Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K for Atari Corporation 35 194K
3: EX-10.23 Amended & Restated Agrmt B/T Atari & Jt Storage 38 246K
4: EX-10.24 Subordinated Secured Convertible Promissory Note 35 154K
5: EX-10.25 Security Agrmt. B/T Registrant & Jts 02/13/96 15 46K
2: EX-10.7 Lease Between Registrant & Owen & Burns 1990 Trust 37± 143K
6: EX-22.1 Subsidiaries of the Company 1 5K
7: EX-27.1 Financial Data Schedule 1 7K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[Download Table]
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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 1-9281
ATARI CORPORATION
(Registrant)
[Download Table]
NEVADA 77-0034553
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
455 SOUTH MATHILDA AVENUE
SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip Code)
Telephone: (408) 328-0900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock (par value $.01)
5 1/4% Convertible Subordinated Debentures
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of its Common Stock on April
4, 1996 on the American Stock Exchange was approximately $69.5 million. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded and such persons may
under certain circumstances be deemed to be affiliates. This determination of
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
Common Stock (par value $.01) of Registrant outstanding at April 4,
1996 -- 63,727,318 shares.
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
This Annual Report on Form 10-K contains registered and other trademarks
and tradenames of Atari and other companies.
PROPOSED MERGER WITH JT STORAGE, INC.
On February 12, 1996, Atari Corporation ("Atari" or the "Company") entered
into a merger agreement with JT Storage, Inc. ("JTS") providing for the merger
of the Company and JTS (the "Merger"). On April 8, 1996, the merger agreement
was amended and restated. As a result of the Merger, Atari would be merged with
and into JTS, and each outstanding share of Atari Common Stock would be
exchanged and converted into one share of JTS Common Stock. JTS was incorporated
on February 3, 1994 to develop, market and manufacture hard disk drives. The
Merger must be approved by the stockholders of Atari and JTS and is subject to
certain other conditions. The Merger is expected to close late in the second
quarter of calendar year 1996.
In connection with the Merger, on February 13, 1996, Atari loaned $25.0
million to JTS pursuant to a Subordinated Secured Convertible Promissory Note
(the "Note") which is secured by substantially all of the assets of JTS.
Interest accrues on the unpaid principal amount of the Note at the rate of 8.5%
per annum. The Note provides that JTS shall repay the outstanding principal and
interest under the Note on September 30, 1996 if the Merger has not occurred
prior to such time. In the event that the Merger Agreement is terminated, either
party may, under certain conditions, elect to convert the outstanding
indebtedness under the Note into shares of JTS Series A Preferred Stock. The
Note is expressly subordinated to outstanding indebtedness in connection with
JTS' primary bank loan agreement, up to an amount of $5.0 million at any given
time.
Based on the number of shares of outstanding Atari Common Stock, JTS Common
Stock and JTS Series A Preferred Stock as of April 5, 1996, immediately after
consummation of the Merger, a total of 102,628,429 shares of JTS Common Stock
would be issued and outstanding, of which 63,727,318 shares, or 62%, would
represent shares issued in the Merger upon conversion of Atari Common Stock.
Upon the closing of the Merger, it is expected that the directors of JTS
will be Sirjang L. Tandon, David T. Mitchell, Alain L. Azan, Jean D. Deleage,
Roger W. Johnson, Lip-Bu Tan, Jack Tramiel and Michael Rosenberg. Messrs.
Tandon, Mitchell, Azan, Deleage, Johnson and Tan are currently directors of JTS,
and Messrs. Tramiel and Rosenberg are currently directors of Atari. The
executive officers of JTS immediately prior to the Merger are expected to be the
executive officers of JTS after the Merger. The parties have also agreed that
Jack Tramiel or a person designated by Jack Tramiel shall be a member of each
committee of the JTS Board of Directors after the Merger.
1
BUSINESS
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.
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. 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 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 related to
multimedia entertainment software for various platforms.
PRODUCTS
Atari's principal products are described below:
Jaguar Entertainment System. Atari introduced its 64-bit Jaguar
interactive multimedia entertainment system in late November 1993 into selected
markets. During 1994, Atari rolled out a nationwide program and commenced
initial shipments into Europe. From its launch through the end of 1994, Jaguar's
suggested retail price was $249.99. As a result of competition and cost
reductions, during the first quarter of 1995, Atari reduced the retail price of
Jaguar to $149.99. The current retail price of Jaguar is $99.99. Despite its
substantially lower retail price, sales of Jaguar continue to be disappointing,
and Atari is test marketing different price points and software bundles for the
Jaguar in an attempt to sell its substantial inventory of such product.
The Jaguar is a 64-bit interactive multimedia system that incorporates two
proprietary chips developed by Atari which are specialized for multimedia
entertainment. The proprietary chips include four processors (graphics
processing unit, object processor, blitter and digital signal processor) and a
standard Motorola 68000 microprocessor. The computational speed of the system is
approximately 44 MIPS and the bus bandwidth is 106.4 megabytes per second. The
video features include 24-bit graphics with up to 16.8 million colors and a 3-D
engine which can render 3-D shaded or texture mapped polygons in real time. The
sound system is based on a high-speed custom digital signal processor dedicated
to audio. The audio is 16-bit compact disk ("CD") quality from cartridge-based
software, and can be processed from simultaneous sources of audio data. This
allows for very realistic sounds in the software, including human voices.
