(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of
Incorporation or Organization)
417 Fifth Avenue, New York, NY10016
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (212) 726-6500
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.10 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. Yes o No þ
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 þ No o
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 the 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the
registrant, based on the $2.56 closing sale price of the Common Stock on September 28, 2007 as
reported on the NASDAQ Global Market was approximately $16.8 million. As of June 27, 2008, a total
of 13,477,920 shares of the registrant’s Common Stock were outstanding.
This Amendment No. 1 on Form 10-K/A for the year ended March 31, 2008 is being filed to
provide the information required by Part III of Form 10-K. This Amendment No. 1 on Form 10-K/A has
not been updated for events or information subsequent to the date of filing of the original Form
10-K except in connection with the foregoing. Accordingly, this Amendment No. 1 on Form 10-K/A
should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing
of the original Form 10-K.
Amendment No. 1 to our Annual Report contains forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. We caution readers regarding forward-looking statements
in this Report, press releases, securities filings, and other documents and communications. All
statements, other than statements of historical fact, including statements regarding industry
prospects and expected future results of operations or financial position, made in this Amendment
No.1 to our Annual Report on Form 10-K/A are forward looking. The words “believe”, “expect”, “anticipate”, “intend” and
similar expressions generally identify forward-looking statements. These forward-looking
statements are necessarily based upon estimates and assumptions that, while considered reasonable
by us, are inherently subject to significant business, economic and competitive uncertainties and
contingencies and known and unknown risks. As a result of such risks, our actual results could
differ materially from those anticipated by any forward-looking statements made by, or on behalf
of, us. We will not necessarily update information if it later turns out that what occurs is
different from what was anticipated in a forward-looking statement. For a discussion of some
factors that could cause our operating results or other matters not to be as anticipated by
forward-looking statements in this document, please see Item 1A entitled “Risk Factors” on pages 13
to 18 of our 2008 Annual Report on Form 10-K.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Our board of directors consists of five members, who have been elected to serve until our next
Annual Meeting of Stockholders. Each executive officer will serve until his resignation or his
replacement or removal by our Board of Directors. None of these persons has been convicted in a
criminal proceeding during the past five years (excluding traffic violations or similar
misdemeanors), and none of these persons has been a party to any judicial or administrative
proceeding during the past five years (except for matters that were dismissed without sanction or
settlement) that resulted in a judgment, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, federal or state securities laws or a finding
of any violation of federal or state securities laws. No petition under the Federal bankruptcy
laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar
officer was appointed by a court for the business or property of, any of our directors or officers,
or any partnership in which any of our directors or officers was a general partner at or within two
years before the time of such filing, or any corporation or business association of which any of
our directors or officers was an executive officer at or within two years before the time of such
filing. There are no family relationships among our directors or officers. The following
information about the directors and executive officers of us is based, in part, upon information
provided by such persons.
Eugene I. Davis (53) has served as a director on our Board since October 2007. Mr. Davis has
served as Chairman and Chief Executive Officer of PIRINATE Consulting Group, LLC, a privately held
consulting firm, since 1997. PIRINATE specializes in turnaround management, merger and acquisition
consulting and strategic planning advisory services for public and private business entities. From
2001 to 2004, Mr. Davis served in various executive positions at RBX Industries, Inc., including
Chairman, Chief Executive Officer and President. RBX Industries, Inc. filed a voluntary petition
for reorganization under Chapter 11 in March 2004. He presently serves as a director of Atlas Air
Worldwide Holdings, Inc., Foamex International, Inc., American Commercial Lines, Inc., Footstar,
Inc., Haights Cross Communication, Knology, Inc., Delta Airlines, Inc., Viskase Companies Inc.,
Solutia Inc. and Silicon Graphics, Inc. Mr. Davis is a U.S. citizen.
Wendell H. Adair, Jr. (64) has served as a director on our Board since October 2007. He is a
member of M&A Development Company LLC, a real estate development firm located at 5682 Sawyer Road,
Sawyer, Michigan49125. He is a senior lawyer with 35 years of experience specializing in
restructuring and corporate finance. Until April 2006, he held Senior Partner positions at leading
US law firms, including Stroock & Stroock & Lavan LLP from September 1999 to April 2006 and
McDermott, Will & Emery from September 1989 to September 1999. He has previously served on the
boards of private companies and has advised corporate boards with respect to governance, fiduciary
duty and financing matters. Mr. Adair is a U.S. Citizen.
Evence-Charles Coppee (55) has served as a director on our Board since November 2005. Mr.
Coppee was a director of our majority stockholder, Infogrames Entertainment S.A., or IESA, until
March 2008 and served as a Deputy Chief Operating Officer of IESA until May 2007. From 1996 to
2005, he served as Executive Vice President and joint Managing Director of the daily “Liberation”.
