and September 30, 1995 and for the Transition Period........................... F-17
Unaudited Notes to Consolidated Financial Statements.................................. F-18
JTS CORPORATION (PRE-MERGER)
Report of Arthur Andersen LLP......................................................... F-20
Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-21
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-22
Statements of Stockholders' Deficit from inception (February 3, 1994) to
January 28, 1996.................................................................... F-23
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-24
Notes to Financial Statements......................................................... F-25
Unaudited Condensed Consolidated Balance Sheets as of July 28, 1996 and January 28,
1996................................................................................ F-34
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended
July 28, 1996 and July 30, 1995..................................................... F-35
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 28, 1996
and July 30, 1995................................................................... F-36
Unaudited Notes to Consolidated Financial Statements.................................. F-37
THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
Report of Arthur Andersen LLP......................................................... F-38
Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-39
Statement of Revenues and Expenses for the period from February 1, 1995 to January 28,
1996................................................................................ F-40
Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-41
Notes to Financial Statements......................................................... F-42
JTS CORPORATION
Unaudited Pro Forma Condensed Combined Financial Statements........................... F-56
Unaudited Pro Forma Condensed Combined Statements of Operations....................... F-57
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.................. F-59
</TABLE>
F-1
<PAGE> 58
REPORT OF DELOITTE & TOUCHE LLP
To the Shareholders and Board of Directors
of JTS Corporation:
We have audited the accompanying consolidated balance sheets of JTS
Corporation (formerly 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 JTS 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> 59
JTS CORPORATION (FORMERLY 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> 60
JTS CORPORATION (FORMERLY 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> 61
JTS CORPORATION (FORMERLY 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> 62
JTS CORPORATION (FORMERLY 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> 63
JTS CORPORATION (FORMERLY 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> 64
JTS CORPORATION (FORMERLY 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> 65
JTS CORPORATION (FORMERLY 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> 66
JTS CORPORATION (FORMERLY 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> 67
JTS CORPORATION (FORMERLY 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> 68
JTS CORPORATION (FORMERLY 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> 69
JTS CORPORATION (FORMERLY 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> 70
JTS CORPORATION (FORMERLY 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> 71
JTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28, DECEMBER 31,
1996 1995
OCTOBER 27, ----------- ------------
1996 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $1,400, $700 and
$700 held as restricted balances at October 27,
1996, January 28, 1996, and December 31, 1995,
respectively)..................................... $ 10,594 $ 31,790 $ 28,941
Marketable securities................................ -- 16,460 21,649
Accounts receivable (less allowances for doubtful
accounts of $2,972, $4,036 and $4,221 at October
27, 1996, January 28, 1996 and December 31, 1995,
respectively)..................................... 12,854 2,784 2,468
Inventories (See Note 3)............................. 15,602 5,666 10,934
Other current assets................................. 3,370 1,895 1,134
--------- --------- ---------
Total current assets.............................. 42,420 58,595 65,126
Equipment and leasehold improvements................... 26,832 599 1,429
Real estate held for sale.............................. -- 10,443 10,468
Acquired technology (See Note 2)....................... 21,580 -- --
Goodwill (See Note 2).................................. 17,314 -- --
Other assets........................................... 472 538 546
--------- --------- ---------
TOTAL ASSETS........................................... $ 108,618 $ 70,175 $ 77,569
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit.................................. $ 9,932 $ -- $ --
Accounts payable..................................... 33,231 4,317 4,954
Other accrued liabilities............................ 8,785 5,862 5,088
Current portion of long-term obligations............. 2,242 -- --
--------- --------- ---------
TOTAL CURRENT LIABILITIES.............................. 54,191 10,178 10,042
--------- --------- ---------
LONG-TERM OBLIGATIONS.................................. 54,088 42,354 42,354
--------- --------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value -- authorized,
10,000,000 shares; none outstanding...............