Through the use of a compression
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technology customized by Atari (called "JAGPEG"), software developers can
compress data to the point that a 100-megabit game can fit into a 16-megabit ROM
cartridge. This allows for more exciting experiences both visually and in game
play due to the vast amount of data available.
Jaguar Software Titles. From 1994 through 1995, Atari developed titles for
the Jaguar primarily under contract with third party software developers. To
date, Atari has published approximately 45 software titles for the Jaguar. These
titles include an array of licensed and nonlicensed titles, some of which
utilize 3-D graphics, high speed animation, 16.8 million colors, full motion
video, motion capture techniques and 16-bit stereo sound. Atari's software
library includes titles which are cartridge based (ROM chips) and CD based.
Since 1995, the development of titles for Jaguar has been curtailed
substantially and Atari is currently developing a very limited number of titles
which it expects to publish in either cartridge or CD format. In addition to
Atari's software development efforts, in 1994 and 1995 Atari licensed
independent software vendors ("ISVs") to develop and publish titles for the
Jaguar. Atari is not aware of any current development of Jaguar titles by ISVs
and does not expect any such development in the foreseeable future.
Jaguar Peripherals. Atari offers a CD-ROM peripheral for the Jaguar that
enables software end users to have full motion video clips and more complex
games than are available on cartridges. Publishers can take advantage of lower
media cost and quicker turnaround on orders with CD-ROM software as compared to
a ROM cartridge. The CD-ROM peripheral is a double speed player that can play
Jaguar video games, regular audio CD's and CD + G (graphics). The suggested
retail price of the CD-ROM peripheral is $149.99. The success of the CD-ROM
peripheral is substantially dependent on the size of the installed base of
cartridge-based Jaguar consoles.
PC Software. As a result of Atari's investment in game design, art 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.
Library of Titles. In 1996, Atari plans to increase its efforts to license
titles from its game library to third party publishers. Atari has over 100
titles in its game library, including the following:
[Download Table]
Asteroids Combat Iron Soldier RealSport Baseball Tempest
Battlezone Crystal Castles Major Havoc RealSport Football Warbird
Bentley Bear Earthworld Millipede Space War Warlords
Breakout Food Fight Missile Command Star Raiders Yar's Revenge
Centipede Pong
COMPETITION
The video game business is intensely competitive. Since its introduction in
late 1993, Jaguar has failed to achieve broad market acceptance. Atari does not
expect that Jaguar, even at its substantially reduced price, will ever become a
broadly accepted video game console, or that Jaguar technology will be broadly
adopted by software title developers. The video game industry is also
characterized by unpredictable and rapid shifts in the popularity of certain
platforms, by severe price competition, and by frequent new technology and
product introductions. In this regard, numerous companies have introduced or
have developed and are expected to introduce video game consoles that are or may
become competitive with Jaguar. In addition, an increasing number of
entertainment titles are being developed for or ported to the PC platform. Most
of Atari's competitors have greater experience and expertise in 3D graphics and
multimedia technology and have substantially greater engineering, marketing and
financial resources than Atari. Jaguar presently competes with products offered
by the following companies:
- Nintendo commenced development, in collaboration with Silicon Graphics,
Inc., of the Nintendo 64 player, expected to be released in Autumn 1996
in the United States. Nintendo also sells the 16 bit Super NES at a
retail price of $99.95.
- Sega commenced shipment of the Sega Saturn in the United States in May
1995 with a current retail price of $299.00. Sega also sells the 16 bit
Genesis at a retail price of $99.95.
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- Sony released the Sony PlayStation in the United States in late 1995 with
a current retail price of $299.00.
- The 3DO Company licenses the 3DO Interactive Multiplayer System console
architecture for retail sale worldwide.
MARKETING AND DISTRIBUTION
Atari distributes its products domestically through various independent
channels. Jaguar is sold primarily through national retailers, consumer
electronic specialty stores and distributors of electronic products. European
sales are conducted from Atari's European headquarters in London, U.K. Jaguar
and Atari's PC titles are sold in European markets through substantially the
same channels of distribution as those in the United States. Net sales outside
North America for fiscal years 1995, 1994 and 1993 constituted approximately
44%, 40% and 75%, respectively, of total net revenues. No single customer
accounted for 10% or more of total net revenues for the years ended December 31,
1995, 1994 or 1993.
RESEARCH AND DEVELOPMENT
Most of Atari's products, including Jaguar, were developed by its internal
engineering and software groups as well as independent software developers under
contract with Atari. Atari's research and development expenses totaled $5.4
million, $5.8 million and $4.9 million in 1995, 1994, and 1993, respectively.
Atari has significantly downsized its research and development efforts and
currently has five employees dedicated to such efforts. As a result, Atari
expects its research and development expenses to decline substantially in 1996.*
Atari's current development efforts are dedicated to developing a limited
number of Jaguar software titles and porting certain existing Jaguar titles to
the PC platform. As part of this development process, Atari has agreements with
third parties to develop and/or license properties. Under these agreements,
Atari will make payments to these parties as either development fees and/or
advance royalties, and is obligated to make certain minimum royalty guarantees
on future sales. There can be no assurance that all payments for development
fees and/or advance royalties will be recoverable through future sales of
products.
