-----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, HMkB4k4LrpXK9IT0SAga1DYHzk+BubYU4oCvMaDwj3UNeONlNuMcqrAYN11vMitv naMgfUzatmXRO7x115oP9A== 0000891618-97-005029.txt : 19971223 0000891618-97-005029.hdr.sgml : 19971223 ACCESSION NUMBER: 0000891618-97-005029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971102 FILED AS OF DATE: 19971222 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: JTS CORP CENTRAL INDEX KEY: 0000941167 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 770364572 FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14442 FILM NUMBER: 97742574 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 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED NOVEMBER 2, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED NOVEMBER 2, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _______________ COMMISSION FILE NUMBER 0-21085 --------------- JTS CORPORATION (EXACT NAME AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0364572 (STATE OR OTHER JURISDICTION (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 166 BAYPOINTE PARKWAY, SAN JOSE, CA 95134 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(408) 468-1800 NONE - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) Indicate by check mark whether the registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / --------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING AT CLASS DECEMBER 1997[ 19] - ----- ------------------ [ ] Common Stock...................................... 168,650,641
================================================================================ 2 JTS CORPORATION TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS.......................................... 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER................ 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTER................ 5 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.................................................. 8 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS..................................................... 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................... 14 SIGNATURE..................................................................... 15
2 3 JTS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOVEMBER 2, FEBRUARY 2, 1997 1997 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents (including $550, and $1,800 held as restricted balances at November 2, 1997 and February 2, 1997, respectively) $ 1,986 $ 24,766 Accounts receivable, less allowance for doubtful accounts of $4,292 and $1,615 at November 2, 1997 and February 2, 1997, respectively 6,644 21,445 Inventories 7,463 17,750 Other current assets 1,006 2,341 --------- --------- Total current assets 17,099 66,302 PROPERTY AND EQUIPMENT, net 26,440 27,674 ACQUIRED TECHNOLOGY, net -- 19,618 GOODWILL, net -- 16,673 OTHER ASSETS 383 450 --------- --------- TOTAL $ 43,922 $ 130,717 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Bank line of credits $ 8,833 $ 10,540 Borrowings under factoring arrangement -- 2,981 Accounts payable 60,553 33,327 Accrued liabilities 23,836 16,415 Current portion of long-term obligations 3,152 1,967 --------- --------- Total current liabilities 96,374 65,230 --------- --------- LONG-TERM OBLIGATIONS 52,305 53,081 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Convertible preferred stock, $.001 par value -- authorized, 10,000,000 shares; outstanding, 16,813 and 40,000 shares at November 2, 1997 and February 2, 1997, respectively -- -- Common stock, $.001 par value -- authorized, 250,000,000 shares; outstanding, 165,249,165 and 104,744,765 at November 2, 1997 and February 2, 1997, respectively 165 105 Additional paid-in capital 364,317 349,961 Notes receivable from shareholders (2,460) (2,510) Accumulated deficit (466,779) (335,150) --------- --------- Total stockholders' equity (deficit) (104,757) 12,406 --------- --------- TOTAL $ 43,922 $ 130,717 ========= =========