Common stock, $.01 par value -- authorized,
150,000,000 shares; (outstanding: 104,689,064,
63,690,318 and
63,687,118 shares at October 27, 1996, January 28,
1996 and December 31, 1995, respectively)......... 1,047 637 637
Additional paid-in capital........................... 310,875 196,213 196,209
Notes receivable from shareholders................... (2,510) -- --
Unrealized gain (loss) on marketable securities...... -- 3,930 7,088
Accumulated translation adjustments.................. -- (694) (663)
Accumulated deficit.................................. (309,073) (182,443) (178,098)
--------- --------- ---------
Total Shareholders' Equity........................ 340 17,643 25,173
--------- --------- ---------
$ 108,618 $ 70,175 $ 77,569
========= ========= =========
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
F-15
<PAGE> 72
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 27, 1996 AND SEPTEMBER 30, 1995
AND FOR THE ONE MONTH TRANSITION PERIOD ENDED JANUARY 28, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED ONE MONTH
---------------------------- PERIOD ENDED
OCTOBER 27, SEPTEMBER 30, JANUARY 28,
1996 1995 1996
----------- ------------- -------------
<S> <C> <C> <C>
NET SALES................................................ $ 35,056 $ 11,824 $ 735
======= ======= =======
COST AND EXPENSES:
Cost of sales.......................................... 39,122 18,534 6,156
Acquired in-process research and development........... 110,012 -- --
Amortization of existing technology.................... 1,962 -- --
Research and development............................... 6,262 4,552 161
Selling, general and administrative.................... 5,705 12,587 1,089
------- ------- -------
Total operating expenses................................. 163,063 35,673 7,406
------- ------- -------
OPERATING LOSS........................................... (128,007) (23,849) (6,671)
Exchange gains (loss).................................... (604) (2) (115)
Other income (loss), net................................. 3,707 1,174 2,533
Interest income.......................................... 673 2,536 112
Interest expense......................................... (2,415) (1,740) (189)
------- ------- -------
NET INCOME (LOSS)........................................ $ (126,646) $ (21,881) $(4,330)
======= ======= =======
LOSS PER COMMON SHARE.................................... $ (1.55) $ (0.34) $ (0.07)
======= ======= =======
Number of shares used in computations.................... 81,678 63,643 63,687
======= ======= =======
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
F-16
<PAGE> 73
JTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED ONE MONTH
--------------------------- PERIOD ENDED
OCTOBER 27, SEPTEMBER 30, JANUARY 28,
1996 1995 1996
----------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) by operating activities......... $ (10,081) $ (25,683) $ (1,589)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in JTS merger.............................. 684 -- --
Sale of marketable securities............................ 16,460 46,698 4,467
Purchase of property and equipment....................... (11,125) (364) 3
Stock dividend received on investment.................... -- 82 --
Borrowing by JTS......................................... (30,000) -- --
Decrease in other assets................................. -- 279 --
Game software development costs.......................... -- (7,632) --
Sale of real estate...................................... 10,000 -- --
--------- --------- --------
Net cash provided (used) by investing activities......... (13,981) 39,063 4,470
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit................................ (467) -- --
Payment on promissory note............................... (1,965) -- --
Payment on capital leases................................ (215) -- --
Extinguishment of 5 1/4% convertible subordinated
debentures............................................ -- (53) --
Issuance of common stock................................. 1,471 46 4
Bank Borrowing........................................... 4,042 -- --
--------- --------- --------
Net cash provided (used) by financing activities......... 2,866 (7) 4
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES............................ -- 41 (36)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............ (21,196) 13,414 2,849
CASH AND EQUIVALENTS:
Beginning of period...................................... 31,790 22,592 28,941
--------- --------- --------
End of period............................................ $ 10,594 $ 36,006 $ 31,790
========= ========= ========
OTHER CASH FLOW INFORMATION FROM CONTINUING OPERATIONS:
Interest paid............................................ $ 3,102 $ 2,306 $ --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on marketable securities................. $ -- $ 5,265 $ --
Issuance of common stock and assumptions of warrants and
employee stock options in connection with the
Merger................................................ 111,093 -- --
Liabilities of $84,308 assumed net of related assets of
$45,297 acquired from the Merger...................... 39,011 -- --
Extinguishment of note receivable from JTS acquisition... 30,000 -- --
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
F-17
<PAGE> 74
JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Atari Corporation's 1995 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 January 29, 1996 and the current
quarter ended on October 27, 1996. The unaudited condensed consolidated
statement of operations for the nine months ended October 27, 1996 reflects the
results of Atari's operations from January 29, 1996 through October 27, 1996 and
of JTS' operations from July 30, 1996 (the merger date) through October 27,
1996. The financial statements for the transition period from January 1, 1996 to
January 28, 1996 are included also.