MANUFACTURING
Atari has placed no manufacturing orders for the Jaguar console since
mid-1995. Based on current and expected sales and inventory levels, Atari does
not intend to pursue additional Jaguar manufacturing. The Jaguar console unit
was assembled in the United States by a third-party subcontractor under a
manufacturing arrangement. The agreement may be canceled by either party with 90
days' notice. Jaguar software products and accessories are manufactured by
several suppliers and are assembled by subcontractors. Atari believes that it
could readily replace these sources of supply and assembly, if necessary.
INTELLECTUAL PROPERTY RIGHTS
Atari has exclusive use of its "Atari" name and "Fuji" logo in all areas
other than coin-operated arcade video game use. Atari also has a portfolio of
other intellectual properties including patents, trademarks, and copyrights
associated with its video game and computer businesses. Atari believes its
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 Atari will be able to preserve any
of its other 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 which was
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* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
4
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 Atari's
intellectual property and a license were not available on commercially
reasonable terms, Atari's business, financial condition and results of
operations would be materially and adversely affected. Litigation, which has in
the past and could in the future result in substantial costs and diversion of
resources, may also be necessary to enforce Atari's patents or other
intellectual property rights or to defend against third-party infringement
claims. The occurrence of litigation relating to patent infringement or other
intellectual property matters, regardless of the outcome, could have a material
adverse effect on Atari's business, financial condition and results of
operations.
BACKLOG
Orders are usually placed by purchasers on an as-needed basis, are
sometimes cancelable before shipment, and are usually filled from inventory
shortly after receipt. Atari currently has a substantial inventory of finished
products and product components for which there are no orders. Although Atari is
taking steps to realize revenue from such inventory, Atari recognized
substantial inventory write-downs in 1995 and there can be no assurance that
substantial additional write-downs will not be required.
EMPLOYEES
Due to disappointing sales of Jaguar and related products, Atari reduced
its workforce from 101 persons at December 31, 1994 to 73 persons at December
31, 1995 and 31 persons at March 31, 1996. Atari does not presently anticipate
any further reductions in its workforce. As of March 31, 1996, Atari had
approximately 25 employees in the U.S., including five in engineering and
product development, 12 in marketing, sales and distribution, two in purchasing
and six in general administration and management. In addition, Atari had six
employees outside the United States at March 31, 1996. None of the employees are
represented by a labor union. Atari considers its employee relations to be good.
ITEM 2. PROPERTIES
Atari leases its 7,200 square feet headquarters facility in Sunnyvale,
California under a lease which expires in 2001. Atari also leases a 33,600
square feet international sales facility in Slough, England and a 19,400 square
feet vacant facility in Viannen, Holland. Atari also holds certain properties in
Southern California and Texas for sale. Some of these properties are currently
being leased by Atari. These properties are reported as real estate held for
sale in the Consolidated Financial Statements. See Note 7 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Atari 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. Atari
believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
Atari is a defendant and counter claimant in a civil action for alleged
breach of contract brought in U.S. District Court for the Northern District of
New York, case number 95 Civ. 1945, by Tradewell, Inc., a New York corporation,
seeking specific performance for release of goods having a value of $1.6
million. Atari 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 settlement, Atari now seeks damages of approximately $1.3 million.
Atari believes this action will have no material adverse effect on its business,
financial condition or results of operations.*
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* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
5
Atari 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
Phillips Laser Magnetic Storage ("Phillips") for breach of contract and breach
of implied covenant of good faith and fair dealing arising out of Phillips'
failure to deliver goods to Atari. Atari has been advised that Phillips intends
to file an unspecified counterclaim. Atari believes this action will have no
material adverse effect on its business, financial condition or results of
operations.*
Atari 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 and Acclaim Entertainment for breach of contract and
related claims. Counterclaims have been filed against Atari for alleged breach
of contract. Atari believes this action will have no material adverse effect on
its business, financial condition or results of operations.*
Atari is not aware of any other pending legal proceedings against Atari and
its consolidated subsidiaries other than routine litigation incidental to their
normal business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Atari's Common Stock has traded on the American Stock Exchange under the
symbol "ATC" since November 7, 1986. As of the close of business on April 5,
1996, 63,727,318 shares of Atari Common Stock were outstanding and no shares of
Preferred Stock were outstanding. As of that date, there were approximately
2,800 stockholders of record of Atari Common Stock. The following table sets
forth the high and low sale prices of Atari's Common Stock for the periods
indicated as reported on the consolidated transaction system.