(See Condensed Notes to Consolidated Financial Statements) 3 4 JTS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- NOVEMBER 2, OCTOBER 27, NOVEMBER 2, OCTOBER 27, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- NET SALES $ 23,981 $ 33,265 $ 125,806 $ 35,056 Cost of sales 33,269 34,877 (174,092) 39,122 ------------------------ ------------------------ GROSS MARGIN (DEFICIT) ( 9,288) (1,612) (48,286) (4,066) Acquired in-process research and development -- 110,012 -- 110,012 Repositioning charge 38,008 -- 38,008 -- Amortization of existing technology -- 1,962 2,388 1,962 Research and development expense 3,916 5,710 15,880 6,262 Selling, general and administrative expense 4,017 3,916 17,488 5,705 ------------------------ ------------------------ Total operating expenses 45,941 156,477 73,764 163,063 ------------------------ ------------------------ OPERATING LOSS (19,722) (123,212) 122,050 (128,007) Exchange gains (loss) (9) 66 57 (604) Other income (loss), net (3,187) (824) (3,959) 3,707 Interest income 13 53 336 673 Interest expense (2,043) (1,276) (6,038) (2,415) ------------------------ ------------------------ NET LOSS $ (60,455) $(125,193) $(130,654) $(126,646) Preferred Stock Dividends (147) -- (975) -- ------------------------ ------------------------ NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS (60,602) (125,193) (131,629) (126,646) ------------------------ ------------------------ LOSS PER COMMON SHARE $ (0.39) $ (1.20) $ (1.04) $ (1.55) ======================== ======================== Weighted average number of shares used in 155,532 104,323 126,429 81,678 computations
(See Condensed Notes to Consolidated Financial Statements) 4 5 JTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED
NINE MONTHS ENDED -------------------------- NOVEMBER 2, OCTOBER 27, 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net cash used in operating activities $(23,759) $(10,081) CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in JTS merger -- 684 Sale of marketable securities 16,460 Purchase of property and equipment (7,666) (11,125) Borrowing by JTS (Prior to Merger) (30,000) Sale of Real estate 10,000 -------- -------- Net cash used in investing activities (7,666) (13,981) CASH FLOWS FROM FINANCING ACTIVITIES: Payment on promissory note (1,965) Borrowings under line of credit and factoring liability (5,009) (417) Repayment of borrowings (222) Payment on capital leases (440) (215) Issuance of common stock 118 1,471 Issuance of Preferred Stock 13,399 Repayment of shareholders loans 13 Bank Borrowing 807 4,042 -------- -------- Net cash provided by financing activities 8,666 2,866 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (21) NET DECREASE IN CASH AND CASH EQUIVALENTS (22,780) (21,196) CASH AND CASH EQUIVALENTS: Beginning of period 24,766 31,790 End of period $ 1,986 $ 10,594 OTHER CASH FLOW INFORMATION FROM CONTINUING OPERATIONS Interest paid $ 2,956 $ 3,102
(See Condensed Notes to Consolidated Financial Statements) 5 6 JTS CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1997 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. The unaudited condensed financial statements included herein reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year. On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS Corporation ("JTS") and the separate existence of Atari ceased. Although the business combination resulted in Atari merging into the JTS legal entity, the substance of the transaction was that Atari, as a public company with substantially greater operating history and net worth owns approximately 62% of the equity of the merged company. Therefore, for accounting purposes, the merger was accounted for as a purchase of JTS by Atari. See Note 2. Subsequent to the merger, the Company changed its fiscal year from a 52/53 week fiscal year ending on the Saturday closest to December 31 to a 52/53 week fiscal year ending on the Sunday closest to January 31. Accordingly, the Company's current fiscal year commenced on February 2, 1997 and the current quarter ended on November 2, 1997. Due to this fiscal year change, the end of the quarter does not coincide with the end of the quarter of the previous year. The Company did not recast the financial information for the prior fiscal year as management believes that financial statements for the quarters of the preceding year are nearly comparable to the quarters in the newly adopted fiscal year and that there are no seasonal factors and other factors that could affect the comparability of the information or trends reflected. NOTE 2. MERGER WITH JTS CORPORATION ("JTS") The following unaudited pro forma information shows the results of operations for the nine months ended November 2, 1997 as if the JTS acquisition had occurred at the beginning of the period at the purchase price established on July 30, 1996. The results are not necessarily indicative of what would have occurred had the acquisition actually been made at the beginning of each of the respective periods presented or of future operations of the combined companies. The pro forma results for 1996 combine Atari's results for the nine month period ended September 30, 1996 with JTS' nine month fiscal period (39 weeks) ended October 27, 1996.
