<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED AUGUST 3, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21085
---------------
JTS CORPORATION
(EXACT NAME AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0364572
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
166 BAYPOINTE PARKWAY, SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(408) 468-1800
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES /X/ NO / /
---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT
CLASS SEPTEMBER 15, 1997
- ----- ------------------
<S> <C>
Common Stock................................... 156,971,143
</TABLE>
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<PAGE> 2
JTS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTER...... 5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION......................... 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................... 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 14
SIGNATURE.......................................................... 15
</TABLE>
2
<PAGE> 3
JTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 2,
1997 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $1,400, and
$1,800 held as restricted balances at August
3, 1997 and February 2, 1997, respectively) $ 5,228 $ 24,766
Accounts receivable, less allowance for doubtful
accounts of $3,948 and $1,615 at August 3,
1997 and February 2, 1997, respectively 20,680 21,445
Inventories 15,273 17,750
Other current assets 2,418 2,341
--------- ---------
Total current assets 43,600 66,302
PROPERTY AND EQUIPMENT, net 30,029 27,674
ACQUIRED TECHNOLOGY, net 18,109 19,618
GOODWILL, net 15,796 16,673
OTHER ASSETS 698 450
--------- ---------
TOTAL $ 108,232 $ 130,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIT
CURRENT LIABILITIES:
Bank line of credits $ 21,170 $ 10,540
Borrowings under factoring arrangement 6,389 2,981
Accounts payable 65,952 33,327
Accrued liabilities 17,115 16,415
Current portion of long-term obligations 2,805 1,967
--------- ---------
Total current liabilities 113,431 65,230
--------- ---------
LONG-TERM OBLIGATIONS 52,982 53,081
--------- ---------
STOCKHOLDERS' EQUITY DEFICIT:
Convertible preferred stock, $.001 par value --
authorized, 10,000,000 shares; outstanding,
17,525 and 40,000 shares at August 3, 1997 and
February 2, 1997, respectively -- --
Common stock, $.001 par value -- authorized,
250,000,000 shares; outstanding, 133,919,078
and 104,744,765 at August 3, 1997 and February
2, 1997, respectively 134 105
Additional paid-in capital 350,360 349,961
Notes receivable from shareholders (2,475) (2,510)
Accumulated deficit (406,177) (335,150)
--------- ---------
Total stockholders' equity deficit (58,181) 12,406
--------- ---------
TOTAL $ 108,232 $ 130,717
========= =========
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
3
<PAGE> 4
JTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
AUGUST 3, JUNE 30, AUGUST 3, JUNE 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 28,412 $ 1,040 $ 101,825 $ 7,762
--------- --------- --------- ---------
Cost of sales 70,603 931 140,823 5,689
--------- --------- --------- ---------
GROSS MARGIN (DEFICIT) (42,190) 109 (38,998) 983
Amortization of acquired technology 701 -- 1,402 --
Amortization of Goodwill 492 984
Research and development expense 5,264 106 11,964 307
Selling, general and administrative expense 7,883 879 13,471 8,698
--------- --------- --------- ---------
Total operating expenses 14,340 985 27,822 9,005
OPERATING LOSS (56,530) (876) (66,819) (8,025)
Other income (loss), net 451 203 291 6,783
Interest income 32 331 323 663
Interest expense (2,328) (569) 3,994 (1,138)
--------- --------- --------- ---------
NET LOSS (58,375) (911) (70,199) (1,717)
Preferred Stock Dividends (372) -- (828) --
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (58,747) $ (911) $ (71,027) $ (1,717)
========= ========= ========= =========
LOSS PER COMMON SHARE $ (0.49) $ (0.01) $ (0.63) $ (0.03)
Weighted average number of shares used in
computations 119,622 63,839 112,731 63,770
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
4
<PAGE> 5
JTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
AUGUST 3, JUNE 30, AUGUST 3, JUNE 30,
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (17,158) $ (4,027) $ (26,652) $ (4,027)
---------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 20,908
Purchase of property and equipment (1,467) (7,171)
Proceeds from the sale of property 33
Borrowing by JTS (Prior to Merger) 25,000
Decrease in other assets 46 68
Game software development costs (40) (143)
-------- ---- -------- -----
Net cash provided (used) in investing
activities (1,467) 6 (7,171) (4,134)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and factoring
liability 9,160 10,630
Proceeds from borrowings 152 1,310
Repayment of borrowings (221) (442)
Payment on capital leases (100) (233)
Extinguishment of 5- 1/4% convertible
subordinated debentures - - (75)
Issuance of common stock 26 434 84 497
-------- ---- -------- -----
Net cash provided by financing
activities 10,458 434 14,289 422
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS - 87 - (7)
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,167) (2,553) (19,538) (7,746)
CASH AND CASH EQUIVALENTS:
Beginning of period 13,396 23,748 24,766 28,941
------- -------- ------- --------
End of period $ 5,228 $ 21,195 $ 5,228 $ 21,195
======= ======== ======= ========
OTHER CASH FLOW INFORMATION FROM CONTINUING
OPERATIONS
Interest paid 1,468 2,290 4,633 2,290
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
5
<PAGE> 6
JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS
Corporation ("JTS") and the separate existence of Atari ceased. Although the
business combination resulted in Atari merging into the JTS legal entity, the
substance of the transaction was that Atari, as a public company with
substantially greater operating history and net worth owns approximately 62% of
the equity of the merged company. Therefore, for accounting purposes, the merger
was accounted for as a purchase of JTS by Atari. See Note 2.