[Download Table]
HIGH LOW
---- ----
FISCAL YEAR 1996
First Quarter.................................................. $ 4 1/8 $1 5/8
FISCAL YEAR 1995
Fourth Quarter................................................. $ 3 5/16 $1 1/8
Third Quarter.................................................. 3 5/8 29/16
Second Quarter................................................. 3 1/8 2 1/2
First Quarter.................................................. 4 1/4 2 3/4
FISCAL YEAR 1994
Fourth Quarter................................................. $ 7 3/8 $39/16
Third Quarter.................................................. 7 3/4 2 7/8
Second Quarter................................................. 6 5/8 2 7/8
First Quarter.................................................. 8 1/8 5 5/8
Atari has never paid cash dividends on its Common Stock and does not
anticipate a change in this practice in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of Atari have been
derived from the historical consolidated financial statements of Atari, included
elsewhere herein, with the exception of the Consolidated Statement of Operations
Data prior to fiscal 1993 and the Consolidated Balance Sheet Data prior to
December 31, 1994 which were derived from historical consolidated financial
statements not included herein. The information set forth below should be read
in conjunction with the Company's Consolidated Financial Statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Operations
Data:
Total revenues........................ $ 14,626 $ 38,748 $ 29,108 $127,340 $257,992
Operating loss........................ (53,665) (24,047) (47,499) (79,008) (18,683)
Income (loss) from continuing
operations(1)...................... (50,158) 9,394 (48,866) (82,719) 23,659
Income (loss) before extraordinary
credit............................. (50,158) 9,394 (48,866) (73,719) 23,659
Net income (loss)..................... (49,576) 9,394 (48,866) (73,615) 25,619
Per common share data:
Income (loss) from continuing
operations......................... $ (0.79) $ 0.16 $ (0.85) $ (1.44) $ 0.41
Income (loss) before extraordinary
credit............................. (0.79) 0.16 (0.85) (1.29) 0.41
Net income (loss)..................... (0.78) 0.16 (0.85) (1.28) 0.44
[Enlarge/Download Table]
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS)
Consolidated Balance Sheet Data:
Current assets........................ $ 65,126 $113,188 $ 51,388 $109,551 $239,296
Working capital....................... 55,084 92,670 33,896 75,563 159,831
Total assets.......................... 77,569 131,042 74,833 138,508 253,486
Current liabilities................... 10,042 20,518 17,492 33,988 79,465
Long-term obligations................. 42,354 43,454 52,987 53,937 48,492
Shareholder's equity.................. 25,173 67,070 4,354 50,583 125,529
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(1) Includes a gain from the settlement of patent litigation of $32.1 million in
1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
million in 1991.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of certain
factors, including the risk related factors set forth herein.
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. 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 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 related to
multimedia entertainment software for various platforms.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues 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.*
---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
8
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. From the introduction of Jaguar in
late 1993 through the end of 1995, Atari sold approximately 125,000 units of
Jaguar. As of December 31, 1995, Atari had approximately 100,000 units of Jaguar
in inventory and the value of Jaguar inventory and related software was
approximately $9.9 million. Due to disappointing sales of Jaguar and increased
competition from products introduced by Sega and Sony, Atari reduced the
suggested retail price of Jaguar to $99.99 and recorded an inventory write-down
of $12.6 million in 1995. There can be no assurance that Atari's substantial
unsold inventory of Jaguar and related software can be sold at current or
reduced prices, if at all. In addition, any further decrease in the value of
such inventory could result in substantial additional inventory write-downs by
Atari.
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. As a result, Atari expects research and development expenses will be
substantially lower for the foreseeable future.*
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. Due to the substantial
curtailment of the Jaguar marketing program, Atari expects these expenses will
be substantially lower for the foreseeable future.*
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. Due to the
substantial reduction in general and administrative personnel in 1995 and the
first quarter of 1996, Atari expects these expenses will be substantially lower
for the foreseeable future.*
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 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.
---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
9
For each of 1995 and 1994, interest expense was approximately $2.3 million
on the Atari Convertible Subordinated Debentures (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 11 to the 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.
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 plans to terminate numerous contracts and
business relationships, including several related to software development
activities. The termination of contracts and relationships has, from time to
time, resulted in litigation, diverting management 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 further divert management and
financial resources and could have a material adverse effect on Atari's
business, operating results and financial condition. In addition, Atari holds
several properties for sale, some of which are currently being leased. The
ownership and use of such properties subjects Atari to numerous risks, including
risks of environmental and personal injury liabilities. Although Atari is
attempting to sell certain of such properties, such sales are not expected to
eliminate all the risks associated with Atari's ownership of such properties.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Total revenues for 1994 were $38.7 million compared to $29.1 million for
1993. The increased revenues were primarily a result of Atari's national rollout
of the Jaguar and related products. Sales of Jaguar products represented 76% of
revenues in 1994 compared to 13% of revenues in 1993. Jaguar was introduced in
selected markets in late 1993, and approximately 100,000 units were sold by the
end of 1994 at a suggested retail price of $249.99. Sales of Atari's proprietary
personal computers and certain discontinued video game products represented 24%
of revenues for 1994 compared to 87% of revenues for 1993.
Gross margin for 1994 was $3.5 million, or 9.2% of revenues, compared to a
gross loss of $13.7 million for 1993. Included in cost of revenues are inventory
write-downs of $3.6 million and $18.1 million for 1994 and 1993, respectively,
and a write-off of capitalized game software development costs of $804,000 in
1994. These write-downs of proprietary personal computers and video game
products to estimated realizable values were made concurrently with the
introduction and change in marketing focus to Jaguar products.
Research and development expenses for 1994 were $5.8 million compared to
$4.9 million for 1993. The increase resulted from increased expenditures for the
Jaguar product line.
Marketing and distribution expenses for 1994 were $14.7 million compared to
$9.0 million for 1993. The increase in expenditures was primarily the result of
the national rollout in 1994 of the Jaguar. Such costs included television and
print media promotions and other activities.
General and administrative expenses for 1994 were $7.2 million compared to
$7.6 million for 1993. The marginally lower general and administrative expenses
were primarily due to Atari's restructuring program in 1993. During 1993, Atari
made provisions for restructuring totaling $12.4 million, which included closing
many of Atari's operations in Europe, Asia and Australia, including, but not
limited to, severance payments, rental commitments and other closure costs.