NINE MONTHS ENDED ----------------------------- NOVEMBER 2, OCTOBER 27, 1997 1996 ----------- ----------- Revenue .................................... $ 125,806 $ 33,265) Gross Margin (deficit)...................... (48,286) (1,612) Net (loss) ................................. (131,629) $(125,193) Net (loss) per share ....................... (1.04) (1.20) Weighted average common shares outstanding.. 126,429 104,323
6 7 NOTE 3. INVENTORIES Inventories consist of the following (in thousands):
NOVEMBER 2 FEBRUARY 2 1997 1997 Finished goods......................... $3,298 $ 489 Raw materials and work-in-process...... $4,165 17,261 ------ ------- Total............................. $7,463 $17,750 ====== =======
NOTE 4. INTANGIBLES As a result of lack of market acceptance and limited financial resources the Company has suspended support for the 3 inch mobile disk drives. As such the Company written off the associated intangible assets totaling $33.7 million during the current quarter. NOTE 5. NEW ACCOUNTING STANDARD The Financial Accounting Standards Board issued FASB No. 128, "Earnings per share." This statement becomes effective for periods ending after December 15, 1997. The Company will adopt the statement from its fourth quarter, ending February 1, 1998. The impact of the statement is expected to be immaterial. 7 8 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On July 30, 1996, Atari Corporation ("Atari") was merged into JTS Corporation ("JTS" or the "Company") and subsequent to the merger the company changed its fiscal year from a 52/53 week fiscal year ending on the Saturday closest to December 31 to a 52/53 week fiscal year ending on the Sunday closest to January 31. The merger was accounted for as a purchase of JTS by Atari and as such, the historical balance sheets and the statements of operations for the three months in the prior year include Atari only. The unaudited pro forma condensed combined statements of operations included in footnote two to the financial statements give effect to the merger as if the acquisition were completed at the beginning of the first quarter of 1996. The following discussion and analysis is based on these pro forma condensed combined statements for the prior year which combine the historical results of operations of Atari for the nine months ended September 30, 1996 with the JTS unaudited pro forma combined results of operations for the nine months ended October 27, 1996 respectively, and for the current year which reflects the actual results of the merged company for the nine month period ended November 2, 1997. The liquidity and capital resources discussion and analysis is based on the unaudited balance sheet of the merged company as of November 2, 1997. Throughout this discussion, "fiscal 1998" refers to the fiscal year ending February 1, 1998. Since August 1995, when the Company commenced operating as a disk drive company, the Company's quarterly revenues have fluctuated significantly. The Company has generally been unable to obtain positive gross margins, and the Company has incurred significant losses in every quarter. During most of fiscal 1998, the Company has operated without adequate working capital, which has had a negative impact on its business, especially at a time when market conditions in the hard disk drive industry have been extremely adverse, and thus have favored the better capitalized competitors. JTS AND ATARI BACKGROUND The most significant portion of the Company's business today is its disk drive division which designs, manufactures and markets hard disk drives for use in desktop personal computers. The Company markets its disk drives to original equipment manufacturers ("OEMs"), computer companies and second-tier systems integrators for incorporation into their computer systems and subsystems, as well as to distributors who resell the product to small integrators and through retail channels. The Company sells its products through a direct sales force operating throughout the United States, Europe and Asia, as well as through distributors in the United States, Europe, Latin America and Canada. JTS was incorporated in February 1994 and remained in the development stage until October 1995, when it began shipping its disk drives to customers in the United States and Europe. All of JTS' products are manufactured in Chenai (Madras), India by its subsidiary, JTS Technology Ltd. (formerly Modular Electronics (India) Pvt. Ltd.), which was acquired in April 1996 and employs over 5,500 individuals. Since its inception, JTS has incurred significant losses which have resulted from the substantial costs associated with the design, development and marketing of new products, the establishment of manufacturing operations and the development of a supplier base. 8 9 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 2, 1997 COMPARED TO THE JTS AND ATARI ACTUAL COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 27, 1996. Revenues for the three months ended November 2, 1997 were $24 million. Revenues from the disk drive division decreased from $32.1 million for the same quarter in the prior year to $23.8 million for the current quarter. This revenue decrease from