-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G7QTK5iRFQAm7jGOTpL7vU9wViZL3CR/0tvXzCcypK0uUpVU5FladJbl+xF9ikEn zHA5doXGF0WWXFJ0/pH75w== 0000891618-96-002945.txt : 19961203 0000891618-96-002945.hdr.sgml : 19961203 ACCESSION NUMBER: 0000891618-96-002945 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19961129 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: JTS CORP CENTRAL INDEX KEY: 0000941167 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770364572 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-17093 FILM NUMBER: 96674344 BUSINESS ADDRESS: STREET 1: 166 BAYPOINTE PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4084681800 FORMER COMPANY: FORMER CONFORMED NAME: JT STORAGE INC DATE OF NAME CHANGE: 19960508 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ JTS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3573 77-0364572 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
------------------------ 166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID T. MITCHELL CHIEF EXECUTIVE OFFICER JTS CORPORATION 166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: ANDREI M. MANOLIU, ESQ. MATTHEW W. SONSINI, ESQ. COOLEY GODWARD LLP 3000 EL CAMINO REAL, 5 PALO ALTO SQUARE, PALO ALTO, CALIFORNIA 94306, (415) 843-5000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(1)(2) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- Common Stock. . .$.001 par value 10,037,500 Shares(1) $3.4375 $34,503,906.25 $10,455.73 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Represents the estimated maximum number of shares of the Common Stock of the Registrant which may be issued to the Selling Security Holders upon conversion of the Series B Preferred Stock, upon exercise of the Warrants and upon payments of dividends on the outstanding shares of Series B Preferred Stock in Common Stock. In the event of a stock split, stock dividend or similar transaction involving the Common Stock of the Registrant, in order to prevent dilution, the number of shares registered shall be automatically increased to cover additional shares in accordance with Rule 416(a) under the Securities Act. (2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended, calculated in accordance with Rule 457(c) on the basis of the average of the high and low sales prices reported for such securities by The American Stock Exchange, Inc. on November 21, 1996. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED NOVEMBER 29, 1996 PROSPECTUS 10,037,500 SHARES [JTS CORPORATION LOGO] COMMON STOCK ------------------------ All 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." All of the shares are being offered hereby by the Selling Security 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 the Selling Security Holders in connection with the November 1996 private placement. The Selling Security 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 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 November 25, 1996 was $3.56 per share. ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------ 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 $93,000. The aggregate proceeds to the Selling Security 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 certain other persons against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Selling Security 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 Act. ------------------------ December , 1996 THE DATE OF THIS PROSPECTUS IS DECEMBER , 1996 3 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 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 Corporation ("Atari"). Since 1992, Atari has significantly downsized its operations and going forward JTS is expected to represent a significant portion of the Company's business. To obtain a low-cost manufacturing source of hard disk drives, JTS entered into a verbal agreement in March 1995 to acquire the hard disk drive division of Moduler Electronics (India) Pvt. Ltd. ("Moduler Electronics"), located in Madras, India. JTS subsequently assumed operational and management control of Moduler Electronics and, in April 1996, purchased 90% of the company's outstanding capital stock. 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 historical financial position and results of operations of Atari for 1996 included elsewhere herein are as of and for the six months ended June 30, 1996, which are based on the fiscal year of Atari prior to the Merger. 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 2 4 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. 3 5 THE OFFERING Common Stock outstanding before the Offering.......... 104,732,381 shares(1) Common Stock offered by the Selling Security Holders............................................. 10,037,500 shares(2) Common Stock to be outstanding after the Offering..... 114,732,381 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. AMEX Symbol........................................... JTS
- --------------- (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) 2,596,419 shares of Common Stock issuable upon conversion of the Company's 5 1/4% Convertible Subordinated Debentures. (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; and (iv) further adjustment to the Series B Preferred Stock conversion ratio due to anti-dilution adjustments. See "Description of Capital Stock." 4 6 JTS AND ATARI UNAUDITED SUMMARY PRO FORMA COMBINED FINANCIAL DATA The following table sets forth the Unaudited Summary Pro Forma Combined Financial Data for the periods and as of the date indicated which are derived from the Unaudited Pro Forma Combined Condensed Financial Statements (the "Pro Forma Financial Statements," included elsewhere herein) which present the pro forma combined condensed financial position and results of operations of Atari and JTS. The unaudited pro forma condensed combined balance sheet has been prepared as if the Merger, which will be accounted for as a purchase of JTS by Atari, were consummated as of June 30, 1996. The unaudited pro forma condensed combined statements of operations give effect to the Merger as if the acquisition were completed at the beginning of the periods presented. The Pro Forma Financial Statements combine the historical results of operations of Atari for the year ended December 31, 1995 with the JTS and Moduler Electronics unaudited pro forma combined results of operations for the year ended January 28, 1996 and the historical financial position and results of operations of Atari as of and for the six months ended June 30, 1996 with the historical financial position and results of operations of JTS as of and for the six months ended July 28, 1996. The Unaudited Summary Pro Forma Combined Financial Data is provided for illustrative purposes only and is not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. No pro forma adjustments have been included herein which reflect potential effects of (a) 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 Combined Financial Data should be read in conjunction with the Pro Forma Financial Statements and related notes, and the historical financial statements and related notes of Atari and JTS which are included elsewhere herein. All amounts are stated in thousands, except per share amounts.
FISCAL YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1995 JUNE 30, 1996 ----------------- ---------------- PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: Net revenues............................................ $ 33,403 $ 36,076 Cost of revenues........................................ 86,964 56,943 Selling, marketing, general and administrative expenses............................................. 26,918 11,881 Research and development expenses....................... 18,785 14,398 Operating loss(1)....................................... (99,264) (47,146) Net loss before extraordinary credit.................... (96,926) (48,667) Loss per common share before extraordinary credit....... (0.93) (0.47)
AS OF JUNE 30, 1996 ----------------- PRO FORMA COMBINED BALANCE SHEET DATA: Cash and cash equivalents............................... $ 16,879 Current assets.......................................... 45,954 Working capital (deficit)............................... (5,731) Total assets............................................ 120,304 Current liabilities..................................... 51,685 Long-term debt.......................................... 50,780 Stockholders' equity.................................... 17,839
- ------------------ (1) Excludes the effect of the approximately $110.0 million non-recurring charge for in-process research and development. 5 7 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. On a pro forma combined basis as of June 30, 1996, JTS and Atari had a working capital deficit of $5.7 million and a net worth of $17.8 million. On a pro forma combined basis, JTS and Atari had net revenues of $36.1 million and an operating loss of $47.1 million for the six months ended June 30, 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 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 6 8 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 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 7 9 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 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 8 10 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 six months of fiscal 1997, Markvision International, Peacock Systems GmbH and FutureTech International, Inc. accounted for approximately 27%, 22% and 17%, 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 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. 9 11 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 material adverse effect on JTS' business, operating results and financial condition. See "Business -- Manufacturing." 10 12 RISKS OF INTERNATIONAL SALES AND MANUFACTURING. In fiscal 1996 and the six months ended July 28, 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. 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 11 13 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 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 12 14 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 30,500,000 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. 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. 13 15 USE OF PROCEEDS The shares of Common Stock offered by the Selling Security Holders may be sold from time to time to purchasers directly by the Selling Security Holders 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 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 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 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 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 $93,000. The registration agreement provides for cross-indemnification of such Selling Security 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. 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 "Description of Capital Stock." 14 16 CAPITALIZATION The following table sets forth the cash and cash equivalents balances and the capitalization of the Company as of June 30, 1996 on a pro forma basis as if the Merger had occurred on that date.
PRO FORMA AS OF JUNE 30, 1996 -------------- (IN THOUSANDS) Short-term debt: Current maturities of long-term debt......................................... $ 1,723 Long-term debt: Total long-term debt......................................................... $ 50,780 --------- Total debt................................................................ $ 52,503 --------- 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; 103,715,516 shares issued and outstanding(1).......................................... 1,039 Additional paid-in capital................................................... 307,797 Common stock warrants........................................................ 2,110 Notes receivable, secured by common stock.................................... (2,510) Accumulated translation adjustments.......................................... (770) Accumulated deficit.......................................................... (289,827) --------- Total stockholders' equity................................................ 17,839 --------- Total capitalization................................................. $ 70,342 =========
- --------------- (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. 15 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.
HIGH LOW ----- ----- Year Ending February 2, 1997: Third Quarter.............................................. $5.56 $3.25 Fourth Quarter (through November 25, 1996)................. $3.88 $3.13
The closing price of the Common Stock on AMEX on November 25, 1996 was $3.56 per share. The Company had approximately 2,499 holders of record of its Common Stock as of October 31, 1996. 16 18 ATARI AND JTS UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA The following table sets forth the Unaudited Selected Pro Forma Combined Financial Data for the periods and as of the date indicated which are derived from the Unaudited Pro Forma Combined Condensed Financial Statements (the "Pro Forma Financial Statements") which present the pro forma combined condensed financial position and results of operations of Atari and JTS. The unaudited pro forma condensed combined balance sheet has been prepared as if the Merger, which will be accounted for as a purchase of JTS by Atari, was consummated as of June 30, 1996. The unaudited pro forma condensed combined statements of operations give effect to the Merger as if the acquisition were completed at the beginning of the periods presented. The Pro Forma Financial Statements combine the historical results of operations of Atari for the year ended December 31, 1995 with the JTS and Moduler Electronics unaudited pro forma combined results of operations for the year ended January 28, 1996 and the historical financial position and results of operations of Atari as of and for the quarter ended June 30, 1996 with the historical financial position and results of operations of JTS as of and for the quarter ended July 28, 1996. The Unaudited Selected Pro Forma Combined Financial Data is provided for illustrative purposes only and is not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. No pro forma adjustments have been included herein which reflect potential effects of (a) 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 Combined Financial Data should be read in conjunction with the Pro Forma Financial Statements and related notes, and the historical financial statements and related notes of Atari, JTS and Moduler Electronics which are included elsewhere herein. All amounts are stated in thousands, except for per share amounts.
PRO FORMA COMBINED JTS AND MODULER ATARI ELECTRONICS FISCAL YEAR FISCAL YEAR PRO FORMA ATARI JTS ENDED ENDED COMBINED SIX MONTHS SIX MONTHS PRO FORMA DECEMBER 31, JANUARY 28, DECEMBER 31, ENDED ENDED COMBINED 1995 1996 1995 JUNE 30, 1996 JULY 28, 1996 JUNE 30, 1996 ------------ ------------ ------------ ------------- ------------- ------------- STATEMENT OF OPERATIONS DATA: Net revenues................. $ 14,626 $ 18,777 $ 33,403 $ 2,312 $ 33,764 $ 36,076 Cost of revenues............. 44,234 33,626 86,964 7,142 45,249 56,943 Selling, marketing, general and administrative expenses................... 18,647 5,777 26,918 2,888 7,746 11,881 Research and development expenses................... 5,410 13,375 18,785 307 14,091 14,398 Operating loss(1)............ (53,665) (34,001) (99,264) (8,025) (33,322) (47,146) Net loss before extraordinary credit..................... (50,158) (35,170) (96,926) (1,717) (34,804) (48,667) Loss per common share before extraordinary credit....... (0.79) (7.63) (0.93) (0.03) (3.69) (0.47)
ATARI JTS PRO FORMA AS OF JUNE 30, 1996 AS OF JULY 28, 1996 COMBINED ------------------- ------------------- --------- PRO FORMA COMBINED BALANCE SHEET DATA: Cash and cash equivalents.................................. $21,195 $ 684 $ 16,879 Current assets............................................. 52,662 24,697 45,954 Working capital (deficit).................................. 46,859 (51,185) (5,731 ) Total assets............................................... 64,915 41,695 120,304 Current liabilities........................................ 5,803 75,882 51,685 Long-term debt............................................. 42,354 8,426 50,780 Stockholders' equity (deficit)............................. 16,758 (72,310) 17,839
- ------------------ (1) Pro forma excludes the effect of the approximately $110.0 million non-recurring charge for in-process research and development. 17 19 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. The merger of Atari into JTS was consummated on July 30, 1996. Accordingly, this discussion and analysis addresses the historical operating results for Atari's fiscal year ended December 31, 1995 and JTS' fiscal year ended January 28, 1996 and the subsequent six month periods for each company. The liquidity and capital resources discussion and analysis is based on the unaudited pro forma condensed combined balance sheets of Atari and JTS as of June 30, 1996. Throughout this discussion, "fiscal 1997" refers to JTS' fiscal year ending February 2, 1997. JTS AND MODULER ELECTRONICS BACKGROUND JTS was incorporated in February 1994 and remained in the development stage until October 1995, when it began shipping hard disk drives. In October 1995, JTS began shipment of Palladium disk drives to customers in the United States and Europe. Shipments of Nordic disk drives to Compaq began in June 1996. JTS does not expect volume shipments of Nordic disk drives to commence until the fourth quarter of fiscal 1997. There can be no assurance that JTS will be successful in the production of these products or that they will have market acceptance. 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 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 fiscal year 1996 report of independent public accountants of JTS' financial statements includes an explanatory paragraph describing uncertainties concerning the ability of JTS to continue as a going concern. See "Notes to JTS Financial Statements." All of JTS' products are manufactured in Madras, India by its Moduler Electronics subsidiary. The number of employees at the Moduler Electronics facility grew from 1,140 on December 22, 1995 to 4,008 as of July 28, 1996. In March 1995, JTS entered into a verbal agreement to acquire Moduler Electronics and subsequently assumed operational and management control of certain aspects of Moduler Electronics' disk drive business. In April 1996, JTS acquired 90% of Moduler Electronics and, accordingly, the Pro Forma Combined Condensed Financial Statements of JTS and Moduler Electronics are the bases for the following discussion and analysis of results of operations for the year ended January 28, 1996. JTS AND MODULER ELECTRONICS PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE YEAR ENDED JANUARY 28, 1996 COMPARED TO THE YEAR ENDED JANUARY 29, 1995 For the fiscal year ended January 28, 1996, JTS' pro forma results reflect a net loss of $35.2 million, compared to a net loss of $5.4 million for JTS in fiscal 1995. Total pro forma revenues for fiscal 1996 were $18.8 million and consisted of product sales and license revenues. Net product sales for fiscal 1996 were $13.5 million as JTS initiated product shipments to customers in October 1995. License revenues for fiscal 1996 were $5.3 million as JTS achieved certain development milestones under its Technology Transfer and License Agreement with Western Digital which was executed in February 1995. Of total product revenues, 81% were derived from European customers and 19% were derived from customers in the United States. During fiscal 1996, JTS' product sales were concentrated among several key customers with Olidata S.p.A., Connexe Peripherals, Ltd., Liuski International, Inc. and Aashima Technology B.V. accounting for 34%, 12%, 11% and 10% of total product sales, respectively. JTS had no revenues in fiscal 1995. 18 20 Pro forma gross margin for fiscal 1996 was a deficit of $14.8 million. The deficit resulted principally from costs and expenses due to low manufacturing yields and high per unit costs associated with the start-up of manufacturing operations. Cost of product sales for fiscal 1996 also included a $4.3 million provision for inventory allowances. The principal reasons for these allowances include approximately $3.6 million for obsolete and unsellable inventory, approximately $345,000 for the costs of repairing defective products and a reserve of approximately $500,000 for various other allowances. JTS anticipates incurring future inventory allowances, the level of which will depend upon a number of factors including manufacturing yields, new product introductions, maturity or obsolescence of product designs, inventory levels and competitive pressures. The hard disk drive industry has been characterized by ongoing rapid price erosion and resulting pressure on gross margins. JTS expects that hard disk drive prices will continue to decline in the future and that competitors will offer products which meet or exceed the performance capabilities of JTS products. Due to such pricing pressures, JTS' future gross margin will be substantially dependent upon its ability to control manufacturing costs, improve manufacturing yields and introduce new products on a timely basis. Research and development expenses for fiscal 1996 were $13.4 million compared to $3.7 million for fiscal 1995. The increase is primarily attributable to salaries and benefits resulting from the significant increase in staffing required for product design and the development of manufacturing processes. Specifically, during fiscal 1996, the number of employees in research and development increased by 112 to a total of 137 employees at the end of fiscal 1996. In addition, expenses for supplies, materials and other costs associated with design and pilot production of new products were approximately $5.0 million in fiscal 1996 compared to approximately $1.5 million in fiscal 1995. JTS expects that research and development expenses will continue to increase throughout fiscal 1997 in absolute dollars but that such expenses will decline as a percent of revenues. Selling, general and administrative expenses for fiscal 1996 were $5.8 million compared to $1.5 million for fiscal 1995. The major components of these expenses are salaries and benefits of administrative and marketing and sales employees, facility costs and professional fees. The growth in these expenses in fiscal 1996 was required to support the expansion of JTS' operations and the commencement of marketing and sales efforts. 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. JTS SIX MONTHS ENDED JULY 28, 1996 COMPARED TO SIX MONTHS ENDED JULY 30, 1995 Revenues for the first six months of fiscal 1997 were $33.8 million compared to $3.9 million for the first six months of fiscal 1996. Revenues for the first six months of fiscal 1997 were comprised primarily of sales of the Company's 1 gigabyte and 1.6 gigabyte Palladium 3 1/2-inch disk drives. Minimal product revenues were recorded in the first six months of fiscal 1996, as the Company initiated volume shipments of disk drives in October 1995. However, JTS earned $3.8 million of technology license revenue during the first six months of fiscal 1996 as a result of achieving certain development milestones under the Technology Transfer and License Agreement with Western Digital. JTS' management expects revenues from its 1 gigabyte drives to be nominal for the rest of the fiscal year. JTS recently began shipment of its 1.2 gigabyte Palladium drives, the sales of which are expected to increase in the near future. There can be no assurance that product sales will materialize as expected. The gross margin for the first six months of fiscal 1997 was a deficit of $11.5 million compared to a margin of $0.3 million for the first six months in fiscal 1996. The $11.8 million increase in the gross margin deficit is attributable to high unit costs associated with the ramp-up of volume production of disk drives. In order for JTS to realize positive gross margins in the future, the Company will have to control manufacturing costs, further improve manufacturing yields and successfully introduce new products on a timely basis. Research and development expenses were $14.1 million for the first six months of fiscal year 1997 compared to $3.9 million for the first six months of fiscal year 1996 as a result of a significant increase in the number of employees in research and development required to meet demand for timely product design. 19 21 Selling, general and administrative expenses for the first six months of fiscal 1997 were $7.7 million compared to $1.6 million for the first six months of fiscal 1996. The increase resulted from 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 The following discussion of liquidity and capital resources is based on the unaudited pro forma condensed combined balance sheets of Atari and JTS. Such pro forma balance sheets combine the balance sheet of Atari as of June 30, 1996 and the balance sheet of JTS as of July 28, 1996. On a pro forma combined basis, at June 30, 1996, the Company had cash and cash equivalents of $16.9 million, a working capital deficit of $5.7 million and a net worth of $17.8 million. At June 30, 1996, total debt, including bank credit lines and notes payable, was $64.9 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 becomes due and payable on November 30, 1996. JTS is presently in negotiations with Silicon Valley Bank to extend the term of the line of credit. As of July 28, 1996, all amounts available under this line were drawn down. JTS also had equipment lease financing of $4.2 million at July 28, 1996. There were $5.5 million of working capital loans outstanding between Moduler Electronics and three Indian banks at interest rates ranging from 13% to 15% as of July 28, 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 July 28, 1996, Moduler Electronics' borrowings under these term loan facilities were $6.0 million, and these two loans become due in 2000 and 2002, respectively. Amounts borrowed under these loan agreements have been used for working capital purposes, tooling, facilities expansion and purchases of capital equipment. Certain of these financings made to JTS and Moduler Electronics are contingent on their ability to comply with stringent financial covenants. In this regard, Moduler Electronics did not obtain certain debt and/or equity capital required under one of its loan agreements. JTS has informed the lender that it intends to provide such capital to Moduler Electronics during the fourth quarter of fiscal 1997. In addition, certain of Moduler Electronics' loan agreements require the lender's consent to mergers and similar transactions, which could be interpreted to require the consent of the lending institution to the acquisition of 90% of the capital stock of Moduler Electronics by JTS on April 4, 1996. Such consents were not obtained, but the lending institution has continued to transact business with Moduler Electronics. JTS believes that such matters regarding the Moduler Electronics loan agreements will not have a material adverse effect on JTS' business, operating results or financial condition. There can be no assurance that JTS will be able to renew or maintain its current financing facilities. At July 28, 1996, the Company had $42.3 million of 5 1/4% convertible subordinated debentures due April 29, 2002, which had been issued by Atari 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. Sales to Futuretech and Markvision accounted for approximately 44% of JTS' sales in the six months ended July 28, 1996. 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 future years' 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. 20 22 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 manufacturing capacity for the remainder of fiscal 1997. In fiscal 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 $10,000,000. 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 $10,000,000. Also, in early November 1996, the Company completed a $15,000,000 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 ending February 2, 1997, including planned expense increases, working capital increases and capital expenditures required to manufacture one million 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 Company's products, the availability of critical components, the Company's strategic alliances 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 a public offering of debt or 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. ATARI BACKGROUND Over the past several years, Atari has undergone significant change. In 1992 and 1993, Atari significantly downsized operations, decided to exit the computer business and focused on its video game business. As a result, revenues from computer products as a percentage of total revenues declined from 67% in 1993 to 16% in 1994 and 12% in 1995, while sales of entertainment systems and related software and peripheral products and the receipt of royalties represented the balance of revenues in each such year. These actions resulted in significant restructuring charges for closed operations and write-downs of computer and certain video game inventories in 1992 and 1993. While restructuring, Atari developed its 64-bit Jaguar interactive multimedia entertainment system, which was introduced in selected markets in the fourth quarter of 1993. For 1995 and 1994, total sales of Jaguar and related products were $9.9 million and $29.3 million, respectively, and represented 68% and 76% of Atari's net revenues, respectively. These Jaguar sales were substantially below Atari's expectations, and Atari's business and financial results were materially adversely affected in 1995 as Atari continued to invest heavily in Jaguar game development, entered into arrangements to publish certain licensed titles and reduced the retail price for its Jaguar console unit. Atari attributes the poor performance of Jaguar to a number of factors including (i) extensive delays in development of software for the Jaguar which resulted in reduced orders due to consumer concern as to when titles for the platform would be released and how many titles would ultimately be available, and (ii) the introduction of competing products by Sega and Sony in May 1995 and September 1995, respectively. By late 1995, Atari recognized that despite the significant commitment of financial resources that were devoted to the Jaguar and related products, it was unlikely that Jaguar would ever become a broadly accepted video game console or that Jaguar technology would be broadly adopted by software title developers. As a result, Atari decided to significantly downsize its Jaguar operations. This downsizing resulted in significant reductions in Atari's workforce, and significant curtailment of research and development and sales and marketing activities for Jaguar and related products. Accordingly, Atari decided to focus its efforts on selling its inventory of Jaguar and related products and to emphasize its existing licensing and development activities 21 23 related to multimedia entertainment software for various platforms. Atari presently has a substantial unsold inventory of Jaguar and related products and there can be no assurance that such inventory can be sold at current prices. Despite the introduction of four additional game titles in the first quarter of 1996, sales of Jaguar and related software have remained disappointing due to uncertainty about Atari's commitment to the Jaguar platform, increased price competition and pending competitive product introductions. As a result of continued disappointing sales, management revised estimates and wrote-down inventory by an additional $5.0 million in the first quarter of 1996. As of the end of July 1996, Atari had approximately 95,000 units of Jaguar in inventory. The Company anticipates writing down an additional $3.8 million in Jaguar inventory in the third quarter of fiscal 1997. 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. 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 22 24 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. ATARI SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Net sales for the first six months ended 1996 were $2.3 million as compared to $7.8 million for the same period of 1995. Sales of Jaguar and related products represented 52% of sales for 1996 and 72% for 1995, 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. As a result of the Jaguar price reductions and substantial curtailment of sales and marketing activities for Jaguar, Atari expects sales of Jaguar and related products to decline substantially in 1996 and thereafter. Cost of sales for the first six months of 1996 were $7.1 million. Included in cost of sales in 1996 were inventory write-downs of $5.0 million relating to Jaguar products. These write-downs resulted from management's revised estimates of sales resulting from continued disappointing sales of Jaguar. Subsequent to June 30, 1996, an additional write-down of $2.2 million was recorded based on management's revised estimate of sales. Research and development expenses for the first six months were $0.3 million as compared to $3.6 million for the 1995 period. The substantial decline is due to the elimination of the Company's internal Jaguar development team and other development staff in the fourth quarter 1995. As of June 30, 1996, the Company had capitalized $0.9 million of development costs associated with certain CD titles. Subsequent to June 30, 1996, the Company wrote down $0.7 million of development cost. Marketing and distribution expenses were $1.0 million for the first six months of 1996 as compared to $5.2 million for the 1995 period. The reduction was due to the curtailment of marketing activities for Jaguar products. General and administrative expenses for the first six months of 1996 were $2.0 million as compared to $3.4 million for 1995. The decrease in such expenses was primarily the result of staff reductions, reduced rent, and other reductions in operating costs. Other income (expense), net for the six months ended 1996 was $6.8 million as compared to $1.0 million in 1995. For 1996, the company sold the remaining portion of its holdings in Dixon PLC, a retailer in England, and realized a gain of $6.3 million. Interest income for 1996 was $0.7 million as compared to $1.8 million for 1995. The decrease in interest income is attributable to significantly lower cash balances during the first half of 1996 compared to 1995. Interest expense for the first six months of both periods was $1.2 million and is a result of Atari's 51/4% Convertible Debentures. 23 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 February 1996, the Company signed a merger agreement with Atari and Atari concurrently loaned $25 million to JTS which supported the Company's operations and continued growth. In June 1996, the principal amount of the loan was increased to $30.0 million and the loan was subsequently canceled upon closing of the Merger. To obtain a low-cost manufacturing source of hard disk drives, JTS entered into a verbal agreement in March 1995 to acquire the hard disk drive division of Moduler Electronics (India) Pvt. Ltd. ("Moduler Electronics"), located in Madras, India. JTS subsequently assumed operational and management control of Moduler Electronics and, in April 1996, purchased 90% of the company's outstanding capital stock. On July 30, 1996, the Company completed its merger with Atari, with JTS as the surviving entity. Since 1992, Atari has significantly downsized its operations and going forward JTS is expected to represent a significant portion of the Company's business. 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 24 26 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 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. 25 27 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 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 26 28 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 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 27 29 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." 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. 28 30 The manufacture of high-capacity hard disk drives is a complex process, requiring a "clean room" environment, the assembly of precision components within narrow tolerances and extensive testing to ensure reliability. JTS' manufacturing process is performed in three stages: subassembly, final assembly and final test. The subassembly group builds mechanical subassemblies and flex cables and modifies PCBAs. Printed circuit board assembly is performed by outside vendors. The final assembly group assembles all subassemblies and components into the mechanical head/disk assembly ("HDA"), writes servo information, and performs preliminary testing. To avoid contamination by dust and other particles which may impair the functioning of the disk drive, most assembly takes place under controlled "clean room" conditions. The final test group connects PCBAs to HDAs, burns-in completed drives and performs final tests. The principal components used in JTS' manufacturing process are disks, heads and PCBAs. JTS has two qualified sources for PCBAs and is in the process of qualifying 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. 29 31 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 six months of fiscal 1997, Markvision, Peacock Systems GmbH and FutureTech International, Inc. accounted for approximately 27%, 22% and 17%, respectively, of JTS' total revenue. JTS expects that sales to a relatively small number of OEMs will account for a substantial portion of its net revenues for the foreseeable future, although the companies that comprise JTS' largest customers may change from period to period. In particular, based on existing contracts with FutureTech and Compaq, JTS expects that revenues from these companies will account for a substantial percentage of JTS' revenues in the foreseeable future. The loss of, or decline in orders from, one or more of JTS' key customers would have a material adverse effect on JTS' business, operating results and financial condition. 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, 30 32 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 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. 31 33 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 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 July 28, 1996, JTS had a backlog of 344,123 units for a total of $54.8 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 32 34 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. 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:
