UNITED STATES SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 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 I-9281
ATARI CORPORATION
(Exact name as specified in its charter)
NEVADA 77-0034553
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(State or other jurisdiction (IRS Employer
incorporation or organization) Identification No.)
1196 Borregas Avenue, Sunnyvale, CA 94089
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 745-2000
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NONE
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS SHARES OUTSTANDING AT JUNE 30, 1995
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Common Stock 63,643,035
ATARI CORPORATION
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, 1995; and December 31, 1994 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
QUARTERS ENDED June 30, 1995 and June 30, 1994 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED
June 30, 1995 and June 30, 1994 5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURE 12
ATARI CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994 June 30, Dec 31,
(In Thousands, Except Share Amounts) 1995 1994
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents (including $1,875 and $4,450
held as restricted balances at June 1995 and
December 1994) $ 50,157 $ 22,592
Marketable securities 8,810 58,432
Accounts receivable (less allowances for returns
and doubtful accounts: June 30, 1995 $751;
December 31, 1994 $1,957) 3,328 9,262
Inventories (See Note 2) 25,315 18,185
Other current assets 3,176 4,717
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Total current assets 90,786 113,188
GAME SOFTWARE DEVELOPMENT COSTS - Net 9,443 5,145
EQUIPMENT AND TOOLING - Net 1,519 1,315
REAL ESTATE HELD FOR SALE 10,600 10,741
OTHER ASSETS 605 653
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TOTAL $112,953 $131,042
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,910 $ 15,341
Accrued liabilities 2,625 5,177
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TOTAL CURRENT LIABILITIES 8,535 20,518
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LONG-TERM OBLIGATIONS 43,354 43,454
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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 : June 1995,
63,643,035; December 1994, 63,648,535) 636 636
Additional paid-in capital 196,184 196,138
Unrealized gain (loss) on marketable securities 2,836 542
Accumulated translation adjustments (1,658) (1,724)
Accumulated deficit (136,934) (128,522)
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Total shareholders' equity 61,064 67,070
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TOTAL $112,953 $ 131,042
========== =========
(See Condensed Notes to Consolidated Financial Statements)
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS QUARTER AND SIX MONTHS ENDED
JUNE 30, 1995 AND JUNE 30, 1994
(Amounts in Thousands, Except Per Share Amounts)
Unaudited
Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
NET SALES $ 3,015 $ 8,194 $ 7,762 $ 16,350
========= ========= ========= =========
COST AND EXPENSES:
Cost of sales 1,971 6,950 5,689 13,728
Research and development 1,758 1,539 3,574 2,849
Marketing and distribution 2,581 1,951 5,157 3,681
General and administrative 1,595 1,641 3,390 3,351
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Total operating expenses 7,905 12,081 17,810 23,609
--------- --------- --------- ---------
OPERATING LOSS $ (4,890) $ (3,887) $(10,048) (7,259)
Settlement of patent
litigation (See note 3) --- --- --- 2,200
Exchange gain (8) 580 (3) 852
Other income(expense), net 648 168 1,003 360
Interest income 853 311 1,806 664
Interest expense (590) (570) (1,171) (1,142)
--------- --------- --------- ---------
Loss before income taxes $ (3,987) $ (3,398) $ (8,413) (4,325)
========= ========= ========= =========
Provision for Income Taxes --- --- --- ---
--------- --------- --------- ---------
NET LOSS $ (3,987) $ (3,398) $ (8,413) $ (4,325)
========= ========= ========= =========
LOSS PER COMMON SHARE: $ (0.06) $ (0.06) $ (0.13) $ (0.07)
========= ========= ========= =========
Number of shares used in
computations 63,643 58,511 63,643 57,865
(See Condensed notes to Consolidated Financial Statements)
ATARI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(in thousands) Six Months Ended
June 30, June 30,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided (used) by operations $ (20,171) $ (8,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities 51,916 ---
Property purchases (204) (427)
Stock dividend received on investment 82 ---
Sale of Real Estate held for sale --- 7,693
Increase (Decrease) in other assets 189 80
Increase in game software development costs (4,298) ---
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Net cash provided (used) by investing activities 47,685 7,346
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowing --- (7,526)
5-1/4% convertible subordinated debentures extinguished (53) ---
Reductions in notes receivable from sale of common stock --- 3
Issuance of common stock 46 13,356
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Net cash provided (used) by financing activities (7) 5,833
EFFECT OF EXCHANGE RATE CHANGES ON CASH
& EQUIVALENTS 58 (593)
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NET INCREASE (DECREASE) IN CASH & EQUIVALENTS 27,565 4,552
CASH & EQUIVALENTS:
Beginning of period 22,592 23,059
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End of period $ 50,157 $ 27,611
======== ========
OTHER CASH FLOW INFORMATION FROM CONTINUING OPERATIONS:
Interest paid $ 2,306 $ 2,289
Income taxes paid --- 96
NON CASH INVESTING ACTIVITIES:
Unrealized gain on marketable securities $ 2,294 $ ---
(See Condensed Notes to Consolidated Financial Statements)
ATARI CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1994 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
The Company operates with a 52/53 week fiscal calendar. Both quarters covered
by this report have 13 weeks and for simplicity of presentation, the calendar
quarter date is used to represent the quarter end. The actual fiscal closing
date for the second quarter of 1995 and 1994 was July 1 and July 2 respectively.