Subsequent to the merger, the Company changed its fiscal year from a 52/53
week fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. Accordingly, the
Company's current fiscal year commenced on February 2, 1997 and the current
quarter ended on August 3, 1997.
Due to this fiscal year change, the end of the quarter does not coincide with
the end of the quarter of the previous year. The Company did not recast the
financial information for the prior fiscal year as management believes that
financial statements for the quarters of the preceding year are nearly
comparable to the quarters in the newly adopted fiscal year and that there are
no seasonal factors and other factors that could affect the comparability of the
information or trends reflected.
NOTE 2. MERGER WITH JTS CORPORATION ("JTS")
The following unaudited pro forma information shows the results of
operations for the three and six months ended June 30, 1996 as if the JTS
acquisition had occurred at the beginning of the period at the purchase price
established on July 30, 1996. The results are not necessarily indicative of what
would have occurred had the acquisition actually been made at the beginning of
each of the respective periods presented or of future operations of the combined
companies. The pro forma results for 1996 combine Atari's results for the three
and six month period ended June 30 1996 with JTS' three and six month fiscal
period (13 and 26 weeks respectively) ended July 28, 1996. The following
unaudited pro forma results include the straight-line amortization of
intangibles over periods ranging from seven years to ten years in the first
quarter of 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ------------------------
AUGUST 3, JUNE 30, AUGUST 3, JUNE 30,
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................. 28,412 17,223 101,825 36,076
Gross Margin........................ (39,328) (6,892) (36,135) (15,960)
Net (loss).......................... (55,884) (4,735) (67,164) (21,313)
Net (loss) per share................ (0.467) (0.046) (0.605) (0.21)
Weighted average common and common
equivalent shares outstanding..... 119,622 103,839 112,731 103,770
</TABLE>
6
<PAGE> 7
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 2,
1997 1997
------- -------
<S> <C> <C>
Finished goods $ 7,400 $ 489
Raw materials and work-in-process 7,873 17,261
------- -------
Total $15,273 $17,750
======= =======
</TABLE>
NOTE 4. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued FASB No. 128, "Earnings
per share." This statement becomes effective for periods ending after December
15, 1997. The Company will adopt the statement from its fourth quarter, ending
February 1, 1998. The impact of the statement is expected to be immaterial.
7
<PAGE> 8
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On July 30, 1996, Atari Corporation ("Atari") was merged into JTS Corporation
("JTS" or the "Company") and subsequent to the merger the company changed its
fiscal year from a 52/53 week fiscal year ending on the Saturday closest to
December 31 to a 52/53 week fiscal year ending on the Sunday closest to January
31. The merger was accounted for as a purchase of JTS by Atari and as such, the
historical balance sheets and the statements of operations for the three months
in the prior year include Atari only.