For 1994, Atari experienced a gain on foreign currency exchange of $1.2
million compared to a loss on exchange of $2.2 million in 1993. This change was
a result of fluctuation in exchange rates, a lower foreign asset exposure and a
greater percentage of sales made in U.S. dollars, thereby further reducing
exposure to foreign currency transaction fluctuations.
10
For each of 1994 and 1993, interest expense was approximately $2.3 million
on the Atari Debentures.
Atari utilized net operating loss carryforwards and, as a result, there was
no provision for income taxes in 1994.
As a result of the factors discussed above, Atari reported net income for
1994 of $9.4 million compared to a net loss of $48.9 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Atari held cash and marketable securities of $50.6
million compared to $81.0 million at December 31, 1994. The decrease in cash and
marketable securities was primarily the result of operating losses incurred
during 1995.
During 1995, Atari sold a portion of its holding in Dixon PLC., a U.K.
retailer, and realized a gain on the sale of these securities in the amount of
$2.4 million. In the first quarter of 1996, Atari sold its remaining interest in
Dixon PLC. and realized a gain of $6.1 million. As of December 31, 1995, Atari's
balance sheet reflected an unrealized gain on marketable securities of $7.1
million.
In February 1996, Atari loaned $25.0 million to JTS in connection with the
Merger. The loan is due to be repaid by JTS in September 1996 and is secured by
substantially all of the assets of JTS. Atari's security interest in such assets
is junior to existing security interests in favor of a bank and certain
equipment lessors. In the event the Merger is not consummated, there can be no
assurance that Atari's security interest in such assets will adequately protect
Atari in the event JTS is unable to repay the loan. In addition, the loan is
convertible into shares of JTS Series A Preferred Stock at the option of Atari
or JTS upon the occurrence of certain conditions, including a breach of the
Merger Agreement by the other party. In the event such conversion occurs, Atari
would hold a significant percentage of JTS' outstanding equity securities and
would be subject to the numerous risks associated with JTS' business. There can
be no assurance that such securities would be freely tradeable at the time of
conversion, if ever.
As of December 31, 1995, Atari had $42.4 million of its 5 1/4% convertible
subordinated debentures due April 29, 2002 outstanding. The market value of the
Atari Debentures was approximately $20.0 million at December 31, 1995. The Atari
Debentures may be redeemed at Atari's option, upon payment of a premium. The
debentures, at the option of the holders, are convertible into Atari Common
Stock at $16.3125 per share. A default with respect to other indebtedness of
Atari in an aggregate amount exceeding $5 million would result in an event of
default whereby the Atari Debentures would be due and payable immediately.
Atari believes its existing cash balances are sufficient to meet its
requirements at least through 1996.*
---------------
* This statement is a forward-looking statement reflecting current expectations.
Actual results could differ materially from those projected in the
forward-looking statement due to numerous factors, including the risk related
factors set forth herein.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ATARI CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
[Enlarge/Download Table]
PAGES IN
THIS REPORT
-----------
Consolidated Financial Statements:
Independent Auditors' Report.................................................... 13
Consolidated Balance Sheets at December 31, 1995 and 1994....................... 14
Consolidated Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993................................................................ 15
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1995, 1994 and 1993.......................................................... 16
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993................................................................ 17
Notes to Consolidated Financial Statements...................................... 18
Financial Statement Schedule:
II Valuation and Qualifying Accounts........................................... 33
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or the notes thereto.
12
INDEPENDENT AUDITORS' REPORT
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. Our audits also
included the financial statement schedule listed in the Index at Item 8. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule 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. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 1996
(April 8, 1996 as to Note 16)
13
ATARI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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.
14
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
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.
15
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
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.
16
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
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.
17
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.
18
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
19
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):
[Enlarge/Download Table]
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):
[Download Table]
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
20
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):
[Download Table]
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):
[Download Table]
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.
21
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):
[Download Table]
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.
22
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):
[Download Table]
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):
[Download Table]
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.
23
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information with respect to the stock option plan is as follows:
[Enlarge/Download Table]
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):
[Download Table]
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
======= ======= =======
24
ATARI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[Download Table]
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):
[Download Table]
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.
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages and positions held by all
directors and executive officers of Atari as of March 31, 1996.
[Download Table]
NAME AGE POSITION(S) WITH ATARI
------------------------------- ----------------------------------------------
Jack Tramiel 67 Chairman of the Board
Sam Tramiel 45 Director, President, Chief Executive Officer
and Chief Financial Officer
Leonard I. Schreiber 81 Director
Michael Rosenberg 68 Director
August J. Liguori 44 Director
Laurence M. Scott, Jr. 50 Vice President, Manufacturing and Operations
Leonard Tramiel 41 Vice President, Advanced Software Development
JACK TRAMIEL and a group of associates purchased the assets and liabilities
of Atari from Warner Communications in May 1984 and Mr. Tramiel has served as
Chairman of Atari's Board of Directors since such time. Mr. Tramiel served as
Atari's Chief Executive Officer from May 1984 through May 1988.
SAM TRAMIEL has served as President and as a member of the Board of
Directors of Atari since June 1984, as Chief Executive Officer of Atari since
May 1988 and as Chief Financial Officer of Atari since March 1996.