EXPIRATION DATE LOCATION SQUARE FOOTAGE OF LEASE ----------------------------------------------- -------------- --------------- 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
- --------------- * Occupied pursuant to allotment letters provided certain conditions are satisfied. 33 35 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 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 has been appealed to the Ninth Circuit Court of Appeals, and the parties are presently awaiting the hearing for oral arguments, which is scheduled for December 12, 1996. 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. 34 36 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and officers of JTS as of the date of this Prospectus are as follows:
NAME AGE POSITION(S) - ----------------------- ---- --------------------------------------- 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
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. 35 37 MR. STEVEN L. KACZEUS joined JTS in February 1994 as Chief Technical Officer. Prior to joining JTS, he founded Kalok Corporation in 1987 and served in various technical and management positions, most recently as Chairman of the Board of Directors and Chief Technical Officer. Kalok Corporation filed a petition under the Federal bankruptcy laws in 1993. Mr. Kaczeus holds a Master of Science and Bachelor of Science 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 became a director of JTS in 1995. He has served as a Managing General Partner of Burr, Egan, Deleage & Co., a venture capital firm, since its formation in 1979. In 1976, he formed Sofinnova, Inc. (the U.S. subsidiary of Sofinnova). Mr. Deleage holds a Master of Science in Electrical Engineering from Ecole Superieure d'Electricite and a Ph.D. in Economics from the Sorbonne. In 1993, he was awarded the Legion of Honor from the French government in recognition of his career accomplishments. Mr. Deleage is also a director of DepoTech Corporation and OraVex, Inc. MR. ROGER W. JOHNSON became a director of JTS in April 1996. He served as Administrator of the United States General Services Administration 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. 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. 36 38 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. 37 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 $100,000 as of January 28, 1996 (together, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL -------------------------- COMPENSATION RESTRICTED SECURITIES --------------------------- STOCK UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($)(1) OPTIONS(#) - --------------------------------------------- ----- --------- -------- ------------ ----------- 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 -- -- --
- --------------- (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 38 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. 39 41 401(K) PLAN In January 22, 1996, JTS adopted the JTS Corporation Employee 401(k) Saving Plan ("the 401(k) Plan") covering all of JTS' employees, except collectively bargained employees and employees who are nonresident aliens with no United States source income. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, matching contributions and profit sharing contributions to the Plan by JTS on behalf of all participants. JTS has not made any such contributions to date. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by JTS to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn, and contributions by JTS, if any, are deductible by JTS. OPTION GRANTS IN 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:
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%($) 10%($) - ------------------- ------------- ------------- ----------- ---------- ------- ------- David T. Mitchell -- -- -- -- -- -- Sirjang L. Tandon -- -- -- -- -- -- Kenneth D. Wing 100,000 2.5% $0.25 11/29/2005 $15,750 $39,750 Amit Chokshi 100,000 2.5 0.25 6/7/2005 15,750 39,750 100,000 2.5 0.25 11/29/2005 15,750 39,750 Steven L. Kaczeus 242,500 6.1 0.25 2/7/2004 38,194 96,394 David B. Pearce 8,750 0.2 0.25 6/7/2005 1,378 3,478
- --------------- (1) Under the 1995 Plan, options granted to employees vest at the rate of one-eighth at the end of six months and an additional 1/48 per month until all options have become vested at the end of four years' service. In the event an option was granted to an existing employee of JTS (rather than a newly-hired employee), such option shall vest at the rate described above based on the grant date of such option. (2) Based on total grants of options to purchase 3,999,674 shares of Common Stock. (3) The potential realizable value is calculated based on the term of the option at its time of grant (10 years), and is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annual for the entire term of the option and the option is exercised and sold on the last day of its term for the appreciated stock price. No gain to the optionee is possible unless the stock price increases over the option term. 40 42 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the exercise of stock options by the Named Executive Officers during the fiscal year ended January 28, 1996 and the number and value of securities underlying unexercised options held by the Named Executive Officers as of January 28, 1996:
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL FISCAL YEAR-END(#)(1) YEAR-END($)(1) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE - ---------------------------------- --------------- -------- ---------------- -------------- 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
- --------------- (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. 41 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 $1.00 per share in exchange for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred Stock in the First Series A Financing included the following:
AMOUNT OF INDEBTEDNESS SHARES OF JTS SERIES A CANCELED PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($) - --------------------------------------- ----------------------- ---------------------- ---------- 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
- --------------- (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 42 44 Series A Financing for a purchase price of $1.00 per share in exchange for cash and cancellation of indebtedness. Purchasers of JTS Series A Preferred in the Second Series A Financing included the following:
AMOUNT OF INDEBTEDNESS SHARES OF JTS SERIES A CANCELED PURCHASER(S) PREFERRED PURCHASED (#) CASH CONSIDERATION ($) ($) - --------------------------------------- ----------------------- ---------------------- ---------- 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 --
- --------------- (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 $2.0 million in bridge loans evidenced by promissory notes (the "Bridge Notes"), from certain significant stockholders of JTS. The Bridge Notes accrued interest at a rate of 10% per annum and were canceled after principal and accrued 43 45 interest were paid in full in July 1996. Individuals and entities to whom Bridge Notes were issued included the following:
PRINCIPAL AMOUNT OF STOCKHOLDER(S) BRIDGE NOTE ($) ---------------------------------------------------- ------------------- 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
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 an 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 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. 44 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 and (iv) 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.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING --------------------------- --------------------------- NUMBER(1)(2) PERCENT(3) NUMBER(1)(2) PERCENT(3) ------------ ---------- ------------ ---------- SELLING SECURITY HOLDERS: GFL Advantage Fund Limited................ 3,806,227(4) 3.6% 0 0 Genesee Fund Limited -- Portfolio B....... 761,245(4) * 0 0 Wharton Capital Corporation............... 37,500(5) * 0 0 OFFICERS, DIRECTORS AND 5% STOCKHOLDERS: Jack Tramiel(6)........................... 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(7)...................... 7,761,673 7.4% 7,761,673 7.4% David T. Mitchell(8)...................... 4,010,196 3.8% 4,010,196 3.8% Jean D. Deleage(9)........................ 3,937,500 3.8% 3,937,500 3.7% Lip-Bu Tan(10)............................ 2,800,000 2.7% 2,800,000 2.7% Leonard Tramiel(11)....................... 5,213,946 4.9% 5,213,946 4.9% Steven L. Kaczeus(12)..................... 417,386 * 417,386 * Kenneth D. Wing(13)....................... 302,083 * 302,083 * David B. Pearce........................... 260,000 * 260,000 * Amit Chokshi(14).......................... 29,166 * 29,166 * Roger W. Johnson.......................... -- * -- * All current directors and executive officers as a group (11 persons)(15).... 32,163,098 30.7% 32,163,098 30.7%
- --------------- * 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 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 45 47 (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) 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. (7) 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. (8) Consists of 4,010,196 shares held by Mr. Mitchell and Jintamai K. Mitchell as trustees of the Mitchell 1990 Rev. Trust UTA 3390, as amended. (9) Includes 3,896,550 shares and 40,950 shares of Common Stock held by Alta V Limited Partnership and Customs House Partners, respectively. Jean D. Deleage, a director of JTS, is Vice President of Burr, Egan, Deleage & Co., which is a general partner of Alta V Management Partners, L.P., a general partner of Alta V Limited Partnership, and Customs House Partners. Mr. Deleage disclaims beneficial ownership of such shares except to the extent of his proportionate partnership interests therein. (10) Includes 700,000, 600,000, 500,000, 300,000, 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.; and Walden Technology Ventures II, L.P., respectively. Lip-Bu Tan, a director of JTS, has voting power and investment power with respect to the shares held by each of the foregoing investment funds. Mr. Tan disclaims beneficial ownership of such shares except to the extent of his proportionate partnership interests in such entities. (11) 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. (12) Includes 156,875 shares issuable pursuant to options exercisable within 60 days of October 31, 1996. (13) Includes 166,666 shares issuable pursuant to options exercisable within 60 days of October 31, 1996. (14) Includes 29,166 shares issuable pursuant to options exercisable within 60 days of October 31, 1996. (15) 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). 46 48 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 47 49 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. 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 48 50 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 30,500,000 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. 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. 49 51 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 30,500,000 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. 50 52 PLAN OF DISTRIBUTION The Company has been advised by the Selling Security 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 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 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 (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, which may be in excess of usual and customary brokerage fees. Broker-dealers may agree with the Selling Security 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, to purchase as principal any unsold shares at the price required to fulfill the broker-dealer's commitment to the Selling Security Holders. 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 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 will sell any or all of the shares of Common Stock offered by them hereunder. 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 Atari 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 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. 51 53 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. 52 54 ATARI CORPORATION, JTS CORPORATION AND MODULER ELECTRONICS (INDIA) PRIVATE LIMITED INDEX TO FINANCIAL STATEMENTS
PAGE ---- JTS CORPORATION Report of Arthur Andersen LLP......................................................... F-2 Balance Sheets as of January 28, 1996 and January 29, 1995............................ F-3 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-4 Statements of Stockholders' Deficit from inception (February 3, 1994) to January 28, 1996.................................................................... F-5 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-6 Notes to Financial Statements......................................................... F-7 Unaudited Condensed Consolidated Balance Sheets as of July 28, 1996 and January 28, 1996................................................................................ F-16 Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended July 28, 1996 and July 30, 1995..................................................... F-17 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 28, 1996 and July 30, 1995................................................................... F-18 Unaudited Notes to Consolidated Financial Statements.................................. F-19 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED Report of Arthur Andersen LLP......................................................... F-20 Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995...... F-21 Statement of Revenues and Expenses for the period from February 1, 1995 to January 28, 1996................................................................................ F-22 Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996...... F-23 Notes to Financial Statements......................................................... F-24 ATARI CORPORATION Report of Deloitte & Touche LLP....................................................... F-38 Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-39 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993................................................................................ F-40 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993...................................................................... F-41 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993................................................................................ F-42 Notes to Consolidated Financial Statements............................................ F-43 Unaudited Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995....... F-51 Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and June 30, 1995................................................................... F-52 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and June 30, 1995................................................................... F-53 Unaudited Notes to Consolidated Financial Statements.................................. F-54 ATARI CORPORATION AND JTS CORPORATION Unaudited Pro Forma Condensed Combined Financial Statements........................... F-55 Unaudited Pro Forma Condensed Combined Balance Sheets................................. F-56 Unaudited Pro Forma Condensed Combined Statements of Operations....................... F-57 Notes to Unaudited Pro Forma Condensed Combined Financial Statements.................. F-59
F-1 55 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-2 56 JTS CORPORATION BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JANUARY 28, JANUARY 29, 1996 1995 ----------- ----------- 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 ======= ======
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 57 JTS CORPORATION STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD 52 WEEKS ENDED FROM INCEPTION TO JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ----------------- 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 ======== =======
The accompanying notes to financial statements are an integral part of these statements. F-4 58 JTS CORPORATION STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE --------------- PAID-IN DEFERRED FROM ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL ------ ------ ---------- ------------ ------------ ----------- -------- 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) ===== === ====== ======= ===== ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-5 59 JTS CORPORATION STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD 52 WEEKS ENDED FROM INCEPTION TO JANUARY 28, 1996 JANUARY 29, 1995 ---------------- ----------------- 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 --
The accompanying notes to financial statements are an integral part of these statements. F-6 60 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-7 61 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):
1996 1995 ------ ---- Raw materials................................. $2,093 $309 Finished goods................................ -- 49 ----- -- ------- $2,093 $358 ======= =======
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-8 62 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):
1996 1995 -------- ------- 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................................... $ -- $ -- ========= ========
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-9 63 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-10 64 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:
YEARS ENDING ----------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 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 ========
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:
YEARS ENDING ----------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 1997........................................... $ 583 1998........................................... 578 1999........................................... 553 2000........................................... 571 2001........................................... 243 ------ $2,528 ======
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-11 65 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-12 66 JTS CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OPTION NUMBER OF PRICE OPTIONS PER SHARE --------- --------- 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 ========= ====
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: 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 ==========
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-13 67 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:
YEAR --------------------------------------------- AMOUNT -------------- (IN THOUSANDS) 2000......................................... $ 9,905 2001......................................... 9,905 2002......................................... 9,906 ------- $ 29,716 =======
- 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: United States.......................................... 19% Europe................................................. 81% --- 100% ===
Sales to major customers as a percentage of 1996 product sales are as follows: Olidata................................................. 34% Connexe................................................. 12% Liuski.................................................. 11% Aashima................................................. 10%
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-14 68 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-15 69 JTS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JANUARY 28, 1996 JULY 28, ----------- 1996 --------- (UNAUDITED) 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 ====== ======
See accompanying notes. F-16 70 JTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED --------------------------------- JULY 28, 1996 JULY 30, 1995 -------------- -------------- 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.
F-17 71 JTS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED ------------------------------- JULY 28, 1996 JULY 30, 1995 ------------- ------------- 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 -- ======== ========
See accompanying notes. F-18 72 JTS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying financial statements include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The condensed financial statements should be read in conjunction with the financial statements and notes thereto for the full year included elsewhere in this document. The Company operates with a 52/53 week fiscal calendar. Both quarters covered by this report have 13 weeks and for simplicity of presentation. 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: 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 ========
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.
JULY 28, JULY 30, 1996 1995 -------- -------- Revenues............................................... $ 33,764 $ 5,532 Net loss............................................... $(34,923) $(12,392)
NOTE 3. INVENTORIES Inventories consist of the following (in thousands):
JULY 28, JANUARY 28, 1996 1996 -------- ----------- Raw materials.......................................... $ 8,163 $ 2,093 Work in process........................................ 2,614 -- Finished goods......................................... 1,984 -- ------- ------ $ 12,761 $ 2,093 ======= ======
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 in the third quarter of 1996. In connection with the merger, Atari extended a bridge loan to the Company in the amount of $25.0 million with a stated interest rate of 8 1/2% per annum. F-19 73 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-20 74 THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED STATEMENTS OF ASSETS AND LIABILITIES (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
JANUARY 28, JANUARY 31, 1996 1995 ----------- ----------- 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 ======= ======
The accompanying notes to financial statements are an integral part of these statements. F-21 75 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) 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) ========
The accompanying notes to financial statements are an integral part of this statement. F-22 76 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) 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 ========
The accompanying notes to financial statements are an integral part of this statement. F-23 77 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-24 78 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-25 79 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-26 80 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-27 81 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):
JANUARY 28, JANUARY 31, 1996 1995 ----------- ----------- Raw materials......................................... $ 2,520 $ 1,225 Work-in-process....................................... 1,660 71 Finished goods........................................ 1,803 -- ------ ------ $ 5,983 $ 1,296 ====== ======
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):
ESTIMATED USEFUL LIFE JANUARY 28, JANUARY 31, (YEARS) 1996 1995 ----------- ----------- ----------- 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 ======= ======
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-28 82 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-29 83 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-30 84 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):
STATE BANK OF STATE BANK OF INDIAN BANK TRAVANCORE HYDERABAD --------------- ------------- ------------- PARTICULARS 1996 1995 1996 1995 1996 1995 - --------------------------------------------------- ------ ------ ------ ---- ----- ----- 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% -- -- -- --
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-31 85 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-32 86 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):
YEAR ENDING LOAN REPAYMENTS --------------------------------------------- --------------- 1997 (current portion of long term loans).... $ 90 1998......................................... 898 1999......................................... 834 2000......................................... 808 2001......................................... 202 ------ $ 2,832 ======
6. DUE TO RELATED PARTIES, NET:
1996 1995 ------ ------ (IN THOUSANDS) 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 ====== ======
See Note 8 for a description of the relationships and the nature of transactions between the Division and the above related parties. F-33 87 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):
FUTURE MINIMUM YEAR ENDING LEASE PAYMENTS --------------------------------------------------------------- -------------- 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 ===
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-34 88 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):
NAME OF THE RELATED PARTY NATURE OF TRANSACTION AMOUNT ------------------------------------- -------------------------------------- ------- 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
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-35 89 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-36 90 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-37 91 REPORT OF DELOITTE & TOUCHE LLP To the Shareholders and Board of Directors of Atari Corporation: We have audited the accompanying consolidated balance sheets of Atari Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Atari Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California March 1, 1996 (April 8, 1996 as to Note 16) F-38 92 ATARI CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ----------------------- 1995 1994 --------- --------- 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 ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY 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 ========= =========
See notes to consolidated financial statements. F-39 93 ATARI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- 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
See notes to consolidated financial statements. F-40 94 ATARI CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
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 ------ ------ ---------- ---------- ----------- ---------- ----------- -------- 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 ====== ==== ======== ==== ======= ====== ====== =========
See notes to consolidated financial statements. F-41 95 ATARI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- 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 $ -- ======== ======== ========
See notes to consolidated financial statements. F-42 96 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-43 97 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-44 98 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):
DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------------------- ---------------------------------- GROSS GROSS AMORTIZED MARKET UNREALIZED AMORTIZED MARKET UNREALIZED ISSUE COST VALUE GAINS COST VALUE GAINS - ---------------------------------------- --------- ------- ---------- --------- ------- ---------- 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 ===== ======= ======= ======
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):
1995 1994 ------- ------- Finished goods................................................... $ 9,927 $15,799 Raw materials and work-in-process................................ 1,007 2,386 ------- ------- Total....................................................... $10,934 $18,185 ======= =======
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-45 99 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):
1995 1994 ------ ------- 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 ====== =======
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):
1995 1994 ------ ------ 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 ====== ======
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-46 100 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):
1995 1994 1993 ---- ---- ----- Current: Federal............................................. $-- $-- $ -- Foreign............................................. -- -- (264) State............................................... -- -- -- -- -- ----- Income tax credit..................................... $-- $-- $(264) == == =====
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-47 101 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):
1995 1994 1993 -------- ------- -------- 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) ======== ======= ========
The components of the net deferred tax asset at December 31 consist of (in thousands):
1995 1994 -------- -------- 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................................. $ -- $ -- ======== ========
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-48 102 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Additional information with respect to the stock option plan is as follows:
OPTION PRICE RANGE PER SHARE NUMBER OF ------------------ OPTIONS LOW HIGH TOTAL --------- ------ ----- ----------- 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 =========
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):
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 -------- -------- -------- 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 ======= ======= =======
F-49 103 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 1994 1993 ------- ------- ------- 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 ======= ======= =======
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): 1996................................................ $ 670 1997................................................ 460 1998................................................ 183 1999................................................ 85 2000................................................ 74 ------ Total minimum lease payments.............. $1,472 ======
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-50 104 ATARI CORPORATION CONSOLIDATED BALANCE SHEET JUNE 30, 1996 AND DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1996 1995 --------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and equivalents (including $700 held as restricted balances at December 31, 1995)............................................... $ 21,195 $ 28,941 Marketable securities............................................... -- 21,649 Accounts receivable (less allowances for returns and doubtful accounts: June 30, 1996 $3,995; December 31, 1995 $4,221).................. 648 2,468 Inventories (See Note 2)............................................ 4,598 10,934 Subordinated secured convertible note with JT Storage, Inc. (See Note 4)..................................................... 25,000 -- Other current assets................................................ 1,221 1,134 --------- --------- Total current assets........................................ 52,662 65,126 GAME SOFTWARE DEVELOPMENT COSTS -- Net................................ 901 758 EQUIPMENT AND TOOLING -- Net.......................................... 406 671 REAL ESTATE HELD FOR SALE............................................. 10,445 10,468 OTHER ASSETS.......................................................... 501 546 --------- --------- TOTAL................................................................. $ 64,915 $ 77,569 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................... $ 2,623 $ 4,954 Accrued liabilities................................................. 3,180 5,088 --------- --------- TOTAL CURRENT LIABILITIES............................................. 5,803 10,042 --------- --------- LONG-TERM OBLIGATIONS................................................. 42,354 42,354 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value -- authorized, 10,000,000 shares; none outstanding................................................. -- -- Common stock, $.01 par value -- authorized, 100,000,000 shares; (outstanding: June 1996, 63,854,718; December 1995, 63,687,118)....................................... 639 637 Additional paid-in capital.......................................... 196,704 196,209 Unrealized gain on marketable securities............................ -- 7,088 Accumulated translation adjustments................................. (770) (663) Accumulated deficit................................................. (179,815) (178,098) --------- --------- Total shareholders' equity....................................... 16,758 25,173 --------- --------- TOTAL....................................................... $ 64,915 $ 77,569 ========= =========
