Atari Corporation ANNUAL REPORT 1992 A ATARI TO OUR SHAREHOLDERS: As you will read in the accompanying lOK report. Atari is still going through a difficult time. Sales are down significantly, and a large loss was incurredin 1992. The new Atari Falcon030 commenced shipment during the first quarter of 1993. Shipments were quite small and are increasing in quarter two. Initial responses are encouraging, but we realize that this market is extremely competitive, and we are closely monitoring sales in order to control inventory. Please refer to the "Principal Products" section in the lOK for further information onthe Atari FalconOSO. On the entertamment side of the business, the Company is developing a multimedia entertainment system called "Jaguar." This product looks promising, and our engiiteering teams are working hard to complete this project. The "brains" ofthe system is a proprietary, Atari-developed 64-bit RISC processor. The power of this system will allow for true 24-bit graphics, 16 miUion colors, stereo CD quaHty sound and a 3-D rendering engine which allows 3-D polygons to be manipulated in a "real" world in real time. In the "Principal Products" section ofthe lOK, there is amore detailed specification ofthe "Jaguar." In 1992, we continued our cost control programs and decided to restructure our operations to become more efficient, streamlined and competitive. Taking advantage of new regulations in the EEC, which allow for the free flow of goods, we are centraUzing our European operations inHolland. We will maintain satellite sales offices in Germany, France, the U.K. and Italy for conducting sales activities throughout Europe. To further reduce overhead, we also consolidated all North American and Asian operations into the corporate headquarters inCalifornia. As we did last year, our annual report is comprised of the President's Message and a reproduction of the Forai lOK. This was done to help save money for the future products and theirsuccessfullaimch. I suggestyouread the lOKfora more detailed report onAtari. 1993 will be a challenging year. With the launch of the Atari Falcon030 and the future introduction ofthe "Jaguar," we planto rebuild our sales and bring Atari back to profit. For their continued support, I thank our shareholders, suppliers, employees and customers. Sincerely, SamTramiel President — 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM lO-K (MarkQae) fxl ANNUALREPORTPURSUANTTOSECTION13OF15(d)OFTHESECURITIES EXCHANGEACT OF 1934 FcMTtiiefiscalyearendedDecember31, 1992 OR TRA^^mONREPORTPURSUANTTOSECTION13OR 15(d)OFTHESECURITIES I EXCHANGE ACT OF 1934 Forthetransitionperiodfrom to _ CommissionFileNumber1-928 ATARI CORPORATION (Registrant) MEYADA 77-0034553 . (Stateorotherjurisdictionofincorporationororg«izatiO«) (LR.S.EmployerIdentificationNo.) 1196BorregasAve. Sn«n^.l._ OA (ZyCode) (Addressofprincipal - executiveoffices) I. Telephone: (408)74$.2«» NONE SecuritiesregisteredpursuanttoSecticm12(b)a£theAct: SecuritieslegsteredpursuanttoSection12(g)oftheAct: Nameofea<^exdiange _ Trtl^-nfeachdass onwhichboth areregistered CommonStock(parvalue$.01) AmericanStockExchange 5Vi%ConvertibleSubor^natedDebentures IndicatebycheckmarkwhethertheRegistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)of theSecuritiesExOums^Actof1934duringthepreceding 12months (orforsuch shorterperiodthattheregistrantwas requiredtofilesudireports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days. Yes X No Indicatebycheckmarkifdisclosureofdelinquent filerspursuantto Item 405 ofRegulation S-Kis not contained herein, and will be contained, to the best of registrant's knowledge, in definitive proxy orXmformation statements incorporatedbyreferenceinPartinofthisForm10-KoranyamendmraittothisForm10-K. [ ] TheamiMatemarketvalueofthevotingstockheldbynon-affiliatesoftheRegistrant,basedupontheclosingsale pSrtioccekohfel^dCb6ymeamcohnoffSitcoecrkanodndAiprreiclto2r,a1n9d93byoneatchhepAemresroincwahnoStoowcnksE5xc%hoarngmeowraesof$1t5h,e17o8u,t26s7t.andSmhgarCesomofmoCnomSmtoocnk havebeenexcluded and such personsmayundercertaincircumstancesbedeemedtobe affiliates, lliisdetermmation ofofficeroraffiliatestatusisnotnecessarilyaconclusivedeterminationforotherpurposes. CommonStock(parvalue$.01)ofRegistrantc«itstandingatApril2, 1993-57,803.741shares. DOCUMENTS INCORPORATED BY REFERENCE Portions ofthe Proxy Statement to be filedwiththe Securities andExchange Commission in connectionwiththe AnnualMeetingofShareholderstobeheldJune25, 1993 areincorporatedbyreferraceintoPartHIhereof. PART I Item 1. BUSINESS General Atari Corporation ("Atari" or the "Company") was incorporated under the laws ofNevada in May 1984. Atari designs, manufactures and markets personal computers and related personal computing products and video game systems. In July 1984, Atari acquired certain microcomputer andvideo game assets fromtheAtari,Inc. subsidiaryofWarnerCommunications, Inc. ("WCI") (now