The unaudited pro forma condensed combined statements of operations included
in footnote two to the financial statements give effect to the merger as if the
acquisition were completed at the beginning of the first quarter of 1996. The
following discussion and analysis is based on these pro forma condensed combined
statements for the prior year which combine the historical results of operations
of Atari for the three and six months ended June 30, 1996 with the JTS unaudited
pro forma combined results of operations for the three and six months ended July
28, 1996 respectively, and for the current year which reflects the actual
results of the merged company for the three and six month period ended August 3,
1997. The liquidity and capital resources discussion and analysis is based on
the unaudited balance sheet of the merged company as of August 3, 1997.
Throughout this discussion, "fiscal 1998" refers to the fiscal year ending
February 1, 1998.
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 "Champion" family for
desktop personal computers. Total disk drives shipped to date have primarily
consisted of 3.5-inch drives. The Company markets its disk drives to original
equipment manufacturers ("OEMs"), computer companies and second-tier systems
integrators for incorporation into their computer systems and subsystems, as
well as to distributors who resell the product through retail channels. Company
sells its products through a direct sales force operating throughout the United
States, Europe and Asia, as well as through distributors in the United States,
Europe, Latin America and Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping its disk drives to customers in the
United States and Europe. All of JTS' products are manufactured in Madras, India
by its subsidiary, JTS Technology Ltd. (formerly Modular Electronics (India)
Pvt. Ltd.), which was acquired in April 1996 and employs over 6,000 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.
Due primarily to lack of market acceptance of its video game console, Jaguar,
Atari, prior to acquiring JTS, decided to significantly downsize 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.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 3, 1997 COMPARED TO THE
JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JULY 28, 1996.
Revenues for the three months ended August 3, 1997 were $28.4 million.
Revenues from the disk drive division increased from $17.6 million for the same
quarter in the prior year to $28.1 million for the current quarter. Such
revenues increase reflects progress achieved since the Company initiated
shipment of disk drives in October 1995. During the quarter ended August 3, 1997
the Company shipped 297,000 disk drives, which primarily consisting of the
3.5-inch drives, in capacities ranging from 1 gigabyte to 3.2 gigabytes. The
revenue recognized by the Company is after any adjustment required for excess
inventory held by distributors. A non-occurring charge of $11.2 million for
price protection impacted second quarter revenues.
Sales to the top five customers for the three months ended August 3, 1997
were 49.4% of net sales and two customers had sales greater than 10% of total
net sales for the three month period. The Atari division revenues including
royalty income for the current quarter amounted to $0.4 million. Pro forma
combined revenues for the first quarter in the previous year totaled $17.2
million and included approximately $1.3 million of Atari revenues recorded for
the three month period ended June 30, 1997.
The gross margin loss for the three month period ended August 3, 1997 was
$67.7 million compared to a deficit of $6.9 million on a pro forma basis for the
second quarter in the prior year. The portion of the current quarter's gross
margin attributable to the disk drive division was $68.1 million compared to a
deficit of $7.0 million incurred by the disk drive division in the three month
period ended July 28, 1996. The decline in the gross margin resulted from the
significant decrease in market prices for all disk drive capacities in
conjunction with the write down of smaller capacity drives and the related
production materials on hand. Gross margins during the quarter were impacted by
$20.7 million of inventory write-offs. The gross margin for the Atari division
for the current quarter ended August 3, 1997 was $0.4 million compared to a
deficit of $0.1 million for the three month period ended March 31, 1996. The
improvement in the gross margin results from the sales of the Jaguar product and
inventory write offs included in the first quarter of the prior year and the
impact of royalty agreements signed during the first quarter of 1998.
Research and development expense for the three months ended August 3, 1997
was $5.3 million compared to research and development expenses on a pro forma
basis of $7.8 million for the second quarter in the prior year. The quarter over
quarter decrease for the disk drive division was $2.5 million, and was primarily
attributed to reductions in engineering staffing and higher development material
expenditures in the prior year to support the development of new hard disk drive
platforms. The Atari division experienced a quarter over quarter decline in
research and development expenses of $0.1 million due to the elimination of the
game development team. The Company expects that research and development
expenses will continue to decrease throughout fiscal 1998 in absolute dollars
and decrease as a percent of sales.