See notes to consolidated financial statements. F-51 105 ATARI CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS JUNE 30, 1996 AND JUNE 30, 1995 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED ----------------------- JUNE 30, JUNE 30, 1996 1995 --------- --------- (UNAUDITED) NET REVENUE............................................................ $ 2,312 $ 7,762 COST AND EXPENSES: Cost of revenues..................................................... 7,142 5,689 Research and development............................................. 307 3,574 Marketing and distribution........................................... 976 5,157 General and administrative........................................... 1,912 3,390 ------- ------- Total operating expenses..................................... 10,337 17,810 ------- ------- OPERATING LOSS......................................................... (8,025) (10,048) Other income(expense), net............................................. 6,783 1,000 Interest income........................................................ 663 1,806 Interest expense....................................................... (1,138) (1,171) ------- ------- NET LOSS............................................................... $(1,717) $(8,413) ======= ======= LOSS PER COMMON SHARE:................................................. $ (0.03) $ (0.13) ======= ======= Number of shares used in computations................................ 63,770 63,643
See notes to consolidated financial statements. F-52 106 ATARI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED --------------------- JUNE 30, JUNE 30, 1996 1995 --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used by operations.............................................. $ (4,027) $ (20,171) -------- -------- INVESTING ACTIVITIES: Sale of marketable securities............................................ 20,908 51,916 Proceeds from property sales............................................. 33 -- Property purchases....................................................... -- (204) Borrowing by JTS......................................................... (25,000) -- Stock dividend received on investment.................................... -- 82 Decrease in other assets................................................. 68 189 Increase in software development costs................................... (143) (4,298) -------- -------- Net cash provided (used) by investing activities......................... (4,134) 47,685 -------- -------- FINANCING ACTIVITIES: Extinguishment of debt................................................... (75) (53) Issuance of common stock................................................. 497 46 -------- -------- Net cash provided (used) by financing activities......................... 422 (7) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH & EQUIVALENTS..................................................... (7) 58 -------- -------- NET DECREASE IN CASH & EQUIVALENTS....................................... (7,746) 27,565 CASH & EQUIVALENTS: Beginning of period...................................................... 28,941 22,592 -------- -------- End of period............................................................ $ 21,195 $ 50,157 ======== ======== NON CASH INVESTING ACTIVITIES: Unrealized gain on marketable securities................................. $ -- $ 2,294
F-53 107 ATARI CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. The unaudited financial statements included herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. The Company operates with a 52/53 week fiscal calendar. Both quarters covered by this report have 13 weeks and for simplicity of presentation, the calendar quarter date is used to represent the quarter end. The actual fiscal closing dates for the second quarter of 1996 and 1995 were June 30, and July 1, respectively. NOTE 2. INVENTORIES In the first quarter of 1996, the Company wrote-down inventory by $5.0 million relating to Jaguar products. These write-downs resulted from management's revised estimates of sales resulting from continued disappointing sales of Jaguar. Inventories consist of the following (in thousands):
JUNE 30, DECEMBER 31, 1996 1995 --------- ------------ Finished goods....................................... $ 4,300 $ 9,927 Raw materials and work-in-process.................... 298 1,007 ------ ------- Total...................................... $ 4,598 $ 10,934 ====== =======
NOTE 3. REPURCHASE OF 5 1/4% SUBORDINATED CONVERTIBLE DEBENTURES In the first six months of 1995, the Company repurchased a portion of its 5 1/4% subordinated convertible debentures. The Company repurchased 100 bonds at face value of $1,000 each, and recorded a credit of $47,250. NOTE 4. MERGER JT STORAGE, INC. On February 12, 1996, the Company entered into a merger agreement with JT Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8, 1996, the merger agreement was amended and restated. JTS was incorporated on February 3, 1994 to develop, market and manufacture hard disk drives. The merger was consummated in the third quarter of 1996. In connection with the merger, the Company extended a bridge loan to JTS in the amount of $25.0 million with a stated interest rate of 8 1/2% per annum. F-54 108 ATARI CORPORATION AND JTS CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the merger of Atari and JTS which occurred on July 30, 1996. The unaudited pro forma condensed combined balance sheet has been prepared as if the acquisition, which will be accounted for as a purchase of JTS by Atari, was consummated as of June 30, 1996. Such pro forma balance sheet combines Atari's balance sheet as of June 30, 1996 and the balance sheet of JTS as of July 28, 1996. 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 six months ended June 30, 1996 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 June 30, 1996 with the JTS pro forma statement of operations for the six months ended July 28, 1996. Such statements do not include the effect of the approximately $110.0 million nonrecurring charge for in-process research and development, as such charges will be included in the consolidated statement of operations in the third calendar quarter of 1996. Such statements also exclude Atari's extraordinary gain generated from the Atari Debentures extinguished in 1995 and the $6.3 million gain on sale of marketable securities in the first quarter of 1996. This method of combining historical financial statements for the preparation of the pro forma condensed combined statements is for presentation only. Actual statements of operations of the companies will be combined from the closing date of the acquisition with no retroactive restatements. The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and is not necessarily indicative of the combined financial position or combined results of operations that would have been reported had the Merger occurred on the dates indicated, nor do they represent a forecast of the combined financial position or results of operations for any future period. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements and accompanying notes for Atari, and JTS. F-55 109 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS (IN THOUSANDS)
ATARI JTS JUNE 30, JULY 28, PRO FORMA PRO FORMA 1996 1996 ADJUSTMENTS COMBINED -------- -------- ----------- --------- ASSETS CURRENT ASSETS: Cash and equivalents.......................... $ 21,195 $ 684 (5,000)(k) $ 16,879 Accounts receivable........................... 648 9,660 10,308 Other receivables............................. -- 681 681 Inventories................................... 4,598 12,761 17,359 Subordinated secured convertible note......... 25,000 -- (25,000)(k) -- Other current assets.......................... 1,221 911 (1,405)(i) 727 --------- -------- --------- Total current assets....................... 52,662 24,697 45,954 GAME SOFTWARE DEVELOPMENT COSTS......................................... 901 -- 901 EQUIPMENT AND TOOLING........................... 406 16,830 3,770(d) 21,006 REAL ESTATE HELD FOR SALE....................... 10,445 -- 10,445 INTANGIBLE & OTHER ASSETS....................... 501 -- 23,542(d) 24,043 GOODWILL........................................ -- 168 (168)(c) 17,955 17,955(d) --------- -------- --------- TOTAL...................................... $ 64,915 $ 41,695 $ 120,304 ========= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Bank borrowings............................... $ -- $ 10,400 $ 10,400 Notes payable to stockholders................. -- 1,965 1,965 Subordinated secured convertible note......... -- 30,000 (30,000)(k) -- Accounts payable.............................. 2,623 23,385 26,008 Accrued liabilities........................... 3,180 8,409 11,589 Current portion of long-term obligations...... -- 1,723 1,723 --------- -------- --------- Total current liabilities.................. 5,803 75,882 51,685 LONG-TERM OBLIGATIONS........................... 42,354 8,426 50,780 REDEEMABLE PREFERRED STOCK...................... -- 29,697 (29,697)(c) -- SHAREHOLDERS' EQUITY (DEFICIT): Common stock.................................. 639 -- 400(a) 1,039 Additional paid-in capital.................... 196,704 7,934 103,159(a,c) 307,797 Deferred compensation......................... -- (3,420) 3,420(c) -- Common stock warrants......................... -- 125 1,985(b) 2,110 Notes receivable from sale of common stock.... -- (2,510) (2,510) Accumulated translation adjustments........... (770) (770) Accumulated deficit........................... (179,815) (74,439) 74,439(c) (289,827) (110,012)(e) --------- -------- --------- Total shareholders' equity (deficit)....... 16,758 (72,310) 17,839 --------- -------- --------- TOTAL................................. $ 64,915 $ 41,695 $ 120,304 ========= ======== =========
See notes to unaudited pro forma condensed combined financial statements. F-56 110 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
ATARI JTS SIX MONTHS ENDED SIX MONTHS ENDED PRO FORMA PRO FORMA JUNE 30, 1996 JULY 28, 1996 ADJUSTMENTS COMBINED ---------------- ------------------- ----------- --------- NET REVENUES......................... $ 2,312 $ 33,764 $ 36,076 COST AND EXPENSES: Cost of revenues and inventory write- 3,924(f) downs........................... 7,142 45,249 628(h) 56,943 Research and development........... 307 14,091 14,398 Sales, marketing, general and administrative.................. 2,888 7,746 1,247(g) 11,881 -------- -------- -------- Total operating expenses........ 10,337 67,086 83,222 OPERATING LOSS....................... (8,025) (33,322) (47,146) Gain on sale of marketable securities...................... 6,347 -- (6,347)(1) -- Other income, net.................. 436 155 591 Interest income.................... 663 153 (452)(k) 364 Interest expense................... (1,138) (1,790) 452(k) (2,476) -------- -------- -------- Loss before income taxes........ (1,717) (34,804) (48,667) Income tax credit.................... -- -- -- -------- -------- -------- NET LOSS............................. $ (1,717) $ (34,804) $ (48,667) ======== ======== ======== LOSS PER COMMON SHARE................ $ (0.03) $ (3.69) $ (0.47) Number of shares used in computation........................ 63,770 9,434 (j) 103,305
See notes to unaudited pro forma condensed combined financial statements. F-57 111 ATARI AND JTS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA COMBINED JTS AND ATARI MODULER ELECTRONICS YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA DEC. 31, 1995 JAN. 28, 1996 ADJUSTMENTS COMBINED ------------- ------------------- ----------- --------- NET REVENUES............................. $ 14,626 $ 18,777 $ 33,403 -------- -------- -------- COST AND EXPENSES: 7,847(f) Cost of revenues....................... 44,234 33,626 1,257(h) 86,964 Research and development............... 5,410 13,375 18,785 Sales, marketing, general and administrative...................... 18,647 5,777 2,494(g) 26,918 -------- -------- -------- Total operating expenses............ 68,291 52,778 132,667 OPERATING LOSS........................... (53,665) (34,001) (99,264) Other income (expense)................. 2,683 (365) 2,318 Interest income........................ 3,133 249 3,382 Interest expense....................... (2,309) (1,053) (3,362) -------- -------- -------- Loss before income taxes............ (50,158) (35,170) (96,926) Income tax credit........................ -- -- -- -------- -------- -------- NET LOSS BEFORE EXTRAORDINARY CREDIT..... $ (50,158) $ (35,170) $ (96,926) ======== ======== ======== LOSS PER COMMON SHARE BEFORE EXTRAORDINARY CREDIT................... $ (0.79) $ (7.63) (0.93) Number of shares used in computation..... 63,697 4,611 (j) 103,697
See notes to unaudited pro forma condensed combined financial statements. F-58 112 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ATARI AND JTS NOTE 1 -- PURCHASE PRICE The purchase price of the acquisition of JTS is computed as follows: 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 ============
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: 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 ============
NOTE 2 -- PRO FORMA ADJUSTMENTS The following pro forma adjustments have been made to the unaudited pro forma condensed combined financial statements: (a) -- Reflects the value of all outstanding JTS common stock and the fair value of JTS options. (b) -- Reflects the fair value of JTS common stock warrants. (c) -- Reflects elimination of JTS common and preferred stock, deferred compensation, goodwill and shareholders' deficit. (d) -- Reflects allocation of purchase price to acquired equipment, existing technology and goodwill. (e) -- Reflects a one-time charge for purchased in-process technology. (f) -- Reflects amortization of purchased existing technology on a straight-line basis over three years. (g) -- Reflects amortization of goodwill on a straight-line basis over seven years. (h) -- Reflects depreciation of the step-up of equipment on a straight-line basis over three years. (i) -- Reflects allocation of direct transaction costs. (j) -- Reflects the outstanding common stock of JTS assuming the conversion of outstanding preferred stock of JTS excluding the impact of stock options and warrants which are antidilutive. (k) -- Reflects elimination of note and interest between Atari and JTS. (l) -- Reflects elimination of nonrecurring gain on sale of a marketable security. No deferred tax adjustments is made as the deferred tax assets, consisting primarily of net operating loss carryforwards, exceed the deferred tax liabilities and the excess of the deferred tax assets over the deferred tax liabilities is offset by a valuation allowance due to the uncertainty surrounding the realization. F-59 113 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ATARI AND JTS (CONTINUED) NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT The allocation of the purchase price among identifiable intangible assets was based on 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 will be 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 in accordance with the rules for the preparation of pro forma financial statements. 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 it is currently amortizing. Such expense has not been recorded in the accompanying pro forma financial statements. F-60 114 - ------------------------------------------------------ - ------------------------------------------------------ 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
PAGE ----- Prospectus Summary..................... 2 Risk Factors........................... 6 Use of Proceeds........................ 14 Dividend Policy........................ 14 Capitalization......................... 15 Price Range of Common Stock............ 16 Selected Pro Forma Financial Data...... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 18 Business............................... 24 Management............................. 35 Certain Transactions................... 42 Principal Stockholders and Selling Security Holders..................... 45 Description of Capital Stock........... 47 Shares Eligible for Future Sale........ 50 Plan of Distribution................... 51 Legal Matters.......................... 51 Experts................................ 51 Additional Information................. 52 Index to Consolidated Financial Statements........................... F-1
------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 10,037,500 SHARES [JTS CORPORATION LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- DECEMBER , 1996 - ------------------------------------------------------ - ------------------------------------------------------ 115 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by the Registrant in connection with the sale of the shares of Common Stock being registered. All the amounts shown are estimates except for the registration fee and the AMEX application fee. Registration fee................................................... $10,456 AMEX application fee............................................... 17,500 Blue sky qualification fee and expenses............................ 0 Printing and engraving expenses.................................... 30,000 Legal fees and expenses............................................ 25,000 Accounting fees and expenses....................................... 10,000 Transfer agent and registrar fees.................................. 0 Miscellaneous...................................................... 0 ------- Total.................................................... $92,956 =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under Securities Act. The Registrant's Bylaws provide that the Registrant will indemnify its directors and executive officers and may indemnify other officers to the fullest extent permitted by law. Under its Bylaws, indemnified parties are entitled to indemnification for negligence, gross negligence and otherwise to the fullest extent permitted by law. The Bylaws also require the Registrant to advance litigation expenses in the case of stockholder derivative actions or other actions, against an undertaking by the indemnified party to repay such advances if it is ultimately determined that the indemnified party is not entitled to indemnification. In addition, the Registrant's Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. This provision in the Certificate of Incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director is subject to liability for breach of the director's duty of loyalty to the Registrant for acts or omissions not in good faith or involving intentional misconduct, for knowing violation of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into indemnity agreements with each of its directors and executive officers. Such indemnity agreements contain provisions that are in some respects broader than the specific indemnification provisions contained in Delaware law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since the Company's incorporation in February 1994, the Company has sold and issued the following unregistered securities: (1) In February 1994, the Company issued 1,000 shares of Common Stock at a price of $.01 per share for an aggregate price of $10.00 to the Tandon Family Partnership, of which Sirjang L. Tandon is the General Partner. II-1 116 (2) In February 1994, the Company issued 111 shares of Common Stock to TEAC Corporation ("TEAC") in exchange for certain assets and licensing royalty rights pursuant to a corporate partnering agreement. In February 1995, the Board of Directors approved a 4350-for-1 Common Stock Split. (3) From February 1995 to August 1995, the Company issued 17,696,370 shares of Series A Preferred Stock at a price of $1.00 per share convertible into 17,696,370 shares of Common Stock to fifty eight (58) accredited investors for cash in the aggregate amount of $17,696,370. All of the Company's outstanding shares of Series A Preferred Stock converted into Common Stock on a one-for-one basis upon the closing of the Company's merger with Atari in July 1996. (4) In January 1996, the Company made loans to each of David T. Mitchell, Kenneth D. Wing, Virginia Walker and David B. Pearce, all of whom are current or former executive officers of the Company, in connection with the purchase by such individuals of 2,000,000 shares, 300,000 shares, 250,000 shares and 450,000 shares of Common Stock, respectively, at a purchase price of $0.25 per share and for an aggregate offering price of $750,000 pursuant to the terms of restricted stock purchase agreements. (5) In April 1996, the Company acquired Moduler Electronics in exchange for issuing 1,911,673 shares of Series A Preferred Stock and a warrant to purchase 750,000 shares of Common Stock at a exercise price of $0.25 per share to Lunenberg S.A., an affiliate of Sirjang L. Tandon. Such Warrant has been exercised 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 $29,000,000. (6) On October 31, 1996, the Company issued 15,000 shares of Series B Preferred Stock at a purchase price of $1,000.00 per share to Genesee Fund Limited-Portfolio B and GFL Advantage Fund Limited for an aggregate offering price of $15,000,000. The Series B Preferred Stock is convertible into units consisting of Common Stock and Investor Warrants. The Series B Preferred Stock, together with any accrued and unpaid dividends, may be converted into Common Stock at a conversion price equal to the lower of (i) 85% of the average lowest trading price for the five days 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 one Investor Warrant. The Investor Warrants are exercisable at a purchase price per share of the lower of 110% of (i) the arithmetic average of closing prices for five consecutive trading days used to compute conversion of shares of Series B Preferred Stock in respect of the issuance of the particular Investor Warrant and (iii) $3.6125, subject to adjustment. In connection with the issuance of Series B Preferred Stock to GFL Advantage Fund Limited and Genesee Fund Limited -- Portfolio B, the Company issued 37,500 Finder's Warrants to Wharton Capital Corporation in consideration for financial consulting services furnished to the Company. See "Description of Capital Stock -- Series B Preferred Stock -- Warrants." The sale and issuances of securities in the transactions described in paragraphs (1), (2), (3), (5) and (6) above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under the Securities Act. The sale and issuance of securities in the transactions described in paragraph (4) were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated under the Securities Act. Appropriate legends are affixed to the stock certificates and/or warrants issued in such transactions. II-2 117 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------------------------------------------------------------- 3.1* -- Amended and Restated Certificate of Incorporation, as amended 3.2* -- Amended and Restated Bylaws of JTS Corporation 4.1* -- Form of Specimen Common Stock Certificate of JTS Corporation 4.2* -- Registration Rights Agreement, dated February 3, 1995, as amended by and between the holders of Series A Preferred Stock and the Company 4.3 -- Certificate of Designations of Series B Preferred Stock, dated November 5, 1996 4.4 -- Registration Rights Amendment, dated November 5, 1996 by and between the holders of Series B Preferred Stock and the Company 5.1 -- Opinion of Cooley Godward LLP as to legality of securities being registered 10.1* -- Amended and Restated 1995 Stock Option Plan and forms of stock option 10.2* -- 1996 Non-Employee Directors' Plan and form of stock option agreement 10.3* -- 401(k) Plan, adopted March 15, 1996 10.4* -- Form of Indemnity Agreement 10.5* -- Employment Contract of Kenneth D. Wing, dated June 15, 1995 10.6* -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996 10.7* -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David T. Mitchell and related Promissory Note 10.8* -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T. Mitchell and related Promissory Note 10.9* -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang Lal Tandon and related Promissory Note 10.10* -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and Kenneth D. Wing and related Promissory Note 10.11* -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W. Virginia Walker and related Promissory Note 10.12* -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David Pearce and related Promissory Note 10.13* -- Form of convertible promissory note between JTS and certain principal stockholders of JTS 10.14* -- Form of promissory note between JTS and certain principal stockholders of JTS 10.15* -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and related Security Agreement dated February 13, 1996, between JTS and Atari 10.16* -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A. 10.17* -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler 10.18* -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust 10.19* -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated September 15, 1992 10.20*+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated October 11, 1994
II-3 118
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------------------------------------------------------------- 10.21*+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated March 18, 1996 10.22* -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended January 26, 1995 10.23* -- TEAC Master Agreement, dated February 4, 1994 10.24*+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995 10.25*+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on February 3, 1995 and December 5, 1995 10.26*+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq 10.27*+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and Western Digital 10.28*+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995, between JTS and Pont 10.29*+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon Valley Bank 10.30* -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987 10.31* -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985 10.32* -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated September 24, 1987 10.33* -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995, issued to Silicon Valley Bank 10.34* -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996, issued to Lunenburg S.A. 10.35 -- Agreement for Purchase and Sale of Real Property with Repurchase Option dated September 10, 1996, between JTS and Jack Tramiel 10.36 -- Series B Preferred Stock Subscription Agreement dated as of November 5, 1996 by and between the holder of Series B Preferred Stock and the Company 21.1* -- List of Subsidiaries 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Deloitte & Touche LLP 23.3 -- Consent of Counsel. Reference is made to Exhibits 5.1 24.1 -- Powers of Attorney. Reference is made to page II-6. 27.1 -- Financial Data Schedule
- --------------- * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (No. 333-06643), as amended, which became effective on July 12, 1996. + Confidential Treatment has previously been granted for portions of this Exhibit. (b) FINANCIAL STATEMENT SCHEDULES Schedule II: Valuation and Qualifying Accounts Financial Statement Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. II-4 119 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 15, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 120 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, JTS Corporation has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, County of Santa Clara, State of California, on the 29th day of November, 1996. JTS Corporation By /s/ DAVID T. MITCHELL ------------------------------------ David T. Mitchell President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David T. Mitchell and W. Virginia Walker, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments and registration statements filed pursuant to Rule 462 or otherwise) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- --------------------------- ------------------ /s/ DAVID T. MITCHELL President, Chief Executive November 29, 1996 - --------------------------------------------- Officer and Director David T. Mitchell (Principal Executive Officer) /s/ W. VIRGINIA WALKER Executive Vice President, November 29, 1996 - --------------------------------------------- Finance and Administration, W. Virginia Walker Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) /s/ SIRJANG LAL TANDON Chairman of the Board and November 29, 1996 - --------------------------------------------- Corporate Technical Sirjang Lal Tandon Strategist Director - --------------------------------------------- Jean D. Deleage /s/ LIP-BU TAN Director November 29, 1996 - --------------------------------------------- Lip-Bu Tan /s/ JACK TRAMIEL Director November 29, 1996 - --------------------------------------------- Jack Tramiel /s/ ROGER W. JOHNSON Director November 29, 1996 - --------------------------------------------- Roger W. Johnson
II-6 121 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE We have audited in accordance with generally accepted auditing standards, the financial statements of JTS Corporation included in this registration statement, and have issued our report thereon dated April 4, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index above is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California April 4, 1996 II-7 122 SCHEDULE II JTS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JANUARY 28, 1996 AND THE PERIOD FROM INCEPTION (FEBRUARY 3, 1994) TO JANUARY 29, 1995 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND BEGINNING OF PERIOD EXPENSES WRITE-OFFS OF PERIOD ---------- ---------- ---------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Period ended: January 29, 1995....................... $ -- $ 4 $ -- $ 4 January 28, 1996....................... $ 4 $ 726 $ -- $ 730 SALES RETURN RESERVE: Period ended: January 29, 1995....................... $ -- $ -- $ -- $ -- January 28, 1996....................... $ -- $1,088 $ -- $1,088 ACCRUED WARRANTY: Period ended: January 29, 1995....................... $ -- $ 328 $ -- $ 328 January 28, 1996....................... $328 $ 306 $ -- $ 634
S-1 123 INDEX TO EXHIBITS
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION OF DOCUMENT NUMBER - -------- ---------------------------------------------------------------------- ---------- 3.1* -- Amended and Restated Certificate of Incorporation, as amended......... 3.2* -- Amended and Restated Bylaws of JTS Corporation........................ 4.1* -- Form of Specimen Common Stock Certificate of JTS Corporation.......... 4.2* -- Registration Rights Agreement, dated February 3, 1995, as amended by and between the holders of Series A Preferred Stock and the Company... 4.3 -- Certificate of Designations of Series B Preferred Stock, dated November 5, 1996...................................................... 4.4 -- Registration Rights Amendment, dated November 5, 1996 by and between the holders of Series B Preferred Stock and the Company............... 5.1 -- Opinion of Cooley Godward LLP as to legality of securities being registered............................................................ 10.1* -- Amended and Restated 1995 Stock Option Plan and forms of stock option agreements............................................................ 10.2* -- 1996 Non-Employee Directors' Plan and form of stock option agreement............................................................. 10.3* -- 401(k) Plan, adopted March 15, 1996................................... 10.4* -- Form of Indemnity Agreement........................................... 10.5* -- Employment Contract of Kenneth D. Wing, dated June 15, 1995........... 10.6* -- Consulting Agreement of Roger W. Johnson, dated April 1, 1996......... 10.7* -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and David T. Mitchell and related Promissory Note................. 10.8* -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and David T. Mitchell and related Promissory Note..................... 10.9* -- Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and Sirjang Lal Tandon and related Promissory Note.................... 10.10* -- Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and Kenneth D. Wing and related Promissory Note................... 10.11* -- Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and W. Virginia Walker and related Promissory Note................ 10.12* -- Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and David Pearce and related Promissory Note.......................... 10.13* -- Form of convertible promissory note between JTS and certain principal stockholders of JTS................................................... 10.14* -- Form of promissory note between JTS and certain principal stockholders of JTS................................................................ 10.15* -- Subordinated Secured Convertible Promissory Note, dated February 13, 1996, and related Security Agreement dated February 13, 1996, between JTS and Atari......................................................... 10.16* -- Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A. ....................................................... 10.17* -- Technical Know-How License Agreement, dated June 14, 1996, between JTS and Moduler........................................................... 10.18* -- Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust.... 10.19* -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated September 15, 1992..........................
124
SEQUENTIAL EXHIBIT PAGE NUMBER DESCRIPTION OF DOCUMENT NUMBER ---------------------------------------------------------------------- 10.20*+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated October 11, 1994............................ 10.21*+ -- Loan Agreement between Moduler Electronics (India) Pvt. Ltd. as Borrower and The Industrial Credit and Investment Corporation of India Limited as Lenders, dated March 18, 1996.............................. 10.22* -- Agreed Order Compromising Controversies, dated February 4, 1994, as amended January 26, 1995.............................................. 10.23* -- TEAC Master Agreement, dated February 4, 1994......................... 10.24*+ -- TEAC License Agreement, dated February 4, 1994, as amended on February 3, 1995............................................................... 10.25*+ -- Development Agreement, dated June 16, 1994, between JTS and Compaq, as amended on February 3, 1995 and December 5, 1995...................... 10.26*+ -- Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq................................................................ 10.27*+ -- Technology Transfer and License Agreement, dated February 3, 1995, between JTS and Western Digital....................................... 10.28*+ -- Agreement between JTS and Pont Peripherals Corporation, dated January 31, 1995, between JTS and Pont........................................ 10.29*+ -- Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent Mortgage and Security Agreement, dated December 18, 1995, between JTS and Silicon Valley Bank................................... 10.30* -- Atari and Security Pacific National Bank Indenture, dated April 29, 1987.................................................................. 10.31* -- Federated Group/Security Pacific National Bank Indenture, dated April 15, 1985.............................................................. 10.32* -- First Supplemental Federated Group/Security Pacific National Bank Indenture, dated September 24, 1987................................... 10.33* -- Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18, 1995, issued to Silicon Valley Bank............................... 10.34* -- Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4, 1996, issued to Lunenburg S.A................................ 10.35 -- Agreement for Purchase and Sale of Real Property with Repurchase Option, dated September 10, 1996, between JTS and Jack Tramiel........ 10.36 -- Form of Series B Preferred Stock Subscription Agreement dated as of November 5, 1996...................................................... 21.1* -- List of Subsidiaries.................................................. 23.1 -- Consent of Arthur Andersen LLP........................................ 23.2 -- Consent of Deloitte & Touche LLP...................................... 23.3 -- Consent of Counsel. Reference is made to Exhibit 5.1.................. 24.1 -- Powers of Attorney. Reference is made to page II-6.................... 27.1 -- Financial Data Schedule...............................................