Note 2. INVENTORIES
Inventories consist of the following (in thousands):
June 30, Dec. 31,
1995 1995
Finished goods $ 24,557 $ 15,799
Raw materials and work-in-process 758 2,386
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Total $ 25,315 $ 18,185
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Note 3. Settlement of Patent Litigation.
During the first quarter of 1994, the Company received $2.2 million with respect
to the settlement of patent litigation between the Company, Atari Games
Corporation and Nintendo.
Management Discussion and Analysis for the Second Quarter of 1995 Compared to
the Second Quarter of 1994
Net Sales for the second quarter of 1995 were $3.0 million as compared to $8.2
million for the second quarter of 1994. Sales of Jaguar products represented
approximately 70% of total sales for the second quarter of 1995 as compared to
79% for the second quarter of 1994.
The low sales volume for the second quarter of 1995 is due in part to increased
competition in both video game hardware and software and PC-based entertainment
software. From the video game hardware perspective, in the second quarter of
1995, Sega Enterprises, Ltd. introduced the Saturn, a 32-bit CD-based video game
console. In addition, the Company expects that Sony Corporation will begin
sales of the Sony Playstation in the United States in September 1995.
Although the Jaguar is a 64-bit system and is competitively priced against the
newer 32-bit systems as well as the older 16-bit systems, the Company believes
that the numerous potential choices available in the video game market has
created uncertainty in the minds of the consumers as to which platform to
purchase. This contributed to slow sales in the second quarter of 1995.
In terms of increased competition from PC-based entertainment software,
increasing numbers of game titles are available on a growing installed base of
PC's. Recognizing this opportunity, the Company intends to publish PC
entertainment titles. The first will be Tempest 2000, a top-selling game on
Jaguar based on the classic Atari arcade hit, during the fourth quarter of 1995.
Finally, although the Jaguar and associated software is competitive in terms of
price and performance, net sales for the Company has been hurt by the relatively
small number of available titles for the Jaguar. The number of titles has the
effect of (i) generating fewer sales of Jaguar software products; and (ii)
generating less demand for Jaguar consoles, which in turn results in a smaller
installed base to sell newly released titles. The software library for the
Jaguar may not be sufficiently large to effectively compete with the PC- based
entertainment software market, and with other video game platforms. As of July
31, 1995, there were 26 titles available for the Jaguar.
The Company is taking steps to ameliorate such factors where possible. The
Company is working to ensure a steady flow of new titles for play on the
Jaguar. Titles recently shipped to retail or expected to be ready for shipment
to retail in the immediate future include the following:
Title Format Month Released
Super Burnout Cartridge June 1995
Flashback Cartridge July 1995
White Men Can't Jump Cartridge July 1995
Pinball Fantasies Cartridge July 1995
Blue Lightning CD August 1995
Vid Grid CD August 1995
Ultra Vortek Cartridge August 1995
FlipOut! Cartridge August 1995
The Company expects to release in August 1995 the Jaguar CD peripheral unit with
a suggested retail price of $149.95 for use with the base Jaguar console. The CD
peripheral has built into it the Virtual Light Machine, a multiple-band
interactive light show which takes input from audio CDs and creates a ballet of
light and special video effects on the TV screen. The game titles Blue
Lightning, Virtual Light Machine, VidGrid, and a demonstration version of the
leading software title Myst will be "bundled" with the CD unit along with an
Management Discussion and Analysis for the Second Quarter of 1995 Compared to
the Second Quarter of 1994 (cont.)
audio CD of the soundtrack from the hit Jaguar game, Tempest 2000. The top-
selling PC title, Myst, has been included in the CD bundle to demonstrate the
superior graphics, sound and speed of Jaguar and its related CD peripheral unit.