LEONARD I. SCHREIBER has served as a member of the Board of Directors of
Atari since May 1984. Mr. Schreiber was a partner of Schreiber & McBride, a
private law firm, from 1980 to 1995.
MICHAEL ROSENBERG has served as a member of the Board of Directors of Atari
since May 1987. Mr. Rosenberg has served as Chief Executive Officer of Ross &
Roberts, Inc., a plastics company, since September 1987. Mr. Rosenberg is a
Certified Public Accountant.
AUGUST J. LIGUORI has served as a member of the Board of Directors of Atari
since 1992. Since March 1996, Mr. Liguori has served as Vice President, Finance
of Marvel Entertainment Group, Inc. From October 1986 to February 1996, Mr.
Liguori served in several positions with Atari, including Vice President and
General Manager of Atari U.S. Corp., an Atari subsidiary, from October 1986 to
October 1989, Vice President of Atari Corporation from October 1989 to October
1990, and Vice President, Finance, Treasurer and Chief Financial Officer from
October 1990 to February 1996.
LAURENCE M. SCOTT, JR. has served as Vice President, Manufacturing and
Operations of Atari since 1992. Prior to joining Atari, Mr. Scott served as
President of Radofin Electronics (FE) Ltd., a contract manufacturing firm, from
1978 to 1991.
LEONARD TRAMIEL has served Vice President, Advanced Software Development of
Atari since March 1991. Mr. Tramiel served as Vice President, Software
Development of Atari from July 1984 to March 1991.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Executive officers
of Atari are appointed by and serve at the discretion of the Atari Board of
Directors. Jack Tramiel is the father of Sam Tramiel and Leonard Tramiel.
26
SECTION 16(A) REPORTING DELINQUENCIES
Based solely on its review of copies of filings under Section 16(a) of the
Securities Exchange Act of 1934, as amended, received by it, or written
representations from certain reporting persons, the Company believes that during
fiscal 1995 all Section 16 filing requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation earned during the past
three fiscal years by the Chief Executive Officer of the Company and the three
current and former executive officers of the Company other than the Chief
Executive Officer that were most highly compensated for services rendered to the
Company during the last fiscal year (collectively, "Executive Officers"):
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------------- AWARDS
OTHER ANNUAL ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)
------------------------------ ---- -------- -------- ------------------ ------------
Sam Tramiel................... 1995 $150,000 -- $ 351 --
President and 1994 150,000 $250,000 206 25,000
Chief Executive Officer 1993 166,346 -- 239 25,000
August J. Liguori............. 1995 150,000 -- 206 --
Chief Financial Officer(2) 1994 142,834 50,000 190 --
1993 134,856 -- 175 36,250
Laurence Scott, Jr. .......... 1995 140,000 -- 524 --
Vice President,
Manufacturing 1994 133,425 -- 291 --
and Operations 1993 131,250 -- 2,247 10,500
Theodore Hoff................. 1995 116,827 -- 3,374 1,000,000
President, North America
Operations(3)
---------------
(1) Represents payments for group term life insurance benefits.
(2) Mr. Liguori left the Company effective March 1, 1996.
(3) Mr. Hoff joined the Company in June 1995 and left the Company effective
December 31, 1995.
27
STOCK OPTIONS
The following table sets forth information as to options to purchase Common
Stock granted to each of the Executive Officers during 1995.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE (PER EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(3) SHARE) DATE 5% 10%
--------------------------- ---------- -------------- ---------- ----------- --------- ----------
Sam Tramiel................ -- -- -- -- -- --
August J. Liguori.......... -- -- -- -- -- --
Laurence Scott, Jr......... -- -- -- -- -- --
Theodore Hoff (1).......... 1,000,000 86.1% $2.625 -- -- --
---------------
(1) This option was granted to Mr. Hoff pursuant to the Company's 1986 Stock
Option Plan, as amended. The exercise price of the option was equal to the
fair market value of the Company's Common Stock on the date of grant. These
options expired unexercisable when Mr. Hoff left the Company effective
December 31, 1995.
The following table is a summary of the stock options exercised by each of
the Executive Officers during fiscal 1995, and the number and value of stock
options held by each of the Executive Officers as of December 31, 1995.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ ----------- ----------- ----------- ------------- ----------- -------------
Sam Tramiel....... -- -- 185,000 40,000 $ -- $ --
August J.
Liguori......... 11,250 $29,721 10,000 15,000 -- --
Laurence Scott,
Jr. ............ 30,500 61,534 10,000 20,000 -- --
Theodore Hoff..... -- -- -- 1,000,000 -- --
---------------
(1) The exercise price of each of the options was greater than the market value
of the Common Stock at year end ($1.375 on December 29, 1995).
COMPENSATION OF DIRECTORS
Each of the non-employee directors of Atari, Messrs. Jack Tramiel,
Rosenberg and Schreiber, receives $500 for each meeting of the Atari Board of
Directors which such individual attends. In 1995, each non-employee director
also received an option to purchase 20,000 shares of the Company's Common Stock
pursuant to the Company's 1986 Stock Option Plan, as amended. The exercise price
of the options was $2.69 per share, which was equal to the fair market value of
the Company's Common Stock on the date of grant. Each such option vests as to
20% of the shares on the anniversary of the date of grant such that the option
shall be vested in full on the fifth anniversary of the grant date. Each such
option expires six years after the date of grant, unless terminated earlier due
to such director's resignation or removal from the Company's Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Jack Tramiel, Rosenberg and Schreiber, none of whom was an officer or employee
of the Company during fiscal 1995. Mr. Tramiel
28
served as the Company's Chief Executive Officer from 1984 through 1988, and Mr.
