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Article #559 (635 is last):
From: aa700@cleveland.Freenet.Edu (Michael Current)
Newsgroups: freenet.sci.comp.atari.news
Subject: JTS Corp Quarterly Report, Dec-97
Reply-To: aa700@cleveland.Freenet.Edu (Michael Current)
Posted-By: xx004 (Atari SIG)
Date: Sun Jan 18 17:37:31 1998



Dec 1997 (Qtrly Rpt)

December 22, 1997

JTS CORP (JTS)
Quarterly Report (SEC form 10-Q)

         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.

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.

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.

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.

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.
-- 
Michael Current, mailto:mcurrent@carleton.edu
8-bit Atari FAQ and Vendor Lists, http://www.faqs.org/faqs/atari-8-bit/
Cleveland Free-Net Atari SIG, telnet://freenet-in-c.cwru.edu (go atari)
St. Paul Atari Computer Enthusiasts, http://www.library.carleton.edu/space/





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