From 1987 to 1996, Mr. Coppee held various positions with the French conglomerate Chargeurs (and
Pathe). Prior to that, Mr. Coppee was a Manager with the Boston Consulting Group. Mr. Coppee also
is currently a director of Lafarge Ciment. Mr. Coppee is a Belgian citizen.
Bradley E. Scher (47) has served as a director on our Board since October 2007. He is the
managing member of Ocean Ridge Capital Advisors, LLC, a financial advisory company established to
assist investors, managements and boards of directors of financially and/or operationally
underperforming companies, located at 56 Harrison Street, New Rochelle, NY10801. He has held this
position since 2002. From 1990 to 1996 and 1996 to 2002, he managed portfolios of distressed
investments at Teachers Insurance and Annuity Association of America and PPM America, Inc.,
respectively. He currently and has previously served on the boards of several private companies.
Mr. Scher is a U.S. citizen.
James B. Shein (65) has served as a director on our Board since October 2007. He is Professor
of Management & Strategy at Northwestern University’s Kellogg School of Management located at 2001
Sheridan Road, Evanston, IL60208. He has held this position since 2002. Since 1997, Mr. Shein has
also been counsel at McDermott, Will & Emery, with primary areas of practice including corporate
financial and operating restructurings, business startups and acquisitions, and fiduciary duties of
officers and directors. From 1994 to 1997, he was president of J.S. Associates, a consulting firm
providing turnaround advice to public and private manufacturing and service companies. Between 1990
and 1994, he was the president and chief executive officer of R.C. Manufacturing. Mr. Shein is a
Changes in Directors During Fiscal 2008
On October 5, 2007, California U.S. Holdings, Inc., our majority stockholder and a
wholly-owned subsidiary of IESA, removed James Ackerly, Ronald C. Bernard, Michael G. Corrigan,
Denis Guyennot, and Ann E. Kronen from our Board of Directors via written stockholder consent.
Effective as of March 21, 2008 and April 16, 2008, Thomas Schmider and Jean-Michael Perbet,
respectively, resigned as members of our Board of Directors.
Jim Wilson, Arturo Rodriguez and Timothy Flynn were our only executive officers at July 28,2008. Set forth below is information about Messrs. Wilson, Rodriguez and Flynn.
Chief Executive Officer and President
Chief Financial Officer (Acting), Vice President and Controller
Senior Vice President of Sales
Jim Wilson has been our Chief Executive Officer and President since March 31, 2008. From 2007
to 2008, Mr. Wilson served as the President of Rolo Media, LLC. From 2005 to 2007, Mr. Wilson
served as Executive Vice President and General Manager of Sony Wonder, Sony BMG’s home
entertainment business. From 1996 to 2003, Mr. Wilson served as President of Universal Interactive,
Inc. and, after the acquisition of Universal Interactive, Inc. by Vivendi, as Executive Vice
President of Worldwide Studios for Vivendi Universal Games.
Arturo Rodriguez has been our Vice President — Controller since February 21, 2006 and has
served as our acting Chief Financial Officer since May 16, 2007. Mr. Rodriguez joined us in June
2000 as Senior Manager of Financial Reporting. Since then, he has held the positions of Senior
Manager of Accounting and Financial Reporting, Director of Accounting and Financial Reporting,
Assistant Controller — Accounting and Financial Reporting and Vice President of Accounting and
Financial Reporting. Prior to joining us, Mr. Rodriguez worked
for Arthur Andersen LLP. Mr.
Rodriguez is a New York State Certified Public Accountant.
Timothy Flynn has been our Senior Vice President of Sales since June 9, 2008. Prior to
joining us, Mr. Flynn served as Vice President of Sales — The Americas for Capcom U.S.A., Inc.,
where he helped restructure and grow the third-party video game publisher. Prior to joining Capcom,
Mr. Flynn was Vice President of U.S. Sales at Hip Interactive, Inc. Before that he spent four
years at Sega of America, Inc., most recently as Director of North American Sales and two years at
Psygnosis, Inc., where he served as Eastern Regional Sales Director.
Employment Agreement with Jim Wilson. On March 31, 2008, we entered into an employment letter
agreement with Mr. Wilson, under which Mr. Wilson is to serve as our Chief Executive Officer and
President. Under the Agreement, Mr. Wilson will receive an annual base salary of $400,000. Mr.
Wilson will be eligible to receive an annual bonus of up to 200% of his then-current annual base
salary, depending on the attainment of certain individual and our performance goals established by
our board of directors for the applicable fiscal year. For the fiscal year ending March 31, 2009,
Mr. Wilson is guaranteed $120,000 of his annual bonus for such fiscal year provided that he is
actively employed on March 31, 2009. Under the Agreement, Mr. Wilson has been granted options to
purchase 687,146 shares of our common stock, with an exercise price per share equal to $1.4507.