Selling, general and administrative expenses for the second quarter in the
current year were $7.9. million, including $7.6 million from the disk drive
division, compared to $4.9 million pro forma selling, general administrative
expenses incurred during the first quarter of the previous year which included
$4.0 million from the disk drive division. The $2.5 million increase incurred by
the disk drive division resulted primarily from increases in the provision for
bad and doubtful debts and increased sales and marketing programs focusing on
increasing sales through the distribution channel to the end user. Selling,
general and administrative expenses for the Atari division declined $0.9 million
as a result of staff reductions, reduced rent and other reductions in operating
costs for the division. JTS expects that selling, general and administrative
expenses will decrease marginally through the remainder of fiscal 1998 in
absolute dollars but that such expenses will decline as a percentage of
revenues.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED AUGUST 3, 1997 COMPARED TO THE
JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JULY 28, 1996.
Revenues for the six months ended August 3, 1997 were $101.8 million.
Revenues from the disk drive division increased from $33.8 million for the same
period in the prior year to $100.3 million in the first six months of fiscal
1998. This increase in revenue is primarily the result of higher shipment
volumes in the current year. For the six months ended August 3, 1997 the Company
shipped 837,000 disk drives, which primarily consisting of the 3.5-inch drives,
in capacities ranging from 1 gigabyte to 3.2 gigabytes.
9
<PAGE> 10
Sales to the top five customers for the six months ended August 3, 1997 were
49.5% of net sales and two customers had sales greater than 10% of total net
sales for the six month period. The Atari division revenues including royalty
income for the first two quarters amounted to $1.5 million. Pro forma combined
revenues for the first six months in the previous year totaled $36.0 million and
included approximately $2.3 million of Atari revenues recorded for the six month
period ended June 30, 1997.
The gross margin loss for the six month period ended August 3, 1997 was of
$36.1 million compared to a deficit of $16.0 million on a pro forma basis for
the first two quarters in the prior year. The portion of the current year to
date gross margin deficit attributable to the disk drive division was $37.6
million compared to a deficit of $11.1 million incurred by the disk drive
division in the six month period ended July 28, 1996. The decline in the gross
margin resulted from the significant decrease in market prices for all disk
drive capacities in conjunction with the write down of smaller capacity drives
and the related production materials on hand. The gross margin for the Atari
division for the six months ended August 3, 1997 was $1.5 million compared to a
deficit of $4.8 million for the six month period ended June 30, 1996. The
improvement in the gross margin results from the sales of the Jaguar product and
inventory write offs included in the first quarter of the prior year and the
impact of royalty agreements signed during the first quarter of 1998.
Research and development expense for the six months ended August 3, 1997 was
$12.0 million compared to research and development expenses on a pro forma basis
of $14.8 million for the second quarter in the prior year. The quarter over
quarter decrease for the disk drive division was $2.5 million, and was primarily
attributed to reductions in engineering staffing and higher development material
expenditures in the prior year to support the development of new hard disk drive
platforms. The Atari division experienced a quarter over quarter decline in
research and development expenses of $0.4 million due to the elimination of the
game development team. The Company expects that research and development
expenses will continue to decrease throughout fiscal 1998 in absolute dollars
and decrease as a percent of sales.
Selling, general and administrative expenses for the six months ended August
3, 1997 were $13.5 million, including $12.8 million from the disk drive
division, compared to $11.3 million pro forma selling, general administrative
expenses incurred during the first quarter of the previous year which included
$8.4 million from the disk drive division. The $4.4 million increase incurred by
the disk drive division resulted primarily from increases in the provision for
bad and doubtful debts, an increase in over staff numbers associated with the
growth of the Company and increased sales and marketing programs focusing on
increasing sales through the distribution channel to the end user. Selling,
general and administrative expenses for the Atari division declined $0.9 million
as a result of staff reductions, reduced rent and other reductions in operating
costs for the division. JTS expects that selling, general and administrative
expenses will decrease marginally through the remainder of fiscal 1998 in
absolute dollars but that such expenses will decline as a percentage of
revenues.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
At August 3, 1997, JTS had cash and cash equivalents of $5.2 million, a
working capital deficit of $66.0 million and a negative net worth of $54.3
million.
At August 3, 1997, total debt, including bank credit lines and notes payable
was $82.4 million. This included $6.0 million of working capital loans
outstanding between JTS Technology and three Indian banks at an interest rate of
13% as of August 3, 1997 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 August 3, 1997, JTS Technology's borrowings under these term loan facilities
were $12.2 million. The loans are repayable quarterly, commencing at various
points in time in fiscal 1998 and 1999 with final payments through to 2002.