The graphics in Myst have been increased to 16-bit true color, up from 256 color
on the existing PC version. Myst is scheduled to ship in the fall of 1995. The
Company is developing additional titles for the Jaguar CD unit.
Gross Margin for the second quarter of 1995 was 34.6% of sales. Included in the
gross margins for 1995 was royalty income of $.4 million or 13.3% of sales.
Gross margin from product sales was 21.3% as compared to 15.2% for the second
quarter of 1994. In general, low gross margins for both periods are a result of
the limited software library available for the Jaguar, and the competitive price
of the Jaguar hardware unit. The improvement in gross margin in 1995 is
primarily a result of improvement in the availability of titles from the second
quarter 1994 as compared to the second quarter of 1995.
Research and Development expenses for the second quarter of 1995 were $1.8
million as compared to $1.5 million for the same period of 1994. The increases
in these expenses represent the Company's investment in software development and
the CD peripheral. In addition to these expenses the Company capitalized an
additional $2.0 million game software development costs. These expenditures are
amortized based on the sales of the related software titles once the commercial
shipment of titles has commenced.
Marketing and Distribution expenses for the 1995 quarter were $2.6 million as
compared to $2.0 million for the second quarter of 1994. The Company is
continuing its investment in advertising and promotion of Jaguar. The Company
believes these investments are necessary to insure the long-term success of
Jaguar. As a result of seasonality, a significant portion of sales are made
during the fall. The company intends to invest heavily in promoting Jaguar and
its related CD peripheral and software during the fall of 1995.
General and Administrative expense for the quarters ended 1995 and 1994 were
$1.6 million. The Company maintains offices in Sunnyvale, California and Slough
in the United Kingdom.
Other Income (Expense), net for the second quarter of 1995 was $0.6 million as
compared to $0.2 million for the second quarter of 1994. During the second
quarter of 1995, the Company sold a portion of its common stock holdings in
Dixon Plc., a United Kingdom retailer, and realized a gain of approximately $0.5
million.
During the second quarter of 1994, the Company experienced a gain on exchange
of $0.6 million as compared to a loss on exchange for the second quarter of 1995
of $8K. The gain was primarily attributable to favorable exchange rate changes
applied to its foreign assets. The Company has significantly reduced its
exposed foreign asset position in 1995.
Interest Income for the second quarter of 1995 was $0.9 million as compared to
$0.3 million for the 1994 period. The increase in interest income is primarily
a result of increased cash balances during the period.
Interest expense for the second quarters of 1995 and 1994 were $0.6 million and
represents interest expense associated with the Company's 5-1/4% Subordinated
Convertible debentures.
For the second quarter 1995, the Company incurred a net loss of $4.0 million as
compared to a net loss of $3.4 million in 1994.
Management Discussion Analysis For The First Six Months 1995 As Compared To The
First Six Months For 1994
Net Sales for the first six months ended 1995 were $7.8 million as compared to
$16.4 million for the same period of 1994. Sales of Jaguar represented 72% of
sales for 1995 and 75% percent for 1994. The reduction in sales was in part a
result of increased competition in the video game industry by the introduction
in the U.S. of the Saturn from Sega and the impending introduction in the U.S.
of the Sony Playstation in September of 1995. The suggested retail price for
the Saturn package is $399, and the suggested retail price for the Playstation
is expected to be $299. As a result the Company believes that the Jaguar which
is priced at $159.95, is competitive in terms of price and performance. The
second factor in the reduction in sales was a limited number of titles available
for the Jaguar, which resulted in lower Net Sales for Jaguar software products,
and a lower installed base of Jaguar consoles.
Gross Margin for the first six months of 1995 was 26.7% percent of sales.
Included in the gross margin for the first six months of 1995 was royalty income
of $.7 million or 9.3% of sales. Gross margin from product sales was 17.4% of
sales as compared to 16% of sales for the same period of 1994. The low gross
margins in both periods reflect a limited software library for Jaguar coupled
with Jaguar being competitively priced. The improvement in gross margin in 1995
over that of 1994 is a result of increases in the software library.
Research and Development expenses for the first six months were $3.6 million as
compared to $2.8 million for the 1994 period. These expenses coupled with
capitalized Game Development Cost reflect the Company's commitment to the
development of Jaguar console, game software and related CD peripherals.