Unless vesting is otherwise accelerated, such options shall vest 6.25% per quarter (commencing with
the quarter ending June 30, 2008). Any unvested options shall become fully vested and exercisable
in the event of a change of control (other than with respect to the merger). If the merger is
completed, we have agreed to use our best efforts to cause IESA to agree to grant to Mr. Wilson a
stock option with respect to shares of IESA in substitution of his currently outstanding option to
acquire our common stock. Such option to acquire shares of IESA shall have a present value
approximately equal to the present value of the option to acquire our stock using Black-Scholes or
another reasonable option valuation methodology.
Letter Agreement with Arturo Rodriguez. On January 29, 2008, we entered into a letter
agreement with Arturo Rodriguez regarding his employment with us and his compensation. Mr.
Rodriguez is our Vice President — Controller and has served as our acting Chief Financial Officer
since May 16, 2007. Under the terms of the letter agreement, Mr. Rodriguez is entitled to a
retention bonus equal to three months his current base salary (the “Retention Bonus”) in exchange
for his commitment to continued employment with us through the filing of our Annual Report on Form
10-K for the fiscal year ended March 31, 2008. The Retention Bonus would be paid within ten
business days following the earliest of (i) the termination of his employment by us, (ii) the
filing of the March 31, 2008 Form 10-K and (iii) July 31, 2008 (the earliest such date, the
“Trigger Date”). After the Trigger Date, Mr. Rodriguez may separate his employment from us with no
less than fifteen days’ notice, after which he would be entitled to receive severance of twenty-six
weeks of his current base salary and current elected benefits.
Letter Agreement with Timothy Flynn. On May 17, 2008, we entered into a letter agreement with
Timothy Flynn, under which Mr. Flynn is to serve as our Senior Vice President of Sales. Under the
terms of the letter agreement, Mr. Flynn will receive an annual base salary of $250,000. Mr. Flynn
will be eligible to receive an annual bonus of up to 40% of his then-current annual base salary,
depending on the attainment of certain individual and our performance goals established by our
board of directors for the applicable fiscal year. Under the terms of the letter agreement, Mr.
Flynn is entitled to a sign on bonus equal to 10% of his current base salary (the “Sign On Bonus”)
that is payable once he completes 60 days of continuous employment with us. Should Mr. Flynn
voluntarily terminate his employment with us or be terminated for cause by us within on year of his
hire date, Mr. Flynn would be required to repay the total gross amount of the Sign On Bonus. Under
the letter agreement, Mr. Flynn has been granted options to purchase 20,000 shares of our common
stock, with an exercise price per share equal to $1.64. Unless vesting is otherwise accelerated,
25% of such options shall vest upon the first anniversary of his hire date and thereafter vest
6.25% per quarter (commencing with the quarter ending June 30, 2009). Any unvested options shall
become fully vested and exercisable in the event of a change of control (other than with respect to
the merger). If the merger is completed, we have agreed to use its best efforts to cause IESA to
agree to grant to Mr. Flynn a stock option with respect to shares of IESA in substitution of his
currently outstanding option to acquire our common stock. Such option to acquire shares of IESA
shall have a present value approximately equal to the present value of the option to acquire our
stock using Black-Scholes or another reasonable option valuation methodology.
Changes in Executive Officers During Fiscal 2008
Until November 13, 2007, when he resigned, David Pierce was our Chief Executive Officer and
President. Jean-Marcel Nicolai was a Senior Vice President until he terminated his employment with
us, and became an employee of Atari Interactive (a wholly owned subsidiary of IESA) when his
Employment Agreement with us terminated on August 31, 2007. Mr. Nicolai has since terminated his
employment with Atari Interactive.
From October 10, 2007 to April 2, 2008, Curtis G. Solsvig III, served as our Chief
Restructuring Officer. Mr. Solsvig works at AlixPartners LLC, which was retained to assist us in
evaluating and implementing strategic and tactical options through our restructuring process. Mr.
Solsvig did not receive any compensation as an employee of us, but rather we paid AlixPartners for
services rendered by Mr. Solsvig.
Our Board of Directors directs the management of our business and affairs, but it has
delegated some of its functions to an Audit Committee, a Compensation Committee and a Special
Committee. In addition, from time to time, our Board may establish special committees to address
specific transactions or issues.
Audit Committee and “Audit Committee Financial Expert”
Our Audit Committee reviews the adequacy of our internal controls. It is responsible for
appointing and determining the compensation of the independent registered accounting firm that
audits our financial statements and it reviews the scope and results of annual audits and other
services provided by our independent public accountants. The Audit Committee also performs certain
other functions that are required under the Sarbanes-Oxley Act of 2002, SEC rules or Nasdaq
Marketplace Rules. One of its functions is to review all transactions between IESA (our indirect
51% shareholder) or its subsidiaries and us or our subsidiaries, other than day to day transactions
pursuant to Distribution Agreements that already have been approved by the Committee and by our
entire Board of Directors.