Due to this fiscal year change, the end of the fiscal 1997 quarter does not
coincide with the end of the fiscal 1996 quarter. 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.
As of October 27, 1996, JTS had a working capital deficit of $11.8 million
and net worth of $0.3 million and incurred an operating loss of $128.0 million
for the nine-month period ended October 27, 1996. In early November 1996, the
Company completed a $15 million private financing involving the sale of its
Series B Convertible Preferred Stock. JTS anticipates that with proceeds from
the sale of the preferred stock together with possible additional borrowing
arrangements and/or public offering of debt and equity securities, it will be
able to fund operations through at least the end of the next fiscal year.
NOTE 2. MERGER WITH JTS CORPORATION ("JTS")
Prior to the merger with JTS discussed above, Atari had made a $30 million
loan to JTS and upon consummation of the merger the loan was cancelled. The
merger was accounted for as a purchase of JTS by Atari and accordingly, the
operating results of JTS from July 30, 1996, the date of the merger forward was
combined with Atari's nine-month operating results. The aggregate purchase price
of $112.5 million has been allocated to the acquired assets and liabilities of
JTS. The allocation resulted in $133.5 million allocated to purchased
technology, $110 million of which represented in-process research and
development. The $110
F-18
<PAGE> 75
JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
million was expensed in the accompanying statements of operations for the nine
months ended October 27, 1996, as the technology had not yet reached
technological feasibility and does not have alternative future uses.
The purchase price was preliminarily allocated as follows (in thousands):
<TABLE>
<S> <C>
Inventory, trade accounts receivables and other current assets............ $ 24,697
Equipment and tooling..................................................... 20,600
In-process research and development....................................... 110,012
Existing technology....................................................... 23,542
Goodwill.................................................................. 17,956
Liabilities assumed....................................................... (84,308)
--------
Net assets acquired.................................................. $112,499
========
</TABLE>
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 following unaudited proforma financial information shows the results of
operations for the nine months ended October 27, 1996 and for the nine months
ended October 28, 1995 as if the JTS acquisition and JTS' acquisition of Moduler
Electronics had occurred at the beginning of each period presented. 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 proforma results for 1996
combine Atari's, JTS' and Moduler Electronics' results for the nine months ended
October 27, 1996. The proforma results for 1995 combine Atari's results for the
nine months ended September 30, 1995 with JTS' and Moduler Electronics' nine
months ended October 28, 1995. The following unaudited proforma results include
the straight-line amortization of intangibles over periods ranging from three
years to seven years.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenue........................................................ $ 68,821 $ 17,826
Gross Margin................................................... (15,044) (10,232)
Net (loss)..................................................... (167,284) (47,035)
Net (loss) per share........................................... $ (1.61) $ (0.45)
Weighted average common shares outstanding..................... 103,658 103,642
</TABLE>
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 27, JANUARY 28, DECEMBER 31,
1996 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Finished goods...................................... $ 1,926 $ 5,378 $ 9,927
Raw materials and work-in-process................... 13,676 298 1,007
------- ------ -------
Total.......................................... $15,602 $ 5,666 $ 10,934
======= ====== =======
</TABLE>
F-19
<PAGE> 76
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-20
<PAGE> 77
JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
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-21
<PAGE> 78
JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
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-22
<PAGE> 79
JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
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-23
<PAGE> 80
JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
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-24
<PAGE> 81
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-25
<PAGE> 82
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-26
<PAGE> 83
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-27
<PAGE> 84
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-28
<PAGE> 85
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-29
<PAGE> 86
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-30
<PAGE> 87
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-31
<PAGE> 88
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-32
<PAGE> 89
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-33