Marketing and Distribution expenses were $5.2 million for the first six months
of 1995 as compared to $3.7 million for the 1994 period. The increase reflects
higher advertising and promotion expenses for the Jaguar. The Company believes
these types of expenses are necessary for the long-term success of Jaguar.
General and Administrative expenses for the first six months of 1995 and 1994
were $3.4 million. These amounts reflect the benefits of the Company's
consolidations around the world. The Company maintains operations in Sunnyvale,
California and Slough in the United Kingdom.
Other Income (Expense), net for the six months ended 1995 was $1.0 million as
compared to $2.6 million in 1994. In 1994, the Company settled certain patent
litigation and received $2.2 million. For 1995, the Company realized a gain
from the sale of a portion of its holdings in Dixon Plc. a U.K. retailer, in the
amount of $0.6 million.
In 1994, the Company experienced a gain on exchange of $0.9 million as compared
to an exchange loss of $3K in 1995. The Company has significantly reduced its
exposure in foreign currency assets and therefore is less subject to
fluctuations in exchange.
Interest Income for 1995 was $1.8 million as compared to $0.7 million for 1994.
The increased interest income is attributable to significantly higher cash
balances during the first half of 1995 as compared to 1994.
Interest Expense for the first six months of both periods were $1.2 million and
is a result of the Company's 5-1/4% subordinated debentures.
As a result of the above, the Company incurred a Net Loss for 1995 of $8.4
million as compared to $4.3 million for the same period of 1994.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the Company had cash and marketable securities balances
totaling $59.0 million as compared to $81.0 million as of December 31, 1994.
For the first six months of 1995, the Company used $20.2 million for operations.
The use of cash was substantially attributable to the Net Loss of $8.4 million
and an increase in Jaguar inventory of $7.1 million and a reduction of accrued
liabilities relating to the payment of interest of $2.2 million relating to the
Company's debentures.
A major portion of the Company's investing activities relates to the development
of game software for the Jaguar. For the first six months, the Company invested
$4.3 million in these types of activities. The Company has approximately 75
game titles in development. The Company expects to publish most of these titles
during 1995 and the first half of 1996. In addition, during six months ended
1995, the Company sold a portion of its holdings of Dixon Plc., a U.K. retailer,
and recorded a gain on these transactions of $0.6 million and transferred to
cash $ 2.5 million.
In the first quarter of 1995, the Company repurchased a portion of its 5-1/4%
convertible subordinated debentures and reduced its debt obligations by $0.1
million, resulting in a gain of $47K.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
During the period covered by this Form 10-Q, the following proceedings
have been terminated:
* Civil Action brought in the Superior Court of the State of California
in and for the County of Santa Clara by Magnetics Electronics, Ltd., a
subsidiary of Termbray Industries International (Holding) Ltd., a
former manufacturing subcontractor, in June 1993 seeking damages in
the amount of $3.4 million plus interest, for alleged breach of
contract. On July 18, 1995 the parties agreed to settle the
above-described matter. The Company believes that the settlement will
have no material adverse effect on the Company's consolidated
financial condition or results of operations.
* Civil action brought in the United States District Court for the
Northern District of California by Light Impressions, Inc. and Stephen
P. McGrew in September 1986 alleging restraint of trade. On June 6,
1995 the parties agreed to settle the above-described matter. The
Company believes that the settlement will have no material adverse
effect on the Company's consolidated financial condition or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Atari Corporation was held on
June 5, 1995. There were two matters which were voted on at the meeting:
1. Election of Directors
2. Ratification of Auditors
With respect to the election of directors, the following directors were
elected with the following vote tabulation:
Name For Withheld
--------------------------------------------------
Jack Tramiel 54,357,526 89,133
Sam Tramiel 54,357,526 89,133
August J. Liguori 54,358,026 88,633
Mike Rosenberg 54,358,306 88,353
Leonard Schreiber 54,357,525 89,134
With respect to the ratification of the auditors, Deloitte & Touche
L.O.P. was ratified as auditors of the Company. The vote was as follows:
For 54,373,146
Against 25,125
Abstain 47,688
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED DULY AUTHORIZED HEREBY.
ATARI CORPORATION
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(Registrant)
DATE: August 14, 1995
By /S/ August J. Liguori
AUGUST J. LIGUORI
Vice President, Finance
(Duly authorized Officer
Chief Financial Officer,
Chief Accounting Officer)