Our Audit Committee is currently composed of Messrs. Adair, Scher, Shein, and Davis, each an
independent director, as required by the NASDAQ Marketplace Rules and SEC rules. Mr. Adair serves
as the Chairman of the Audit Committee. The Audit Committee and our Board have determined that Mr.
Davis is an “audit committee financial expert,”
as that term is defined in SEC rules.
Our Compensation Committee (i) oversees our compensation plans, employee stock option plans,
employee stock purchase plans, and programs and policies for executive officers, (ii) monitors the
performance and compensation of executive officers and other key employees, and (iii) monitors
related decisions concerning matters of executive compensation.
During fiscal 2008, the Compensation Committee was initially composed of James Ackerly, Bruno
Bonnell and Michael Corrigan, with Ann Kronen serving in a non-voting capacity. Mr. Bonnell
resigned from the Board effective as of April 4, 2007 and each of Mr. Ackerly, Mr. Corrigan and Ms.
Kronen were removed from the Board effective as of October 5, 2007. Effective as of October 2007,
our Compensation Committee is composed of Messrs. Adair, Shein, and Scher and Mr. Shein serves as
Chairman of the Compensation Committee. All of the directors currently serving as members of the
Committee are independent.
Our Board of Directors adopted an amended Compensation Committee Charter during fiscal 2004,
which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2004.
Our Special Committee was formed in May 2006 to review and approve any transaction that is
outside the ordinary course of business and would materially impact stockholder value, including
(i) evaluating and responding to proposals (including any proposal by IESA or its affiliated
entities to acquire us or any of our material assets, (ii) reviewing all other material
transactions outside the ordinary course of our business to the extent they may affect IESA or its
affiliated entities differently from the way the affect us, and (iii) reviewing all transactions or
contracts (including modifications of existing contracts, relationships or understandings) with
IESA and any other related party transactions.
Our Special Committee is currently composed of Messrs. Davis, Adair, Shein, and Scher, all of
whom are independent.
Our Board does not delegate the responsibility of nominating potential new directors to a
separate nominating committee because our Board believes that all directors should be involved in
Our Board believes that potential nominees should be individuals with high standards of ethics
and integrity who are committed to representing the interests of the stockholders through the
exercise of sound judgment. They should have broad business or professional experience that will
allow them to contribute to our Board’s discussions and decisions, and they should be able to
devote sufficient time and energy to the performance of the duties of a director. Because IESA owns
a majority of our outstanding shares, for a number of years some (but not a majority) of our
directors have been officers of IESA. We believe that the backgrounds and qualifications of our
directors, considered as a group, should provide a composite mix of experience, knowledge, and
abilities that will enable our Board of Directors to fulfill effectively all its responsibilities.
Board candidates who may become members of the Audit Committee must also have the financial
experience necessary to perform their duties and to satisfy the requirements of the SEC rules and
NASDAQ rules relating to Audit Committees. In the event there is a vacancy on our Board of
Directors, our Board considers candidates recommended by current directors, officers, professional
advisors, employees and others.
Our By-Laws contain procedures and requirements for stockholder nominations of directors.
Stockholder Communications with our Board
Our Board of Directors will give appropriate attention to written communications that are
submitted by stockholders, and will respond if and as appropriate. Under procedures approved by a
majority of our independent directors, communications are forwarded to all directors if they relate
to important substantive matters and include suggestions or comments that the Chairman of our Board
of Directors (or in the absence of a Chairman of our Board, any of our directors) considers to be
important for the directors to know. In general, communications relating to corporate governance
and long-term corporate strategy are more likely to be forwarded than communications relating to
ordinary business affairs, personal
grievances or matters as to which we tend to receive repetitive or duplicative communications.
Our Audit Committee has adopted Procedures for Complaints. They provide for confidential
communications on either an identified or anonymous basis to be made to the Audit Committee, via
email, our complaint hotline or through our Vice President and General Counsel who will forward all
communications to the Audit Committee.
Atari stockholders may send communications to our Board of Directors as a whole, to the
independent directors as a group, to any Board committee, or to any individual member of the Board
by writing c/o Kristina K. Pappa, Vice President, Secretary and General Counsel, Atari, Inc., 417
Fifth Avenue, New York, New York10016 and specifying the intended recipients. Inquiries sent by
mail will be reviewed, sorted and summarized by Ms. Pappa or her designee before they are forwarded
to our Board or the applicable committee or individual director(s).
Code of Ethics
We have adopted a Code of Ethics, Standards of Conduct and Confidentiality that applies to
directors, executive officers, and all other employees, including senior financial personnel. We
will make copies of our Code of Ethics available to stockholders upon request. Any such request
should be either sent by mail to Atari, Inc., 417 Fifth Avenue, New York, New York10016, Attn:
General Counsel or made by telephone by calling our General Counsel at (212) 726-6500.
