1 =============================================================================== 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. SHARES OUTSTANDING AT CLASS SEPTEMBER 15, 1997 - ----- ------------------ Common Stock................................... 156,971,143 =============================================================================== 2 JTS CORPORATION TABLE OF CONTENTS PAGE ---- 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 2 3 JTS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) AUGUST 3, FEBRUARY 2, 1997 1997 --------- --------- (UNAUDITED) 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 ========= ========= (See Condensed Notes to Consolidated Financial Statements) 3 4 JTS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED -------------------------- -------------------------- AUGUST 3, JUNE 30, AUGUST 3, JUNE 30, 1997 1996 1997 1996 --------- --------- --------- --------- 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 (See Condensed Notes to Consolidated Financial Statements) 4 5 JTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ----------------------- AUGUST 3, JUNE 30, AUGUST 3, JUNE 30, 1997 1996 1997 1996 ---------- --------- ---------- --------- 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 (See Condensed Notes to Consolidated Financial Statements) 5 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. THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ------------------------ AUGUST 3, JUNE 30, AUGUST 3, JUNE 30, 1997 1996 1997 1996 -------- ------- -------- ------- 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 6 7 NOTE 3. INVENTORIES Inventories consist of the following (in thousands): AUGUST 3, FEBRUARY 2, 1997 1997 ------- ------- Finished goods $ 7,400 $ 489 Raw materials and work-in-process 7,873 17,261 ------- ------- Total $15,273 $17,750 ======= ======= 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 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 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 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 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 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 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: Affirmative Negative 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 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: PROPOSAL AFFIRMATIVE NEGATIVE ABSTAIN NON-VOTE 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 13 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 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 16 EXHIBIT INDEX EXHIBITS - -------- Ex-27 Financial Data Schedule