Atari Corporation Annual Report 1993

48 Pages·1994·2.7 MB·English

by  Atari Corporation

Atari Corporation
ANNUAL
REPORT
1993
TO OUR SHAREHOLDERS:
As discussed in lastyear's President's message, we were developing a new
multi-media entertainment system called Jaguar. I am happy to report that in the
fourth quarter of 1993, we successfully launched the Atari Jaguar, our 64-bit
multi-media entertainment system in New York and San Francisco. The Atari
Jaguar was recently named the industry's "Best New Game System" ( Vi'deoGames
Magazine), "Best New Hardware System" (GameInformer), and "1993 Technical
Achievement ofthe Year" (DieHardGameFari). In April 1994, the Jaguar was given
the European Computer Trade Show Award for "Best Hardware ofthe Year."
Jaguar is the only 64-bit multi-media entertainment system in the market today. I'm
proud ofthe fact that the Atari Jaguar is the onlyvideo game machine built in the
U.S.A.
Having developed the hardware, our emphasis is now the development ofadvanced
We
interactive software. are currently developing over twenty-five software titles,
such as Alien vs. Predator, Kasumi Ninja and Star Raiders 2000. In March of 1994,
we released Tempest 2000 made exclusively for the Jaguar. This game won "Game
,
ofthe Month" awards from leading magazines and showcases the Jaguar's
capabilities. To insure that the Jaguar will have a supply ofgood software, we are
licensing to third party publishers and developers. We now have over 125 such
licensees and the first third-party softwarewill be on the market in the third quarter
of 1994. The following is a short list ofsome ofour software partners: Time Warner
Interactive, Twentieth Century Fox Interactive, Virgin Games, Ocean, U.S. Gold,
Williams Interactive, Activision, JVC Music Industries, Id Software, and Accolade.
Our management team is committed to making Jaguar a success, not only in its
hardware technological superiority, but also in its entertainment value, advertising
campaigns, and the operations necessary to achieve our goals.
CD-ROM
In the fourth quarter of 1994, we will introduce a peripheral for the Atari
Jaguar. The CD-ROM peripheral will play Jaguar software on CD and regular
audio CD's. Also in developmentnow is a full motion video cartridge which will
CD-ROM
enable the to play movies.
In May of 1994, we licensed the Jaguar technology to Sigma Designs. This will allow
for the incoporation ofthe Jaguar 64-bit technologywith Sigma's Reel-Magic
full-motion video PC card. The Jaguar's marketpotential will expand by over 10
million users who will be able to play Jaguar software titles on their IBM
compatibles. This PC card should be available byyear's end.
Turning to our operations for a moment, we have completed our restructuring and
consolidation around the world. As the business grows, we will reap the benefits of
our streamlined central distribution in Europe and consolidation ofU.S. operations.
In order to insure the long term success ofJaguar, we need to raise capital. As part
ofthis process, we sold an additional 1.5 million shares to Time Warner Inc. for a
total of $12.8 million. Including this transaction, Time Warner Inc. now has
approximately 27% ownership ofthe Company. We will also continue to study
additional financing opportunities.
As we did lastyear, our annual report is comprised ofthe President's Message and a
reproduction ofthe 10K. I suggest you read the 10K for a more detailed description
ofJaguar and the results ofoperation for 1993.
For their continued support, I thank our shareholders, suppliers, developers,
licensees, employees and customers.
Sincerely,
Sam Tramiel
President
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
(MarkOne)
[x] ANNUALREPORTPURSUANTTO SECTION 13 OR 15(d)OFTHESECURITIESEXCHANGE
ACT OF 1934
ForthefiscalyearendedJanuary 1, 1994
OR
TRANSITIONREPORTPURSUANTTO SECTION 13 OR 15(d)OF THESECURITIESEXCHANGE
ACT OF 1934
Forthetransitionperiodfrom to
CommissionFileNumber 1-9281
ATARI CORPORATION
(Registrant)
NEVADA 77-0034553
(Stateorotherjurisdictionofincorporationororganization) (I.R.S. EmployerIdentificationNo.)
1196 Borregas Ave.
Sunnyvale, CA 24089
(Addressofprincipal (ZipCode)
executiveoffices)
Telephone: [phone]
NONE
SecuritiesregisteredpursuanttoSection 12(b)oftheAct:
Securitiesregisteredpursuantto Section 12(g)oftheAct:
Nameofeachexchange
Titleofeachclass onwhichbothareregistered
CommonStock(parvalue$.01) AmericanStockExchange
5Va%ConvertibleSubordinatedDebentures
Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) ofthe
SecuritiesExchangeActof1934 duringthepreceding 12months (orfor such shorterperiod thatthe registrantwas requiredto
file suchreports), and(2)hasbeensubjectto suchfilingrequirementsforthepast90 days.