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, our directors,
officers and stockholders who beneficially own more than 10% of our Common Stock are required to
file with the SEC initial reports of ownership and reports of changes in ownership with respect to
our equity securities and to furnish us with copies of all reports they file.
Based solely on our review of the copies of such reports that we received, we believe that
during our 2008 fiscal year, each such reporting person filed all the required reports in a timely
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table for Fiscal 2008
The following table summarizes the compensation we paid during fiscal 2008 to David Pierce,
who was our principal executive officer during part of the fiscal year until his resignation on
November 13, 2007, Jim Wilson, who was our principal executive officer during part of the fiscal
year when he became our Chief Executive Officer and President as of March 31, 2008, Jean-Marcel
Nicolai, who was our senior vice president and chief technology officer during part of the fiscal
year until his resignation on August 31, 2007, to Bruno Bonnell, who was our chief creative officer
and acting chief financial officer during part of the fiscal year until his resignation on April 4,2007, and Arturo Rodriguez, who was acting principal financial officer during part of the fiscal
year when he became our Chief Financial Officer as of May 16, 2007 (these people together being
referred to as the Named Executive Officers).
Name and Principal
David Pierce President and CEO
President and CEO
Jean-Marcel Nicolai SVP, Chief
Bruno Bonnell Acting CFO and
Name and Principal
Arturo Rodriguez Chief Financial
Consists of vacation payout of $18,230 and severance payment of $200,214.
Consists of a Section 401(k) match of $6,000 and life insurance premiums of $875.
Consists of housing costs borne by us and related tax gross up of $76,932, vacation payout of
$9,961 and 401(k) match of $1,800.
Consists of housing costs borne by us and related tax gross up of $136,261, children’s
education costs borne by us and related tax gross up of $51,982 and Section 401(k) match of
Consists of housing costs borne by us and related tax gross up.
Consists of a discretionary bonus that was granted in fiscal 2007 and paid in fiscal 2008.
Consists of a Section 401(k) match of $3,441.
Grants of Plan-Based Awards
The following table summarizes the Plan-Based Awards made to the Named Executive Officers
during fiscal 2008.
Estimated Future Payouts
Estimated Future Payouts Under
Under Equity Incentive Plan
Non-Equity Incentive Plan Awards
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the equity awards held by the Named Executives on March 31,2008.
Units of Stock
of Shares or
that Have Not
Units of Stock
that Have Not
Option Exercises and Stock Vested
No stock options were exercised, and no stock awards vested, with regard to any of the Named
Executive Officers during fiscal 2008.
We do not have any pension plans, and therefore, no pension benefits provided by us or any of
our subsidiaries were received by, or accrued for, any of the Named Executive Officers during
fiscal 2008. We have a Section 401(k) plan under which we will match 100% of an employee’s
contributions up to 3% of the employee’s eligible compensation and will match 50% of an employee’s
contributions between 3% and 9% of the employee’s eligible compensation, up to a total of $6,000
for an employee in a calendar year. During fiscal 2008, we made
matching payments of $1,800 and $3,441 with
regard to each of Jean-Marcel Nicolai and Arturo Rodriguez,
Nonqualified Deferred Compensation
None of the Named Executive Officers received during fiscal 2008, or became entitled during
fiscal 2008 to receive in the future, any deferred compensation.
Directors who are also employed by us, IESA or any of their respective subsidiaries do not
receive any compensation for their service on our Board of Directors. Currently, the non-employee
directors are Mr. Adair, Mr. Coppee, Mr. Davis, Mr. Shein, and Mr. Scher. During fiscal 2008, each
non-employee director serving on our Board of Directors received the following:
an annual retainer of $25,000;
an additional annual retainer of $25,000 for the chairman of the Board of Directors;
an additional annual retainer of $7,500 for the chairman of each of the audit
committee, compensation committee and chief executive officer search committee of the Board
an additional annual retainer of $25,000 for the chairman of the special committee of
the Board of Directors;
an additional annual retainer of $10,000 for all members of the special committee of
the Board of Directors;
a fee for each Board meeting attended ($2,000 for attending in person and $1,000 for
attending via phone);
a fee for each committee meeting attended ($2,000 for attending in person and $1,000
for attending via phone);
an annual stock option grant for 1,000 shares of our Common Stock; and
upon joining the Board of Directors, a one-time stock option grant for 2,500 shares of
our Common Stock.
The following table summarizes the compensation we provided during fiscal 2008 to our
directors who were not employed by us or by IESA:
Non-Employee Director Compensation Table
Fees Earned or
Paid in Cash
Ronald C. Bernard
Michael G. Corrigan
Fees Earned or
Paid in Cash
Ann E. Kronen
Evence Charles Coppee
Wendell H. Adair, Jr.
Eugene I. Davis
James B. Shein
Bradley E. Scher
Consists of travel expenses.
Does not include the consulting fees described under “Consulting Agreement with Ann E.