Amounts borrowed under these loan agreements have been used for working capital
purposes, tooling, facilities expansion and purchases of capital equipment.
At August 3, 1997, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued in 1987 by
Atari Corporation. The debentures pay interest annually, each April, with the
next interest payment due in April 1998.
On April 16, 1997, the Company obtained a commitment from a finance company
for a revolving line of credit to refinance present debt and to obtain working
capital credit facilities of up to $30 million. The revolving line of credit
will have an initial term of three years with automatic annual renewals
thereafter unless terminated by the finance company. The Company will grant the
finance company a first and exclusive lien on all of the Company's present and
future accounts receivable, inventory, equipment and intangible assets to secure
the obligations. The agreement also contains certain financial covenants. At
August 3, 1997 the Company is in breach of some of these, though not all of
these convanents. The Company is working with the finance company to rectify
these breaches. The Company's debentures, described above, contain a
cross-default clause which provides the Company with 30 days to correct the
original default.
JTS cannot assure that any level of future revenues will be attained or that
JTS will achieve or maintain successful operations in the future. The Company's
accounts receivable are heavily concentrated with a small number of customers.
If any large customer of the Company became unable to pay its debts to the
Company, liquidity would be adversely affected. In the event the Company is
unable to increase sales or maintain production yields at acceptable levels
there would be a significant adverse impact on liquidity. This would require the
Company to either obtain additional capital from external sources or to curtail
its capital, research and development and working capital expenditures. Such
curtailment could adversely affect the Company's operations and competitive
position. 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. In addition, significant
cash resources will be required to fund purchases of inventory needed to achieve
anticipated sales levels. Failure to receive such cash resources will negatively
impact the Company's ability to manufacture its products at required levels.
The Company anticipates that it will require additional funds to finance its
growth. The precise amount and timing of the Company's funding needs cannot be
determined at this time, and will depend upon a number of factors, including the
market demand for the purchase of its products, the progress of the Company's
product development efforts and the Company's inventory and accounts receivable
management. The Company currently expects that it would seek to obtain such
funds from additional borrowing arrangements and/or 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 February 2, 1997, the Company has Federal and State net operating loss
("NOL") carryforwards of approximately $245 million and $94 million,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $2.1 million and $1.0 million, respectively, all
of which will expire on various dates through 2012.
11
<PAGE> 12
Under the Internal Revenue Code of 1986, as amended, certain changes in the
ownership or business of a corporation that has Federal NOLs or tax credit
carryforwards will result in the inability to use or the imposition of
significant restrictions on the use of such NOLs or tax credit carryforwards to
offset future income and tax liabilities of the Company. The merger between
Atari and JTS constituted a change in ownership with respect to JTS and
accordingly, restricts the use of JTS' pre-merger NOLs against post-merger
income of the Company to the maximum of $12.5 million per year, unless
previously expired. In addition, subsequent events may result in the imposition
of restrictions on the ability of the Company to utilize its NOLs and tax credit
carryforwards. There can be no assurance that the Company will be able to
utilize all or any of its NOL's or tax credit carryforwards.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant and counter claimant in a civil action for
alleged breach of contract brought in U.S. District Court for the Southern
District of New York, case number 95 Civ. 1935, by Tradewell, Inc., a New York
corporation, seeking specific performance for release of goods having value of
$1.6 million. The Company counterclaimed seeking specific performance for the
purchase of media or, alternatively, damages in the amount of $3.3 million. The
matter was settled in August 1997, and pursuant to the settlement agreement
Tradewell agreed to pay $425,000 over time to the Company.
The Company is a defendant in a civil action brought in England titled
Bullfrog Production, Ltd. ("Bullfrog"), v Atari Corporation, Case No. 584, for
which Bullfrog obtained judgment against the Company in the amount of $250,000
plus interest and costs. This amount was paid during the quarter.
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.
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 by the Company
to the Ninth Circuit Court of Appeals, and a hearing for oral arguments was held
on December 12, 1996. The case was reversed and remanded to the District Court
for further proceedings.
The Company is a defendant in a claim brought by Extron Contract
Manufacturing Co. in the Superior Court of the State of California in and for
the County of Santa Clara for work in material overages in excess of
$215,826.33.