- --------------- * Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (No. 333-06643), as amended, which became effective on July 12, 1996. + Confidential Treatment has previously been granted for portions of this Exhibit. EX-4.3 2 CERTIFICATE OF DESIGNATION 1 EXHIBIT 4.3 JTS CORPORATION CERTIFICATE OF DESIGNATIONS OF SERIES B CONVERTIBLE PREFERRED STOCK (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) JTS Corporation, a Delaware corporation (the "Corporation"), in accordance with the provisions of Section 103 of the General Corporation Law of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY: That pursuant to authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, as amended, of the Corporation, the Board of Directors of the Corporation, at a meeting duly called and held on October 29, 1996, adopted a resolution providing for the creation of a series of the Corporation's Preferred Stock, $.001 par value, which series is designated "Series B Convertible Preferred Stock," which resolution is as follows: RESOLVED, that pursuant to authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, as amended, the Board of Directors does hereby provide for the creation of a series of the Preferred Stock, $.001 par value (hereafter called the " Preferred Stock"), of the Corporation, and to the extent that the voting powers and the designations, preferences and relative, participating, optional or other special rights thereof and the qualifications, limitations or restrictions of such rights have not been set forth in the Certificate of Incorporation, as amended, of the Corporation, does hereby fix the same as follows: SERIES B CONVERTIBLE PREFERRED STOCK SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series B Convertible Preferred Stock" (the "Series B Convertible Preferred Stock"), and the number of shares constituting the Series B Convertible Preferred Stock shall be 15,000, and shall not be subject to increase. SECTION 2. STATED CAPITAL. The amount to be represented -1- 2 in stated capital at all times for each share of Series B Convertible Preferred Stock shall be the sum of (i) $1,000, (ii) to the extent legally available, the accrued but unpaid dividends on such share of Series B Convertible Preferred Stock, and (iii) to be determined on at least a quarterly basis, an amount equal to the accrued and unpaid interest on dividends in arrears through the date of determination (as provided in Section 4). SECTION 3. RANK. All Series B Convertible Preferred Stock shall rank (i) senior to the Common Stock, par value $.001 per share (the "Common Stock"), of the Corporation, now or hereafter issued, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, and (ii) on a parity with any additional series of preferred stock of any class which the Board of Directors or the stockholders may from time to time authorize, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. SECTION 4. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series B Convertible Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors of the Corporation (the "Board of Directors" or the "Board") out of funds legally available for such purpose, dividends at the rate of $50.00 per annum per share, and no more, which shall be fully cumulative, shall accrue without interest (except as otherwise provided herein as to dividends in arrears) from the date of original issuance and shall be payable in cash quarterly on February 1, May 1, August 1, and November 1 of each year commencing February 1, 1997 (except that if any such date is a Saturday, Sunday, or legal holiday, then such dividend shall be payable on the next succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of record as they appear on the stock books of the Corporation on such record dates, not more than 20 nor less than 10 days preceding the payment dates for such dividends, as shall be fixed by the Board. Dividends on the Series B Convertible Preferred Stock shall be paid in cash or, subject to the limitations in Section 4(b) hereof, shares of Common Stock of the Corporation or any combination of cash and shares of Common Stock, at the option of the Corporation as hereinafter provided. The amount of the dividends payable per share of Series B Convertible Preferred Stock for each quarterly dividend period shall be computed by dividing the annual dividend amount by four. The amount of dividends payable for the initial dividend period and any period shorter than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends not paid on a payment date, whether or not such dividends have been declared, will bear interest at the rate of 12% per annum until paid. No dividends or other distributions, other than -2- 3 dividends payable solely in shares of Common Stock or other capital stock of the Corporation ranking junior as to dividends to the Series B Convertible Preferred Stock (collectively, the "Junior Dividend Stock"), shall be paid or set apart for payment on any shares of Junior Dividend Stock, and no purchase, redemption, or other acquisition shall be made by the Corporation of any shares of Junior Dividend Stock unless and until all accrued and unpaid dividends on the Series B Convertible Preferred Stock and interest on dividends in arrears at the rate specified herein shall have been paid or declared and set apart for payment. If at any time any dividend on any capital stock of the Corporation ranking senior as to dividends to the Series B Convertible Preferred Stock (the "Senior Dividend Stock") shall be in default, in whole or in part, no dividend shall be paid or declared and set apart for payment on the Series B Convertible Preferred Stock unless and until all accrued and unpaid dividends with respect to the Senior Dividend Stock, including the full dividends for the then current dividend period, shall have been paid or declared and set apart for payment, without interest. No full dividends shall be paid or declared and set apart for payment on any class or series or the Corporation's capital stock ranking, as to dividends, on a parity with the Series B Convertible Preferred Stock (the "Parity Dividend Stock") for any period unless all accrued but unpaid dividends (and interest on dividends in arrears at the rate specified herein) have been, or contemporaneously are, paid or declared and set apart for such payment on the Series B Convertible Preferred Stock. No full dividends shall be paid or declared and set apart for payment on the Series B Convertible Preferred Stock for any period unless all accrued but unpaid dividends have been, or contemporaneously are, paid or declared and set apart for payment on the Parity Dividend Stock for all dividend periods terminating on or prior to the date of payment of such full dividends. When dividends are not paid in full upon the Series B Convertible Preferred Stock and the Parity Dividend Stock, all dividends paid or declared and set apart for payment upon shares of Series B Convertible Preferred Stock (and interest on dividends in arrears at the rate specified herein) and the Parity Dividend Stock shall be paid or declared and set apart for payment pro rata, so that the amount of dividends paid or declared and set apart for payment per share on the Series B Convertible Preferred Stock and the Parity Dividend Stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of Series B Convertible Preferred Stock and the Parity Dividend Stock bear to each other. Any references to "distribution" contained in this Section 4 shall not be deemed to include any stock dividend or distributions made in connection with any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary. -3- 4 (b) If the Corporation elects in the exercise of its sole discretion to issue shares of Common Stock in payment of dividends on the Series B Convertible Preferred Stock, the Corporation shall issue and dispatch, or cause to be issued and dispatched, to each holder of such shares a certificate representing the number of whole shares of Common Stock arrived at by dividing the per share Computed Price of such shares of Common Stock into the total amount of cash dividends such holder would be entitled to receive if the aggregate dividends on the Series B Convertible Preferred Stock held by such holder which are being paid in shares of Common Stock were being paid in cash; provided, however, that if certificates representing shares of Common Stock are issued and dispatched to holders of Series B Convertible Preferred Stock subsequent to the third trading day after a dividend payment date, the percentage used to calculate the Computed Price will be reduced by one for each trading day after the third trading day following such dividend payment date to the date of dispatch of shares of Common Stock. No fractional shares of Common Stock shall be issued in payment of dividends. In lieu thereof, the Corporation may issue a number of shares of Common Stock to each holder which reflects a rounding to the nearest whole number of shares of Common Stock or may pay cash. The Corporation shall not exercise its right to issue shares of Common Stock in payment of dividends on Series B Convertible Preferred Stock if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held in the Corporation's treasury, is insufficient to pay the portion of such dividends to be paid in shares of Common Stock; (ii) the issuance or delivery of shares of Common Stock as a dividend payment would require registration with or approval of any governmental authority under any law or regulation, and such registration or approval has not been effected or obtained; (iii) the shares of Common Stock to be issued as a dividend payment have not been authorized for listing, upon official notice of issuance, on any securities exchange or market on which the Common Stock is then listed; or have not been approved for quotation if the Common Stock is traded in the over-the-counter market; (iv) the Computed Price (determined without regard to the proviso to the definition thereof) is less than the par value of one share of Common Stock; -4- 5 (v) the shares of Common Stock (A) cannot be sold or transferred without restriction by unaffiliated holders who receive such shares of Common Stock as a dividend payment or (B) are no longer listed on a national securities exchange, on the Nasdaq National Market or the Nasdaq SmallCap Market; or (vi) the issuance of shares of Common Stock in payment of dividends on Series B Convertible Preferred Stock held by any Restricted Person (as defined in Section 9(a) hereof) would result in any Restricted Person beneficially owning more than 4.9% of the Common Stock, determined as provided in the proviso to the second sentence of Section 9(a) hereof. Shares of Common Stock issued in payment of dividends on Series B Convertible Preferred Stock pursuant to this Section shall be, and for all purposes shall be deemed to be, validly issued, fully paid and nonassessable shares of Common Stock of the Corporation; the issuance and delivery thereof is hereby authorized; and the dispatch thereof will be, and for all purposes shall be deemed to be, payment in full of the cumulative dividends to which holders are entitled on the applicable dividend payment date. "Computed Price" of one share of Common Stock on any date means 100 percent of the arithmetic average of the per share Trading Price (as defined in Section 9(b)) of the Common Stock on the five trading days ending one trading day prior to the applicable dividend payment date; provided, however, that, notwithstanding the foregoing, in no event shall the Computed Price be less than $.001 per share. SECTION 5. LIQUIDATION PREFERENCE. In the event of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B Convertible Preferred Stock shall be entitled to receive out of the assets of the Corporation, whether such assets constitute stated capital or surplus of any nature, an amount per share of Series B Convertible Preferred Stock equal to the sum of (i) all dividends accrued and unpaid thereon to the date of final distribution to such holders, (ii) accrued and unpaid interest on dividends in arrears to the date of distribution, and (iii) $1,000.00 (collectively, "the Liquidation Preference"), and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's capital stock ranking junior as to liquidation rights to the Series B Convertible Preferred Stock (collectively, the "Junior Liquidation Stock"); provided, however, that such rights shall accrue to the holders of Series B Convertible Preferred Stock only in the event that the Corporation's payments with respect to the liquidation preference -5- 6 of the holders of capital stock of the Corporation ranking senior as to liquidation rights to the Series B Convertible Preferred Stock (the "Senior Liquidation Stock") are fully met. After the liquidation preferences of the Senior Liquidation Stock are fully met, the entire assets of the Corporation available for distribution shall be distributed ratably among the holders of the Series B Convertible Preferred Stock and any other class or series of the Corporation's capital stock having parity as to liquidation rights with the Series B Convertible Preferred Stock (the "Parity Liquidation Stock" ) in proportion to the respective preferential amounts to which each is entitled (but only to the extent of such preferential amounts). After payment in full of the liquidation price of the shares of the Series B Convertible Preferred Stock and the Parity Liquidation Stock, the holders of such shares shall not be entitled to any further participation in any distribution of assets by the Corporation. Neither a consolidation or merger of the Corporation with another corporation nor a sale or transfer of all or part of the Corporation's assets for cash, securities, or other property in and of itself will be considered a liquidation, dissolution, or winding up of the Corporation. SECTION 6. MANDATORY REDEMPTION. (a) Notwithstanding any other provision herein, unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the American Stock Exchange, Inc. (the "AMEX"), the Corporation shall not be required to issue upon conversion of shares of Series B Convertible Preferred Stock more than 20,946,476 shares (such amount to be subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date of filing this Certificate of Designations with the Secretary of State of the State of Delaware) of Common Stock (the "Maximum Share Amount"), less the aggregate number of shares of Common Stock issued by the Corporation pursuant to Section 4 as dividends on the Series B Convertible Preferred Stock, upon conversion of shares of Series B Convertible Preferred Stock pursuant to Section 9. The Maximum Share Amount shall be allocated among the shares of Series B Convertible Preferred Stock at the time of initial issuance thereof pro rata based on the total number of authorized shares of Series B Convertible Preferred Stock provided in Section 1. Each certificate for shares of Series B Convertible Preferred Stock initially issued shall bear a notation as to the number of shares constituting the portion of the Maximum Share Amount allocated to the shares of Series B Convertible Preferred Stock represented by such certificate for purposes of conversion thereof. The Corporation shall maintain records which show the number of shares of Common Stock issued by the Corporation pursuant to Section 4 as dividends on the shares of Series B Convertible Preferred Stock represented by each certificate, which -6- 7 records shall be controlling in the absence of manifest error. Upon surrender of any certificate for shares of Series B Convertible Preferred Stock for transfer or re-registration thereof (or, at the option of the holder, for conversion pursuant to Section 9(a) of less than all of the shares of Series B Convertible Preferred Stock represented thereby), the Corporation shall make a notation on the new certificate issued upon such transfer or re-registration or evidencing such unconverted shares, as the case may be, as to the remaining number of shares of Common Stock from the Maximum Share Amount remaining available for conversion of the shares of Series B Convertible Preferred Stock evidenced by such new certificate (including, without limitation, by taking into account the number of shares of Common Stock issued by the Corporation pursuant to Section 4 as a dividend on the shares of Series B Convertible Preferred Stock represented by the certificate so surrendered and not previously reflected on the certificate so surrendered, as shown on the records maintained by the Corporation). If any certificate for shares of Series B Convertible Preferred Stock is surrendered for split-up into two or more certificates representing an aggregate number of shares of Series B Convertible Preferred Stock equal to the number of shares of Series B Convertible Preferred Stock represented by the certificate so surrendered (as reduced by any contemporaneous conversion of shares of Series B Convertible Preferred Stock represented by the certificate so surrendered), each certificate issued on such split-up shall bear a notation of the portion of the Maximum Share Amount allocated thereto determined by pro rata allocation from among the remaining portion of the Maximum Share Amount allocated to the certificate so surrendered. If any shares of Series B Convertible Preferred Stock represented by a single certificate are converted in full pursuant to Section 9, all of the portion of the Maximum Share Amount allocated to such shares of Series B Convertible Preferred Stock which remains unissued after such conversion shall be re-allocated pro rata to the outstanding shares of Series B Convertible Preferred Stock held of record by the holder of record at the close of business on the date of such conversion of the shares of Series B Convertible Preferred Stock so converted, and if there shall be no other shares of Series B Convertible Preferred Stock held of record by such holder at the close of business on such date, then such portion of the Maximum Share Amount shall be allocated pro rata among the shares of Series B Convertible Preferred Stock outstanding on such date. (b) The Corporation shall promptly, but in no event later than five business days after the occurrence, give notice to each holder (by telephone line facsimile transmission at such number as such holder has specified in writing to the Corporation for such purposes or, if such holder shall not have specified any -7- 8 such number, by overnight courier or first class mail, postage prepaid, at such holder's address as the same appears on the stock books of the Corporation) and any holder may at any time after the occurrence give notice to the Corporation, in either case, if on any ten trading days within any period of 20 consecutive trading days the Corporation would not have been required to convert shares of Series B Convertible Preferred Stock of such holder in accordance with Section 9(a) as a consequence of the limitations set forth in Section 6(a) had all outstanding shares of Series B Convertible Preferred Stock held by such holder been converted into Common Stock on each such day, determined without regard to the limitation, if any, on such holder contained in the proviso to the second sentence of Section 9(a) (any such notice, whether given by the Corporation or a holder, an "Inconvertibility Notice"). If the Corporation shall have given or been required to give any Inconvertibility Notice, or if a holder shall have given any Inconvertibility Notice, then within ten business days after such Inconvertibility Notice is given or was required to be given, the holder receiving or giving, as the case may be, the Inconvertibility Notice shall have the right by written notice to the Corporation (which written notice may be contained in the Inconvertibility Notice given by the holder) to direct the Corporation to redeem the portion of such holder's outstanding shares of Series B Convertible Preferred Stock (which, if applicable, shall be all of such holder's outstanding shares of Series B Convertible Preferred Stock) as shall not, on the business day prior to the date of such redemption, be convertible into shares of Common Stock by reason of the limitations set forth in Section 6(a) (determined without regard to the limitation, if any, on such holder contained in the proviso to the second sentence of Section 9(a)), within ten business days after such holder so directs the Corporation, at a price per share equal to the Redemption Price (as defined herein). If a holder directs the Corporation to redeem outstanding shares of Series B Convertible Preferred Stock and, prior to the date the Corporation is required to redeem such shares of Series B Convertible Preferred Stock, the Corporation would have been able, within the limitations set forth in Section 6(a), to convert all of such holder's outstanding shares of Series B Convertible Preferred Stock (determined without regard to the limitation, if any, on such holder contained in the proviso to the second sentence of Section 9(a)) on any ten trading days within any period of 20 consecutive trading days commencing after the period of 20 consecutive trading days which gave rise to the applicable Inconvertibility Notice from the Corporation or such holder of shares of Series B Convertible Preferred Stock, as the case may be, had all of such holder's outstanding shares of Series B Convertible Preferred Stock been surrendered for conversion into Common Stock on each of such ten trading days within such 20 -8- 9 trading day period, then the Corporation shall not be required to redeem any shares of Series B Convertible Preferred Stock by reason of such Inconvertibility Notice. (c) Notwithstanding the giving of any notice by the Corporation to the holders of Series B Convertible Preferred Stock pursuant to Section 6(a) or the giving or the absence of any notice by the holders of the Series B Convertible Preferred Stock in response thereto or any redemption of shares of Series B Convertible Preferred Stock pursuant to Section 6(b), thereafter the provisions of Section 6(b) shall continue to be applicable on any occasion unless the Stockholder Approval shall have been obtained from the stockholders of the Corporation or waived by the AMEX. (d) As used herein, the term "Section 6 Redemption Date" means each date on which the Corporation is required to redeem shares of Series B Convertible Preferred Stock as provided in this Section 6. On each Section 6 Redemption Date, the Corporation shall make payment in immediately available funds of the applicable Redemption Price to such holder of shares of Series B Convertible Preferred Stock to be redeemed to or upon the order of such holder as specified by such holder in writing to the Corporation at least one business day prior to such Section 6 Redemption Date. If the Corporation is required to redeem all or any portion of a holder's outstanding shares of Series B Convertible Preferred Stock pursuant to this Section 6, the Corporation shall make payment to such holder of the shares of Series B Convertible Preferred Stock to be redeemed in respect of each share of Series B Convertible Preferred Stock to be redeemed of an amount equal to the greater of (a) the product of (A) the amount of the Liquidation Preference of such share of Series B Convertible Preferred Stock determined as of the applicable Section 6 Redemption Date times (B) 117.65% and (b) an amount equal to the product obtained by multiplying (x) the number of shares of Common Stock which would, but for the redemption pursuant to this Section 6, be issuable on conversion in accordance with Section 9(a) of one share of Series B Convertible Preferred Stock and any accrued and unpaid dividends thereon and any accrued and unpaid interest on dividends thereon in arrears if a notice of conversion were given by the holder of such Series B Convertible Preferred Stock on the applicable Section 6 Redemption Date (determined without regard to any limitation on conversion contained in Section 9(a)) times (y) the arithmetic average of the Trading Price (as defined in Section 9(b)) of the Common Stock for the five consecutive trading days ending one trading day prior to the Section 6 Redemption Date (such greater amount being referred to herein as the " Redemption Price"). Upon redemption of less than all of the shares of Series B Convertible Preferred Stock evidenced -9- 10 by a particular certificate, promptly, but in no event later than three business days after surrender of such certificate to the Corporation, the Corporation shall issue a replacement certificate for the shares of Series B Convertible Preferred Stock evidenced by such certificate which have not been redeemed. Only whole shares of Series B Convertible Preferred Stock may be redeemed. (e) As used in this Section 6, "Stockholder Approval" means the approval by a majority of the votes cast by the holders of shares of Common Stock (in person or by proxy) at a meeting of the stockholders of the Corporation (duly convened at which a quorum was present), or a written consent of holders of shares of Common Stock entitled to such number of votes given without a meeting, of the issuance by the Corporation of 20% or more of the outstanding Common Stock of the Corporation for less than the greater of the book or market value of such Common Stock on conversion of the Series B Convertible Preferred Stock, as and to the extent required under Section 713 of the rules of the AMEX (or any successor or replacement provision thereof). Although the Stockholder Approval shall relieve the Corporation of its obligation to redeem shares of Series B Convertible Preferred Stock, the Corporation shall not be entitled to delay or defer any redemption of shares of Series B Convertible Preferred Stock required by this Section 6 in order to seek the Stockholder Approval. (f) The shares of Series B Convertible Preferred Stock shall not be subject to mandatory redemption by the Corporation except as provided herein. SECTION 7. NO SINKING FUND. The shares of Series B Convertible Preferred Stock shall not be subject to the operation of a purchase, retirement, or sinking fund. SECTION 8. OPTIONAL REDEMPTION. So long as the Corporation is in compliance in all material respects with its obligations to the holders of shares of Series B Convertible Preferred Stock (including, without limitation, its obligations under the Registration Rights Agreements between the Corporation and the original holders of the Series B Convertible Preferred Stock (collectively, the "Registration Rights Agreements") and the provisions of this Certificate of Designations), the Corporation shall have the right, exercisable on not less than 20 days or more than 30 days written notice to the holders of record of the shares of Series B Convertible Preferred Stock to be redeemed, at any time on or after the date which is six months after the date of initial issuance of shares of Series B Convertible Preferred Stock (the "Issuance Date") to redeem all, and from time to time to redeem any part of not less than 500 shares (or such lesser number of shares of Series B Convertible Preferred Stock as shall remain outstanding at the time of exercise of such redemption right), of Series B -10- 11 Convertible Preferred Stock in accordance with this Section 8. Any notice of redemption (a "Notice of Redemption") under this Section shall be delivered to the holders of the shares of Series B Convertible Preferred Stock at their addresses appearing on the records of the Corporation; provided, however, that any failure or defect in the giving of notice to any such holder shall not affect the validity of notice to or the redemption of shares of Series B Convertible Preferred Stock of any other holder. Any Notice of Redemption shall state (1) that the Corporation is exercising its right to redeem all or a portion of the outstanding shares of Series B Convertible Preferred Stock pursuant to this Section 8, (2) the number of shares of Series B Convertible Preferred Stock held by such holder which are to be redeemed, (3) the Redemption Price per share of Series B Convertible Preferred Stock to be redeemed or the formula for determining the same, determined in accordance herewith and (4) the date of redemption of such shares of Series B Convertible Preferred Stock, determined in accordance with this Section (the "Redemption Date"). On the Redemption Date and after receipt by the Corporation of certificates for shares of Series B Preferred Stock to be redeemed pursuant to this Section 8, the Corporation shall make payment of the applicable Redemption Price to each holder of shares of Series B Convertible Preferred Stock to be redeemed to or upon the order of such holder as specified by such holder in writing to the Corporation at least one business day prior to the Redemption Date. If the Corporation exercises its right to redeem all or a portion of the outstanding shares of Series B Convertible Preferred Stock the Corporation shall make payment to the holders of the shares of Series B Convertible Preferred Stock to be redeemed in respect of each share of Series B Convertible Preferred Stock to be redeemed of an amount equal to the Redemption Price. Upon redemption of less than all of the shares of Series B Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three business days after surrender of such certificate to the Corporation, the Corporation shall issue and deliver to the holder of record of the surrendered certificate (or such holder's assignee) a replacement certificate for the shares of Series B Convertible Preferred Stock which have not been redeemed. Only whole shares of Series B Convertible Preferred Stock may be redeemed. If the Corporation exercises its right to redeem less than all outstanding shares of Series B Convertible Preferred Stock, then such redemption shall be made, as nearly as practical, pro rata among the holders of record of the Series B Convertible Preferred Stock. Except as otherwise permitted by Section 9 hereof in connection with a conversion of shares of Series B Convertible Preferred Stock pursuant to Section 9(a), no share of Series B Convertible Preferred Stock as to which the holder exercises the right of conversion pursuant to Section 9 hereof may be redeemed by -11- 12 the Corporation pursuant to this Section 8 on or after the date of exercise of such conversion right regardless of whether the Notice of Redemption shall have been given prior to the date of exercise of such conversion right. SECTION 9. CONVERSION. (a) CONVERSION AT OPTION OF HOLDER. The holders of the Series B Convertible Preferred Stock may, upon surrender of the certificates therefor, convert any or all of their shares of Series B Convertible Preferred Stock into units consisting of (1) fully paid and nonassessable shares of Common Stock and such other securities and property as hereinafter provided and (2) common stock purchase warrants in the form hereinafter provided (the "Warrants") to purchase shares of Common Stock and such other securities and property as hereinafter and in the Warrants provided. Commencing on the earlier of (1) the date which is 80 days after the Issuance Date and (2) the Registration Effective Date, and at any time thereafter, each share of Series B Convertible Preferred Stock may be converted at the principal executive offices of the Corporation, the office of any transfer agent for the Series B Convertible Preferred Stock, if any, the office of any transfer agent for the Common Stock or at such other office or offices, if any, as the Board of Directors may designate, into units initially consisting of (1) such number of fully paid and nonassessable shares of Common Stock (calculated as to each conversion to the nearest 1/100th of a share) determined by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued but unpaid dividends to the Conversion Date on the share of Series B Convertible Preferred Stock being converted, and (iii) accrued but unpaid interest on the dividends on the share of Series B Convertible Preferred Stock being converted in arrears to the Conversion Date by (y) the lower of (a) the product of (I) the Conversion Percentage times (II) the arithmetic average of the Trading Price of the Common Stock on the five consecutive trading days immediately preceding the Conversion Date or (b) $3.6125 (subject to equitable adjustments for stock splits, stock dividends, combinations, recapitalizations, reclassifications and similar events occurring on or after the date of filing of this Certificate of Designations with the Secretary of State of the State of Delaware), and (2) Warrants initially entitling the holder to purchase a number of shares of Common Stock equal to the quotient obtained by dividing (x) the number of shares of Common Stock issuable in respect of such conversion, determined in accordance with clause (1) of this sentence, by (y) ten and having the terms and conditions provided in Section 9(e) hereof, in each case subject to adjustment as hereinafter provided (the "Conversion Rate"); provided, however, that in no event shall any holder of -12- 13 shares of Series B Convertible Preferred Stock be entitled to convert any shares of Series B Convertible Preferred Stock in excess of that number of shares of Series B Convertible Preferred Stock upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by such holder and any person whose beneficial ownership of shares of Common Stock would be aggregated with such holder's beneficial ownership of shares of Common Stock for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and collectively, the "Restricted Persons") (other than shares of Common Stock deemed beneficially owned through the ownership of unconverted shares of Series B Convertible Preferred Stock and unexercised Warrants) and (2) the number of shares of Common Stock issuable upon the conversion of the number of shares of Series B Convertible Preferred Stock with respect to which the determination in this proviso is being made, would result in beneficial ownership by any Restricted Person of more than 4.9% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of the proviso to the immediately preceding sentence. The "Conversion Price" shall be equal to the Conversion Amount divided by the Conversion Rate. (b) CERTAIN DEFINITIONS. "Computation Date" means (1) the date which is 80 days after the Issuance Date, unless the Registration Statement theretofore has been declared effective by the SEC, (2) each date which is 30 days after a Computation Date, if the Registration Statement has not been declared effective by the SEC prior to such 30th day, (3) if the Registration Statement has not been declared effective by the SEC within 80 days after the Issuance Date, the date on which the Registration Statement is declared effective by the SEC, (4) the date which is 30 days after the date on which the Registration Statement ceases to be available for use by any holder of shares of Series B Convertible Preferred Stock which is named therein as a selling stockholder with the SEC, if, at any time during which the Registration Statement is required by the Registration Rights Agreements to remain available for such, the Registration Statement ceases to be so available for any reason (including, without limitation, by reason of an SEC stop order, a material misstatement or omission therein or the information contained in the Registration Statement having become outdated) and shall remain so unavailable on such 30th day, (5) the date on which the Registration Statement becomes available for use by holders of -13- 14 shares of Series B Convertible Preferred Stock, if the Registration Statement shall have become unavailable for such use as described in the preceding clause (4) of this paragraph, (6) the date which is 30 days after the date on which any holder of shares of Series B Convertible Preferred Stock shall have become unable to convert