Consulting Agreement with Ann E. Kronen
had a consulting agreement with Ann E. Kronen (the “Kronen Agreement”) under which we
engaged Ms. Kronen to provide product consultation services, business development and relationship
management services with potential and existing business partners that are located on the West
Coast. That agreement was terminated in January 2008. In fiscal 2008, Ms. Kronen received $165,000 for services under the Kronen Agreement. In
addition, Ms. Kronen was reimbursed for travel expenses incurred in connection with her rendering
of those services.
Compensation Committee Interlocks and Insider Participation
During fiscal 2008, the Compensation Committee of our Board of Directors was composed of Mr.
Adair, Mr. Davis, and Mr. Shein, with Mr. Shein as the Chairman. No member of the Compensation
Committee is or was formerly an officer or an employee of us. No executive officer serves as a
member of our board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our Board, nor has such interlocking relationship existed
in the past.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS.
The table below contains information regarding the beneficial ownership of shares of our
common stock by each person or entity known by us to beneficially own 5% or more of the total
number of outstanding shares of our common stock as of June 13, 2008. The table below also contains
information regarding the beneficial ownership of shares of our common stock as of June 13, 2008 by
all executive officers and directors of us.
Amount and Nature of
Beneficial Ownership of
Shares of Common
Name and Address of Beneficial Owner(1)
Geater Than 5% Holders
Infogrames Entertainment S.A.
California U.S. Holdings, Inc.
The BlueBay Multi-Strategy (Master) Fund Limited
The BlueBay Value Recovery (Master) Fund Limited
CCM Master Qualified Fund, Ltd.
Morgan Stanley & Co. Incorporated
Our Executive Officers and Directors
Wendell H. Adair, Jr.
Eugene I. Davis
Timothy J. Flynn
Bradley E. Scher
James B. Shein
All our named executive officers and directors of as a group (14 persons)
Less than 1%.
As of June 13, 2008, 13,477,920 shares of Common Stock were outstanding, not including shares
issuable upon exercise of outstanding options.
Unless otherwise stated in the applicable footnote, the address for each beneficial owner is
c/o Atari, Inc., 417 Fifth Avenue, New York, New York10016.
For purposes of this table, beneficial ownership of securities is defined in accordance with
the rules of the SEC and means generally the power to vote or exercise investment discretion
with respect to securities, regardless of any economic interests therein. Except as otherwise
indicated, to the best of the Company’s knowledge, the beneficial owners of shares of Common
Stock listed above have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. In addition, for purposes of this table, a
person or group is deemed to have “beneficial ownership” of any shares that such person has
the right to acquire within 60 days following June 13, 2008. Shares a person has the right to
acquire within 60 days after June 13, 2008 date are included in the total outstanding shares
for the purpose of determining the percentage of the outstanding shares that person owns, but
not for the purpose of calculating the percentage ownership of any other person.
Information is based on a Schedule 13D dated May 6, 2008, filed with the SEC. The shares are
owned of record by CUSH, a direct wholly owned subsidiary of IESA. IESA may be deemed to
beneficially own the shares because they are held by a subsidiary. The address of IESA is 1,
Place Verrazzano, 69252 Lyon Cedex 09, France.
Includes 26,000 shares of Common Stock which IESA has the power to vote under a proxy from
the Cayre family.
Information is based on a Schedule 13D/A dated May 8, 2008, filed with the SEC. The BlueBay
Funds collectively hold approximately 31.5% of shares of common stock of IESA. The BlueBay
Funds are also eligible to redeem certain warrants and convert convertible bonds into shares
of IESA, whereby, upon redemption and exercise of such stock warrants, the BlueBay Funds would
collectively hold approximately 54.9% of the outstanding stock of IESA (on a fully diluted
basis). The BlueBay Funds may be deemed by Rule 13d-3(d)(1) of the Exchange Act to be
beneficial owners of Atari stock held by IESA. The address of The BlueBay Value Recovery
(Master) Fund Limited and The BlueBay Multi-Strategy (Master) Fund Limited is 77 Grosvenor
Street, London, W1K 3JR, United Kingdom. See footnotes 2 and 3.
Information is based on a Schedule 13D dated October 12, 2007, filed with the SEC. Each of
CCM Master Qualified Fund, Ltd., Coghill Capital Management, L.L.C., and Clint D. Coghill
beneficially owns 1,264,145 shares of Common Stock and has shared voting power with respect to
that Common Stock. Coghill Capital Management, L.L.C. serves as the investment manager of CCM
Master Qualified Fund, Ltd. and Mr. Coghill is the managing partner of Coghill Capital
Management, L.L.C. The address of CCM Master Qualified Fund, Ltd. is One North Wacker Drive,
Suite 4350, Chicago, IL60606.
Information is based on a Schedule 13D dated February 14, 2008, filed with the SEC. The
address of Morgan Stanley and Morgan Stanley & Co. Incorporated is 1585 Broadway, New York, NY10036.