<PAGE> 90
JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 28,
1996
JULY 28, -----------
1996
---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalent and restricted cash............................. $ 684 $ 547
Trade accounts receivable, less allowance for doubtful accounts of
$1,011 and $730, respectively....................................... 9,660 1,286
Receivable from Moduler Electronics................................... -- 6,892
Other receivables..................................................... 681 812
Inventories........................................................... 12,761 2,093
Prepaid and other current assets...................................... 911 240
------ ------
24,697 11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net............................. 16,830 7,943
GOODWILL.............................................................. 168 --
------ ------
TOTAL....................................................... $ 41,695 $ 19,813
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit................................................... $ 10,400 $ 4,323
Notes payable to stockholders......................................... 1,965 1,000
Note payable to Atari Corporation..................................... 30,000 --
Accounts payable --
Trade............................................................... 23,385 7,226
Moduler Electronics................................................. -- 9,546
Accrued liabilities................................................... 8,409 3,501
Current portion of capitalized lease obligation and long-term debt.... 1,723 1,520
------ ------
75,882 27,116
------ ------
LONG-TERM OBLIGATIONS................................................. 8,426 3,485
------ ------
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,697
and 27,785 shares, respectively..................................... 29,697 27,785
------ ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
outstanding: 9,447 and 7,367 shares, respectively................... -- --
Additional paid-in capital............................................ 8,059 6,004
Deferred compensation................................................. (3,420) (4,320)
Notes receivable from stockholders.................................... (2,510) (623)
Accumulated deficit................................................... (74,439) (39,634)
------ ------
(72,310) (38,573)
------ ------
TOTAL....................................................... $ 41,695 $ 19,813
====== ======
</TABLE>
See accompanying notes.
F-34
<PAGE> 91
JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JULY 28, 1996 JULY 30, 1995
-------------- --------------
<S> <C> <C>
REVENUE:
Product sales................................................... $ 33,764 $ 48
Technology license revenue...................................... -- 3,829
-------------- --------------
33,764 3,877
-------------- --------------
COST AND EXPENSES:
Cost of sales................................................... 45,249 3,498
Research and development........................................ 14,091 3,887
Selling, general and administrative............................. 7,746 1,557
-------------- --------------
67,086 8,942
-------------- --------------
OPERATING LOSS (33,322) (5,065)
Interest income................................................... 153 --
Interest expense.................................................. (1,790) --
Other income (expense)............................................ 155 5
-------------- --------------
NET LOSS $(34,804) $ (5,060)
========== ==========
NET LOSS PER COMMON SHARE......................................... $ (3.69) $ (1.16)
========== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE....................... 9,434 4,360
========== ==========
See accompanying notes.
</TABLE>
F-35
<PAGE> 92
JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 28, 1996 JULY 30, 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations........................................ $ (32,356) $ (7,045)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases................................................. (2,501) (3,056)
Cash acquired from the Moduler acquisition......................... 1,634 --
-------- --------
Net cash used in investing activities.............................. (867) (3,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock.......................... -- 8,855
Proceeds from note payable -- Atari Corporation.................... 30,000 --
Other.............................................................. 3,360 1,848
-------- --------
Net cash provided by financing activities.......................... 33,360 10,703
NET INCREASE IN CASH AND EQUIVALENTS............................... 137 602
CASH AND EQUIVALENTS:
Beginning of period................................................ 547 --
-------- --------
End of period...................................................... $ 684 $ 602
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of preferred stock in connection with the Moduler
acquisition...................................................... $ 1,912 $ --
Assets of $17,296 acquired net of related liabilities of $15,449
assumed from Moduler............................................. 1,847 --
======== ========
</TABLE>
See accompanying notes.