shares of Series B Convertible Preferred Stock in accordance with Section 9(a) for any reason (other than by reason of the 4.9% limitation set forth in Section 9(a)), if any holder of shares of Series B Convertible Preferred Stock shall remain unable so to convert shares of Series B Convertible Preferred Stock on such 30th day, and (7) the date on which holders of shares of Series B Convertible Preferred Stock become able to convert shares of Series B Convertible Preferred Stock, if any holder of shares of Series B Convertible Preferred Stock shall have become unable to convert such shares as described in the preceding clause (6) of this paragraph; provided, however, that a Computation Date shall not be deemed to have occurred by reason of clause (4) or (5) if, during a period that a Computation Date would have occurred under clause (4) or (5), the Company has exercised its rights under Section 3(f) of the Registration Rights Agreement. As used herein, the "Conversion Amount" initially shall be equal to $1,000.00, subject to adjustment as hereinafter provided. As used herein, "Conversion Date" shall mean the date on which the notice of conversion is actually received by the Corporation, whether by mail, courier, personal service, telephone line facsimile transmission or other means, in case of a conversion at the option of the holder pursuant to Section 9(a). As used herein, "Conversion Percentage" shall mean 85 percent, except that, if (x) the Registration Statement is not ordered effective by the SEC within 80 days after the Issuance Date, (y) the Registration Statement shall cease to be available for use by any holder of shares of Series B Convertible Preferred Stock which is named therein as a selling stockholder for any reason (including, without limitation, by reason of an SEC stop order, a material misstatement or omission in the Registration Statement or the information contained in the Registration Statement having become outdated)(other than by reason of the Corporation exercising its rights under Section 3(f) of the Registration Rights Agreement)) or (z) a holder of shares of Series B Convertible Preferred Stock having become unable to convert any shares of Series B Convertible Preferred Stock in accordance with Section 9(a) (other than by reason of the 4.9% limitation set forth in Section 9(a)) then the percentage stated above in this paragraph shall be reduced by two and one-half percentage points -14- 15 (subject to the percentage limitation set forth in Section 2(c) of the Registration Rights Agreements) on each Computation Date (pro rated in the case of any Computation Date which is less than 30 days after a Computation Date) unless, in lieu of such reduction in respect of any particular Computation Date, the Company shall have made cash payments on a timely basis in the amounts specified in Section 2(c) of the Registration Rights Agreements. As used herein, "Registration Effective Date" shall mean, with respect to any share of Series B Convertible Preferred Stock, the date on which the Registration Statement is first ordered effective by the SEC. As used herein, "Registration Statement" shall mean the Registration Statement required to be filed by the Corporation with the SEC pursuant to Section 2(a) of the Registration Rights Agreements. As used herein, "SEC" shall mean the United States Securities and Exchange Commission. As used herein, the "Trading Price" of any security on any date shall mean the lowest sale price (regular way) of such security on such date on the principal securities exchange on which such security is listed for trading, as reported by Bloomberg L.P. (c) OTHER PROVISIONS. Notwithstanding anything in this Section 9(c) to the contrary, no change in the Conversion Amount pursuant to Section 9(c) shall actually be made until the cumulative effect of the adjustments called for by this Section 9(c) since the date of the last change in the Conversion Amount would change the Conversion Amount by more than 1%. However, once the cumulative effect would result in such a change, then the Conversion Rate shall actually be changed to reflect all adjustments called for by this Section 9(c) and not previously made. Notwithstanding anything in this Section 9(c), no change in the Conversion Amount shall be made that would result in a Conversion Price of less than the par value of the Common Stock into which shares of Series B Convertible Preferred Stock are at the time convertible. The holders of shares of Series B Convertible Preferred Stock at the close of business on the record date for any dividend payment to holders of Series B Convertible Preferred Stock shall be entitled to receive the dividend payable on such shares on the corresponding dividend payment date notwithstanding the conversion thereof after such dividend payment record date or the Corporation's default in payment of the dividend due on such -15- 16 dividend payment date; provided, however, that the holder of shares of Series B Convertible Preferred Stock surrendered for conversion during the period between the close of business on any record date for a dividend payment and the opening of business on the corresponding dividend payment date must pay to the Corporation, within five days after receipt by such holder, an amount equal to the dividend payable on such shares on such dividend payment date if such dividend is paid by the Corporation to such holder. A holder of shares of Series B Convertible Preferred Stock on a record date for a dividend payment who (or whose transferee) tenders any of such shares for conversion into shares of Common Stock and Warrants on or after such dividend payment date will receive the dividend payable by the Corporation on such shares of Series B Convertible Preferred Stock on such date, and the converting holder need not make any payment of the amount of such dividend in connection with such conversion of shares of Series B Convertible Preferred Stock. Except as provided above, no adjustment shall be made in respect of cash dividends on Common Stock or Series B Convertible Preferred Stock that may be accrued and unpaid at the date of surrender of shares of Series B Convertible Preferred Stock. The right of the holders of Series B Convertible Preferred Stock to convert their shares shall be exercised by delivering to the Corporation or its agent, as provided above, a written notice, duly signed by or on behalf of the holder, stating the number of shares of Series B Convertible Preferred Stock to be converted. Such notice may be delivered by mail, courier, personal service, telephone line facsimile transmission or other means. Promptly, but in no event later than ten business days after delivery of a notice of conversion, such holder shall surrender for such purpose to the Corporation or its agent, as provided above, certificates representing shares to be converted, duly endorsed in blank or accompanied by proper instruments of transfer. If such holder shall fail to deliver certificates representing shares to be converted in such form on or prior to such tenth business day, such notice of conversion shall not be effective, unless otherwise agreed by the Corporation, but such failure shall not affect such holder's right to convert such shares at a date after the date such notice of conversion was given. The Corporation shall pay any tax arising in connection with any conversion of shares of Series B Convertible Preferred Stock except that the Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery upon conversion of shares of Common Stock, Warrants or other securities or property in a name other than that of the holder of the shares of the Series B Convertible Preferred Stock being converted, and the Corporation shall not be required to issue or deliver any such shares or other -16- 17 securities or property unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. The Corporation (and any successor corporation) shall take all action necessary so that a number of shares of the authorized but unissued Common Stock (or common stock in the case of any successor corporation) sufficient to provide for the conversion of the Series B Convertible Preferred Stock outstanding and exercise of the Warrants issuable on such conversion upon the basis hereinbefore provided are at all times reserved by the Corporation (or any successor corporation), free from preemptive rights, for such conversion, subject to the provisions of the next succeeding paragraph. If the Corporation shall issue any securities or make any change in its capital structure which would change the number of shares of Common Stock into which each share of the Series B Convertible Preferred Stock shall be convertible or for which the Warrants shall be exercisable as herein provided, the Corporation shall at the same time also make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Series B Convertible Preferred Stock on the new basis. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all of the outstanding shares of Series B Convertible Preferred Stock and exercise of all Warrants issued and issuable upon conversion of the shares of Series B Convertible Preferred Stock, the Corporation promptly shall seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. In case of any consolidation or merger of the Corporation with any other corporation (other than a wholly-owned subsidiary of the Corporation) in which the Corporation is not the surviving corporation, or in case of any sale or transfer of all or substantially all of the assets of the Corporation, or in the case of any share exchange pursuant to which all of the outstanding shares of Common Stock are converted into other securities or property, the Corporation shall make appropriate provision or cause appropriate provision to be made so that each holder of shares of Series B Convertible Preferred Stock then outstanding shall have the right thereafter to convert such shares of Series B Convertible Preferred Stock into the kind of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer, or share exchange by a holder of shares of Common Stock into which such shares of Series B Convertible Preferred -17- 18 Stock could have been converted immediately prior to the effective date of such consolidation, merger, sale, transfer, or share exchange and that on a basis which preserves the economic benefits of the conversion rights of the holders of shares of Series B Convertible Preferred Stock on a basis as nearly as practical as such rights exist hereunder prior thereto. If, in connection with any such consolidation, merger, sale, transfer, or share exchange, each holder of shares of Common Stock is entitled to elect to receive securities, cash, or other assets upon completion of such transaction, the Corporation shall provide or cause to be provided to each holder of Series B Convertible Preferred Stock the right to elect the securities, cash, or other assets into which the Series B Convertible Preferred Stock held by such holder shall be convertible after completion of any such transaction on the same terms and subject to the same conditions applicable to holders of the Common Stock (including, without limitation, notice of the right to elect, limitations on the period in which such election shall be made, and the effect of failing to exercise the election). The Corporation shall not effect any such transaction unless the provisions of this paragraph have been complied with. The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers, or share exchanges. If a holder shall have given a notice of conversion of shares of Series B Convertible Preferred Stock, upon surrender of certificates representing shares of Series B Convertible Preferred Stock for conversion, the Corporation shall issue and deliver to such person certificates for the Common Stock and Warrants issuable upon such conversion within three business days after such surrender of certificates and the person converting shall be deemed to be the holder of record of the Common Stock and Warrants issuable upon such conversion, and all rights with respect to the shares surrendered shall forthwith terminate except the right to receive the Common Stock and Warrants or other securities, cash, or other assets as herein provided. If a holder shall have given a notice of conversion as provided herein, the Corporation's obligation to issue and deliver the certificates for Common Stock and Warrants shall be absolute and unconditional, irrespective of the absence of any action by the converting holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Corporation to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the holder of any obligation to the Corporation, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to the holder in connection with such conversion. If the Corporation fails to issue -18- 19 and deliver the certificates for the Common Stock and Warrants to the holder converting shares of Series B Convertible Preferred Stock pursuant to the first sentence of this paragraph as and when required to do so, in addition to any other liabilities the Corporation may have hereunder and under applicable law, the Corporation shall pay or reimburse such holder on demand for all out-of-pocket expenses including, without limitation, fees and expenses of legal counsel incurred by such holders as a result of such failure. No fractional shares of Common Stock or Warrants to purchase fractional shares of Common Stock shall be issued upon conversion of Series B Convertible Preferred Stock but, in lieu of any fraction of a share of Common Stock or Warrants to purchase fractional shares of Common Stock which would otherwise be issuable in respect of the aggregate number of such shares surrendered for conversion at one time by the same holder, the Corporation at its option (a) may pay in cash an amount equal to the product of (i) the arithmetic average of the Trading Price of a share of Common Stock on the three consecutive trading days ending on the trading day immediately preceding the Conversion Date and (ii) such fraction of a share or (b) may issue an additional share of Common Stock or Warrant to purchase an additional share of Common Stock. The Conversion Amount shall be adjusted from time to time under certain circumstances, subject to the provisions of the first three sentences of the first paragraph of this Section 9(c), as follows: (i) In case the Corporation shall issue rights or warrants on a pro rata basis to all holders of the Common Stock entitling such holders to subscribe for or purchase Common Stock on the record date referred to below at a price per share less than the average daily Trading Prices of the Common Stock on the 30 consecutive business days commencing 45 business days before the record date (the "Current Market Price"), then in each such case the Conversion Amount in effect on such record date shall be adjusted in accordance with the formula C(1) = C x O + N O + N x P M where C(1) = the adjusted Conversion Amount C = the current Conversion Amount -19- 20 O = the number of shares of Common Stock outstanding on the record date. N = the number of additional shares of Common Stock issuable pursuant to the exercise of such rights or warrants. P = the offering price per share of the additional shares (which amount shall include amounts received by the Corporation in respect of the issuance and the exercise of such rights or warrants). M = the Current Market Price per share of Common Stock on the record date. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. If any or all such rights or warrants are not so issued or expire or terminate before being exercised, the Conversion Amount then in effect shall be readjusted appropriately. (ii) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Junior Stock (as hereinafter defined) evidences of its indebtedness or assets (including securities, but excluding any warrants or subscription rights referred to in subparagraph (i) above and any dividend or distribution paid in cash out of the retained earnings of the Corporation), then in each such case the Conversion Amount then in effect shall be adjusted in accordance with the formula C(1) = C x M ----- M - F where C(1) = the adjusted Conversion Amount C = the current Conversion Amount M = the Current Market Price per share of Common Stock on the record date mentioned below. F = the aggregate amount of such cash dividend and/or the fair market value on the record date of the assets or securities to be distributed divided by the number of shares of Common Stock outstanding on the record date. The Board of Directors shall determine such fair market value, which determination shall be conclusive. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution. For purposes of this subparagraph (ii), "Junior Stock" shall include any class of capital stock ranking junior as to dividends or upon liquidation to the Series B -20- 21 Convertible Preferred Stock. (iii) All calculations hereunder shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. (iv) If at any time as a result of an adjustment made pursuant to the fifth paragraph of this Section 9(c), the holder of any Series B Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive securities, cash, or assets other than Common Stock, the number or amount of such securities or property so receivable upon conversion shall be subject to adjustment from time to time in a manner and on terms nearly equivalent as practicable to the provisions with respect to the Common Stock contained in subparagraphs (i) to (iii) above. Except as otherwise provided above in this Section 9, no adjustment in the Conversion Amount shall be made in respect of any conversion for share distributions or dividends theretofore declared and paid or payable on the Common Stock. Whenever the Conversion Amount is adjusted as herein provided, the Corporation shall send to each transfer agent, if any, for the Series B Convertible Preferred Stock and the Common Stock, and to the principal securities exchange, if any, on which the Series B Convertible Preferred Stock and the Common Stock is traded, or the Nasdaq National Market if the Series B Convertible Preferred Stock or Common Stock is admitted for a quotation thereon, a statement signed by the Chairman of the Board, the President, or any Vice President of the Corporation and by its Treasurer or its Secretary or an Assistant Secretary stating the adjusted Conversion Amount determined as provided in this Section 9, and any adjustment so evidenced, given in good faith, shall be binding upon all stockholders and upon the Corporation. Whenever the Conversion Amount is adjusted, the Corporation will give notice by mail to the holders of record of Series B Convertible Preferred Stock, which notice shall be made within 15 days after the effective date of such adjustment and shall state the adjustment and the Conversion Amount. Notwithstanding the foregoing notice provisions, failure by the Corporation to give such notice or a defect in such notice shall not affect the binding nature of such corporate action of the Corporation. Whenever the Corporation shall propose to take any of the actions specified in the fifth paragraph of this Section 9(c) or in subparagraphs (i) or (ii) of the eighth paragraph of this Section 9(c) which would result in any adjustment in the Conversion Amount under this Section 9(c), the Corporation shall cause a notice to be -21- 22 mailed at least 20 days prior to the date on which the books of the Corporation will close or on which a record will be taken for such action, to the holders of record of the outstanding Series B Convertible Preferred Stock on the date of such notice. Such notice shall specify the action proposed to be taken by the Corporation and the date as of which holders of record of the Common Stock shall participate in any such actions or be entitled to exchange their Common Stock for securities or other property, as the case may be. Failure by the Corporation to mail the notice or any defect in such notice shall not affect the validity of the transaction. (d) CONVERSION AT OPTION OF CORPORATION. So long as the Corporation shall be in compliance in all material respects with its obligations to the holders of the Series B Convertible Preferred Stock (including its obligations under the Registration Rights Agreements and the provisions of this Certificate of Designations) and so long as the Registration Statement shall be effective, the Corporation shall have the right, exercisable at any time after the date which is three years after the date of original issuance of the Series B Convertible Stock by at least 20 business days but not more than 30 business days prior notice (a "Corporation Conversion Notice") to the holders of the Series B Convertible Preferred Stock to require the holders of the Series B Convertible Preferred Stock to convert, in accordance with the provisions, and subject to the limitations, of this Section 9, all or any part of the outstanding shares of Series B Convertible Preferred Stock into shares of Common Stock and Warrants to the extent the same are at such time convertible into shares of Common Stock and Warrants. The Corporation Conversion Notice shall state (1) the number of shares of Series B Convertible Preferred Stock which the Corporation seeks to require to be converted into shares of Common Stock and Warrants and (2) the date for such conversion (the "Corporation Conversion Date"). If the Corporation shall give a Corporation Conversion Notice, then, unless theretofore converted by the holder or redeemed by the Corporation in accordance herewith, and, so long as the Registration Statement shall remain effective on the Corporation Conversion Date and the Corporation shall be in compliance in all material respects with its obligations to the holders of the Series B Convertible Preferred Stock (including its obligations under the Registration Rights Agreements and the provisions of this Certificate of Designations) on the Corporation Conversion Date, then on the Corporation Conversion Date such shares of Series B Convertible Preferred Stock covered by such Corporate Conversion Notice (or such lesser number of shares of Series B Convertible Preferred Stock as are convertible into Common Stock and Warrants on the Corporation Conversion Date) shall be converted into such number of shares of -22- 23 Common Stock and Warrants as shall be determined pursuant to this Section 9 as if the conversion of such number of shares of Series B Convertible Preferred Stock were made by the holders thereof in accordance herewith without any further action on the part of the holders of such shares of Series B Convertible Preferred Stock. Upon receipt by the Corporation of certificates for shares of Series B Convertible Preferred Stock converted into shares of Common Stock and Warrants in accordance with this Section 9(e) after a Corporation Conversion Notice is given, the Corporation shall issue and, within three trading days after such surrender, deliver to or upon the order of such holder (1) that number of shares of Common Stock as shall be issuable in respect of the conversion of the number of shares of Series B Convertible Preferred Stock converted, together with accrued and unpaid dividends thereon to the date of conversion and accrued and unpaid interest on dividends on such shares which are in arrears, into Common Stock and Warrants as shall be determined in accordance herewith, (2) certificates for that number of Warrants as shall be issuable in respect of the number of shares of Common Stock referred to in the immediately preceding clause (1) and (3) a new certificate for the balance of shares of Series B Convertible Preferred Stock, if any. (e) FORM OF WARRANT. The Warrants issuable upon conversion of shares of Series B Convertible Preferred Stock shall be in the following form: [FORM OF WARRANT] THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. Right to Purchase (1) ----------- Shares of Common Stock of JTS Corporation JTS CORPORATION - -------- (1) Insert appropriate number in accordance with Section 9(a) and 9(c) of the Certificate of Designations. -23- 24 COMMON STOCK PURCHASE WARRANT JTS CORPORATION, a Delaware corporation (the "Company") hereby certifies that, for value received, [FILL IN NAME] or registered assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time after the date hereof, and before 5:00 p.m., New York City time, on the Expiration Date (as defined herein), ______________* fully paid and nonassessable shares of Common Stock, $.001 par value, of the Company at a purchase price per share equal to the Purchase Price (as hereinafter defined). The number of such shares of Common Stock and the Purchase Price are subject to adjustment as provided in this Warrant. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Business Day" as used herein shall mean a day on which the New York Stock Exchange is open for business. (b) The term "Common Stock" includes the Company's Common Stock, $.001 par value per share, as authorized on the date hereof, and any other securities into which or for which the Common Stock may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Company" shall include JTS Corporation and any corporation that shall succeed to or assume the obligation of JTS Corporation hereunder. (d) The term "Expiration Date" refers to [INSERT DATE WHICH IS 3 YEARS AFTER CONVERSION DATE IN RESPECT OF WHICH WARRANT IS ISSUED]. (e) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holder of this Warrant at any time shall be entitled to receive, or shall have received, on the exercise of this Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4. -24- 25 (f) The term "Purchase Price" shall mean $[INSERT LOWER OF 110% OF (X) THE ARITHMETIC AVERAGE OF CLOSING PRICE FOR FIVE CONSECUTIVE TRADING DAYS USED TO COMPUTE CONVERSION OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK IN RESPECT OF THE ISSUANCE OF THE PARTICULAR WARRANT AND (Y) $3.6125], subject to adjustment as provided in this Warrant. 1. EXERCISE OF WARRANT. 1.1 EXERCISE AT OPTION OF HOLDER. (a) This Warrant may be exercised by the Holder hereof in full or in part at any time or from time to time during the exercise period specified in the first paragraph hereof until the Expiration Date by surrender of this Warrant and the subscription form annexed hereto (duly executed) by such Holder, to the Company at its principal office, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company in the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the subscription form by (b) the Purchase Price then in effect. On any partial exercise the Company will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, providing in the aggregate on the face or faces thereof for the purchase of the number of shares of Common Stock for which such Warrant or Warrants may still be exercised. (b) Notwithstanding any other provision of this Warrant, in no event shall the holder of this Warrant be entitled at any time to purchase a number of shares of Common Stock on exercise of this Warrant in excess of that number of shares upon purchase of which the sum of (1) the number of shares of Common Stock beneficially owned by such holder and any person whose beneficial ownership of shares of Common Stock would be aggregated with such holder's beneficial ownership of shares of Common Stock for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and collectively, the "Restricted Persons") (other than shares of Common Stock deemed beneficially owned through the ownership of the unexercised portion of this Warrant and shares of Preferred Stock beneficially owned by all such Restricted Persons) and (2) the number of shares of Common Stock issuable upon exercise of the portion of this Warrant with respect to which the determination in this sentence is being made, would result in beneficial ownership by any Restricted Person of more than 4.9% of the outstanding shares of Common Stock. For -25- 26 purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (1) of the immediately preceding sentence. 1.2 NET ISSUANCE. Notwithstanding anything to the contrary contained in Section 1.1, the Holder may elect to exercise this Warrant in whole or in part by receiving shares of Common Stock equal to the net issuance value (as determined below) of this Warrant, or any part hereof, upon surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) --------- A Where: X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock as to which this Warrant is to be exercised A = the current fair market value of one share of Common Stock calculated as of the last trading day immediately preceding the exercise of this Warrant B = the Purchase Price As used herein, current fair market value of Common Stock as of a specified date shall mean with respect to each share of Common Stock the average of the closing bid prices of the Common Stock on the principal securities market on which the Common Stock may at the time be traded over a period of five Business Days consisting of the day as of which the current fair market value of a share of Common Stock is being determined (or if such day is not a Business Day, the Business Day next preceding such day) and the four consecutive Business Days prior to such day. If on the date for which current fair market value is to be determined the Common Stock is not eligible for trading on any securities market, the current fair market value of Common Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors of the Company, -26- 27 unless prior to such date the Company has become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the current fair market value of the Common Stock shall be deemed to be the value received by the holders of the Company's Common Stock for each share thereof pursuant to the Company's acquisition. 2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as practicable after the exercise of this Warrant, and in any event within three days thereafter, the Company at its expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, in such denominations as may be requested by such Holder, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current fair market value (as determined in accordance with subsection 1.2) of one full share, together with any other stock or other securities any property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise. 3. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY, ETC.; RECLASSIFICATION, ETC. In case at any time or from time to time, all the holders of Common Stock (or Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor, (a) other or additional stock or other securities or property (other than cash) by way of dividend, or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock (or Other Securities) issued as a stock dividend or in a stock-split (adjustments in respect of which are provided for in Section 5), then and in each -27- 28 such case the Holder of this Warrant, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) which such Holder would hold on the date of such exercise if on the date hereof the Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the case referred to in subdivisions (b) and (c) of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4. 4. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition of such reorganization, consolidation, merger, sale or conveyance, the Company shall give at least 30 days notice to the Holder of such pending transaction whereby the Holder shall have the right to exercise this Warrant prior to any such reorganization, consolidation, merger, sale or conveyance. Any exercise of this Warrant pursuant to notice under this paragraph shall be conditioned upon the closing of such reorganization, consolidation, merger, sale or conveyance which is the subject of the notice and the exercise of this Warrant shall not be deemed to have occurred until immediately prior to the closing of such transaction. 5. ADJUSTMENT FOR EXTRAORDINARY EVENTS. In the event that the Company shall (i) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive -28- 29 event or events described herein in this Section 5. The Holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive that number of shares of Common Stock determined by multiplying the number of shares of Common Stock which would be issuable on such exercise as of immediately prior to such issuance by a fraction of which (i) the numerator is the Purchase Price in effect immediately prior to such issuance and (ii) the denominator is the Purchase Price in effect on the date of such exercise. 6. FURTHER ASSURANCES. The Company will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of all or any portion of this Warrant from time to time outstanding. 7. NOTICES OF RECORD DATE, ETC. In the event of (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to or consolidation or merger of the Company with or into any other person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, then and in each such event the Company will mail or cause to be mailed to the Holder, at least ten days prior to such record date, a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for securities or other property deliverable on such reorganization, reclassification, recapitalization, transfer, consolidation, -29- 30 merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or a favorable vote of stockholders if either is required. Such notice shall be mailed at least ten days prior to the date specified in such notice on which any such action is to be taken or the record date, whichever is earlier. 8. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant. 9. TRANSFER OF WARRANT. This Warrant shall inure to the benefit of the successors to and assigns of the Holder. This Warrant and all rights hereunder, in whole or in part, is registrable at the office or agency of the Company referred to below by the Holder hereof in person or by his duly authorized attorney, upon surrender of this Warrant properly endorsed. 10. REGISTER OF WARRANTS. The Company shall maintain, at the principal office of the Company (or such other office as it may designate by notice to the Holder hereof), a register in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each successor and prior owner of such Warrant. The Company shall be entitled to treat the person in whose name this Warrant is so registered as the sole and absolute owner of this Warrant for all purposes. 11. EXCHANGE OF WARRANT. This Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the office or agency of the Company referred to in Section 10, for one or more new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares of Common Stock which may be subscribed for purchase hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. 12. REPLACEMENT OF WARRANT. On receipt of evidence -30- 31 reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 13. WARRANT AGENT. The Company may, by written notice to the Holder, appoint an agent having an office in the United States of America, for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 11, and replacing this Warrant pursuant to Section 12, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 14. REMEDIES. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 15. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder hereof to purchase Common Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Purchase Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 16. NOTICES, ETC. All notices and other communications from the Company to the registered Holder of this Warrant shall be mailed by first class certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or at the address shown for such Holder on the register of Warrants referred to in Section 10. 