Consists of shares that can be acquired through stock option exercises within 60 days
following June 13, 2008.
See footnote 2.
Changes in Control
Under the terms of the employment agreement with Jim Wilson, Mr. Wilson was granted options to
purchase 687,146 shares of our common stock, with an exercise price per share equal to $1.4507.
Unless vesting is otherwise accelerated, such options vest 6.25% per quarter (commencing with the
quarter ending June 30, 2008). Any unvested options will become fully vested and exercisable in
the event of a change of control (other than with respect to the merger with IESA). If the merger
is completed, we have agreed to use our best efforts to cause IESA to agree to grant to Mr. Wilson
a stock option with respect to shares of IESA in substitution of his currently outstanding option
to acquire our common stock. Such option to acquire shares of IESA shall have a present value
approximately equal to the present value of the option to acquire our stock using Black-Scholes or
another reasonable option valuation methodology.
Under the terms of the letter agreement with Timothy Flynn, Mr. Flynn was granted options to
purchase 20,000 shares of our common stock, with an exercise price per share equal to $1.64. Unless
vesting is otherwise accelerated, 25% of such options shall vest upon the first anniversary of his
hire date and thereafter vest 6.25% per quarter (commencing with the quarter ending June 30, 2009).
Any unvested options shall become fully vested and exercisable in the event of a change of control
(other than with respect to the merger with IESA). If the merger is completed, we have agreed to
use our best efforts to cause IESA to agree to grant to Mr. Flynn a stock option with respect to
shares of IESA in substitution of his currently outstanding option to acquire our common stock.
Such option to acquire shares of IESA shall have a present value approximately equal to the present
value of the option to acquire our stock using Black-Scholes or another reasonable option valuation
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions Between Us and IESA and Affiliates
We have entered into several agreements with IESA and its affiliates, including BlueBay High
Agreements Related to the Merger
In connection with the merger agreement described under the caption “Agreement and Plan of
Merger” of our 2008 Annual Report on Form 10-K, IESA, BlueBay High Yield and we have entered into
the following agreements:
Credit Agreement. In connection with the merger, we entered into a Credit Agreement with IESA
(the “IESA Credit Agreement”), dated April 30, 2008, under which IESA committed to provide up to an
aggregate of $20 million in loan availability at an interest rate equal to the applicable LIBOR
rate plus 7% per year, subject to the terms and conditions of the IESA Credit Agreement (the “New
Financing Facility”). We will use borrowings under the New Financing Facility to fund its
operational cash requirements during the period between the date of the merger agreement and
the closing of the merger. The obligations under the New Financing Facility are secured by liens on
substantially all of our present and future assets, including accounts receivable, inventory,
general intangibles, fixtures, and equipment. We will be able to draw from the New Financing
Facility from time to time until the earlier of December 31, 2008 or the date the New Financing
Facility is terminated. We have agreed that it will make monthly prepayments on amounts borrowed
under the New Financing Facility of its excess cash. We will not be able to reborrow any loan
amounts paid back under the New Financing Facility other than loan amounts prepaid from excess
Under the IESA Credit Agreement, we made certain representations and warranties regarding its
corporate existence, operations, assets and legal matters affecting us and our business. Such
representations and warranties must also be made prior to each draw on the New Financing Facility.
We also agreed to certain affirmative covenants, including the delivery to IESA of a budget, which
is subject to approval by IESA in its commercially reasonable discretion and which shall be
supplemented from time to time, financial statements and variance reports thereon. We also agreed
to certain negative covenants restricting it from entering into certain major transactions or
taking certain actions affecting its financial condition.
The occurrence of an event of default under the IESA Credit Agreement gives IESA the right,
subject to the terms of the Intercreditor Agreement described below, to (i) terminate the New
Financing Facility, immediately ending the commitments thereunder; and/or (ii) declare the
outstanding loans thereunder to be immediately due and payable in whole or part. Events of default
Our failure to pay principal on the outstanding loans when due and payable;
Our failure to pay interest on the outstanding loans or fees when due and payable and
such failure is unremedied for five days;
if any of our or our subsidiaries’ representations or warranties is proven to be
incorrect in any material respect when made;
the failure of us or any of our subsidiaries to uphold certain affirmative covenants or
any of the negative covenants made in the IESA Credit Agreement, or the failure of us or
any of our subsidiaries to uphold any other covenant or agreement made in connection with
the New Financing Facility, and such failure is unremedied for 30 days;
if any New Financing Facility document ceases to be in full force and effect or we take
any action for the purpose of terminating any such document;
the failure of us or any of our subsidiaries to make payments with respect to certain
material indebtedness when due and payable;
the occurrence of events or conditions resulting in any material indebtedness becoming
due prior to its scheduled maturity;
the occurrence of a bankruptcy event;
if we or any of our subsidiaries become unable to pay its debts when due;
the rendering of a judgment in excess of $1 million net of insurance against us or any
of our subsidiaries;
the occurrence of a reportable event within the meaning of ERISA that could result in
liability exceeding $5 million;
the occurrence of a change of control (other than the merger) or a material adverse
deviation from our budget; or
the occurrence of a default under the agreements regarding the “Test Drive” and “Test
Drive Unlimited” intellectual property assets, which agreements are further described
below, the merger agreement or the credit agreement with BlueBay High Yield, which
agreement is further described below.