Yes X No
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405 ofRegulation S-K isnotcontainedherein, and
will not be contained, to the best ofregistrant's knowledge, in definitive proxy or information statements incorporated by
referenceinPartIIIofthisForm 10-KoranyamendmenttothisForm 10-K. [X ]
The aggregatemarketvalue ofthe voting stockheldbynon-affiliates oftheRegistrant, basedupon the closing sale price of
its Common Stock onMarch24, 1994 on theAmerican Stock Exchange was $94,630,828. Shares ofCommon Stockheld by
each officeranddirectorandbyeachpersonwho owns 5% ormore ofthe outstanding Common Stockhave been excluded and
suchpersonsmayundercertaincircumstancesbedeemedtobe affiliates. This determination ofofficeroraffiliate status isnot
necessarilyaconclusivedeterminationforotherpurposes.
CommonStock(parvalue$.01)ofRegistrantoutstandingatMarch24, 1994- 57,223,862 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions ofthe Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual
MeetingofShareholderstobeheldJune 17, 1994areincorporatedbyreferenceintoPartIHhereof.
-3 -
PART
I
Item 1. BUSINESS
General
Atari Corporation ("Atari" or the "Company") was incorporated under the laws of Nevada in May
1984. Atari designs and markets interactive multimedia entertainment systems and related software and
peripheral products. In July 1984, Atari acquired certain video game and microcomputer assets from the Atari,
Inc. subsidiary ofWarner Communications, Inc. ("WO") (now Time Warner, Inc.), in exchange for, among
other considerations, 14,200,000 shares of the Company's Common Stock. Time Warner, Inc. holdings
represent approximately 25% of the Company's outstanding Common Stock. As more fully described in
Note 15 to the Consolidated Financial Statements, the Company entered into an agreement on March 24, 1994
to sell an additional 1,500,000 shares of Common Stock to Time Warner, Inc. After the completion ofthis
transaction, Time Warner will hold approximately 27% of the Company's outstanding shares of Common
Stock.
—
The Company operates in one industry segment the design, sale and servicing of consumer electronic
products.
Principal Products
The Company's principal products are Jaguar, a 64-bit interactive multimedia entertainment system,
along with related game software and peripheral products; Lynx, a 16-bit portable color hand-held video game,
relatedgame software and accessory products, andthe Falcon030 series ofpersonal computers.
Jaguar
The Company introduced, in late November 1993, the Atari 64-bit Jaguar Interactive Multimedia
System into the New York and San Francisco markets. The retail price is $249.95, which includes a Jaguar, a
controller and a software title named "CyberMorph." This limited rollout was necessitated because of
restricted supply during the production startup. The introduction ofJaguar was supported with marketing in
both metropolitan areas and was seen in an advertising campaign on television by its target audience. Retail
sale reports fortheNovemberthrough December periodwere encouraging.
The Jaguar is a 64-bit interactive multimedia system that incorporates two proprietary chips that the
Company developed in its own facilities. The chips are named "TOM" and "JERRY." The Jaguar incorporates
five processors:
1. Graphics Processing Unit (GPU)
2. Digital Signal Processor (DSP)
3. Object Processor
BLITTER
4.
5. 68000
The first four processors above are located in proprietary chips and the 68000 is a standard Motorola
microprocessor. The computational speed ofthe system is approximately 55 MIPS and the bus bandwidth is
106.4 megabytes per second. The video features include 24-bitgraphics with up to 16 million colors and a 3-D
engine which can render 3-D shaded or texture map polygons in real time. The system also supports real time
texture mapping which allows for realistic surfaces to be applied over the 3-D polygons. The Company
believes the graphics ofthe Jaguar video are equal to or superiorto any other system currently available.
The sound system is based on a high-speed custom DSP dedicated to audio. The audio is 16-bit CD
quality, from cartridge based software, and can be processed from simultaneous sources ofaudio data. This
allows forvery realistic sounds inthe software and includes humanvoices.
Through the use ofa compression technology customized by the Company, code named "JAGPEG."
ROM
software developers can compress data to the point that a 100-megabit game can fit into a 16-megabit
cartridge. This allows for more exciting experiences both visually and in game play due to the vast amount of
dataavailable.