17. INVESTMENT REPRESENTATIONS. By acceptance of this Warrant, the Holder represents to the Company that this Warrant is -31- 32 being acquired for the Holder's own account and for the purpose of investment and not with a view to, or for sale in connection with, the distribution thereof, nor with any present intention of distributing or selling the Warrant or the Common Stock issuable upon exercise of the Warrant. The Holder acknowledges that the Holder has been afforded the opportunity to meet with the management of the Company and to ask questions of, and receive answers from, such management and the Company's counsel about the business and affairs of the Company and concerning the terms and conditions of the offering of this Warrant, and to obtain any additional information, to the extent that the Company possessed such information or could acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information otherwise obtained by or furnished to the Holder hereof in connection with the offering of this Warrant. The Holder hereof asserts that it may be considered to be a sophisticated investor, is familiar with the risks inherent in speculative investments such as in the Company, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in this Warrant and the Common Stock issuable upon exercise of this Warrant, and is able to bear the economic risk of the investment. The Holder acknowledges and agrees that this Warrant and, except as otherwise provided in the Registration Rights Agreement, the Common Stock issuable upon exercise of this Warrant (if any) have not been (and at the time of acquisition by the Holder, will not have been or will not be), registered under the Securities Act or under the securities laws of any state, in reliance upon certain exemptive provisions of such statutes. The Holder recognizes and acknowledges that such claims of exemption are based, in part, upon the representations of the Holder contained herein. The Holder further recognizes and acknowledges that because this Warrant and, except as provided in the Registration Rights Agreement, the Common Stock issuable upon exercise of this Warrant (if any) are unregistered, they may not be eligible for resale, and may only be resold in the future pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or pursuant to a valid exemption from such registration requirements. Unless the shares of Common Stock have theretofore been registered for resale under the Securities Act, the Company may require, as a condition to the issuance of Common Stock upon the exercise of this Warrant (i) in the case of an exercise in accordance with Section 1.1 hereof, a confirmation as of the date of exercise of the Holder's representations pursuant to this Section 17 or (ii) in the case of an exercise in accordance with Section 1.2 hereof, an opinion (in form and substance reasonably satisfactory to the Company) of counsel reasonably satisfactory to the Company that the shares of Common Stock to be issued upon such exercise may be issued without -32- 33 registration under the Securities Act. 18. LEGEND. Unless theretofore registered for resale under the Securities Act, each certificate for shares issued upon exercise of this Warrant shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities have been acquired for investment and may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the Securities Act of 1933, as amended, or an opinion of counsel that registration is not required under said Act. 19. MISCELLANEOUS. This Warrant and any terms hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement or such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of California. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, JTS Corporation has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. Dated: JTS CORPORATION By:___________________________ Title: FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO JTS CORPORATION 1. The undersigned Holder of the attached original, executed Warrant hereby elects to exercise its purchase right under such Warrant with respect to ______________ shares of Common Stock, as -33- 34 defined in the Warrant, of JTS Corporation, a Delaware corporation (the "Company"). 2. The undersigned Holder (check one): __ (a) elects to pay the aggregate purchase price for such shares of Common Stock (the "Exercise Shares") (i) by lawful money of the United States or the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $___________ or (ii) by wire transfer of United States funds to the account of the Company in the amount of $____________, which transfer has been made before or simultaneously with the delivery of this Form of Subscription pursuant to the instructions of the Company; or __ (b) elects to receive shares of Common Stock having a value equal to the value of the Warrant calculated in accordance with Section 1.2 of the Warrant. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other names as is specified below: Name: _____________________________________ Address: _____________________________________ _____________________________________ Dated:____________ ___, _____ ____________________________ (Signature must conform to name of Holder as specified on the face of the Warrant) ____________________________ ____________________________ (Address) [END OF FORM OF WARRANT] SECTION 10 REDEMPTION AT OPTION OF HOLDERS. (i) Each -34- 35 holder of shares of Series B Convertible Preferred Stock shall be entitled, at such holder's option, by notice to the Corporation given within 20 days after the occurrence of an Optional Redemption Event, to require the Corporation to redeem all or a portion of such shares following the occurrence of an Optional Redemption Event. An Optional Redemption Event means any one of the following events: (A) For any period of ten consecutive trading days following the SEC Effective Date there shall be no closing lowest sale price of the Common Stock on any national securities exchange or the Nasdaq National Market; (B) The Common Stock ceases to be listed for trading on any national securities exchange or the Nasdaq National Market for ten consecutive days; (C) The inability for 30 or more consecutive days of any holder of shares of Series B Convertible Preferred Stock who is entitled to optional redemption rights under this Section 10 to sell such shares of Common Stock issued or issuable on conversion of shares of Series B Convertible Preferred Stock pursuant to the Registration Statement for any reason on each day in such 30-day period; provided, however, that if the Corporation exercises its rights under Section 3(f)(ii) of the Registration Rights Agreements, then this provision shall be inapplicable solely during the period that Section 3(f)(ii) is in effect; (D) The Corporation shall fail or default in the performance of any material obligation to a holder of shares of Series B Convertible Preferred Stock under the terms of the Certificate of Designations or under any of the Registration Rights Agreements or any other agreements or documents entered into in connection with the issuance of shares of Series B Convertible Preferred Stock, as such instruments may be amended from time to time; (E) Any consolidation or merger of the Corporation with or into another entity (other than a merger or consolidation of a subsidiary of the Corporation into the Corporation or a wholly-owned subsidiary of the Corporation) where the shareholders of the Corporation immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such -35- 36 transaction or the common stock of such surviving corporation is not listed for trading on the AMEX, the NYSE or the Nasdaq National Market; or (F) The taking of any action, including any amendment to the Corporation's Certificate of Incorporation, which materially and adversely affects the rights of any holder of shares of Series B Convertible Preferred Stock; provided that this Section F shall not apply to the Corporation's issuance of securities in a financing so long as the Board of Directors shall have determined that the terms of any such financing are fair to the holders of Series B Convertible Preferred Stock. (ii) To exercise the optional redemption right, a holder of shares of Series B Convertible Preferred Stock shall deliver to the Corporation a notice of redemption (an "Optional Redemption Notice"), accompanied by the certificate for the shares of Series B Convertible Preferred Stock to be redeemed. Any Optional Redemption Notice shall state (1) that the holder delivering such notice is thereby requiring the Corporation to redeem shares of Series B Convertible Preferred Stock pursuant to this Section 10, (2) the Optional Redemption Event giving rise to such redemption, and (3) the number of shares of Series B Convertible Preferred Stock held by such holder which are to be redeemed. In no event later than five business days following receipt of such notice by the Corporation, the Corporation shall make payment in immediately available funds of the applicable Redemption Price with respect to the shares of Series B Convertible Preferred Stock to be redeemed to or upon the order of such holder as specified by such holder in the Optional Redemption Notice. Upon redemption of less than all of the shares of Series B Convertible Preferred Stock evidenced by a particular certificate, promptly, but in no event later than three business days after surrender of such certificate to the Corporation, the Corporation shall issue a replacement certificate for the shares of Series B Convertible Preferred Stock which have not been redeemed. Only whole shares of Series B Convertible Preferred Stock may be redeemed. SECTION 11. VOTING RIGHTS. Except as otherwise required by law or expressly provided herein, shares of Series B Convertible Preferred Stock shall not be entitled to vote on any matter. The affirmative vote or consent of the holders of a majority of the outstanding shares of the Series B Convertible Preferred Stock, voting separately as a class, will be required for (1) any amendment, alteration, or repeal, whether by merger or consolidation or otherwise, of the Corporation's Certificate of Incorporation if the amendment, alteration, or repeal materially -36- 37 and adversely affects the powers, preferences, or special rights of the Series B Convertible Preferred Stock, or (2) the creation and issuance of any Senior Dividend Stock or Senior Liquidation Stock; provided, however, that any increase in the authorized preferred stock of the Corporation or the creation and issuance of any stock which is both Junior Dividend Stock and Junior Liquidation Stock or any other capital stock of the Corporation ranking on a parity with the Series B Convertible Preferred Stock shall not be deemed to affect materially and adversely such powers, preferences, or special rights; provided, further, however, except as provided by applicable law, no consent or approval shall be required in the event that the Corporation shall issue any equity or debt securities of the Corporation in a financing so long as the Board of Directors shall have determined that the terms of any such financing are fair to the holders of the Series B Convertible Preferred Stock. SECTION 12. OUTSTANDING SHARES. For purposes of this Certificate of Designations, all shares of Series B Convertible Preferred Stock shall be deemed outstanding except (i) from the date of surrender of certificates representing shares of Series B Convertible Preferred Stock for conversion into Common Stock, all shares of Series B Convertible Preferred Stock converted into Common Stock; (ii) from the date of registration of transfer, all shares of Series B Convertible Preferred Stock held of record by the Corporation or any subsidiary or Affiliate (as defined herein) of the Corporation and (iii) from the Redemption Date, all shares of Series B Convertible Preferred Stock which are redeemed, so long as in each case the Redemption Price of such shares of Series B Convertible Preferred Stock shall have been paid by the Corporation as and when required hereby. For the purposes of this Certificate of Designations, "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation. "Control" is the power to direct the management and policies of a person, directly or through one or more intermediaries, whether through the ownership of voting securities, by contract, or otherwise. -37- 38 IN WITNESS WHEREOF, JTS Corporation has caused this certificate to be signed by W. Virginia Walker, its Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary, this 1st day of November, 1996. JTS CORPORATION By /s/ W. Virginia Walker ______________________________ W. Virginia Walker -38- EX-4.4 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.4 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of October 31, 1996 (this "Agreement"), is made by and between JTS CORPORATION, a Delaware corporation (the "Company"), and the person named on the signature page hereto (the "Initial Investor"). W I T N E S S E T H: WHEREAS, in connection with the Subscription Agreement, dated as of October 31, 1996, between the Initial Investor and the Company (the "Subscription Agreement"), the Company has agreed, upon the terms and subject to the conditions of the Subscription Agreement, to issue and sell to the Initial Investor an aggregate of 12,500 shares (the "Preferred Shares") of preferred stock of the Company as provided in the Subscription Agreement, which shares of Preferred Stock are convertible into units consisting of (x) shares (the "Conversion Shares") of Common Stock, $.001 par value (the "Common Stock"), of the Company and (2) warrants (the "Warrants") to purchase shares of Common Stock (the "Warrant Shares"); and WHEREAS, to induce the Initial Investor to execute and deliver the Subscription Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), and applicable state securities laws with respect to the Conversion Shares and the Warrant Shares; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Initial Investor hereby agree as follows: 1. DEFINITIONS. (a) As used in this Agreement, the following terms shall have the following meanings: (i) "Investor" means the Initial Investor and any transferee or assignee who agrees to become bound -1- 2 by the provisions of this Agreement in accordance with Section 9 hereof. (ii) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (iii) "Registrable Securities" means the Conversion Shares, the Warrant Shares and any shares of Common Stock issued by the Company to any Investor as a dividend on the Preferred Shares. (iv) "Registration Statement" means a registration statement of the Company under the Securities Act, including any amendment thereto. (b) As used in this Agreement, the term Investor includes (i) each Investor (as defined above) and (ii) each person who is a permitted transferee or assignee of the Registrable Securities pursuant to Section 9 of this Agreement. (c) Capitalized terms defined in the introductory paragraph or the recitals to this Agreement shall have the respective meanings therein provided. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Subscription Agreement. 2. REGISTRATION. (a) MANDATORY REGISTRATION. The Company shall prepare, and on or prior to the date which is 30 days after the date of the closing under the Subscription Agreement (the "Closing Date"), file with the SEC a Registration Statement on Form S-1 covering at least 8,333,000 shares of Common Stock as Registrable Securities, and which Registration Statement shall state that, in accordance with Rule 416 under the Securities Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Shares to prevent dilution resulting from stock splits, stock dividends or similar transactions or by reason of changes in the conversion price of the Preferred Shares in accordance with the terms -2- 3 thereof. If at any time the number of shares of Common Stock included in the Registration Statement required to be filed as provided in the first sentence of this Section 2(a) shall be insufficient to cover the number of shares of Common Stock issuable on conversion in full of the unconverted Preferred Shares and exercise in full of the unexercised Warrants and Warrants which may be issued upon exercise of the unconverted Preferred Stock, then promptly, but in no event later than 20 days after such insufficiency shall occur, the Company shall file with the SEC an additional Registration Statement on Form S-3, if available, or Form S-1 or other applicable form (which shall not constitute a post-effective amendment to the Registration Statement filed pursuant to the first sentence of this Section 2(a)) covering such number of shares of Common Stock as shall be sufficient to permit such conversion. For all purposes of this Agreement (other than Section 2(c) hereof) such additional Registration Statement shall be deemed to be the Registration Statement required to be filed by the Company pursuant to Section 2(a) of this Agreement, and the Company and the Investors shall have the same rights and obligations (other than Section 2(c) hereof) with respect to such additional Registration Statement as they shall have with respect to the initial Registration Statement required to be filed by the Company pursuant to this Section 2(a). (b) CERTAIN OFFERINGS. If any offering pursuant to a Registration Statement pursuant to Section 2(a) hereof involves an underwritten offering, the Company shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering. The Investors who hold the Registrable Securities to be included in such underwriting shall pay all underwriting discounts and commissions and other fees and expenses of such investment banker or bankers and manager or managers so selected in accordance with this Section 2(b) (other than fees and expenses relating to registration of Registrable Securities under federal or state securities laws, which are payable by the Company pursuant to Section 5 hereof) with respect to their Registrable Securities and the fees and expenses of such legal counsel so selected by the Investors. (c) PAYMENTS BY THE COMPANY. If (1) the Registration Statement covering the Registrable Securities which is required to be filed by the Company pursuant to -3- 4 the first sentence of Section 2(a) hereof is not effective within 80 days after the Closing Date, (2) the Registration Statement required to be filed by the Company pursuant to Section 2(a) shall cease to be available for use by any holder of shares of Series B Convertible Preferred Stock which is named therein as a selling stockholder for any reason (including, without limitation, by reason of an SEC stop order, a material misstatement or omission in such Registration Statement or the information contained in such Registration Statement having become outdated (other than the Registration Statement having become outdated in connection with the Company's exercise of its rights pursuant to Section 3(f)(ii) hereof)) or (3) a holder of shares of Series B Convertible Preferred Stock having become unable to convert any shares of Series B Convertible Preferred Stock in accordance with Section 9(a) of the Certificate of Designations (other than by reason of the 4.9% limitation set forth therein), then, in lieu of the adjustment of the Conversion Percentage (as defined in the Certificate of Designations on any particular Computation Date) the Company shall have the right to make payment to the Initial Investor in such amount and at such time as shall be determined pursuant to this Section 2(c). The amount to be paid by the Company to the Initial Investor shall be determined as of each Computation Date, and such amount shall be equal to two-and-one-half percent (2.5%) of the aggregate subscription price paid by the Initial Investor for the Preferred Shares pursuant to the Subscription Agreement (each, a "Periodic Amount"); provided, however, that the maximum aggregate amount payable by the Company pursuant to this Section 2(c) shall be an amount equal to fifteen percent (15%) of the aggregate subscription price paid by the Initial Investor pursuant to the Subscription Agreement. If the Company elects to make payment hereunder of any Periodic Amount, such payment shall be made by the Company by wire transfer in immediately available funds on the applicable Computation Date to such account as shall be specified for such purpose by the Initial Holder. As used in this Section 2(c), "Computation Date" shall have the meaning provided in the Certificate of Designations. (d) PIGGY-BACK REGISTRATIONS. If at any time the Company shall determine to prepare and file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any -4- 5 acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each Investor who is entitled to registration rights under this Section 2(d) written notice of such determination and, if within ten (10) days after receipt of such notice, such Investor shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which such Investor has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such Investors; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such Registration Statement; and provided further, however, that, after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement, based on the number of securities for which registration is requested except to the extent such pro rata exclusion of such other securities is prohibited under any written agreement entered into by the Company with the holder of such other securities prior to the date of this Agreement, in which case such other securities shall be excluded, if at all, in accordance with the terms of such agreement. No right to registration of Registrable Securities under this Section 2(d) shall be construed to limit any registration required under Section 2(a) hereof. The obligations of the Company under this Section 2(d) may be waived by Investors holding a majority in interest of the Registrable Securities and shall expire after the Company has afforded the opportunity for the Investors to exercise registration rights under this Section 2(d) for two registrations; provided, however, that any Investor who shall have had any Registrable Securities excluded from any Registration Statement in accordance with this Section 2(d) shall be entitled to include in an additional Registration Statement filed by the Company the Registrable Securities -5- 6 so excluded. Notwithstanding any other provision of this Agreement, if the Registration Statement required to be filed pursuant to Section 2(a) of this Agreement shall have been ordered effective by the SEC and the Company shall have maintained the effectiveness of such Registration Statement as required by this Agreement and if the Company shall otherwise have complied in all material respects with its obligations under this Agreement, then the Company shall not be obligated to register any Registrable Securities on such Registration Statement referred to in this Section 2(d). (e) ELIGIBILITY FOR FORM S-3. The Company shall file all reports required to be filed by the Company with the SEC in a timely manner so as to become eligible for the use of Form S-3 and so as to maintain such eligibility for the use of Form S-3. 3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the Registrable Securities, the Company shall: (a) prepare promptly, and file with the SEC not later than 30 days after the Closing Date, a Registration Statement with respect to the number of Registrable Securities provided in Section 2(a), and thereafter to use its best efforts to cause each Registration Statement relating to Registrable Securities to become effective as soon as possible after such filing, and keep the Registration Statement effective pursuant to Rule 415 at all times until the earlier of (1) such date as is three years after the Closing Date and (2) the date on which the Investors no longer beneficially own any Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that if the Company is seeking to accomplish a Significant Business Development (as defined in Section 3(f)) and notifies the Investors in writing of such intent and otherwise complies with the provisions of Section 3(f) hereof prior to the time that the Registration Statement has been declared effective, the Company shall have the right, for a period of up to thirty (30) days, to delay seeking effectiveness of the Registration Statement provided that such period of up to thirty (30) days ends on or before the 80th day following the Closing Date or such later date as agreed to by the Investors. -6- 7 (b) subject to the provisions of paragraph (f)(ii) below, prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times until such date as is three years after the Closing Date, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) furnish to each Investor whose Registrable Securities are included in the Registration Statement and its legal counsel, (1) promptly after the same is prepared and publicly distributed, filed with the SEC or received by the Company, one copy of the Registration Statement and any amendment thereto, each preliminary prospectus and prospectus and each amendment or supplement thereto, each letter written by or on behalf of the Company to the SEC or the staff of the SEC and each item of correspondence from the SEC or the staff of the SEC relating to such Registration Statement (other than any portion of any thereof which contains information for which the Company has sought confidential treatment) and (2) such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such securities or blue sky laws of such jurisdictions as the Investors who hold a majority in interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof at all times until the earlier of (A) such date as is three years after the Closing Date and (B) the date on which the Investors no longer beneficially own any Registrable Securities, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times until the earlier of (A) such date as is three years after the date such -7- 8 Registration Statement is first ordered effective by the SEC and (B) the date on which the Investors no longer beneficially own any Registrable Securities and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto (I) to qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (II) to subject itself to general taxation in any such jurisdiction, (III) to file a general consent to service of process in any such jurisdiction, (IV) to provide any undertakings that cause more than nominal expense or burden to the Company or (V) to make any change in its charter or by-laws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its stockholders; (e) in the event that the Registrable Securities are being offered in an underwritten offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the underwriters of such offering; (f) (i) as promptly as practicable after becoming aware of such event, notify each Investor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (ii) Notwithstanding Section 3(f)(i), if at the time the Company notifies the Investors as contemplated by Section 3(f)(i) that such event relates to a prospective development which constitutes a Significant Business Development (as defined herein) of the Company, then the Company shall not be required to make such amendment or supplement for a period of up to thirty (30) days commencing on the date the prospectus included in the Registration Statement becomes unavailable for use due to such Significant Business Development; provided, however, that the Company may not invoke the provisions of this -8- 9 Section 3(f)(ii) for more than thirty (30) days during any 180 day period; (iii) A "Significant Business Development" shall mean (a) any business combination transaction involving the purchase of the Company at a premium to the market price of the Common Stock or a purchase of all or substantially all of the assets of the Company at a price which, if the consideration therefor were distributed to the stockholders of the Company, would constitute a premium to the market price of the Common Stock at the time such transaction is first publicly announced by the Company, (b) any business combination transaction involving the acquisition by the Company of another business for aggregate consideration in an amount in excess of $50 million, or (c) any financing transaction involving the raising by the Company of funds in an amount in excess of $10 million; (g) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time; (h) permit a single firm of counsel designated as selling stockholders' counsel by the Investors who hold a majority in interest of the Registrable Securities being sold to review and comment on the Registration Statement and all amendments and supplements thereto a reasonable period of time prior to their filing with the SEC; (i) make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Company's Registration Statement on Form S-4 which was declared effective by the SEC on July 12, 1996; (j) at the request of the Investors who hold a majority in interest of the Registrable Securities being sold, furnish on the date that Registrable Securities are delivered to an underwriter, if any, for sale in connection with the Registration Statement (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given -9- 10 by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters; and (ii) an opinion, dated such date, from counsel representing the Company for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and the Investors; (k) make available for inspection by any Investor, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such Investor or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Company's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Company) with the Company with respect thereto, substantially in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. The Company shall hold in confidence and shall not make any disclosure of information concerning an Investor provided to the Company pursuant to Section 4(e) hereof unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a -10- 11 misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information; (l) use its best efforts (i) to cause all the Registrable Securities covered by the Registration Statement to be listed on the American Stock Exchange, Inc. ("AMEX") or such other principal securities market on which securities of the same class or series issued by the Company are then listed or traded or (ii) if securities of the same class or series as the Registrable Securities are not then listed on AMEX or any such other securities market, to cause all of the Registrable Securities covered by the Registration Statement to be listed on the Nasdaq National Market or the New York Stock Exchange; (m) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (n) cooperate with the Investors who hold Registrable Securities being offered and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates to be in such denominations or amounts as the case may be, as the managing underwriter or underwriters, if any, or the Investors may reasonably request and registered in such names as the managing underwriter or underwriters, if any, or the Investors may request; and, within three business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an instruction substantially in the form attached hereto as EXHIBIT 1 and an opinion of such -11- 12 counsel, if required by the Company's transfer agent, in the form attached hereto as EXHIBIT 2; and (o) take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement. 4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least four (4) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if any of such Investor's Registrable Securities are eligible for inclusion in the Registration Statement. If at least one (1) business day prior to the filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor; (b) Each Investor by such Investor's acceptance of the Registrable Securities agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; (c) In the event Investors holding a majority in interest of the Registrable Securities being registered determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and -12- 13 customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; (d) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice; and (e) No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements approved by the Investors entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses of the underwriters applicable with respect to its Registrable Securities, in each case to the extent not payable by the Company pursuant to the terms of this Agreement. 5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions and other fees and expenses of investment bankers and other than brokerage commissions, incurred in connection with registrations, filings or qualifications pursuant to Section 3 and other than the legal fees for the Investors, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees and the fees and disbursements of counsel for the Company, shall be borne by the Company. -13- 14 6. INDEMNIFICATION. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act, any underwriter (as defined in the Securities Act) for the Investors, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(d) with respect to the number of legal counsel, the Company shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for -14- 15 any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (I) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Company pursuant to Section 3(c) hereof; and (III) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, any underwriter and any other stockholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such stockholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and such -15- 16 Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim as does not exceed the amount of the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information so furnished in writing by such persons expressly for inclusion in the Registration Statement. (d) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel selected by the indemnifying party but reasonably acceptable to the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the -16- 17 representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In such event, the Company shall pay for only one separate legal counsel for the Investors; such legal counsel shall be selected by the Investors holding a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation and (c) contribution by any seller of Registrable Securities shall be limited in amount to the amount by which the net amount of proceeds received by such seller from the sale of such Registrable Securities exceeds the purchase price paid by such seller for such Registrable Securities. 8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the Investors the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: -17- 18 (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any transferee of all or any portion of such securities (or all or any portion of the Preferred Shares) of Registrable Securities only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. In connection with any such transfer the Company shall, at its sole cost and expense, promptly after such assignment take such actions as shall be reasonably acceptable to the Initial Investor and such transferee to assure that the Registration Statement and related prospectus are available for use by such transferee for sales of the Registrable Securities in respect of which the rights to registration have been so assigned. 10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may be amended and the -18- 19 observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a majority in interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. MISCELLANEOUS. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered (by hand, by courier, by telephone line facsimile transmission or other means) or sent by certified mail, return receipt requested, properly addressed and with proper postage pre-paid (i) if to the Company, at JTS Corporation, 166 Baypointe Parkway, San Jose, California 95134, Attention: Chief Financial Officer, telephone line facsimile transmission No. (408) 468-1619, (ii) if to the Initial Investor, c/o Genesee Investments, 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332, telephone line facsimile transmission No. (206) 462-4645 and (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b), and shall be effective, when personally delivered, upon receipt and, when so sent by certified mail, four days after deposit with the United States Postal Service. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of California applicable to agreements made and to be performed entirely within such State. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it -19- 20 may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (e) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (h) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) The Company acknowledges that any failure by the Company to perform its obligations under this Agreement, including, without limitation, the Company's obligations under Section 3(n), or any delay in such performance could result in damages to the Investors and the Company agrees that, in addition to any other liability the Company may have by reason of any such failure or delay, the Company shall be liable for all direct and consequential damages caused by any such failure or delay. (j) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. -20- 21 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of day and year first above written. JTS CORPORATION By__________________________ Name: Title: INITIAL INVESTOR: NAME:_______________________ By__________________________ Name: Title: -21- 22 Exhibit A--Schedule of Initial Investors