TimeWarner, Inc.). TheCompanyoperatesin thehomecomputerandvideo eiitertainment systemsmarkets. ComputerStrategy In 1991, the Companydecided to refocusits computerR&D efforts toward the homemarket. The Company realized that its ST, Mega and TT computers would not be competitive and therefore reduceditsmanufacturingplanduringthe endof1991 andthrough 1992. The Company's newpersonal computeris ttieAtari FalconOSO. This machine is based onthe Motorola 68030 microprocessor. It also incorporates the Motorola 56001 Digital Signal Processor R&D alongwith a number ofproprietary semiconductor chips designedby the Company's personnel. CD ThefeaturesoftheAtariFalconOSO,with truecolor and stereo qualitysound, positionsitwell for the personal multimedia market. Initial comments from the press and software communities have beenpositive. ShipmentsoftheAtariFakxMiOaOcommencedduringthe firstquarterof1993, insmall quantities approximately five months behind schedule. For a more in-depth description ofthe Atari Falcon030, pleasegototihc"PrmdpalProdwts" section. Entertainment Strategy The present entertainment market is divided into two segments. The larger, T.V. mteractive segment, is dominated by 16-bit systems fmm Sega and Nintendo. The other is the LCD (liquid crystal display) handheld game segment which includes the Nintendo Game Boy, the Sega Game Gear and the Atari Lynx. The Company is continuing to developsoftware for the Atari Lynx and at theendof1992, therewere approximately65 software titles. The Company is continuing its R&D effort on the T.V. interactive product code named "Jaguar." The "Jaguar" is a multimedia system based on an Atari-designed proprietary 64-bit RISC processor. The Company in 1990decide notto compete in the 16-bit arenawith a "metoo" product and focusedon the 64-bit project. The "Jaguar" features true 24-bitgraphics, 16 million colors, stereo CD quality sound and a3-D renderingenginewhich allows3-D polygons tobemanipulatedin a"real" worldinrealtime. Please refertothe "PrindpalProducts" section foramoredetaileddescription. operationStrategy In 1992, the Company continued cost control (programs and decided to restructure its operations to become more efficient, streamlined and competitive. The company continued to use subcontractors to manufacture its products which allows for flexibility and less fixed overhead. Taking advantage of new regulations in the EEC, which allows for the free flow of goods, the Company is centralizing its European operations in Holland. The Company will maintain satellite sales offices in Germany, France, the United Kingdom and Italy for conducting sales activities throughout Europe. The Company has consolidated its North American and Asian operations into itscorporateheadquartersin California. During 1992, the Company incurred expenses and made provisions for restructuring totalling $17.1 million which included reducing the number ofemployees and closing certain facilities around the world. A substantial portion of the restructuring was completed in 1992. The table below is a quarterlycomparison ofresearch and development, selling, general and administrative costs (SG&A) excludingrestructuringcharges, and netsalesfor1990, 1991 and 1992: Atari Corporation SG&AandNetSales (OOO's) ForthePeriodsEnded: 1990 1991 1992 SG&A Sales SG&A Sales SG&A Sales Ql $ 25,629 $ 85,547 $ 22,808 $ 63,444 $ 16,093 $ 44,079 Q2 26,771 84,895 20,408 49,210 16,104 23,265 Q3 24,521 89,146 16,006 49,240 10,499 34,529 Q4 39.979 151,883 27.855 96.098 14.144 25.467 • TOTALS $116,900 $411,471 $87,077 $257,992 $ 56,840 $127340 Dueto theseasonal nature ofthebusiness, the Companynormally achieves higher sales in the fourth quarter. The Company's SG&A expenses are higher in the fourth quarter as a result of increasedpromotional activity. The Company is continually reviewing its cost structure and estimates its current selling, general and administrative costs, after all restructuring has taken place, and not including promotional expense attributable to newproducts, tobe approximately$6.0million perquarter. Concurrently, with the structural changes of the business as stated above, the Company continued its R&D efiforte and is developing new technology to compete in the home computer and video game industries. Although the Company feels these technologies are competitive, the Company does not know whether these technologies will achieve broad acceptance in the marketplace. As a result of the new technologies, the Company is selling off its inventory of older computer andvideo game products. The Company recentlycommenced shipment, inthe firstquarter m of1993, oftheAtari Falcon030 computers small quantities. Theimpactofthistransitionwill result in substantially lower quarterly sales in 1993 than previously achieved in the same quarters ofprior years. -3- PrincipalProducts The Company's principal products are its Atari