The Company has developed a CD-ROM peripheral for the Jaguar and software is now being
developed to take advantage ofthe benefits that CD-ROM brings to the user, such as full motion video and
even more datathan is available on cartridges. Publishers can take advantage oflower media cost and quicker
turnaround on orders with CD-ROM as compared to ROM cartridge. The CD peripheral is a double speed
player and can also play back regular audio CD's and CD + G (graphics). The Company is also developing a
VCR quality Full Motion Video plug-in cartridge utilizing an MPEG chip which will allow for the playback of
any software compatible to "White Book" specifications, such as many CD videos. The Company expects to
ship the CD-ROM peripheral inthe secondhalfof 1994. The suggested retail price will be $199.95.
The Jaguar also has a high-speed serial port which will allow for future connection into telephone
networks and will allow for modem-based, two-player games over telephone lines. The Company is also
investigating a multiplayer network over telephone lines which will allow, for example, multiple spacecraft
flying around in a 3-D world interactingwith each other andbeing seen onyourhometelevision set.
The Company is developing orhas developed around 30 software titles where it is the developer and/or
the publisher. In additiontothe efforts bythe Companyto develop software there are approximately 100 third-
party licensees that have signed license agreements to develop and publish Jaguar software. These companies
are very important to the success of the Jaguar and are being supported by an internal team to aid their
developmentwork. The Company expects to seethe firstthird-party software onthe market inthe third quarter
of 1994. The Company will receive royalty payments fromthe third parties whenthey publish software on the
Jaguar system. The Company, as ofthe endofMarch 1994, has fivetitles being sold andthe Company expects
thatbythe end ofthe second quarterto have sixmore available. The most recently introduced title is "Tempest
2000" and it was named "Game ofthe Month" by two leading video game magazines, Electronics Gaming
Monthly and Die-Eard Game Fan. The Company plans to continue to invest in research and development in
the software areato improve the quality ofthe experiences available on the Jaguar platform. These efforts will
be shared with the third-party licensees so thatthe overall software experience will be improved. These efforts
will be seen in even more realistic gaming experiences with texture mapped 3-D polygons and fast-moving
adventure.
The Company is further developing the Jaguar hardware and is now working on the second generation
ofthis powerful hardware base. The second generation will be software compatible with the present software
and will also be able to play even more advanced software. The Company also plans to have the Jaguar chip
CD-ROMs
set incorporated onto a PC compatible add-on card, so that users ofPC's that have double speed
can also use Jaguar CD software. This product will likely be licensed to a third-party hardware company but
nothing has been finalizedto date.
The Jaguar is currently being assembled by IBM^ in the U.S.A. The Company will start up a second
assembler during the second halfof 1994. The proprietary chips, "TOM" and "JERRY," are manufactured by
a major semiconductor supplier in Japan and a major U.S. supplier is commencing production in the second
quarter of 1994.
As of the end of March 1994, the Company is currently focusing its marketing in the Major
metropolitan areas ofNewYork, San Francisco and Los Angeles. The Company plans to continue the rollout
ofproduct across the U.S. as software andhardware becomemore available. The Company expects that by the
end of 1994 there will be approximately 50 software titles availablethrough both the Company and third-party
publishers.
AtariLynx
The Company offers a color portable hand-held video game system called the Atari Lynx. The Atari
Lynx provides 16-bit color graphics, stereo sound, fast action and depth ofgame play, and comes complete
with a built-in eight-directionaljoypad and a 314 inch full color LCD offering up to 16 colors at one time from
a palette ofover 4,000 colors. With the use ofthe Comlynx cable, it is possible with certain games for up to
eightplayers to network in multi-playercompetition. Over 65 differentgames are currently available.
Atari Falcon030 Series ofPersonal Computers
The Company offers a Falcon030 series of personal computers based on the 32-bit Motorola 68030
microprocessor and which include a Motorola 56001 Digital Signal Processor. The Company designed four
custom semiconductor chips for the Atari Falcon030. The Ajax chip is used as the floppy disc controller. The
Combel chip functions as the memory controller and graphics processor. The high quality video is performed
bythe Videl chip andthe directmemory access is handled bythe SDMA chip. These computers are capable of
recording and playback of sound in 16-bit stereo at 50 MHz which is above CD quality specifications. The
Atari Falcon030 computers operate at an internal clock speed of 16 million cycles per second. The computer
can display high quality video in 16-bit true color displaying 65,536 on-screen colors in a resolution of
VGA VGA
768x480. For video, the Atari Falcon030 computer can use standard and Super monitors,
televisions and Atari color and monochrome monitors, thereby giving the user greater video flexibility. The
Atari Falcon030 can be configured with different RAM (random access memory) sizes of 1 meg, 4 meg and 14
meg and various hard disk drive sizes. The Atari Falcon030 uses an enhanced version ofthe Company's TOS
operating system which includes multitasking (MultiTOS) and is compatible with most of the application
software developed for the Company's ST series of computers. The Atari Falcon030, through its array of
interfaces, can link to audio visual equipment such as televisions, monitors, hi-fi stereo systems, musical
synthesizers, modems, telephones, printers and digital audio tape (DAT) players. The Company has a license
from Kodak so that the Atari Falcon030 can play back, manipulate and edit Photo-CD (a photo-CD player is
needed). This combination offeatures positions the Atari Falcon030 well for the personal multimedia market.