No. of Purchase Total Name and Address Series B Preferred Shares Price Purchase Price - ---------------- ------------------------- -------- -------------- Genesee Fund Limited- 2,500 $1,000 $ 2,500,000 Portfolio B c/o CITCO Kaya Flamboyan 9 Curacao, Netherlands Antilles GFL Advantage Fund Limited 12,500 $1,000 $12,500,000 c/o CITCO Kaya Flamboyan 9 Curacao, Netherlands Antilles
-22- EX-5.1 4 OPINION OF COOLEY GODWARD 1 EXHIBIT 5.1 [COOLEY GODWARD LLP LETTERHEAD] November 25, 1996 JTS Corporation 166 Baypointe Parkway San Jose, CA 95134 Dear Ladies and Gentlemen: You have requested our opinion with respect to certain matters in connection with the filing by JTS Corporation (the "Company") of a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission covering a total of 10,037,500 shares (the "Shares") of common stock, $0.001 par value ("Common Stock") 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, issued or issuable upon conversion of Series B Preferred Stock, issued to GFL Advantage Fund Limited and Genesee Fund Limited-Portfolio B, (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 issued to Wharton Capital Corporation, as described in the Registration Statement. In connection with this opinion, we have examined the Registration Statement, the Company's Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, and such other documents, records, certificates, memoranda and other instruments as we deem necessary as a basis for this opinion. We have assumed the genuineness and authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as copies thereof, and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, when issued in accordance with the Registration Statement, will be validly issued, fully paid, and nonassessable. 2 JTS Corporation November 19, 1996 Page 2 We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus included in the Registration Statement. Very truly yours, COOLEY GODWARD LLP By: /s/ Andrei M. Manoliu ___________________________ Andrei M. Manoliu AMM/kal EX-10.35 5 AGREEMENT FOR PURCHASE 1 Exhibit 10.35 AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY WITH REPURCHASE OPTION THIS AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY WITH REPURCHASE OPTION (the "Agreement") is made and entered into as of the 10th day of September, 1996 by and between JTS CORPORATION ("Seller" or "JTS"), and JACK TRAMIEL ("Buyer" or "Tramiel"). For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer hereby agree as follows: 1. DEFINITIONS. Unless the context otherwise specifies or requires, for the purposes of this Agreement all words and phrases having their initial letters capitalized herein shall have the meanings set forth in SCHEDULE 1 attached hereto. 2. PURCHASE AND SALE. Seller agrees to sell the real property described on the attached EXHIBIT A (collectively the "Property") to Buyer, and Buyer agrees to purchase the Property from Seller, on all of the terms, covenants and conditions set forth in this Agreement. 3. PURCHASE PRICE. The total purchase price for the Property (the "Purchase Price") shall be the sum of Ten Million Dollars ($10,000,000) which, subject to all prorations and adjustments provided in this Agreement, shall be paid by Buyer to Seller through escrow on the Closing Date in cash. 4. CONDITIONS TO AGREEMENT. 4.1 BUYER'S CONDITIONS PRECEDENT. Buyer's obligation to purchase the Property or otherwise to perform any obligation provided in this Agreement shall be conditioned expressly upon the fulfillment to Buyer's reasonable satisfaction of each of the following conditions precedent: 4.1.1 The due and timely performance by Seller of each and every covenant, undertaking and agreement to be performed by Seller as provided in this Agreement. 4.1.2 As of the Closing Date, there shall have been no material adverse change in the condition of the Property, or any portion thereof. 4.2 SELLER'S CONDITIONS PRECEDENT. Seller's obligation to sell the Property shall be conditioned expressly upon the fulfillment to Seller's reasonable satisfaction of each of the following conditions precedent: 1. 2 4.2.1 Buyer's due execution and delivery to Seller on the Closing Date of a Memorandum of the Option to Repurchase in the form attached hereto as EXHIBIT B for each county in which any of the Property is located (COLLECTIVELY THE "OPTION MEMORANDA"). 4.2.2 The due and timely performance by Buyer of each and every covenant, undertaking and agreement to be performed by Buyer as provided in this Agreement. 4.3 REMOVAL OF TITLE CONDITIONS. Buyer has notified Seller of its objections to the disapproved exceptions listed on Schedule 2 attached hereto (the "Disapproved Exceptions"). Following the Closing Date Seller shall, at its sole cost and expense, remove the Disapproved Exceptions. 4.4 TERMINATION. In the event any of the foregoing conditions are neither fulfilled, nor waived as provided above, Buyer, at its election by written notice to Seller, may terminate this Agreement and be released from all obligations under this Agreement. In the event of termination by Buyer all funds deposited in escrow by Buyer or paid by Buyer to Seller outside of escrow and all interest accrued on such funds shall be returned immediately to Buyer, and all documents deposited in escrow by Buyer or Seller shall be returned to the depositing party. 5. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS. 5.1 SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Seller hereby makes the following covenants, representations and warranties to and for the benefit of Buyer: 5.1.1 Seller will convey to Buyer all its right, title and interest in the Property to Buyer, including the assignment of all right, title and interest Seller may have as landlord under the Tenant Occupancy Leases. 5.1.2 Neither Seller's execution of this Agreement nor performance by Seller of any of its obligations hereunder (i) violates or shall violate any written agreement to which Seller is bound, or (ii) shall constitute a violation or breach by Seller of any judgment, order, writ, injunction or decree issued or imposed upon Seller, and no approval, consent, order, authorization, designation, filing (other than recording), registration, notification of, by or with any judicial or governmental authority is required in conjunction with Seller's execution of this Agreement and performance of its obligations hereunder. 5.1.3 Seller shall deliver to Buyer on the Closing date a certified copy of the resolution of its board of directors authorizing the transactions contemplated by this Agreement. 5.1.4 At any time following the Closing Date and during the term of this Agreement, Buyer shall, upon the written request of Seller, cause the Property or any portion of it, to be listed for sale, and shall cooperate fully with Seller in the marketing of the Property. 2. 3 5.2 BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer hereby makes the following representations and warranties to and for the benefit of Buyer: 5.2.1 Neither Buyer's execution of this Agreement nor performance by Buyer of any of its obligations hereunder (i) violates or shall violate any written agreement to which Buyer is bound, or (ii) shall constitute a violation or breach by Buyer of any judgment, order, writ, injunction or decree issued or imposed upon Buyer, and no approval, consent, order, authorization, designation, filing (other than recording), registration, notification of, by or with any judicial or governmental authority is required in conjunction with Buyer's execution of this Agreement and performance of its obligations hereunder. 5.2.2 Buyer is fully familiar with the Property due to Buyer's affiliation with the previous owner of the Property. Buyer is purchasing the Property based solely on his own knowledge and investigation of the Property (to the extent he deems any such investigation necessary in light of his prior knowledge of the Property), in its "as-is, where-is" condition, without reliance upon any representation or warranty of Seller. 6. TITLE, ESCROW AND CLOSING. 6.1 CONDITIONS OF TITLE. Seller shall convey title to the Property upon the close of escrow by grant deeds (the "Deeds") subject to no exceptions other than the following (the "Conditions of Title"): 6.1.1 The lien for local real estate taxes and assessments not yet due or payable; 6.1.2 All items set forth in Schedule B of the Title Reports for the portions of the Property located in California and all items set forth in Schedule C of the Title Reports for the portions of the Property located in Texas, with the understanding that Seller, following the Closing Date, shall remove the exceptions described on the SCHEDULE 2, attached hereto; 6.1.3 Interests of tenants pursuant to Tenant Occupancy Leases; and 6.1.4 The Option Memoranda. 6.2 TITLE INSURANCE. Buyer's obligation to purchase the Property shall be subject to the irrevocable commitment of the Title Company to issue upon payment of its normal premium on the close of escrow of the transaction contemplated by this Agreement its CLTA Owner's Policy of Title Insurance for each portion of the Property located in California and its standard form of Texas Land Title form of owner's policy of title insurance for each portion of the Property located in Texas, insuring Buyer in the aggregate amount of $10,000,000, that fee simple title to the Property is vested in Buyer subject only to the Conditions of Title. Buyer shall be entitled to direct the Title Company to allocate the amount of insurance to individual parcels for the purpose of issuing individual policies of title insurance if Buyer so chooses. 3. 4 6.3 CLOSING DATE. Through an escrow established with the Title Company, Buyer and Seller shall consummate this transaction on September 12, 1996, or such later date as the parties shall mutually agree upon (the "Closing Date"). 6.4 DEPOSITS AND DELIVERIES BY SELLER. Seller shall deposit or cause to be deposited into escrow with the Title Company, or deliver directly to Buyer outside of escrow, on or before the Closing Date, the following documents duly executed and acknowledged as required: 6.4.1 The Deeds. 6.4.2 An Assignment of Leases in the form attached hereto as EXHIBIT C transferring to Buyer all of Seller's interest as landlord under the Tenant Occupancy Leases, and all guarantees thereof, if any, (the "Assignment of Leases"). 6.4.3 An Affidavit of Non-Foreign Status. 6.4.4 Seller's written escrow instructions to close escrow in accordance with the terms of this Agreement. 6.4.5 Counterpart originals of the Option Memoranda. 6.4.6 Such other documents, resolutions, consents and affidavits necessary or advisable to effect the valid consummation of the transaction evidenced by this Agreement. 6.5 DEPOSITS AND DELIVERIES BY BUYER. Buyer shall deposit or cause to be deposited into escrow with the Title Company, or deliver directly to Seller outside of escrow, on or before the Closing Date, each of the following documents duly executed and acknowledged as required and funds: 6.5.1 Cash, wire transfer, cashier's check, or other immediately available funds, which shall equal the Purchase Price (the "Purchase Funds"). 6.5.2 A counterpart original of the Assignment of Leases. 6.5.3 Counterpart originals of the Option Memoranda. 6.5.4 Buyer's written escrow instructions to close escrow in accordance with the terms of this Agreement. 6.6 CLOSING. The Title Company shall close escrow on the Closing Date when and if it is irrevocably committed to issue the title insurance described in SECTION 6.2 above and has received all of the documents and funds listed in SECTIONS 6.4 and 6.5 above. The Title Company shall close escrow by: 4. 5 6.6.1 Recording the Deeds and the Option Memoranda, in that order. 6.6.2 Issuing to Buyer the owner's policy of title insurance described in SECTION 6.2 above. 6.6.3 Delivering to Buyer the original of the Assignment of Leases and Non-Foreign Affidavit, each duly executed by Seller. 6.6.4 Delivering to Seller both original counterparts of the Option Memoranda, and the Purchase Funds, after taking into account Seller's share of prorations. 6.6.5 Delivering to Buyer and Seller copies of all other documents and things deposited and/or delivered through escrow, the originals of which are not being delivered by the Title Company to such parties, together with Title Company's final closing statement for the subject transaction. 6.7 PRORATIONS. 6.7.1 Rents and other income, current taxes, insurance premiums and management, service, operating and maintenance expenses shall be prorated between Seller and Buyer as of the Closing Date. All bonds, assessments, encumbrances and other charges against the Property levied on or before the Closing Date shall be assumed by Buyer. 6.7.2 All deposits made by tenants of the Property as security for rent, cleaning or any other purpose and prepaid rents and all interest accrued or due on such sums shall, at the sole option of Buyer, be credited against the Purchase Price to be paid by Buyer. 6.8 CLOSING COSTS. Seller shall pay the cost of all transfer, sales and conveyance taxes imposed by any governmental authority upon this transaction, title insurance and endorsement premiums for the title insurance, recording fees and escrow fees incurred in connection with the contemplated transaction. 6.9 POSSESSION. Right to possession of the Property shall transfer to Buyer on the Closing Date, subject to the rights of the tenants under the Tenant Occupancy Leases. 7. COMMISSIONS. 7.1 BROKERAGE COMMISSION AND FINDER'S FEE. Each party to this Agreement warrants to the other no person or entity can properly claim a right to a real estate commission, real estate finder's fee, real estate acquisition fee or other real estate brokerage-type compensation (collectively, "Real Estate Compensation") based upon the acts of that party with respect to the transaction contemplated by this Agreement, and each party hereby agrees to indemnify, defend and protect the other against and to hold the other harmless from any loss, cost or expense (including but not limited to attorneys' fees and returned commissions) resulting from any claim for Real Estate Compensation by any person or entity based upon such acts. 5. 6 7.2 GRANT OF OPTION TO REPURCHASE. Tramiel does hereby grant JTS an option to purchase the Property from Tramiel upon the following terms and conditions: 7.2.1 PURCHASE PRICE. In the event the option is exercised the purchase price for the Property shall be Ten Million Dollars ($10,000,000) (THE "OPTION PRICE"), subject to reduction in accordance with the provisions of Section 7.2.5, below. 7.2.2 TITLE AND COSTS. In the event that the option is exercised, the Property shall be conveyed free and clear of all liens and encumbrances other than the lien for current real property taxes not yet due and the Conditions of Title and the Tenant Occupancy Leases, and any other leases or rental agreements relating to the property entered into by Tramiel with the approval of JTS following the Closing Date, shall be assigned to JTS. JTS shall pay the transfer tax upon conveyance of the Property, recording costs, and the cost of any title insurance and escrow fees. Current taxes, insurance, premiums and management, service, operating and maintenance expenses shall be prorated between JTS and Tramiel as of the date Tramiel conveys the Property to JTS. 7.2.3 EXERCISE OF THE OPTION. The option may be exercised at any time prior to the first anniversary of the Closing Date, but in no event shall the closing take place until after such first anniversary. The Property shall be conveyed to JTS, the purchase price shall be paid by JTS to Tramiel, and the Tenant Occupancy Leases, and any other leases or rental agreements entered into by Tramiel with the approval of JTS following the Closing Date, shall be assigned to JTS by Tramiel, no later than thirty (30) days following the first anniversary of the Closing Date. The option shall be exercised by giving written notice of JTS's election to exercise the option to Tramiel. If the option is not exercised within the time provided, unless the date for the exercise of the option shall be extended in writing, the option shall terminate. 7.2.4 ADDITIONAL ENCUMBRANCES, ALTERATIONS. Tramiel shall not further encumber the Property, grant any easements, or agree to any restrictions upon the Property without the prior written consent of JTS. Tramiel shall not make any alterations to the Property nor convey title to the Property to any third person until such time as the option shall have expired, except as provided in Section 7.2.5 below. 7.2.5 SALE OF 11820 W. OLYMPIC BOULEVARD, LOS ANGELES, CA. Atari Corporation entered into a purchase agreement with The Oved Intervivos Trust Dated May 12, 1988, The Frederick H. Leeds Intervivos Trust of November 30, 1990 and the Sheila L. Greger Intervivos Trust dated May 12, 1989 for the sale of that portion of the Property known as 11820 W. Olympic Boulevard, West Los Angeles, California (the "West Los Angeles Site") for a purchase price of $2,400,000. In the event Tramiel completes this transaction, or any other transaction for the sale of the West Los Angeles Site with the approval of JTS, the Option Price shall be reduced by the net sales proceeds received by Tramiel upon his sale of the West Los Angeles Site. Tramiel has indicated to JTS that he has negotiated a transaction with Kim Dunitz, the owner of a one twenty-fourth interest in the West Los Angeles Site, to pay her a total of $100,000 in exchange for her interest. The net sales proceeds shall be the gross sales price less the sum of all Tramiel's expenses, taxes, commissions, costs, transfer fees, closing 6. 7 costs incurred in connection with such sale and any amount up to $100,000 (or greater amount if agreed to in writing by JTS) paid by Tramiel to Kim Dunitz in exchange for her interest in the West Los Angeles Site. 7.2.6 RECORDING. The parties agree to record a memorandum of this Agreement. If the option is not exercised JTS agrees to deliver quitclaim deeds for the Property to Tramiel. 8. RIGHT OF FIRST OFFER. The property located at 7060 W. Sunset Boulevard, Los Angeles (the "Sunset/LaBrea Site") is encumbered by that certain Declaration of Establishment of Restrictions and Covenants Affecting Land (the "Declaration") recorded March 23, 1988 as Document #88-396092 in which a certain person has a right of first offer concerning the Sunset/LaBrea Site. Because Tramiel's offer to purchase each parcel comprising the Property is not severable, JTS must notify the holder of such right of first offer of the terms of this Agreement. In the event that, after the closing of the sale to Tramiel, such person elects to purchase the Property, Tramiel, at the direction of JTS, shall convey the Property either directly to such person or to JTS, upon payment to Tramiel of the amount of Ten Million Dollars. 9. GENERAL PROVISIONS. 9.1 NOTICES. Any notice required or permitted to be given under this Agreement shall be in writing and (i) personally delivered, (ii) sent by United States mail, registered or certified mail, postage prepaid, return receipt requested, (iii) sent by Federal Express or similar nationally recognized overnight courier service, or (iv) transmitted by facsimile with a hard copy sent within one (1) business day by any of the foregoing means, and in all cases addressed as follows, and such notice shall be deemed to have been given upon the date of actual receipt or delivery (or refusal to accept delivery) at the address specified below (or such other addresses as may be specified by notice in the foregoing manner) as indicated on the return receipt or air bill: To Seller: JTS CORPORATION 166 Baypointe Parkway San Jose, CA 95134 Attn: Chief Financial Officer With a copy to: Andrei Manoliu, Esq. Cooley Godward 5 Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Fax No. (415) 857-0663 Phone No. (415) 843-5000 7. 8 To Buyer: MR. TRAMIEL 18331 Lexington Drive Monte Sereno, CA 95030 With a copy to: Adron W. Beene, Esq. 6453 Hidden Creek Court San Jose, CA 95120 Fax No. (408) 997-8439 Phone No. (408) 323-9223 9.2 ENTIRE AGREEMENT; NO MODIFICATIONS. This Agreement, together with the schedules and exhibits attached hereto, incorporates all agreements, warranties, representations and understandings between the parties to the Agreement with respect to the subject matter hereof and constitutes the entire agreement of Seller and Buyer with respect to the purchase and sale of the Property. Any prior or contemporaneous correspondence, memoranda, understandings, offers, negotiations and agreements, oral or written, are merged herein and replaced in total by this Agreement and the exhibits hereto and shall be of no further force or effect. This Agreement may not be modified or amended except in a writing signed by Seller and Buyer. 9.3 TIME. Time is of the essence in the performance of the parties' respective obligations set forth in this Agreement. 9.4 ATTORNEYS' FEES; VENUE. In the event any action or proceeding at law or in equity between Buyer and Seller to enforce or interpret any provision of this Agreement or to protect or establish any right or remedy of either Buyer or Seller hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses including, without limitation, reasonable attorneys' and paralegals' fees and expenses, incurred by such prevailing party, in such action or proceeding and in any appeal in connection therewith, whether or not such action, proceeding or appeal is prosecuted to judgment or other final determination, together with all costs of enforcement and/or collection of any judgment or other relief. Venue shall be in Santa Clara County. 9.5 SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by Buyer without the prior written consent of Seller which may be granted or withheld by Seller in its sole discretion. Subject to the foregoing provision, this Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective successors and assigns. 9.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts and each such counterpart shall be deemed to be an original; all counterparts so executed shall constitute one instrument and shall be binding on all of the parties to this Agreement notwithstanding that all of the parties are not signatory to the same counterpart. 8. 9 9.7 CONSTRUCTION. This Agreement shall be governed by and construed under the laws of the State of California. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Agreement or any schedules or exhibits to it or any document executed and delivered by either party in connection with this Agreement. All captions in this Agreement are for reference only and shall not be used in the interpretation of this Agreement or any related document. If any provision of this Agreement shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Agreement and all such other provisions shall remain in full force and effect. 9.8 FURTHER ASSURANCES. The parties agree to enter into such further documents as may be necessary to effect the transactions contemplated hereby. IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of the date and year first written above: SELLER: BUYER: JTS Corporation By /s/ W. Virginia Walker /s/ Jack Tramiel ______________________________ ____________________________ Jack Tramiel Its Executive Vice President _____________________________ 9. 10 SCHEDULE 1 DEFINED TERMS For the purposes of this Agreement, the following words and phrases shall have the following meanings unless the context otherwise specifies or requires: "TENANT OCCUPANCY LEASES" shall mean all leases, work letter agreements, improvement agreements, and other rental agreements, if any, listed in SCHEDULE B TO THE ASSIGNMENT OF LEASES (which is attached to this Agreement as EXHIBIT C) with respect to occupancy or use of the Property by tenants. "TITLE COMPANY" shall mean Stewart Title Company whose address for this transaction is as follows: Stewart Title Company 180 Montgomery Street, Suite 840 San Francisco, CA 94104 Attn: Terry Duwell, Escrow Officer Escrow No. 20101847 Fax No. (415) 986-5973 Phone No. (415) 705-8970 "TITLE REPORTS" shall mean the preliminary title reports with respect to the Property described as follows: 40020708 8/25/96 (West Los Angeles, Los Angeles County) 80127028 8/8/96 (Costa Mesa, Orange County) 40020707 8/12/96 (Sunset/La Brea, Los Angeles County) 96116311B 8/14/96 (Champions Terrace, Harris County) 96116311A 8/14/96 (Deerbrook, Harris County) 96302992 8/9/96 (Mesquite and Carrollton, TX, Dallas County) 1. 11 SCHEDULE 2 DISAPPROVED EXCEPTIONS Title Report No. Disapproved Exceptions West Los Angeles #6,7,8,9,12 of Schedule B 40020708 Sunset LaBrea #13 (but only to the extent of the right of first 40020707 offer contained therein), 15 of Schedule B Costa Mesa #8 of Schedule B 80127028 Champions Terrace #6,7,8,10 of Schedule C 96116311B Deerbrook #6,7,8,9,10 of Schedule C 96116311A Mesquite and Carrollton #5,6,7,10,11,12,13 of Schedule C 96302992 2. 12 EXHIBIT A LEGAL DESCRIPTION [to be attached] 13 EXHIBIT A Legal Description of Orange County Property 14 EXHIBIT A DESCRIPTION: THE LAND REFERRED TO HEREIN IS SITUATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS: PARCEL 1: A PORTION OF BLOCK 34 OF PACIFIC FARMS, IN THE CITY OF LOS ANGELES, AS PER MAP RECORDED IN BOOK 1 PAGE 43 AND 44 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF THE SOUTHERLY LINE OF OLYMPIC BOULEVARD, AS DESCRIBED IN THE DEED TO THE STATE OF CALIFORNIA, RECORDED IN BOOK 17331 PAGE 349, OFFICIAL RECORDS OF SAID COUNTY, WITH A LINE WHICH IS PARALLEL WITH AND DISTANT 308.19 FEET SOUTHWESTERLY (MEASURED ALONG THE NORTHWEST LINE OF SAID BLOCK FROM THE NORTHEASTERLY LINE OF SAID BLOCK 34; THENCE EASTERLY ALONG SAID SOUTHERLY LINE ON A CURVE, CONCAVE TO THE NORTH, HAVING A RADIUS OF 2055 FEET, A DISTANCE OF 162.72 FEET, MORE OR LESS, TO A POINT DISTANT WESTERLY 158.86 FEET, MEASURED ALONG SAID SOUTHERLY LINE FROM THE NORTHEASTERLY LINE OF SAID BLOCK 34; THENCE SOUTHERLY PARALLEL WITH SAID NORTHEASTERLY LINE, 58.97 FEET, MORE OR LESS, TO THE BEGINNING OF A TANGENT CURVE, CONCAVE TO THE NORTHEAST, HAVING A RADIUS OF 308.6 FEET, WHICH SAID CURVE INTERSECTS THE SOUTHERLY LINE OF SAID BLOCK 34 AT A POINT DISTANT WESTERLY THEREON 110.65 FEET FROM THE MOST EASTERLY CORNER OF SAID BLOCK; THENCE SOUTHEASTERLY ALONG SAID CURVE 180.74 FEET, MORE OR LESS, TO SAID SOUTHERLY LINE; THENCE WESTERLY ALONG SAID SOUTHERLY LINE, 221.28 FEET, MORE OR LESS, TO A LINE WHICH IS PARALLEL WITH THE NORTHEASTERLY LINE OF SAID BLOCK 34 AND PASSES THROUGH THE POINT OF BEGINNING; THENCE NORTHWESTERLY ALONG SAID PARALLEL LINE, 199.35 FEET, TO THE POINT OF BEGINNING. PARCEL 2: AN EASEMENT FOR SPUR TRACK PURPOSES, OVER A STRIP OF LAND, 9 FEET IN WIDTH, MEASURED AT RIGHT ANGLES, OR RADIALLY, EXTENDING FROM THE SOUTHERLY LINE OF SAID OLYMPIC BOULEVARD, TO THE SOUTHERLY LINE OF SAID BLOCK 34, THE SOUTHWESTERLY LINE OF SAID STRIP OF LAND BEING THE NORTHEASTERLY LINE OF THE HEREINBEFORE DESCRIBED PARCEL 1. PARCEL 3 PARCEL D OF PARCEL MAP L.A. NO. 5795, IN THE CITY OF LOS ANGELES, AS PER MAP FILED IN BOOK 205, PAGES 27, 28 AND 29 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. 15 EXHIBIT A (CONTINUED) PARCEL 4 NON EXCLUSIVE EASEMENTS FOR ROADWAY, WALKWAY, SURFACE DRAINAGE AND INGRESS AND EGRESS AND PARKING OF MOTOR VEHICLES AND INCIDENTAL PURPOSES OVER THOSE PORTIONS OF PARCELS A, B, C PARCEL MAP L.A. NO. 5795, IN THE CITY OF LOS ANGELES, AS PER MAP FILED IN BOOK 205, PAGES 27, 28, AND 29 OF PARCEL MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY AS MORE FULLY SET IN PARAGRAPH 3A AND 3B AND DELINEATED ON EXHIBIT "A" IN THE DECLARATION OF ESTABLISHMENT OF RESTRICTIONS AND COVENANTS AFFECTING LAND RECORDED MARCH 23, 1988, AS INSTRUMENT NO. 88-39602. PARCEL 5 AN EXCLUSIVE EASEMENT IN, TO, OVER, UNDER AND ACROSS THOSE PORTIONS OF PARCEL A, B, C SHOWN ON PARCEL MAP NO. 5795 AS RECORDED IN BOOK 205, PAGES 27-29 OF PARCEL MAPS, (THE "SERVIENT PROPERTY") AS REQUIRED FOR THE EXISTENCE AND MAINTENANCE OF ANY AND ALL IMPROVEMENTS WHICH ENCROACH AS OF THE DATE HEREOF UPON THE SERVIENT PROPERTY FROM ANY PORTION OF PARCEL D AS SHOWN ON PARCEL MAP NO. 5795 AS RECORDED IN BOOK 205, PAGES 27-29, INCLUSIVE, AS OF THE DATE HEREOF. GRANTOR FURTHER CONFIRMS AND AGREES THAT GRANTEE HAS THE RIGHT TO ENTER THE SERVIENT PROPERTY TO REPAIR, MAINTAIN SUCH ENCROACHING IMPROVEMENT WHICH EXIST AS OF THE DATE HEREOF, AS GRANTED IN DEED DATED MARCH 17, 1988, RECORDED MARCH 23, 1988 AS INSTRUMENT NO. 88- 396094, OFFICIAL RECORDS. 16 EXHIBIT A Legal Description of Los Angeles County Property 17 EXHIBIT "A" A METES AND BOUNDS DESCRIPTION of a tract or parcel of land containing 0.9189 acres (40,028 square feet) located in the Wherry B. Adams Survey, Abstract No. 95, Harris County, Texas; being that portion know as Reserve "G" in Deerbrook Mall, a subdivision of 95.1343 acres approved by the city of Humble, Texas, on March 11, 1984 (not yet recorded) the 95.1343 acre tract described in deed of record under File Code No. 070-00-0208, Clerk's File No. J331875 of the Harris County Official Public Records of Real Property; said 0.9189 acre parcel being more particularly described as follows: BEGINNING at a 1-inch iron pipe with cap found at the most westerly southwest corner of Deerbrook Mall, same being the southeast corner of Lot 10, Block 9 in the Second Replat of Northshire Section 3, a subdivision of record in Volume 306; Page 124 of the Harris County Map Records; said iron pipe parking the southwest corner of the herein described parcel; THENCE, North 20(degree) 53' 25" West, 116.00 feet along the east line of the aforementioned Lot 10, to a 1-inch iron pipe with cap found on the southerly right-of-way line of Canterbury Driver (60-foot wide); THENCE, North 20(degree) 00' 44" East, 43.57 feet to an "X" mark found in concrete for the northwest corner of the parcel being described; THENCE, North 69(degree) 05' 29" East, 109.82 feet to a 5/8 inch iron foot set at an angle point; THENCE, North 36(degree) 24' 19" East, 59.36 feet to a nail set for corner in the arc of a non-tangent curve to the left; THENCE, 13.12 feet along the arc of said non-tangent curve to the 1 ft. having a radius of 547.58 feet, a central angle of 01(degree) 2" and chord bearing South 57(degree) 04' 48" East, 13.12 feet to a nail set at the end of said curve and point of tangency; THENCE; South 57(degree) 45' 59" East, 224.17 feet to a 5/8-inch iron rod set for the southeast corner; THENCE; South 69(degree) 06' 35" West 303.80 feet to the POINT OF BEGINNING AND CONTAINING 0.9189 acre (40,028 square feet) of land area. 18 EXHIBIT A Legal Description of Orange County Property 19 EXHIBIT A THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE, AND IS DESCRIBED AS FOLLOWS: PARCEL 1 OF LOT LINE ADJUSTMENT NO. LL-92-03, IN THE CITY OF COSTA MESA, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS PER INSTRUMENT RECORDED SEPTEMBER 3, 1992 AS INSTRUMENT NO. 92-596398 OF OFFICIAL RECORDS OF SAID ORANGE COUNTY. 20 EXHIBIT A Legal Description of Dallas County Property 21 EXHIBIT A Legal description of land: TRACT I Lots 7A and 7B, in Block A, of TREASURY ADDITION, an addition to the City of Mesquite, Dallas County, Texas, according to the Map or Plat thereof recorded in Volume 84240, Page 3231, Map Records, Dallas County, Texas, and Certificate of Correction of Error, filed 12/15/89, recorded in Volume 89243, Page 2092, Real Property Records, Dallas County, Texas. TRACT II, PARCEL I BEING a track of land in the M.P. Green Survey, Abstract No. 519, Dallas County, located in the city limits of Carrollton, Texas, and also being a part of Lot 1, Block 2, CAPITAL CENTER - PHASE I, as filed for record in Volume 83168, Page 2036, Plat Records, Dallas County, Texas and being more particularly described as follows: BEGINNING at a found iron rod in the west right-of-way of Interstate Highway 35-E, said point being the southeast corner of Lot 1, Block 2 "Capital Center Phase I" as filed for record in Volume 83168, Page 2036, Plat Records, Dallas County, Texas; THENCE South 59(degree)19'36" West, departing said right-of-way line, a distance of 575.75 feet to a set iron rod for a corner, said corner being on the east right-of-way line of Crescent Drive (60 feet wide); THENCE North 30(degree)40'24" West, along said east right-of-way line, a distance of 483.74 feet to a set iron rod for a corner; THENCE North 59(degree)19'36" East, a distance of 595.32 feet to a set iron rod for a corner, on the west right-of-way line of said Interstate Highway 35-E; THENCE Southeasterly, along said right-of-way and along a circular curve to the left, having a radius of 11,609.16 feet whose back tangent bears South 27(degree)09'44" East, through a central angle of 2(degree)23'22", an arc distance of 484.17 feet to the POINT OF BEGINNING AND CONTAINING 282,432 square feet or 6.484 acres of land more or less. 1. 22 TRACT II, PARCEL II BEING a tract of land in the M.P. Green Survey, Abstract No. 519, Dallas County, located in the City of Carrollton, Texas, and also being a part of Lot 1, Block 2, CAPITAL CENTER - PHASE I, as filed for record in Volume 83168, Page 2036, Plat Records of Dallas County, Texas, and being more particularly described as follows: BEGINNING at a set iron rod in the common east line of proposed Crescent Drive (60 foot R.O.W.) and the west line of Lot 1, Block 2 "Capital Center Phase I" and said POINT OF BEGINNING being North 30(degree)40'24" West, along said common line a distance of 483.74 feet from the southwest corner of Lot 1, Block 2 "Capital Center - Phase I"; THENCE North 30(degree)40'24" West, continuing along said common line a distance of 209.17 feet to a set iron rod for a corner; THENCE North 59(degree)19'36" East, departing said common line a distance of 610.05 feet to a set iron rod for a corner in the west right-of-way line of Interstate Highway 35-E; THENCE Southeasterly, along said right-of-way line and along a circular curve to the left having a radius of 11,609.19 feet whose black tangent bears South 26(degree)07'38" East, through a central angle of 1(degree)02'06" an arc length of 209.69 feet to a set iron rod for a corner; THENCE South 59(degree)19'36" West, departing said west right-of-way line, a distance of 595.32 feet to the POINT OF BEGINNING AND CONTAINING 125,997 square feet or 2.893 acres of land more or less. 2. 