FalconOSO series of personal computer systems based on the TOS proprietary operating system and the Atari Lynx color handheld game systemwith relatedvideo game software. AtariFalcon030SeriesofComputers These computers are based on the 32-bit Motorola 68Q30 microprocessor and include a Motorola 56001 Digital Signal Processor. The Company designed 4 custom semiconductor chips for theAtari FalconOSO. TheAjaxchip is used as the Qoppydisc controller. The Combel chip functions as the memory controller and graphics processor. The high quality video is performed by the Videl SDMA chip and the direct memory access is handled by tte chip* These conaimters are capable of recordingand playbackofsound in 16-bit stereo at 50 MHzwhich is above CD quality specifications. The Atari Falcon030 computers operate at an mtemal clodk speed of 16 million <^cles per second. The computer can display high qualityvideo in 16-bit true color displaying 65,536 on-screen colors in VGA a resolution of768x480. Forvideo, the Atari Falcon030 computer can use standard and Super VGA monitors, TV's and Atari color and fflonochromeXEU>mtors, thereby ^^dng the user greater RAM video flexibility. The Atari Falcon030 can be configured with different (random access memory) sizesof1 meg, 4 megand 14n^gmidvar^^tetrddrive sizes* TheAtariFalcon030 uses an enhanced version ofthe Company's TOS operating system which includes multi-tasking (MultiTOS) and is compatible with mmtofthe applicati^J^lw»#^dwi^ped for the Company's ST series of computers. The Atari Falcon030, through its ^rray ofinterfaces, can link to audio visual equipment such as T.V.'s, monitors, hi-fi stereo systems, musical synthesizers, ntodems, t€*ephones, printers and DAT players. The double processor layout (tiae 68030 and the 56001) allows for processing speeds that are up to 10 times quicker than other personal computers. This combination of features positionstheAtariFalcon030well forthepersonalmultimediamarket. The Company, internally and throughsome ofits independent software developers, is currently developing softwarewhich will take advantage ofthe new and improved power and features ofthis series ofcomputers. 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). Production ofthe Atari Falcon030 series ofcomputers commenced inthe firstquarterof1993 insmallquantities. AtariSTSeriesofComputers The Atari ST Seriesofperwnal and business computers is based on the Motorola 68000 and 68030 series ofmicroprocessors usingthe Cbnypiany's TOS pioprietary operating system. This series of computers includes the Atari STE, Atari MegaSTE, Atari TIX)30 and related peripherals. RAM Depending upon the model, these computers have different configurations of from one-half megabyte forthe STE up to 26 megabytes for the TT. The highest resolutionin coloris 640x480with a color palette of 4096 colors. Inteinal clodc speeds are from eight million cycles per second to thirty-two million cycles per second. The Company began to phase out this series of computers in 1992preparing forthetransitiontotheAtariFalcon030. Sales ofthe Company's ST series ofcomputers represented53%, 53% and59% ofnetsalesin 1992, 1991 and 1990, respectively. OperatingSystem ROM TOS (The Operating System) is biiilt into (read-only memory) in each of the Company's 68030 and 68000 lines ofcomputers. TOS gives the Atari computer-user astateofthe art grajAical user interfece with a pointing device (the mouse), drop-down menus, windows and icons. This,intuitive, gfi^bicalway ofpresenting the computer allows a less intimidating and easier to learn environment for the computeruser. In theveraonsofTOSincluded in theAtari Falcon030 seriesof computers, multi-tasking (MultiTOS) has been added to TOS. In addition, new features have been added to TOS that allow for additional flexibility and enhanced ease of use. Some features are availabletoownersofjweviousmodelsas anupgrade. MultiTOS adds significant enhancements such as drag-and-drop, the ability to use the mouse to drag a portion of a document from one application and have it automatically inserted into a document from a second applieaticm. Thiscouldbe usedtocut aportionofapicture from apainting piogram and paste it into a wordproccssing document. MultiTOS also provides IPC (inter-process communication, the ability for applications to seamles^ diaie data with each other), as well as provisions to easily extend file system access to UNIX, MBSflX, and Macintosh. MuhiTOS also has buUt-in CD-ROM file system support for ISO9660 and High Sierra formats with support for CD-ROM/XA (extended architecture) drives. MultiTOS is extremely user-friendly and designed for userswithlittleorno computerbackground. MIDI Aunique featureofthe STline andAtariFalcon030 computersis the inclusionofMIDI ports (Musical Instrument Digital Interface) directly on board the computer. This feature allows profes- sional aswell as amateurmusicians to connect