On January 3, 1997, Dusseldorf Securities, Limited ("DSL") and Greystone
Capital, Ltd., ("GCL"), through counsel, made a letter demand of the Company for
payment of $1,250,000 allegedly due under a letter agreement between DSL and the
Company dated December 21, 1996 (the "Agreement"). DSL and GCL claim that the
Company owes $1,250,000 as fees for a January 1997 private placement of the
Company's preferred stock which was not completed through DSL or GCL. On
February 26, 1997, DSL and GCL filed suit against the Company in Los Angeles
County Superior Court, No. BC166450, entitled Dusseldorf Securities, Limited v.
JTS Corporation. The original lawsuit asserted claims for breach of contract,
breach or warranty, and misrepresentation against the Company and asserts those
and other tort claims against Michael Arnouse, an individual not affiliated with
the Company, through whom it is alleged the Company completed a private
placement of its securities. The action against Arnouse has been dismissed for
lack of jurisdiction. The original complaint has been amended to included
contract, fraud and other tort claims by Greystone Properties, Ltd. against JTS,
based on the basic facts as the original complaint. An application for writ of
attachment was filed and argued on May 9, 1997; the application was denied. The
Company has filed counterclaims for breach of contract and fraud.
The Company is a defendant in a claim brought by Zion Technology, Corp. in
the Superior Court of the State of California in and for the County of Santa
Clara, Case No. CV765828. The complaint alleges breach of a Software licensing
agreement. The plaintiff seeks damages in the amount of $297,000.
12
<PAGE> 13
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 a material adverse effect on its
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of JTS Corporation was held on July 9,
1997 in Santa Clara, California. At the meeting the following individuals were
elected to the Board of Directors of the Company and will hold office until the
1998 Annual Meeting of Stockholders. The number of affirmative and negative
votes cast were as follows:
<TABLE>
<CAPTION>
Affirmative Negative
<S> <C> <C>
Jean D. Deleage 85,381,848 1,029,982
Roger W. Johnson 85,414,458 997,372
David T. Mitchell 85,408,780 1,003,050
Lip-Bu Tan 85,412,108 999,722
Sirjang L. Tandon 85,410,380 1,001,450
Jack Tramiel 85,407,557 1,004,273
</TABLE>
Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:
<TABLE>
<CAPTION>
PROPOSAL AFFIRMATIVE NEGATIVE ABSTAIN NON-VOTE
<S> <C> <C> <C> <C>
To approve an amendment to the
Company's 1995 Stock Option Plan to
increase the aggregate number of shares
of Common Stock authorized for issuance
under such Plan by 5,000,000 shares to
14,000,000 shares 58,516,208 2,826,914 1,099,297 23,969,411
To approve the Company's 1997
Employee Stock Purchase Plan 59,273,552 2,018,895 1,130,272 23,988,861
To approve an amendment to the
Company's Amended and Restated
Certificate of Incorporation to increase
the authorized number of shares of
Common Stock from 150,000,000 to
250,000,000 83,584,452 2,364,491 462,887
To ratify selection of Arthur
Andersen LLP as independent
auditors of the Company for its
fiscal year ending February 1, 85,992,224 197,596 222,010
1998
</TABLE>
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex-27 Financial Data Schedule
(b) Reports on Form 8-K -- None
14
<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
JTS CORPORATION
-----------------------------------------
(Registrant)
Date: September 17, 1997
By /s/ JOESPH A. PREZIOSO
--------------------------------------
Joesph A. Prezioso
Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Ex-27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> MAY-05-1997
<PERIOD-END> AUG-03-1997
<CASH> 5,223
<SECURITIES> 0
<RECEIVABLES> 24,628
<ALLOWANCES> (3,948)
<INVENTORY> 15,273
<CURRENT-ASSETS> 43,600
<PP&E> 35,143
<DEPRECIATION> (5,114)
<TOTAL-ASSETS> 108,232
<CURRENT-LIABILITIES> 113,431
<BONDS> 42,354
0
0
<COMMON> 134
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 108,232
<SALES> 28,412
<TOTAL-REVENUES> 28,412
<CGS> 70,603
<TOTAL-COSTS> 70,603
<OTHER-EXPENSES> 11,673
<LOSS-PROVISION> 2,667
<INTEREST-EXPENSE> 2,328
<INCOME-PRETAX> (58,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (58,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (58,375)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> 0
</TABLE>