23 EXHIBIT A Legal Description of Harris County Property 24 EXHIBIT A TO SPECIAL WARRANTY DEED PARCEL 1 ALL OF RESERVE "B" OF CASHEL FOREST, SECTION ONE, ACCORDING TO THE MAP OR PLAT THEREOF RECORDED IN VOLUME 176, PAGE 35 OF THE MAP RECORDS OF HARRIS COUNTY, TEXAS PARCEL 2 ALL OF RESERVE "G" OF DEERBROOK MALL, ACCORDING TO THE MAP OR PLAT THEREOF RECORDED IN VOLUME 334 PAGE 1 OF THE MAP RECORDS OF HARRIS COUNTY, TEXAS, AND BEING MORE PARTICULARLY DESCRIBED BY METES AND BOUNDS ON EXHIBIT "A" ATTACHED HERETO. 25 EXHIBIT B TO PURCHASE AGREEMENT FORM OF MEMORANDUM OF OPTION TO REPURCHASE IN RECORDABLE FORM attached 26 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: COOLEY GODWARD & CASTRO HUDDLESON & TATUM 5 PALO ALTO SQUARE 3000 EL CAMINO REAL PALO ALTO, CA 94306-2115 ATTN: ANNA B. POPE, ESQ. MEMORANDUM OF OPTION THIS MEMORANDUM OF OPTION (the "Memorandum") is entered into as of , 1996 between JTS CORPORATION ("JTS"), and JACK TRAMIEL ("Tramiel"), in reference to the following: 1. OPTION. JTS and Tramiel entered into that certain AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY WITH REPURCHASE OPTION (the "Purchase Agreement") as of the day of September, 1996. 2. GRANT OF OPTION TO REPURCHASE. Pursuant to the Purchase Agreement, Tramiel did and does hereby, grant JTS an option to purchase the property described on the attached Exhibit A (the "Property") from Tramiel upon the terms and conditions set forth in the Purchase Agreement. 3. ADDITIONAL ENCUMBRANCES, ALTERATIONS. Tramiel agreed in the Purchase Agreement, among other things, that Tramiel shall not further encumber the Property, grant any easements, or agree to any restrictions upon the Property without the prior written consent of JTS. Tramiel shall not make any alterations to the Property nor convey title to the Property to any third person until such time as the option shall have expired. 4. NOTICE. The purpose of this Memorandum is to identify the Purchase Agreement for the purposes of information and notice. The sole instrument for determining the terms, conditions and provisions of, and the parties' rights under, the Purchase Agreement is the Purchase Agreement itself. IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as of the day and year first hereinabove written. JTS Corporation By ------------------------------- --------------------------------- Jack Tramiel Its ------------------------------ 1. 27 STATE OF ______________________________ ) ) ss. COUNTY OF _____________________________ ) On _______________________, 19___, before me,_______________________________, personally appeared _______________________________________________, [ ] personally known to me -OR- [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. Witness my hand and official seal. ___________________________________ Signature of the Notary This certificate must be attached Title or Type of Document: to the document described at right: Number of Pages: Date of Document: Signer(s) other than named above: (C)1993 National Notary Association, Canoga Park, CA CAPACITY CLAIMED BY SIGNER Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] Individual [ ] Corporate Officer(s) [ ] Partner(s) [ ] Limited [ ] General [ ] Attorney-in-Fact [ ] Trustee(s) [ ] Guardian/Conservator [ ] Other: SIGNER IS REPRESENTING: Name of person(s) or entity(ies) STATE OF ____________________________ ) ) ss. COUNTY OF ___________________________ ) On _______________________, 19___, before me,_____________________________, personally appeared _______________________________________________, [ ] personally known to me -OR- [ ] proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. SIGNER IS REPRESENTING: Witness my hand and official seal. ___________________________________ Signature of the Notary CAPACITY CLAIMED BY SIGNER Though statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [ ] Individual [ ] Corporate Officer(s) [ ] Partner(s) [ ] Limited [ ] General [ ] Attorney-in-Fact [ ] Trustee(s) [ ] Guardian/Conservator [ ] Other: SIGNER IS REPRESENTING: Name of person(s) or entity(ies) 2. 28 This certificate must be attached Title or Type of Document: to the document described at right: Number of Pages: Date of Document: Signer(s) other than named above: (C)1993 National Notary Association, Canoga Park, CA 3. EX-10.36 6 FORM OF SERIES B PREFERRED STOCK 1 EXHIBIT 10.36 SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT, dated as of the date of acceptance set forth below, by and between JTS CORPORATION, a Delaware corporation, with headquarters located at 166 Baypointe Parkway, San Jose, California 95134 (the "Company"), and the undersigned (the "Buyer"), a British Virgin Islands corporation. W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D as promulgated by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 Act"); WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the conditions of this Agreement, shares of non-voting, convertible preferred stock of the Company which will be convertible into units consisting of (1) shares of Common Stock, $.001 par value (the "Common Stock"), of the Company and (2) warrants to purchase shares of Common Stock (the "Warrants"), subject to acceptance of this Agreement by the Company; and WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Company and Genesee Fund Limited-Portfolio B are executing and delivering a Subscription Agreement (the "Portfolio B Subscription Agreement") providing for the purchase and sale, upon the terms and subject to the conditions provided therein, of shares of non-voting, convertible preferred stock for an aggregate purchase price of $2,500,000.00; and NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE. (a) SUBSCRIPTION. The undersigned hereby agrees to purchase from the Company the number of shares (the "Preferred Shares") of Series B Convertible Preferred Stock, $.001 par value (the "Preferred Stock"), of the Company set forth on the signature page of this Agreement, having the terms and conditions as set forth in the form of Certificate of Designations attached hereto as ANNEX I (the "Certificate of Designations") at the price per share and for the aggregate purchase price set forth on the signature page of this Agreement. The purchase price for the Preferred Shares shall be payable in United States Dollars. The shares of -1- 2 Common Stock issuable upon conversion of the Preferred Stock are referred to herein as the "Conversion Shares." The shares of Common Stock issuable upon exercise of the Warrants are referred to herein as the "Warrant Shares." The Conversion Shares and the Warrant Shares are referred to herein as the "Common Shares." The Common Shares and the Preferred Shares are referred to herein collectively as the "Shares." The Shares and the Warrants are referred to herein collectively as the "Securities." (b) FORM OF PAYMENT. The Buyer shall pay the purchase price for the Preferred Shares by delivering good funds in United States Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached hereto as ANNEX II (the "Joint Escrow Instructions"). Such delivery of funds shall be made against delivery by the Company of the certificates for the Preferred Shares registered in the name of the Buyer. Promptly following payment by the Buyer to the Escrow Agent of the purchase price of the Preferred Shares, but in no event later than the two New York Stock Exchange trading days after such payment, the Company shall deliver certificates for the Preferred Shares, registered in the name of the Buyer, to the Escrow Agent. By signing this Agreement, the Buyer and the Company each agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. (c) METHOD OF PAYMENT. Payment of the purchase price for the Preferred Shares shall be made by wire transfer of funds to: Citibank, N.A. 153 East 53rd Street New York, New York 10043 ABA#021000089 For Further Credit to A/C#37179446 for credit to the account of Brian W. Pusch Attorney Escrow Account Reference: Advantage/JTS Not later than 4:00 p.m., New York City time, on the date which is one New York Stock Exchange trading day after the Company shall have accepted this Agreement and returned a signed counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall deposit with the Escrow Agent the aggregate purchase price for the Preferred Shares. 2. BUYER REPRESENTATIONS, WARRANTIES, ETC. -2- 3 The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: (a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the Preferred Shares for its own account for investment only and not with a view towards the public sale or distribution thereof other than in connection with the registration thereof under the 1933 Act; (b) ACCREDITED INVESTOR. The Buyer is an "accredited investor" as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3); (c) REOFFERS AND RESALES. All subsequent offers and sales of the Securities by the Buyer shall be made pursuant to registration of the Shares being offered and sold under the 1933 Act or pursuant to an exemption from registration; (d) COMPANY RELIANCE. The Buyer understands that the Preferred Shares are being offered and sold, and the Common Shares and the Warrants are being offered, to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer=s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Preferred Shares and to receive an offer of the Common Shares and the Warrants; (e) INFORMATION PROVIDED. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Preferred Shares and the offer of the Common Shares which have been requested by the Buyer. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Buyer has had the opportunity to obtain and to review the Company's (1) Joint Proxy Statement/Prospectus, dated July 15, 1996, of the Company, (2) Form 8-A, dated July 25, 1996, (3) Final Prospectus pursuant to Rule 424(b)(3), dated July 17, 1996, (4) Current Reports on Form 8-K, dated July 28, 1996, September 26, 1996 and September 27, 1996, (5) the Company's Registration Statement on Form S-8, dated July 31, 1996 and (6) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 (collectively, the "SEC Reports"). The Buyer understands that its investment in the Securities involves a high degree of risk; -3- 4 (f) ABSENCE OF APPROVALS. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities; and (g) SUBSCRIPTION AGREEMENT. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Buyer and is a valid and binding agreement of the Buyer enforceable in accordance with its terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 3. COMPANY REPRESENTATIONS, WARRANTIES, ETC. The Company represents and warrants to, and covenants and agrees with, the Buyer that: (a) ORGANIZATION AND AUTHORITY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to (i) own, lease and operate its properties and to carry on its business as now being conducted, and (ii) to execute, deliver and perform its obligations under this Agreement, the Registration Rights Agreement, the form of which is attached hereto as ANNEX III (the "Registration Rights Agreement"), the Certificate of Designations, the Warrants, and the other agreements to be executed and delivered by the Company in connection herewith, and to consummate the transactions contemplated hereby. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and where failure so to qualify could have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company. (b) CAPITALIZATION. The authorized capital stock of the Company currently consists of (a) 150,000,000 shares of Common Stock, $.001 par value, of which 104,732,381 shares were outstanding as of October 31, 1996, all of which are fully paid and nonassessable, and on the Closing Date (as defined herein) there will be no material increase from October 31, 1996 in the number of shares of Common Stock outstanding; and (b) 10,000,000 shares of Preferred Stock, $.001 par value, and of which 15,000 shares will be designated as Series B Convertible Preferred Stock. As of October 31, 1996, the Company had outstanding options to purchase 5,034,853 shares of Common Stock. The Company does not have outstanding any material amount of securities (or obligations to issue any such securities) convertible into, exchangeable for or otherwise entitling the holders thereof to acquire shares of Common -4- 5 Stock, except as disclosed in the SEC Reports. The outstanding shares of Common Stock and outstanding options, warrants and other securities to purchase Common Stock have been duly authorized and validly issued. None of such outstanding shares of Common Stock, options, warrants and other securities has been issued in violation of the preemptive rights of any securityholder of the Company. (c) CONCERNING THE SECURITIES. The Shares have been duly authorized and the Preferred Shares, when issued and paid for in accordance with this Agreement, and the Common Shares, when issued upon conversion of the Preferred Shares, or exercise of the Warrants, as the case may be, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive or similar rights of any stockholder of the Company, as such, to acquire any of the Securities. The Common Stock has been listed for trading on the American Stock Exchange, Inc. ("AMEX") since July 30, 1996, is currently listed for trading thereon and (1) the Company and the Common Stock meet the criteria for continued listing and trading on AMEX; (2) the Company has not been notified since July 30, 1996 by AMEX of any failure or potential failure to meet the criteria for continued listing and trading on AMEX and (3) no suspension of trading in the Common Stock is in effect. Subject to the following sentence, the Company knows of no reason that the Common Shares will not be eligible for listing on AMEX. The Company has informed the Buyer that as of the date hereof, the Company does not satisfy the numerical listing criterion set forth in Section 101(a) of the AMEX Company Guide, and the Company has informed the Buyer that AMEX may determine in the future that the Company's Common Stock is no longer eligible for listing and trading on AMEX as a result of the Company's failure to satisfy such numerical listing criterion; provided, however, that nothing contained in this representation shall affect the Company's obligations under the Certificate of Designations including, without limitation, Section 10 thereof. (d) SUBSCRIPTION AGREEMENT; REGISTRATION RIGHTS AGREEMENT; WARRANTS. This Agreement, the Registration Rights Agreement and the Warrants have been duly and validly authorized by the Company, this Agreement has been duly executed and delivered on behalf of the Company and this Agreement is, the Registration Rights Agreement, when executed and delivered by the Company, will be, and the Warrants, when executed and delivered by the Company and issued from time to time upon conversion of the Preferred Stock, will be valid and binding obligations of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally and limits upon rights to indemnity. -5- 6 (e) NON-CONTRAVENTION. The execution and delivery of this Agreement by the Company and the consummation by the Company of the issuance of the Preferred Shares and the other transactions contemplated by this Agreement, the Registration Rights Agreement and the terms of the Preferred Stock and the Warrants do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under, the certificate of incorporation or by-laws of the Company, or any indenture, mortgage, deed of trust or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound which would have a material adverse effect on the Company or any applicable law, rule or regulation or any applicable decree, judgment or order of any court, United States federal or state regulatory body, administrative agency or other governmental body having jurisdiction over the Company or any of its properties or assets which would have a material adverse effect on the Company. (f) APPROVALS. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained by the Company for (1) the issuance and sale of the Preferred Shares as contemplated by this Agreement, (2) the issuance of Common Shares and Warrants on exercise of the Preferred Shares and (3) the issuance of Common Shares on exercise of the Warrants. (g) INFORMATION PROVIDED. The information provided by or on behalf of the Company to the Buyer in connection with the transactions contemplated by the Agreement, including, without limitation, the information referred to in Section 2(e) of this Agreement and the information concerning the manufacture, sale and marketing of the Company's 1 gigabyte 3-inch internal hard drive for notebook computers, does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are made, not misleading. (h) ABSENCE OF CERTAIN CHANGES. Since July 17, 1996, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or other), results of operations or prospects of the Company, except as disclosed in the SEC Reports. (i) ABSENCE OF LITIGATION. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company or any of its subsidiaries, threatened against the Company or any of its subsidiaries, wherein an unfavorable decision, ruling or finding -6- 7 would have a material adverse effect on the properties, business, condition (financial or other), results of operations or prospects of the Company and its subsidiaries taken as a whole or the transactions contemplated by this Agreement or any of the documents contemplated hereby or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of such other documents. The Company has informed the Buyer that the Company has entered into a settlement with Venture Lending & Leasing, Inc. ("VLLI") concerning VLLI's action against the Company relating to the relocation of certain leased equipment from its initial location to Madras, India, in alleged violation of the lease agreement. The Company has informed the Buyer that VLLI's complaint concerning such action has not yet been dismissed. The Company does not believe that the outcome of such litigation will have a material adverse effect on the Company. (j) PROPERTIES. The Company and its subsidiaries have good title to all property real and personal (tangible and intangible) and other assets owned by it, free and clear of all security interests, charges, mortgages, liens or other encumbrances, except such as are described in the SEC Reports or such as do not materially interfere with the use of such property made, or proposed to be made, by the Company or its subsidiaries. The leases, licenses or other contracts or instruments under which the Company and its subsidiaries lease, hold or are entitled to use any property, real or personal, are valid, subsisting and enforceable with only such exceptions as do not materially interfere with the use of such property made, or proposed to be made, by the Company or its subsidiaries. Neither the Company nor any of its subsidiaries has received notice of any material violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. (k) LABOR RELATIONS. No material labor problem exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company or any of its subsidiaries. (l) SEC FILINGS. The Company has timely filed all required forms, reports and other documents with the SEC, except that the Company failed to file in a timely manner its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996. All of such forms, reports and other documents complied, when filed, in all material respects, with all applicable requirements of the 1933 Act and the Securities Exchange Act of 1934, as amended (the "1934 Act"). 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. -7- 8 (a) TRANSFER RESTRICTIONS. The Buyer acknowledges that (1) the Preferred Shares and the Warrants have not been and are not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Agreement, the Common Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any such resale of Securities under circumstances in which the seller, or the person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other person is under any obligation to register the Securities (other than pursuant to the Registration Rights Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder (other than pursuant to Section 4(d) hereof and pursuant to the Registration Rights Agreement). (b) RESTRICTIVE LEGEND. The Buyer acknowledges and agrees that the certificates for the Preferred Shares and the Warrants and, until such time as the Common Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the certificates for the Common Shares, may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for the Securities): The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended. The securities have been acquired for investment and may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the Securities Act of 1933, as amended, or an opinion of counsel that registration is not required under said Act. (c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter into the Registration Rights Agreement on or before the Closing Date. (d) FORM D; BLUE SKY LAWS. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Buyer promptly -8- 9 after such filing. The Buyer agrees to cooperate with the Company in connection with such filing and, upon request of the Company, to provide all information relating to the Buyer reasonably required for such filing. (e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the Closing Date, the Company shall file a listing application for the Common Shares with AMEX and shall provide evidence of such filing to the Buyer. The Company shall use its best efforts to obtain approval by AMEX of the listing of the Common Shares, subject to official notice of issuance, as promptly as possible after the Closing Date. The Company shall inform the Buyer of such approval promptly after the same is given. So long as the Buyer beneficially owns any of the Preferred Shares, the Warrants or the Common Shares, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. (f) USE OF PROCEEDS. The Company will use the proceeds from the sale of the Preferred Shares for the Company's internal working capital purposes and not for the purpose of any investment in or loan to any other person. (g) BLUE SKY LAWS. On or before the Closing Date, the Company shall take such action as shall be necessary to qualify, or to obtain an exemption for, the Preferred Shares for sale to the Buyer pursuant to this Agreement, the Common Shares and Warrants for issuance to the Buyer on conversion of the Preferred Shares and the Common Shares for issuance to the Buyer upon exercise of the Warrants under such of the securities or "blue sky" laws of jurisdictions in the United States as shall be applicable to the sale of the Preferred Shares pursuant to this Agreement, the issuance of Common Shares and Warrants on conversion of the Preferred Shares and the issuance of Common Shares on exercise of the Warrants. The Company shall furnish copies of all filings, applications, orders and grants or confirmations of exemptions relating to such securities or "blue sky" laws on or prior to the Closing Date. (h) CERTAIN EXPENSES. Whether or not the closing occurs, the Company shall pay or reimburse the Buyer for all reasonable legal fees and expenses of counsel to the Buyer for the preparation and negotiation of, and closing under, this Agreement (but not to exceed $10,000). (i) CERTAIN ISSUANCES OF SECURITIES. Unless the Company obtains Shareholder Approval (as defined in the Certificate -9- 10 of Designations) or a waiver thereof from the AMEX, the Company will not issue any shares of Common Stock or shares of any other series of preferred stock or other securities convertible into, exchangeable for or otherwise entitling the holder to acquire shares of Common Stock which would be subject to Section 713 of the rules of AMEX (or any successor or replacement provision thereof) and which would be integrated with the sale of the Preferred Shares to the Buyer and the conversion thereof into Common Shares for purposes of Section 713 of the rules of the AMEX (or any successor or replacement provision thereof). 5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE. (a) TRANSFER AGENT INSTRUCTIONS. Promptly following the delivery by the Buyer of the aggregate purchase price for the Preferred Shares in accordance with Section 1(c) hereof, and prior to the Closing Date, the Company will irrevocably instruct its transfer agent for the Common Stock (the "Transfer Agent") to issue certificates for the Common Shares from time to time (i) upon conversion of the Preferred Shares in such amounts as specified from time to time to the Transfer Agent in the Notices of Conversion surrendered in connection with such conversions and referred to in Section 5(b) of this Agreement, and (2) upon exercise of the Warrants in such amounts as specified from time to time to the Transfer Agent in the Form of Subscription to be attached to the Warrants and surrendered in connection with such exercises, in each case such certificates to bear the restrictive legend specified in Section 4(b) of this Agreement prior to registration of the Common Shares under the 1933 Act, registered in the name of the Buyer or its nominee and in such denominations to be specified by the Buyer in connection with each conversion of Preferred Shares or exercise of Warrants, as the case may be. The Company warrants that no instruction other than (x) such instructions referred to in this Section 5, (y) stop transfer instructions to give effect to Section 4(a) hereof prior to registration of the Common Shares under the 1933 Act and (z) the instructions required by Section 3(m) of the Registration Rights Agreement will be given by the Company to the Transfer Agent and that the Common Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement. Nothing in this Section 5(a) shall limit in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory in form, scope and substance to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall permit the transfer of such Securities and, in the case of the Common Shares, -10- 11 promptly, but in no event later than three days after receipt of such opinion, instruct the Company's transfer agent to issue upon transfer one or more share certificates in such name and in such denominations as specified by the Buyer. The provisions of Section 3(n) of the Registration Rights Agreement shall supersede this Section 5(a) once said Section 3(n) becomes applicable. (b) CONVERSION PROCEDURE. In connection with the exercise of conversion rights relating to the Preferred Shares, the Buyer or any subsequent holder of the Preferred Shares shall complete, sign and furnish to the Company a Notice of Conversion in the form attached hereto as ANNEX IV, which shall be deemed to satisfy all requirements of the Certificate of Designations. 6. STOCK DELIVERY INSTRUCTIONS. The certificates for the Preferred Shares shall be delivered by the Company to the Escrow Agent pursuant to Section 1(b) hereof on a delivery against payment basis at the closing. 7. CLOSING DATE. The date and time of the issuance and sale of the Preferred Shares (the "Closing Date") shall be 12:00 noon, New York City time, on the date which is two New York Stock Exchange trading days after the date on which the Buyer has deposited the purchase price for the Preferred Shares with the Escrow Agent in accordance with Section 1(c) hereof, or such other mutually agreed to time. The closing shall occur on the Closing Date at the offices of the Escrow Agent. 8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE. The Buyer understands that the Company's obligation to sell the Preferred Shares to the Buyer pursuant to this Agreement is conditioned upon: (a) The receipt and acceptance by the Company of this Agreement as evidenced by execution of this Agreement by the Company and delivery of an executed counterpart of this Agreement to the Buyer or its legal counsel; (b) Delivery by the Buyer to the Escrow Agent of good funds as payment in full of an amount equal to the purchase price for the Preferred Shares in accordance with Section 1(c) hereof; (c) The accuracy on the Closing Date of the representations and warranties of the Buyer contained in this Agreement as if made on the Closing Date and the performance by the -11- 12 Buyer on or before the Closing Date of all covenants and agreements of the Buyer required to be performed on or before the Closing Date; and (d) The closing under the Portfolio B Subscription Agreement shall have occurred. 9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Preferred Shares on the Closing Date is conditioned upon: (a) Delivery by the Company to the Escrow Agent of the certificates for the Preferred Shares in accordance with this Agreement; (b) The accuracy on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date and the performance by the Company on or before the Closing Date of all covenants and agreements of the Company required to be performed on or before such Closing Date and receipt by the Buyer of a certificate, dated the Closing Date, of an officer of the Company confirming such matters; (c) The receipt by the Buyer of confirmation of the filing with the Secretary of State of the State of Delaware of the Certificate of Designations in the form attached hereto as ANNEX I; (d) Receipt by the Buyer on the Closing Date of an opinion of counsel for the Company, dated the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer, to the effect set forth in ANNEX V attached hereto; and (e) The closing under the Portfolio B Subscription Agreement shall have occurred. 10. GOVERNING LAW; MISCELLANEOUS. (a) This Agreement shall be governed by and interpreted in accordance with the laws of the State of California. (b) This Agreement may be executed in counterparts and by the parties hereto on separate counterparts, all of which together shall constitute one and the same instrument. A facsimile transmission of this Agreement bearing a signature on behalf of a party hereto shall be legal and binding on such party. -12- 13 (c) The headings, captions and footers of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. (d) If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction. (e) This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement. (f) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, or any course of dealings between the parties, shall not operate as a waiver thereof or an amendment hereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or exercise of any other right or power. (g) Any notices required or permitted to be given under the terms of this Agreement shall be sent by mail or delivered personally (which shall include telephone line facsimile transmission) or by courier and shall be effective five days after being placed in the mail, if mailed, or upon receipt, if delivered personally or by courier, in the case of the Company addressed to the Company at its address shown in the introductory paragraph of this Agreement (facsimile number (408) 468-1619) or, in the case of the Buyer, at its address shown on the signature page of this Agreement, with a copy to Genesee Investments, 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332 (facsimile number 206-462-4645) or such other address as a party shall have provided by notice to the other party in accordance with this provision. The Buyer hereby designates as its address for any notice required or permitted to be given to the Buyer pursuant to the Certificate of Designations the address shown on the signature page of this agreement, with a copy to: GFL Advantage Fund Limited, c/o Genesee Investments, 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332 (facsimile number 206-462-4645), until the Buyer shall designate another address for such purpose. (h) The Buyer shall have the right to assign it rights and obligations under this Agreement with respect to the purchase of all or any portion of the Preferred Shares to another investment fund, provided such assignee, by written instrument duly executed by such assignee, assumes all obligations of the Buyer hereunder with respect to the purchase of the portion of the Preferred Shares -13- 14 so assigned and makes the same representations and warranties with respect thereto as the Buyer makes in this Agreement, whereupon the Buyer shall be relieved of any further obligations, responsibilities and liabilities with respect to the purchase of all or the portion of the Preferred Shares the obligation for the purchase of which has been so assigned. In the case of any such assignment, the Company shall agree in writing with such assignee to make available to such assignee the benefits of the Registration Rights Agreement with respect to the Common Shares issuable on conversion of the Preferred Shares with respect to which the purchase under this Agreement has been so assigned. (i) The respective representations, warranties, covenants and agreements of the Buyer and the Company contained in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall survive the delivery of payment for the Preferred Shares and shall remain in full force and effect regardless of any investigation made by or on behalf of them or any person controlling or advising any of them. (j) This Agreement and its Annexes set forth the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, whether written or oral, with respect thereto. (k) The Buyer shall have the right to terminate this Agreement by giving notice at any time at or prior to the Closing Date if: (1) the Company shall have failed, refused, or been unable at or prior to the date of such termination of this Agreement to perform any of its obligations hereunder; (2) any other condition of the Buyer's obligations hereunder is not fulfilled; or (3) the closing shall not have occurred on a Closing Date on or before November 8, 1996, other than by reason of a breach of this Agreement by the Buyer. Any such termination shall be effective upon the giving of notice thereof by the Buyer. -14- 15 IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or one of its officers thereunto duly authorized as of the date set forth below. NUMBER OF SHARES: 12,500 PRICE PER SHARE: $1,000.00 AGGREGATE PURCHASE PRICE: $12,500,000.00 NAME OF BUYER: GFL ADVANTAGE FUND LIMITED SIGNATURE ____________________________ Title: _______________________________ Date: _______________________________ Address: c/o CITCO Kaya Flamboyan 9 CuraHao, Netherlands Antilles This Agreement has been accepted as of the date set forth below. JTS CORPORATION By: ________________________ Title: _____________________ Date: _____________________ -15- 16 Exhibit A--Schedule of Initial Investors
No. of Purchase Total Name and Address Series B Preferred Shares Price Purchase Price - ---------------- ------------------------- -------- -------------- Genesee Fund Limited- 2,500 $1,000 $ 2,500,000 Portfolio B c/o CITCO Kaya Flamboyan 9 Curacao, Netherlands Antilles GFL Advantage Fund Limited 12,500 $1,000 $12,500,000 c/o CITCO Kaya Flamboyan 9 Curacao, Netherlands Antilles
EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP San Jose, California November 29, 1996 EX-23.2 8 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 CONSENT OF DELOITTE & TOUCHE LLP We consent to the use in this Registration Statement of JTS Corporation on Form S-1 of our report dated March 1, 1996 (April 8, 1996 as to Note 16) on the consolidated financial statements of Atari Corporation and subsidiaries as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California November 29, 1996 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS YEAR FEB-02-1997 JAN-28-1996 JAN-29-1996 JAN-30-1995 JUL-28-1996 JAN-28-1996 1 1 684 547 0 0 11,352 2,016 1,011 730 12,761 2,093 911 240 20,760 10,774 3,930 2,831 41,695 19,813 75,882 27,116 0 0 29,697 27,785 0 0 0 0 (72,310) (38,573) 41,695 19,813 33,764 13,502 33,764 18,777 45,249 28,548 45,249 50,588 21,837 32 281 726 1,790 589 (34,804) (33,050) 0 0 (34,804) (33,050) 0 0 0 0 0 0 (34,804) (33,050) (3.69) (7.17) (3.69) (7.17)
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