with electronic musical instruments, enabUng them to record, edit, and arrange music in real time without the limitations oftraditional tape media. With the introduction of 16-bit stereo capabilities within the Atari Falcon030 computers, musicians now have the enhanced ability to digitally record musical samples such as guitars and vocals. The Company believes this technology combined with third party software applications, sold directly by developers, creates a superior solution when compared to competitors' products currently in the marketplace. Application Software As part of the development and launching of the Atari FalconOSO series of computers, the Company commenced the development of application software. The Company is developing soft- ware intemaUy and by contract with third party developers. In addition, third party Independent Software Vendors (ISV) are developing products on their own. There are approximately 180 developersworkingon over 200 Atari Falcon-specific applications. These applications cover a broad spectrum of applications, including, but not limited to, databases, desktop publishing, sound manipulation, true color paint packages,vdcemail and entertainment programs. These applications, coupled with the performance of the hardware, will give users a low cost solution that exceeds the capabilitiesofthe highercostvideo, graphicand sound systemsthatarecurrentlyinthemarket. Currentiy there are over 5,000 software titles for ST series ofcomputers, many ofwhich will work on the Atari FalconOSO series of computers. These tities include word processing, database, spreadsheet, networking, graphics, computer-aided design (CAD), electronic publishing and enter- tainmentsoftware. -5- Video GameSystems Portable 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 8-directional joypad and a 3Vi kich full color LCD offering up to 16 colors at one time from a palette of over 4,000 colors. With the use of the Comlynx cable, it is possible with certain games for up to 8 flayers to network in multi-player competiticm. Over 65 differentgames arecurrently available. TheCompanywillbe releasingadditionaltitles. Table Top Games The Company*s existing table top video gafls^ offerings include the 2600VCS and the 7800 ProSystem®. Sales of these products have declined significantly around the world as a result of intense competitive pres^aes, principally from Nintendo and Sega product offerings. The 7800 ProSystem is compatible with 2600 software and offers enhanced graphics for|^mes designed to use the7800'scapabilities. TheCcMiipanyintendsto phaseouttheseproducts. Sales ofthe Company's video game systems constituted approximately 38%, 34% and 21% of m sales 1992, 1991 and 1990, respectively. TelevisionInteractive The Company is developing a new interactive multimedia cm^le based on proprietary custom semiconductor chips, including a 64-bit RISC processor. This multimedia console is code mmed "Jaguar." The video features include 24-bit graphics with up to 16 million colors and a 3-D rendering enginewhichcan manipulate3-D polygon shapesin a "real" world inlealtime. The "Jaguar" also has real time texture mapping and can create special video effects. We anticipate the video output on md "Jaguar" will be far superior to video games avaikMe today will allow for more realistic simulationsformovingvehicles such as spaceships, cars, airplanesand figures. ROM Theentertainmentsoftware forthesystemwillbe firstavailableon cartridge. The sound system is based on a high-^ieed ci^tCHii Digital Signal Processor dedicated to audio. The audio is stereo 16-bit CD quality and can be processed from simultaneous sources of audio data. This allows forvery realistic soimds to be med during sc^Btware design as well as humaii voices. The "Jaguar" will include a 32-bit expansion port which will allow for future connection into cable and telephone networks when such opportunities arise. There also will be a radio processing portformodem use and forconnectiontodigital audioperipheralssuchas DATplayers. The Company is also developing a compact disc peripheral for "Jaguar." Software developed forthis mediacan take advantageoflower mediacost, capacity (up to 650 megabytes) and additional flexibiUtyin the areaoffull motionvideo (FMV),voice and music. In the future, "Jaguar"willbeable FMV VHS to connect a cartridge into the 32-bit expansion port which will allow for playback at CD quaUty. The compact disc peripheral is double-speed and is being designed to also play regular audio, CD+G (graphics) andKodak'snewRwto-CD. The Company is developing ROM-based softwarefor"Jaguar" concurrentwith the hardware development. MarketingandDisttibution The Companydistributes its productsdomesticaUythroughvariousindependentchannels. Its computer products are sold through independent computer specialty dealers, either directly or through distributors. Generally, these dealers also provide