lower volumes combined with lower average selling price per drive in the current quarter. During the quarter ended November 2, 1997 the Company shipped 201,000 disk drives, which primarily consisting of the 3.5-inch drives, in capacities ranging from 1 gigabyte to 4.3 gigabytes. The revenue recognized by the Company is after any adjustment required for excess inventory held by distributors. Sales to the top five customers for the three months ended November 2, 1997 were 42% of net sales and one customer had sales greater than 10% of total net sales for the three month period. The Atari division revenues including royalty income for the current quarter amounted to $0.2 million. Revenues for the third quarter in the previous year totaled $33.3 million and included approximately $1.2 million of Atari revenues. The gross margin loss for the three month period ended November 2, 1997 was $9.3 million compared to a deficit of $1.6 million for the third quarter of the prior year. The portion of the current quarter's gross margin attributable to the disk drive division was $9.5 million compared to a deficit of $1.7 million incurred by the disk drive division in the three month period ended October 27, 1996. The decline in the gross margin resulted from the significant decrease in market prices for all disk drive capacities though particularly the higher capacity drives in conjunction with the write down of smaller capacity drives and the related production materials on hand. The gross margin for the Atari division for the current quarter ended November 2, 1997 was $0.2 million compared to $0.1 million for the three month period ended October 27, 1996. The improvement in the gross margin results from increased royalty revenue during the quarter. Research and development expense for the three months ended November 2, 1997 was $3.8 million compared to research and development expenses of $5.7 million for the third quarter in the prior year. The quarter over quarter decrease for the disk drive division was $1.9 million, and was primarily attributed to reductions in engineering staffing and suspension of support for the 3-inch disk drive product. The Atari division research and development programs were eliminated in the third quarter of the prior year. The Company expects that research and development expenses will continue to decrease throughout fiscal 1998 in absolute dollars and decrease as a percent of sales. Selling, general and administrative expenses for the three months ended November 2, 1997 were $4.0 million, compared to $3.9 million selling, general administrative expenses incurred during the third quarter of the previous year. The expenses associated with the disk drive division increased from $2.7 million to $3.8 million primarily resulting from the increased infrastructure associated with the expansion of the division. JTS expects that selling, general and administrative expenses will decrease marginally through the remainder of fiscal 1998 in absolute dollars and that such expenses will decline as a percentage of revenues. Repositioning charge of $38.0 million during the current quarter was related to the Company's decision to suspend support for the 3-inch mobile disk drive and consisted of $15.8 of goodwill, $17.9 million of existing technology, $1.8 million of capital assets, and $2.5 million of inventory commitments. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 2, 1997 COMPARED TO THE JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 27, 1996. Revenues for the nine months ended November 2, 1997 were $125.8 million. Revenues from the disk drive division increased from $65.8 million for the same period in the prior year to $124.1 million in the first nine months of fiscal 1998. This increase in revenue is primarily the result of higher shipment volumes in the current year to OEMs, small system integrators, and distributors. For the nine months ended November 2, 1997 the Company shipped 1,052,000 disk drives, which primarily consisting of the 3.5-inch drives, in capacities ranging from 1 gigabyte to 4.3 gigabytes. Sales to the top five customers for the nine months ended November 2, 1997 were 37.3% of net sales and 1 customer had sales greater than 10% of total net sales for the nine month period. The Atari division revenues including royalty income for the first three quarters amounted to $1.7 million. Pro forma combined revenues for the first nine months in the previous year totaled $68.8 million and included approximately $3.0 million of Atari revenues recorded for the nine month period ended October 27, 1996. 