F-36
<PAGE> 93
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 for simplicity of presentation.
NOTE 2. ACQUISITION OF MODULER ELECTRONICS
In April 1996, the Company acquired 90% of the outstanding shares of
Moduler Electronics, a disk drive manufacturer. The Company acquired the stock
in consideration for 1,911,673 shares of the Company's Series A preferred stock
and a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The acquisition was accounted for as a
purchase.
In connection with the acquisition, net assets acquired were as follows:
<TABLE>
<S> <C>
Inventories and other current assets.............................. $ 9,542
Equipment and leasehold improvements.............................. 7,754
Current liabilities assumed....................................... (12,681)
Long-term liabilities assumed..................................... (2,768)
--------
Net assets acquired..................................... $ 1,847
========
</TABLE>
The table below reflects condensed pro forma operating results of the
combined companies for the six months then ended as if the acquisition took
place at the beginning of each period.
<TABLE>
<CAPTION>
JULY 28, JULY 30,
1996 1995
-------- --------
<S> <C> <C>
Revenues............................................... $ 33,764 $ 5,532
Net loss............................................... $(34,923) $(12,392)
</TABLE>
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 28, JANUARY 28,
1996 1996
-------- -----------
<S> <C> <C>
Raw materials.......................................... $ 8,163 $ 2,093
Work in process........................................ 2,614 --
Finished goods......................................... 1,984 --
------- ------
$ 12,761 $ 2,093
======= ======
</TABLE>
NOTE 4. MERGER WITH ATARI CORPORATION
On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. On April 8, 1996, the
merger agreement was amended and restated. The merger was consummated on July
30, 1996. There was no significant transaction from July 28, 1996 through the
merger date and therefore, the balance sheet as of July 28, 1996 also reflects
the financial position of the Company as of the merger date.
F-37
<PAGE> 94
REPORT OF ARTHUR ANDERSEN LLP
To Moduler Electronics (India) Private Limited:
We have audited the accompanying statements of assets and liabilities of
The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as
of January 28, 1996 and January 31, 1995, and the related statements of revenues
and expenses and cash flows for the year ended January 28, 1996. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The financial statements referred to above have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the joint proxy statement of Atari
Corporation and JTS Corporation, formerly JT Storage, Inc.) as described in Note
1, and are not intended to be a complete presentation of the assets,
liabilities, revenues, expenses and cash flows of Moduler Electronics (India)
Private Limited.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited as of January 28, 1996
and January 31, 1995, and the related revenues, expenses and cash flows for the
year ended January 28, 1996 in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 1 to the
financial statements, the Division has suffered a loss from operations and has
an excess of liabilities over assets that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
San Jose, California
April 4, 1996
F-38
<PAGE> 95
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-39
<PAGE> 96
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-40
<PAGE> 97
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-41
<PAGE> 98
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-42
<PAGE> 99
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-43
<PAGE> 100
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-44
<PAGE> 101
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-45
<PAGE> 102
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-46
<PAGE> 103
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-47
<PAGE> 104
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-48
<PAGE> 105
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-49
<PAGE> 106
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-50
<PAGE> 107
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-51
<PAGE> 108
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-52
<PAGE> 109
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-53
<PAGE> 110
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
See notes to consolidated financial statements.
9. OTHER MATTERS:
Technical Know-how and Collaboration Agreement
Foreign currency transactions with parties outside India are subject to
controls imposed by the Reserve Bank of India ("RBI"), India's central bank.