product support, offer peripheral equipmentand software, andprovidewarrantyand post-warranty repairservices. Video game systems are sold primarilythrough national retailers, department stores and mail order outlets. These products carry a substantially lower retail price and require less technical supportthan computers. International distribution is channeled directly through sales subsidiaries and through ^dependent distributors. Primary^ international distribution is by direct sales in AustraHa, the Benelux countries, France, Germany, Italy, Spain, Switzeriand, and the United Kingdom. In other international maritets, the Company distributes its products through independent national and regional distributors. Theseinternationalmarkets are served through substantiallythesamechannels as those in the United States market. NetsalesoutsideNorthAmericaforfiscalyears 1992, 1991 and 1990constitutedapproximately85%, 86% and 89%, respectively,oftotal net sales. Sales are subject, in varying degrees, to some seasonaUty which is characteristic of the consumer electronics market. This seasonality has historically been characterized by increased sales in the fourth quarter. This seasonaUty did not continue in 1992, and the Company cannot make any assurancethat thisseasonaUtywiU returntohistoric trends. No single customer accounted for 10% or more of total net sales for the years ended December31, 1992, 1991 or 1990. Backlog The Companysubcontracts manufacturingand purchases products accordingto its forecast of near-term demand, and not primarily for specific customer orders. Warehoused inventories of finished products are maintained in advance of receipt of orders. Orders are usuaUy placed by purchasers on an as-needed basis, are cancellable before shipment, and are usually filled ft-om inventory shortly after receipt. Accordingly, in Une with industry practice, the backlog of orders at anytimeisgeneraUynotindicativeofactualsalesin any futureperiod. -7- ResearchandDevelojHiient The Company's ability to compete depends, in large measure, on its ability to adapt to the rapid technological changes in the personal computer industry, including hardware, applications software and operating ^stem software* In this regard, the Q»s^iiy ki^mimiiu^ed to an ongoing program ofresearch and development. Most ofthe Company's products have been developed by its internal engineering group, including such proAicts as the Atari Falcon030 and "Jaguar." The Company's research and development expenditures totaled $9.2 million, $15.3 million and $22.9 miUioiiin 1992, 1991 and 1990, respectively. In order to secure rights to new technologies and software, the Company is occasionally required to make advance royalty f^yments and provide minimum royalty guarantees. These advances and guarantees are necessary to compete in the open market for such technologies. However, there is no assurance tiiait these luivances and guaraittees will be fully recovered through subsequentproductsales. Manufacturing Until thesecond quarterof1991, the Company'sprincipalproductsweremanufacturedat the Company's 180,000 square foot facility in Tamshui, Taiwan. During the second quarter of 1991, the Companysoldthis facilityand reported again ofapproxknatefy$40.9 nuUion. Subsequentto 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 subccm- tractors for the production ofitsproduct and atjiiffeyent times experienced start-up problems which have delayed production. The Company has divided the assembly ofits principal products amonga number ofdifferent 1^ subcontractors. Company believes, in the event production is intemipted, it can switch production over to another subcontractor. Although timing problems will occur, which may have adverse ^feets on the Company, the CcmpBtiy believes it has distributed the production of its ^ principalproductsin such amanneras miiiiQ^ effectswhichcouldoccur. ^ OEM Other finished products and accessories purchaseddirectiy^^^fi^^ vendors. To the OEM extent that the Company encounters difficulties in connectionwith its vendors, including added costsandpotmtialdelays, ti^Company'sbusiness andoperationscouldbeadviprselyaffected. Sufostantialty all component parts and peripheral equipment required by the Company are acquired from multiple sources and have been readily available. Some components, particularly certain microprocessors and custom circuits used in the Company's principal computer products, as well as certain perif^eral equipment, Me ai^able onfy li^^^a Mmked Bumber of suppliers. In addition, certain parts, such as DRAMs, may be subject to comjgipdity market fluctuations in both ^t price and availability, though the Company believe g^mative source of supply for mck items can be developed if necessary, the resulting increase in cost and the disruption or termination ofexistingsources could have an adverse effect on the Company's operations and financial results.