9 10 The gross margin loss for the nine month period ended November 2, 1997 was of $48.3 million compared to a deficit of $15 million on a pro forma basis for the first three quarters in the prior year. The portion of the current year to date gross margin deficit attributable to the disk drive division was $50.0 million compared to a deficit of $12.7 million incurred by the disk drive division in the first nine months of financial 1996. The decline in the gross margin resulted from the significant decrease in market prices for all disk drive capacities in conjunction with significant write down of obsolete and surplus drives, and the related production materials on hand. The gross margin for the Atari division for the nine months ended November 2, 1997 was $1.7 million compared to a deficit of $2.3 million for the nine month period ended September 30, 1996. The improvement in the gross margin results from the sales of the Jaguar product and inventory write offs included in the first quarter of the prior year and the impact of royalty agreements signed during the first quarter of 1998. Research and development expense for the first nine months ended November 2, 1997 was $15.9 million compared to research and development expenses on a pro forma basis of $20.7 million for the first nine months of the prior year. The period over period decrease for the disk drive division was $4.2 million, and was primarily attributed to reductions in engineering staffing and higher development material expenditures in the prior year to support the development of new hard disk drive platforms. The Atari division experienced a quarter over quarter decline in research and development expenses of $0.6 million due to the elimination of the game development team. The Company expects that research and development expenses will continue to decrease throughout fiscal 1998 in absolute dollars and decrease as a percent of sales. Selling, general and administrative expenses for the nine months ended November 2, 1997 were $17.5 million, including $16.6 million from the disk drive division, compared to $15.4 million pro forma selling, general administrative expenses incurred during the first nine months of the previous year which included $9.5 million from the disk drive division. The $7.1 million increase incurred by the disk drive division resulted primarily from increases in the provision for bad and doubtful debts, an increase in over all staff numbers associated with the growth of the Company and increased sales and marketing programs focusing on increasing sales through the distribution channel to the end user. Selling, general and administrative expenses for the Atari division declined $5 million as a result of staff reductions, reduced rent and other reductions in operating costs for the division. JTS expects that selling, general and administrative expenses will decrease marginally through the remainder of fiscal 1998 in absolute dollars but that such expenses will decline as a percentage of revenues. Repositioning charge of $38.0 million during the current year was related to the Company's decision to suspend support for the 3-inch mobile disk drive and consisted of $15.8 of goodwill, $17.9 million of existing technology, $1.8 million of capital assets, and $2.5 million of inventory commitments. 10 11 LIQUIDITY AND CAPITAL RESOURCES At November 2, 1997, JTS had cash and cash equivalents of $2 million, a working capital deficit of $79.3 million and a negative net worth of $104.8 million. At November 2, 1997, total debt, including bank credit lines and notes payable was $64.3 million. This included $4.7 million of working capital loans outstanding between JTS Technology and three Indian banks at an interest rate of 12% as of November 2, 1997. In addition, the above amount includes term loan facilities with the Industrial Credit and Investment Corporation of India Limited (ICICI) and the Shipping Credit and Investment Corporation of India Limited (SICI) in the amount of $12.9 million at interest rates of LIBOR plus 2.75% and LIBOR plus 4%, respectively. At November 2, 1997, JTS Technology's borrowings under these term loan facilities were $12 million. The loans are repayable quarterly, commencing at various points in time in fiscal 1998 and 1999 with final payments through to 2002. Amounts borrowed under these loan agreements have been used for working capital purposes, tooling, facilities expansion and purchases of capital equipment. At November 2, 1997, the Company had $42.4 million of 5 1/4% convertible subordinated debentures due April 29, 2002, which had been issued in 1987 by Atari Corporation. The debentures pay interest annually, each April, with the next interest payment due in April 1998. JTS cannot assure that any level of future revenues will be attained or that JTS will achieve or maintain successful operations in the future. The Company's accounts receivable are heavily concentrated with a small number of customers. If any large customer of the Company became unable to pay its debts to the Company, liquidity would be adversely affected. In the event the Company is unable to increase sales or maintain production yields at acceptable levels there would be a significant adverse impact on liquidity. This would require the Company to either obtain additional capital from external sources or to curtail its capital, research and development and working capital expenditures. Such curtailment could adversely affect the Company's operations and competitive position. The Company will need significant additional financing resources over the next several years for facilities expansion, capital expenditures, working capital, research and development and vendor tooling. In addition, significant cash resources will be required