Funds can only be remitted for payments against specific invoices for receipt of
materials or equipment and certain additional limited uses. Except for payments
below $5,000, cash in advance or deposit payments are not freely permitted to
parties outside the country. As part of the Company's disk drive EOU project
approval, the Government has allowed the Company to pay $2 million to JTS for
technical know-how fees. The Company is yet to finalize its agreement with JTS
for the payment of technical know-how fees as of the date of the statements. The
Division has not recorded any liability for possible future payment of technical
know-how fees due to the anticipated acquisition of the Company by JTS. The
Company's term loan agreements with ICICI contains certain restrictions on the
timing and period of payment of technical know-how fees.
Divestiture of Voice Coil Business
The Company transferred the VCMA business, after write-offs of
approximately $350,000 of related party balances, to Tancom Electronics
("Tancom") as of January 28, 1996. Such transfer included plant and equipment
and inventories of the VCMA business, along with certain other assets and
liabilities.
Tancom is owned and controlled by the Chairman of the Company and his
family members and is therefore considered a related party. Retained earnings
attributable to the VCMA business since April 1, 1994 less advances made to
certain related parties were also transferred to Tancom. The Division expects to
continue to purchase voice coil assemblies from Tancom, provided their prices
remain competitive. The Division has not entered into any agreement mandating
the purchase of voice coil assemblies from Tancom.
As of January 28, 1996, the total value of assets transferred to Tancom was
$558,146 and the total value of liabilities transferred totalled $28,148.
Retained earnings of the VCMA business transferred to Tancom totalled $418,493.
Accounts receivable of $428,080 and accounts payable of $236,163 relating to the
voice coil business, outstanding as of January 28, 1996 has been included in the
Statement of Assets and Liabilities of the Division due to regulatory
constraints on transfer of foreign currency receivables and payables. All of the
accounts receivables of the VCMA business are owing from Tantec Magnetics, a
related party to the Company.
10. SUBSEQUENT EVENTS:
New Long Term Loan
On February 20, 1996, the Company was sanctioned an additional foreign
currency loan of $10 million, to be reduced to the extent of participation by
other institutions, by the ICICI for the proposed expansion of its disk drive
business. The Company had received a letter of intent ("letter") from the ICICI
the terms and conditions of which have to be agreed upon by the Company within
30 days before a formal foreign currency loan agreement ("loan agreement") could
be executed by both parties. Interest on this proposed loan shall be payable at
the lending rates of the ICICI prevailing on the date of execution of the loan
agreement. Lending rates of the ICICI are US dollar LIBOR, plus a fixed percent,
if the funds are provided out of the floating rate US dollar funds, and a fixed
rate per annum, if the funds are provided out of fixed rate US dollar funds.
According to the letter, this loan will be secured by a first charge on all of
the Company's equipment, both present and future, subject to any prior charge on
specified equipment in favor of the Company's banks. The
F-54
<PAGE> 111
THE HARD DISK DRIVE DIVISION OF
MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
(CURRENCY: UNITED STATES DOLLAR)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company is also required to provide an irrevocable and unconditional guarantee
from the Chairman in favor of ICICI for due repayment of the loan along with all
interest and any other moneys. Further, for the loan to become effective, the
Company would have to raise $5,584,885 by issue of equity shares to promoters,
obtain an unsecured loan of $3,601,000 and state subsidies of $236,177 to meet a
part of the cost of the project.
On March 18, 1996, the Company entered into a loan agreement with the ICICI
for $7 million towards their participation in the total sanctioned amount of $10
million. The loan is repayable in US dollar in 12 equal quarterly installments
of $583,333 each commencing form May 20, 1998. The Company has procured an
irrevocable and unconditional guarantee from the Chairman of the Company as
required by the letter of intent. The funding of this loan by ICICI is dependent
upon the Company's compliance with the pre-disbursement conditions relating to
raising of additional equity capital and obtaining of unsecured loans and state
subsidies, mentioned above. If the Company does not comply with these
pre-disbursement conditions, the previously obtained loans from ICICI (see Note
5) could be held in default and ICICI may have the right to recall the earlier
loans, besides not funding the current loan.