Since introduction in the first quarter of 1993, the Company has shipped small quantities ofthis product. The
Company does notexpect sales ofthis productto bematerial inthe future.
OtherProducts
The Company also has some inventory ofits older 16-bit computer products and 8-bit game products,
namely ST and TT series ofcomputers, 2600 and 7800 video games systems and XE computer and Portfolio
products. As a result ofthese inventories being technologically obsolete and noncompetitive, the Company has
written offthese inventories. The Company is expectingminimal sales fromthese products inthe future.
The percentage breakdown ofthe Company's sales forthe lastthree fiscal years is as follows:
Computers Video Games
% %
1993 67 33
% %
1992 66 34
% %
1991 66 34
Marketing and Distribution
The Company distributes its products domestically through various independent channels. Interactive
media entertainment systems are sold primarily through national retailers, consumer electronic specialty stores
and distributors of electronic products. The Company's computer products are sold through independent
computer specialty dealers, either directly or through distributors. Generally, these dealers also provide
product support, offer peripheral equipment and software, and provide warranty and post-warranty repair
services. European distribution is conducted from the Netherlands. The European markets are served through
substantiallythe same channels ofdistributors as those inthe United States market.
Net sales outsideNorth America for fiscal years 1993, 1992 and 1991 constituted approximately 75%,
85%and 86%, respectively, oftotal net sales.
The Company's sales are subject, in varying degrees, to some seasonality which is characteristic ofthe
consumer electronics market. This seasonality has historically been characterized by increased sales in the
fourth quarter. Because there were no significant new product introductions in 1992 and limited Jaguar
shipments in 1993, such seasonality was not evident. The Company cannot make any assurances that its sales
will resumethetypical seasonality ofthe market.
No single customer accounted for 10% or more oftotal net sales for the years ended December 31,
1993, 1992 or 1991.
Backlog
The Company purchases products and components according to its forecast ofnear-term demand, and
not primarily to specific customer orders. Warehoused inventories of finished products are maintained in
advance ofreceipt oforders. Orders are usually placed by purchasers on an as-needed basis, are cancelable
before shipment, and are usually filled from inventory shortly after receipt. Accordingly, in line with industry
practice, thebacklog oforders at anytime is generallynot indicative ofactual sales in any future period.
Research and Development
The Company's ability to compete, within its industries, depends, in large measure, on its ability to
adapt to the rapid technological changes, including hardware systems, related software, and peripheral
products. In this regard, the Company is committed to an ongoing program of research and development,
focused primarily on the Jaguar product line. Most ofthe Company's products, including Jaguar, have been
developed by its internal engineering group. The Company's research and development expenditures totaled
$4.9 million, $9.2 million and $15.3 million, in 1993, 1992 and 1991, respectively.
-7-
The Company is engaged in an on-going program to develop software for Jaguar. As part of this
development process, the Company enters into agreements with third parties to develop and/or license
properties. Under these agreements, the Company will make payments to these parties as either development
fees and/or advance royalties, and will possibly contractually obligate itselfto minimum royalty guarantees on
future sales. Payments for development and advance royalties are capitalized as software development costs
and are amortized to cost ofsales as the developedproducts are sold.
The Company periodically assesses, by reference to current and estimated sales, the recoverability of
these costs and charges to current operations costs that are determined to no longer be recoverable. In this
regard, there can be no assurance that all payments for development fees and/or advance royalties will be
recoverablethrough future sales ofproducts.
Manufacturing
Until the second quarter of 1991, the Company's principal products were manufactured at the
Company's 180,000 square foot facility in Tam Shiu, Taiwan. During the second quarter of 1991, the
Company sold this facility. Subsequent to the sale of its facility, the Company entered into various
arrangements with independent subcontractors for the assembly of its principal products. The Company is
completely dependent on these subcontractors for the production of its products and at different times has
experienced start-up problems which have delayed production.