Schreiber served as a Vice President of the Company from 1984 through 1986. No
member of the Compensation Committee or executive officer of the Company has a
relationship that would constitute an interlocking relationship with executive
officers or directors of another entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 5, 1996, with
respect to beneficial ownership of Atari Common Stock owned by (a) each person
(or group of affiliated persons) known by Atari to be the beneficial owners of
more than 5% of Atari's Common Stock, (b) each of Atari's directors, (c) each of
Atari's Executive Officers and (d) all directors and executive officers as a
group.
[Enlarge/Download Table]
SHARES PERCENT
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED(1)
------------------------------------------------------------- ------------ ------------
Jack Tramiel(2)(3)........................................... 12,490,616 19.6%
455 South Mathilda Avenue
Sunnyvale, California 94086
Time Warner, Inc.(4)......................................... 8,670,000 13.6
75 Rockefeller Plaza
New York, New York 10019
Sam Tramiel(3)(5)............................................ 5,662,567 8.9
455 South Mathilda Avenue
Sunnyvale, California 94086
Leonard Tramiel(3)(6)........................................ 5,263,946 8.2
455 South Mathilda Avenue
Sunnyvale, California 94086
Bear Stearns & Co., Inc.(7).................................. 4,710,000 7.4
245 Park Avenue
New York, New York 10167
Sega Holdings USA Inc ....................................... 4,705,883 7.4
303 Twin Dolphin Drive, Suite 200
Redwood City, California 94065
Garry Tramiel(3)(8).......................................... 4,055,000 6.4
455 South Mathilda Avenue
Sunnyvale, California 94086
August J. Liguori(9)......................................... 262,000 *
Michael Rosenberg(10)........................................ 37,000 *
Leonard I. Schreiber(11)..................................... 206,000 *
Laurence M. Scott, Jr.(12)................................... 10,000 *
All directors and executive officers 23,932,129 37.3
as a group (seven persons)(13).............................
---------------
* Less than 1%
(1) Based on 63,727,318 shares of Atari Common Stock outstanding as of April 5,
1996.
(2) Includes 11,597,315 shares held by Jack 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.
(3) In connection with the proposed Merger with JTS, Messrs. Jack Tramiel, Sam
Tramiel, Leonard Tramiel and Garry Tramiel have entered into Voting
Agreements with JTS. The terms of such Voting Agreements provide (i) that
such stockholders will not transfer (except as may be specifically required
by court order), sell, exchange, pledge (except in connection with a bona
fide loan transaction) or otherwise dispose of or encumber the shares of
Atari Common Stock beneficially owned by them, or any new shares of such
stock they may acquire, at any time prior to the effective time or earlier
termination of the Merger, and (ii) that such stockholders will vote all
shares of Atari Common Stock beneficially owned by them in favor of the
approval of the Merger Agreement and the Merger. Such voting
29
agreements are accompanied by irrevocable proxies whereby such stockholders
provided to JTS the right to vote their shares on the proposals relating to
the Merger Agreement and the Merger at the Atari Shareholders Meeting which
will be called to vote on such matters.
(4) Includes 7,100,000 shares held by Warner Communications Investors, Inc.,
1,500,000 shares held by Warner Communications, Inc., and 70,000 shares
held by Atari Games, a subsidiary of Time Warner, Inc.
(5) Includes 352,062 shares held by Sam Tramiel as custodian on behalf of his
children, 8,100 shares held by Mr. Tramiel's wife and an aggregate of
97,416 shares held by Mr. Tramiel's minor children. Also includes 225,000
shares subject to options which are vested or become vested within 60 days
following March 31, 1996.
(6) Includes 40,000 shares held by Leonard Tramiel's wife and 10,000 shares
held by Mr. Tramiel's minor children.
(7) Based on a Schedule 13 G filed with the Securities and Exchange Commission
on February 7, 1996.
(8) Includes 55,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(9) Includes 165,000 shares subject to options which are vested or become
vested within 60 days following March 31, 1996.
(10) Includes 12,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(11) Includes 12,000 shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(12) Represents shares subject to options which are vested or become vested
within 60 days following March 31, 1996.
(13) Includes 479,000 shares subject to options which are vested or become
vested within 60 days following March 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements required to be filed hereunder are listed
in the accompanying Index to Consolidated Financial Statements and
Financial Statement Schedule on page 12 hereof.
2. Financial Statement Schedule
The financial statement schedule required to be filed hereunder are
listed in the accompanying Index to Consolidated Financial Statements
and Financial Statement Schedule on page 12 hereof.
3. Exhibits
The exhibits listed under Item 14(c) are filed as part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K: None.
(c) Exhibits
30
[Enlarge/Download Table]
EXHIBIT NOTES DESCRIPTION
------- ----- -------------------------------------------------------------------------------
3.1 (1) Articles of Incorporation of Registrant, as filed May 17, 1984.
3.2 (1) Certificate of Amendment of Articles of Incorporation as filed July 11, 1984.