F-55
<PAGE> 112
JTS CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give effect to the merger of Atari and JTS which occurred on July 30, 1996 which
was accounted for as a purchase of JTS by Atari. Although the business
combination resulted in Atari merging into the JTS legal entity, the substance
of the transaction is that Atari, a public company with substantially greater
operating history and net worth, owns approximately 62% of the combined equity.
The aggregate purchase price of $112.5 million has been allocated to the
acquired assets and liabilities of JTS. Included in the pro forma purchase price
are the approximately 40 million shares of outstanding common stock of JTS, the
value of the assumed JTS options and warrants of $11.1 million and the direct
transaction costs of $1.4 million. The common stock, options and warrants were
valued using $2.50 per share which is the representative value of Atari stock at
the time the proposed transaction was announced. The Company allocated $133.6
million to purchased technology, $110.0 million of which represented in-process
research and development. The $110.0 million was expensed upon the closing of
the Merger as the technology had not yet reached technological feasibility and
does not have alternative future uses.
The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1995 give effect to the merger as if the acquisition was
completed at the beginning of the year and combines Atari's statement of
operations as of December 31, 1995 with the pro forma combined statement of
operations for JTS and Moduler Electronics for the year ended January 28, 1996.
The unaudited pro forma condensed combined statements of operations for the nine
months ended October 27, 1996 give effect to the merger with Atari as if the
acquisition was completed at the beginning of the year and combines Atari's
statement of operations with the JTS and Moduler Electronics pro forma statement
of operations for the nine months ended October 27, 1996. Such statements do not
include the effect of the approximately $110.0 million nonrecurring charge for
in-process research and development. Such statements also exclude Atari's
extraordinary gain generated from the Atari Debentures extinguished in 1995 and
the $3.9 million gain on sale of marketable securities in the first quarter of
1996. The unaudited pro forma condensed combined balance sheet has been omitted
as the consolidated balance sheet as of October 27, 1996, included elsewhere
herein, reflects both of these transactions.
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 results of
operations that would have been reported had the Merger with Atari and the
acquisition of Moduler Electronics occurred on the dates indicated, nor do they
represent a forecast of the combined results of operations for any future
period. The unaudited pro forma condensed combined financial statements should
be read in conjunction with the historical financial statements and accompanying
notes for Atari, and JTS and Moduler Electronics.
F-56
<PAGE> 113
JTS CORPORATION
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED JTS
AND MODULER
ATARI ELECTRONICS
NINE MONTHS ENDED NINE MONTHS ENDED PRO FORMA PRO FORMA
OCTOBER 27, 1996 OCTOBER 27, 1996 ADJUSTMENTS COMBINED
----------------- ----------------------- ----------- ---------
<S> <C> <C> <C> <C>
NET REVENUES................. $ 2,972 $ 65,849 $ 68,821
-------- -------- --------
COST AND EXPENSES:
Cost of revenues and
inventory write-downs... 5,334 78,531 83,865
Research and development... 650 20,083 20,733
Sales, marketing, general
and administrative...... 2,958 9,549 1,924(b) 21,258
-------- -------- --------
5,886(a)
941(c)
Total operating
expenses.............. 8,942 108,163 125,856
OPERATING LOSS............... (5,970) (42,314) (57,035)
Gain on sale of marketable
securities.............. 3,930 -- (3,930)(f) --
Other expense, net......... (647) (141) -- (788)
Interest income............ 653 173 (452)(e) 374
Interest expense........... 1,708 2,497 (452)(e) 3,753
-------- -------- --------
NET LOSS..................... (3,742) (44,779) (61,202)
======== ======== ========
LOSS PER COMMON SHARE........ (0.59)
Number of shares used in
computation................ (d) 103,658
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-57
<PAGE> 114
JTS CORPORATION
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:
Cost of revenues....................... 44,234 33,626 77,860
Research and development............... 5,410 13,375 18,785
Sales, marketing, general and
administrative...................... 18,647 5,777 2,565(b) 36,093
-------- -------- --------
7,847(a)
1,257(c)
Total operating expenses............ 68,291 52,778 132,738
OPERATING LOSS........................... (53,665) (34,001) (99,335)
Other income (expense)................. 2,683 (365) 2,318
Interest income........................ 3,133 249 3,382
Interest expense....................... (2,309) (1,053) (3,362)
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) $ (96,997)
======== ======== ========
LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) (0.94)
Number of shares used in computation..... 63,697 4,611 (d) 103,697
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
F-58
<PAGE> 115
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF JTS CORPORATION
NOTE 1 -- PURCHASE PRICE
The purchase price of the acquisition of JTS by Atari is computed as
follows:
<TABLE>
<S> <C>
Warrants and employee stock options............................ $ 11,093,000
Common stock to be issued...................................... 100,000,000
Direct transaction costs....................................... 1,405,048
------------
TOTAL..................................................... $ 112,498,048
============
</TABLE>
The JTS common stock, options and warrants were valued using $2.50 per
share which is the representative value of Atari stock at the time the proposed
transaction was announced.