The Jaguar console unit is assembled in the United States by a third-party subcontractor under an
agreement covering various terms of this manufacturing arrangement. The agreement may be canceled by
either party with a 90-day notice period. Cancellation ofthe agreement could have a material adverse impact
on the Company's ability to achieve its near-term plans, although the Company believes it has found an
alternative manufacturing source. The Company intends to secure an alternative manufacturing source for
Jaguar in 1994.
The Jaguar console unit is assembled from component parts purchased from various supplies. The
Company's custom 64-bit RISC processor chip set is currently purchased from a single-source supplier. The
Company's business would be adversely impacted by added costs or delays in delivery from this supplier. The
Company has secured a second source for the supply ofthis component part and expects this supply source to
be available inthe second quarterof1994. Othercomponentparts are acquiredfrommultiple sources andhave
been readily available.
Jaguar software products and accessories are manufactured by several suppliers and are assembled by
subcontractors. The Company believes that, in comparison to the Jaguar console unit, it is less dependent on
these manufacturers and subcontractors and that it could replace these sources of supply and assembly more
readily.
Exports
Export information is contained in Note 13 ofthe Notes to Consolidated Financial Statements. Gross
margins on sales of products internationally and on sales of products that include components from foreign
suppliers may be adversely affected by foreign currency exchange rate fluctuations and by current and
proposed international trade regulations, includingtariffs and anti-dumping penalties.
Intangible Property Rights
The Company's most significant trademarks are its "Atari" name and "Fuji" logo, both ofwhich were
acquired from WCI for the Company's exclusive use in all areas other than coin-operated arcade video game
-8
use. The Company also acquired fromWCI aportfolio ofintellectual properties including patents, trademarks
and copyrights in conjunction with its video game and computer businesses. The Company believes the
ownership ofits patents, trademarks and other intellectual property to be important assets and it considers such
rights to be important in the marketing of its products along with technological innovation and expertise,
efficientproduction, andmarketing strength.
The Company's rights to make, use and sell certain computer andvideo game software are held through
licenses from third parties. A significant license grants the Company an exclusive right to the TOS operating
system andnon-exclusive rightto certain developmenttools developed by Digital Research, Inc. forthe ST, TT
and Falcon030 series ofcomputers. The operating system license is fully paidand includes the rightto produce
unlimited copies in perpetuity.
As the Jaguar entertainment console has been internally developed, the Company does not have any
license arrangements withthird parties.
The Company has, from time to time, been notified ofclaims that it may be infringing patents owned
by others. The Company assesses such claims on a case by case basis and seeks licenses under such patents
where appropriate. Based upon industry practice, the Company believes that if it is found to have infringed
such patents, it will be able to implement the necessary modifications to avoid infringement or obtain licenses
on terms which will not have a material effect on its operations, although no assurance can be given that the
terms ofany offered licensewill be acceptabletothe Company.
Employees
As ofDecember 31, 1993, the Company had approximately 133 employees worldwide, including 43 in
engineering and product development, 38 in marketing, sales and distribution, 7 in purchasing and production,
and 45 ingeneral administrationandmanagement.
None of the employees are represented by a labor union. The Company considers its employee
relations to begood.
Many ofthe Company's employees are highly skilled. The Company's business depends, to a great
extent, on its ability to attract and retain highly skilled employees. The Company competes for its employees
with many otherhightechnology companies, many ofwhich havegreater resources.
Competition
The video game industry is highly competitive in both hardware and software. The software for the
video game business is a very important aspect and certain game titles are also very important, such as ones
thathave their origins in the coin operated industry or the entertainment industry. The Company licenses such
titles fromholders ofthese properties and has the title programmed for use on an Atari platform. The potential
for licensingtitles has increased sinceNintendo™, as ofJanuary 1991, ceasedto require its software developers
to license titles exclusively to Nintendo™. The Company has recently consummated contracts for major titles
that will appear on Atari formats, including Jaguar. In the video game market, the Company's main
competitors are Nintendo™ and Sega™ Other potential competitors are Sony™ and 3DO™. Management
believes the Companyhas an advantage over its competitors as itrelates to pnce/performance ratio.
The personal computer industry is highly competitive and has been characterized by rapid
technological advances inbothhardware and software as well as constant introduction ofnew products offering
more features at lower cost. The principal elements of competition among personal computer manufacturers
are quality and reliability, availability ofsoftware, peripherals and accessories, ease ofuse, price/performance