3.3 (1) Certificate of Amendment of Articles of Incorporation, as filed September 12,
1986.
3.4 (1) Amended and Restated Bylaws of Registrant.
4.1 (1) Form of Indenture.
10.1 (1) OEM Software License Agreement with Digital Research (California) Inc. dated
August 22, 1984.
10.2 (1) License Funding and Sale Agreement with Epyx Inc. dated January 5, 1990.
10.3 (2) Hardware Technology Assignment and License Agreement with Epyx Inc. dated June
3, 1989.
10.4 (2) Software Production and Distribution License Agreement with Epyx Inc. dated
June 3, 1989.
10.5 (2) Manufacturing Services Agreement with Epyx Inc. dated June 21, 1989.
10.6 (2) OEM Purchase and Distribution Agreement with Epyx Inc. dated June 12, 1989.
10.7
Lease by and between the Registrant and Victor H. Owen and Judith Owen Burns
1990 Revocable Trust, dated December 27, 1990, Judith Owen Burns trustee.
10.8 (1) Industrial Lease Agreement for Warehouse at 360 Caribbean Drive, Sunnyvale,
California, dated May 10, 1986.
10.9 (1) Industrial Lease Agreement for Warehouse at 390 Caribbean Drive, Sunnyvale,
California, dated December 17, 1986.
10.10 (3) Agreement and Plan of Merger with The Federated Group, Inc. dated August 28,
1987.
10.11 (2) Agreement for Sale of Assets dated November 8, 1989 among Silo California Inc.,
The Federated Group, Inc. and Atari Corporation.
10.12* (1) Amended 1986 Stock Option Plan.
10.13* (1) Amended form of Incentive Stock Option Agreement.
10.14* (4) Amended Stock Option Plan.
10.15 (1) Memorandum of Agreement among Registrant, Jack Tramiel, Atari Holdings, Inc.,
Productions et Editions Cinematographiques Francais S.A.R.L., Atari
International (UK) Inc., Warner Communications Inc. and certain subsidiaries of
Atari Holdings, Inc., dated August 29, 1986.
10.16 (1) Assets Purchase Agreement with Atari, Inc. and certain subsidiaries and
affiliates of Atari, Inc. dated July 1, 1984.
10.17 (1) Agreement with Atari, Inc. and Jack Tramiel dated July 1, 1984.
10.18 (1) Intellectual Property Rights Heads of Agreement with Atari, Inc. dated July 1,
1984.
10.19 (5) Agreement for Purchase and Sale of Real Estate -- Taiwan.
10.20 (5) General Agreement of Sale -- Irish Facility.
10.21 (6) Stock Purchase Agreement with Time Warner, Inc. dated March 24, 1994.
10.22 (7) Stock Purchase Agreement with Sega Holdings USA, Inc. dated September 26, 1994.
10.23
Amended and Restated Agreement and Plan of Reorganization by and between the
Registrant and JT Storage, Inc. ("JTS") dated as of April 8, 1996.
10.24
Subordinated Secured Convertible Promissory Note dated February 13, 1996
executed by JTS.
10.25
Security Agreement by and between the Registrant and JTS dated as of February
13, 1996.
22.1
Subsidiaries of the Company.
25.1
Power of Attorney (see page 34).
27.1 Financial Data Schedule.
31
---------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(File No. 33-12753) filed with the Commission on July 2, 1987.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989.
(3) Incorporated by reference to the Company's Form 14D-1 and 13D Statement,
filed with the Commission on August 28, 1987.
(4) Incorporated by reference to the Company's Proxy Statement relating to its
Annual Meeting of Shareholders held on May 16, 1989.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal period ended March 31, 1994.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal period ended September 30, 1994.
32
SCHEDULE II
ATARI CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
[Enlarge/Download Table]
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------
December 31, 1993:
Allowance for doubtful accounts................ $2,533 $ 232 $2,293(1) $ 472
Accrued sales returns and allowances........... 4,300 457 4,181(2) 576
December 31, 1994:
Allowance for doubtful accounts................ $ 472 $ 194 $ 72(1) $ 594
Accrued sales returns and allowances........... 576 1,563 776(2) 1,363
December 31, 1995:
Allowance for doubtful accounts................ $ 594 $ 50 $ 317(1) $ 327
Accrued sales returns and allowances........... 1,363 5,028 2,497(2) 3,894
---------------
(1) Amounts written off, net
(2) Customer returns allowed
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 11th day of
April 1996.
ATARI CORPORATION
By: /s/ SAM TRAMIEL
------------------------------------
Sam Tramiel, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Jack Tramiel and Sam Tramiel, and
each of them acting individually, as his attorney-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the dates indicated.
[Download Table]
/s/ JACK TRAMIEL April 11, 1996
------------------------------------------
Jack Tramiel
Chairman of the Board
/s/ SAM TRAMIEL April 11, 1996
------------------------------------------
Sam Tramiel
President, Chief Executive Officer,
Chief Financial Officer and Director
/s/ MICHAEL ROSENBERG April 11, 1996
------------------------------------------
Michael Rosenberg
Director
/s/ LEONARD I. SCHREIBER April 11, 1996
------------------------------------------
Leonard I. Schreiber
Director
/s/ AUGUST J. LIGUORI April 11, 1996
------------------------------------------
August J. Liguori
Director
34
Dates Referenced Herein and Documents Incorporated by Reference
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