The purchase price is allocated as follows:
<TABLE>
<S> <C>
Current assets................................................. $ 24,696,763
Equipment and tooling.......................................... 20,599,675
In-process technology.......................................... 110,011,856
Existing technology............................................ 23,541,619
Liabilities assumed............................................ (84,307,614)
Goodwill....................................................... 17,955,749
------------
TOTAL..................................................... $112,498,048
============
</TABLE>
The allocation of the purchase price to the assets acquired in the Moduler
Electronics acquisition is discussed on page F-37. The pro forma amounts for JTS
and Moduler include the operations for JTS and Moduler for the periods indicated
and assume that Moduler was acquired at the beginning of the periods indicated.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the unaudited pro
forma condensed combined financial statements:
(a) -- Reflects amortization of purchased existing technology on a
straight-line basis over three years.
(b) -- Reflects amortization of goodwill on a straight-line basis over
seven years.
(c) -- Reflects depreciation of the step-up of equipment on a straight-line
basis over three years.
(d) -- 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.
(e) -- Reflects elimination of interest between Atari and JTS.
(f) -- Reflects elimination of nonrecurring gain on sale of a marketable
security.
No deferred tax adjustments is made as the deferred tax assets, consisting
primarily of net operating loss carryforwards, exceed the deferred tax
liabilities and the excess of the deferred tax assets over the deferred tax
liabilities is offset by a valuation allowance due to the uncertainty
surrounding the realization.
F-59
<PAGE> 116
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF JTS CORPORATION (CONTINUED)
NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT
The allocation of the purchase price among identifiable intangible assets
was based on an allocation of the fair value of those assets. Such allocation
assigned $110.0 million to purchased in-process research and development. The
$110.0 million was expensed in the third calendar quarter as the technology had
not yet reached technological feasibility and does not have alternative future
uses. The unaudited pro forma condensed combined statements of operations do not
include this one-time charge for purchased in-process technology as it
represents a material nonrecurring charge which resulted from the merger.
NOTE 4 -- DEFERRED COMPENSATION
Upon the closing of the merger, JTS recorded a one-time expense charge of
approximately $3.4 million of deferred compensation which was being amortized.
Such expense has not been recorded in the accompanying pro forma financial
statements.
F-60
<PAGE> 117
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- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary..................... 2
Risk Factors........................... 7
Use of Proceeds........................ 15
Dividend Policy........................ 15
Capitalization......................... 16
Price Range of Common Stock............ 17
Selected Pro Forma Financial Data...... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 25
Management............................. 36
Certain Transactions................... 43
Principal Stockholders and Selling
Security Holders..................... 46
Description of Capital Stock........... 51
Shares Eligible for Future Sale........ 54
Plan of Distribution................... 55
Legal Matters.......................... 55
Experts................................ 55
Additional Information................. 56
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------
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39,392,046 SHARES
[JTS CORPORATION LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
JANUARY 23, 1997
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