to fund purchases of inventory needed to achieve anticipated sales levels. Failure to receive such cash resources will negatively impact the Company's ability to manufacture its products at required levels. The Company anticipates that it will require additional funds to finance its growth. The precise amount and timing of the Company's funding needs cannot be determined at this time, and will depend upon a number of factors, including the market demand for the purchase of its products, the progress of the Company's product development efforts and the Company's inventory and accounts receivable management. The Company currently expects that it would seek to obtain such funds from additional borrowing arrangements and/or private or public offerings of debt and equity securities. There can be no assurance that funds required by the Company in the future will be available on terms satisfactory to the Company or at all. As of November 2, 1997, the Company has Federal and State net operating loss ("NOL") carryforwards of approximately $250 million and $94 million, respectively, and Federal and State research and development tax credit carryforwards of approximately $2.1 million and $1.0 million, respectively, all of which will expire on various dates through 2012. 11 12 Under the Internal Revenue Code of 1986, as amended, certain changes in the ownership or business of a corporation that has Federal NOLs or tax credit carryforwards will result in the inability to use or the imposition of significant restrictions on the use of such NOLs or tax credit carryforwards to offset future income and tax liabilities of the Company. The merger between Atari and JTS constituted a change in ownership with respect to JTS and accordingly, restricts the use of JTS' pre-merger NOLs against post-merger income of the Company to the maximum of $12.5 million per year, unless previously expired. In addition, subsequent events may result in the imposition of restrictions on the ability of the Company to utilize its NOLs and tax credit carryforwards. There can be no assurance that the Company will be able to utilize all or any of its NOL's or tax credit carryforwards. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company was a defendant and counter claimant in a civil action for the alleged breach of contract brought in U.S. District Court for the Southern District of New York, case number 95 Civ. 1935, by Tradewell, Inc. a New York corporation, seeking specific performance for release of goods having value of $1.6 million. The Company counterclaimed seeking specific performance for the purchase of media or, alternatively, damages in the amount of $3.3 million. The matter was settled in August 1997, and pursuant to the settlement agreement Tradewell Inc. agreed to pay $425,000 over time to the Company. The Company is a defendant in a civil action for alleged breach of written contract brought in the Municipal Court of California, County of Santa Clara, case no. DC96339801, by Bryma Technologies, seeking $15,000 and attorney's fees for Atari's cancellation of Bryma's "Child Locator" development product. The Company is awaiting a trial date. The Company is a defendant in a civil action for alleged breach of contract, negligent misrepresentations, suppression of facts and other relief brought in the Superior Court of the State of California, County of Santa Clara, case no. CV765828 seeking $235,000 by Creative Talents, SDN, a Malaysian corporation. The Company is a defendant in a civil action brought for alleged breach of contract brought in the Superior Court of California, County of Santa Clara, case no. CV758563 seeking $194,707.04 by Extron Contract Manufacturing Co. On January 23, 1992, a certain debenture holders filed an involuntary bankruptcy petition against The Federated Group, Inc. a subsidiary of the Company and formerly a subsidiary of Atari Corporation. The case was appealed by the Company to the Ninth Circuit of Appeals, and a hearing for oral arguments was held on December 12, 1996. The case was reversed and remanded to the Bankruptcy court whose decision placed the Federated Group Inc. into Bankruptcy proceedings on December 4, 1997. The Company is a defendant in a civil action brought for alleged breach of contract brought for alleged breach of Lease in the Superior Court of California, County of Santa Clara, case no. CV758843 seeking $70,578 by Yercaf N.V., a Delaware corporation. The Company is the plaintiff in a civil action brought for breach of contract in the District Court of Harris County, Texas, 113th Judicial District, case no. 97-46725 seeking damages in the amount of $878,703.43 against Barron America, Inc. The Company is a defendant in a civil action brought for alleged breach of contract in the Municipal Court of California, County of San Diego, case no 595700 seeking $13,855 by Capital Electronics, Inc. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Santa Clara, case no CV769466 seeking $373,981 by DPMS, Inc. dba Danco Machine. On January 3, 1997, Dusseldorf Securities, Limited ("DSL") and Greystone Capital, Ltd., ("GCL"), through counsel, made a letter demand of the Company for payment of $1,250,000 allegedly due under a letter agreement between DSL and the Company dated December 21, 1996 (the "Agreement"). DSL and GCL claim that the Company owes $1,250,000 as fees for a January 1997 private placement of the Company's preferred stock which was not completed through DSL or GCL. On February 26, 1997, DSL and GCL filed suit against the Company in Los Angeles County Superior Court, No. 8C166450, entitled Dusseldorf Securities, Limited v. JTS Corporation. The original lawsuit asserted claims for breach of contract, breach of warranty, and misrepresentation against the Company and asserts those and other tort claims against Michael Arnouse, an individual not affiliated with the Company, through whom it is alleged the Company completed a private placement of its securities. The action against Arnouse has been dismissed for lack of jurisdiction. The original complaint has been amended to include contract, fraud and other tort claims by Greystone Properties, Ltd. against JTS, based on the same basic facts as the original complaint. An application for writ of attachment was filed and argued on May 9, 1997; the application was denied. The Company has filed counterclaims for breach of contract and fraud. Discovery is proceeding and a trial has been set for June 1, 1998. The Company is a defendant in a civil action brought as a Complaint for Money in the Superior Court of California, County of Santa Clara, case no. CV 768323 seeking $61,167.32 by Fireman's Fund Insurance Companies. The Company is a plaintiff in a civil action brought in the Superior Court of California, County of Santa Clara and removed to the United States District Court, Northern District of California, San Jose Division, case no C97-20669 PVT/ARB seeking $98,849.87 from defendant Steve Harris, an individual. The Company has settled a civil suit brought in the Superior Court of California, County of San Diego, case no. 72147 by Kabool, Inc. The Company is a defendant in a civil action brought for alleged breach of contract and common counts in the Municipal Court of California, County of Santa Clara, case no. DC97 354833 seeking $12,110.80 by Lenthor Engineering, Inc., a California corporation. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Santa Clara, case no. CV 770226 seeking $100,570.10 by Magnebit Holding Corporation, a California corporation. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Riverside, case no. 304042 seeking $2,648,555 by Magnecomp Corporation, a California corporation. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Santa Clara, case no. CV 769985 seeking $45,254.97 by Mountz, Inc., a California corporation. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Los Angeles, case no. CV BC179327 seeking $1,967,986 by NMB Technologies, Inc., a California corporation. This case has been settled. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Santa Clara, case no. CV769538 seeking $137,735.51 by Polcraft, Inc. The Company is a plaintiff and cross-defendant in a civil action brought in the Superior Court of the State of California in and for the County of Santa Clara brought against Philips Laser Magnetic Storage ("Philips") for breach of contract and breach of implied covenant of good faith and fair dealing arising out of Philips' failure to deliver good to Atari Corporation. Philips has filed a counterclaim to the action for goods sold and delivered and work in process for approximately $3,000,000. This case has been settled and the parties are drafting formal documents. The Company is a defendant in a civil action brought for alleged breach of contract in the Superior Court of California, County of Orange, case no. 786105 seeking $48,062.55 by Roberts, Mealer & Associates, Inc. aka Roberts, Mealer & Company. The Company is a defendant in a claim brought by Zion Technology, Corp. in the Superior Court of the State of California in and for the County of Santa Clara, case no CV765828. The plaintiff seeks damages in the amount of $297,000. The Company is a Plaintiff in a civil action brought for non payment for goods delivered in the English High Court of England, Case No. 1997 seeking $208,000 by BV International Limited. The Company is a Plaintiff in a civil action brought for Breach of Contract in the House of Lords (England), HRS/js/26768 seeking $533,000 by The Electronics Boutique Stores (VIC) Limited. 12 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Ex-27 Financial Data Schedule (b) Reports on Form 8-K -- None 13 14 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. JTS CORPORATION ---------------------------------------- (Registrant) Date: December 22, 1997 By /s/ JOSEPH A. PREZIOSO ------------------------------------ Joseph A. Prezioso Executive Vice President Finance & Administration Chief Financial Officer 14 15 EXHIBIT INDEX
EXHIBITS - -------- Ex-27 Financial Data Schedule
15 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS FEB-01-1998 AUG-04-1997 NOV-02-1997 1,986 0 10,936 (4,292) 7,463 17,099 35,056 (8,616) 43,922 (96,374) (42,354) 0 0 0 0 43,922 23,981 23,981 32,269 32,269 45,941 300 2,043 (60,602) 0 (60,602) 0 0 0 (60,602) $(0.59) 0
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