Intercreditor Agreement. Under an intercreditor agreement among IESA, BlueBay High Yield and
us (the “Intercreditor Agreement”), dated April 30, 2008, IESA has agreed that for so long as
obligations under the BlueBay Credit
Facility (as defined below) are not discharged, it will (i) not seek to exercise any rights or
remedies with respect to the shared collateral for a period of 270 days (provided that, in any
event, IESA may not exercise such rights or remedies while BlueBay High Yield is exercising its
rights and remedies as to the collateral), (ii) not take action to hinder the exercise of remedies
under the BlueBay Credit Facility (as defined below) and (iii) waive any rights as a junior lien
creditor to object to the manner in which BlueBay High Yield may enforce or collect obligations
under the BlueBay Credit Facility (as defined below).
Waiver, Consent and Fourth Amendment to BlueBay Credit Facility. In order to permit the
signing of the merger agreement and the establishment of the New Financing Facility with IESA, we
entered into a Waiver, Consent and Fourth Amendment to its credit facility with BlueBay High Yield,
dated April 30, 2008, under which, among other things, (i) BlueBay High Yield waived our
non-compliance with certain representations and covenants under the Credit Agreement, (ii) BlueBay
High Yield consented to our entering into the credit facility with IESA, (iii) BlueBay High Yield
consented to our entering into the merger agreement, and (iv) BlueBay High Yield and us agreed to
certain amendments to the credit facility with BlueBay High Yield with respect to the Intercreditor
Agreement referenced above regarding the parties’ respective security interests in our assets, our
operational covenants and events of default. Termination of the merger agreement by any party would
constitute an event of default under the credit facility with BlueBay High Yield.
Intercompany Transactions Between Us and IESA
Management Services. IESA renders management services to us (systems and administrative
support) and we render management services and production services to Atari Interactive, a
subsidiary of IESA, and other subsidiaries of IESA. In the fiscal year ended March 31, 2007,
related party net revenues from providing management services to IESA were $3.0 million, and
related party expenses from receiving services from IESA were $3.0 million. In fiscal 2006, related
party net revenues from providing management services to IESA were $3.1 million, and related party
expenses from receiving services from IESA were $3.0 million. Agreements governing the provision of
management and production services were modified pursuant to the Global MOU described below.
Distribution Agreements. Atari Interactive develops video games and owns the name “Atari” and
the Atari logo, which we use under a license (as further described below). Furthermore, IESA
distributes our products in Europe, Asia, and certain other regions, and pays us royalties in this
respect. IESA also develops (through its subsidiaries) products which we distribute in the United
States, Canada, and Mexico and for which we pay royalties to IESA. Both IESA and Atari Interactive
are material sources of products which we bring to market in the United States, Canada, and Mexico.
In fiscal 2007, related party net expenses from our distribution activities were $16.7 million and
related party revenues from IESA distribution activities were $7.7 million. In fiscal 2006, related
party net expenses from our distribution activities were $20.7 million and related party revenues
from IESA distribution activities were $13.9 million. Agreements governing distribution of products
were modified pursuant to the Global MOU described below.
Global Memorandum of Understanding. On December 4, 2007, we entered into a Global Memorandum
of Understanding Regarding Restructuring of Atari, Inc. (“Global MOU”) with IESA, pursuant to which
we agreed, in furtherance of our restructuring plan, to the supersession or termination of certain
existing agreements and the entry into certain new agreements between IESA and/or its affiliates
and us, as briefly described below. Furthermore, we agreed to discuss with IESA an extension of the
termination date beyond 2013 of the Trademark License Agreement, dated September 4, 2003, as
amended, between us and Atari Interactive (as described below).
•Short Form Distribution Agreement. We entered into a Short Form Distribution Agreement with
IESA (together with two of its affiliates) that superseded, with respect to games to be distributed
on or after the effective date of the Short Form Distribution Agreement, the two prior distribution
agreements between us and IESA dated December 16, 1999 and October 2, 2000. Subject to certain
limitations, IESA granted us the exclusive right for the term of the Short Form Distribution
Agreement to contract with IESA for distribution rights in United States, Canada and Mexico to all
interactive entertainment software games developed by or on behalf of IESA that are released in
packaged media format. The distribution of each game would be subject to a sales plan and specific
commitments by us and IESA, and the royalties to be paid shall equal (x) a flat per-unit fee per
manufactured unit or (y) a percentage of net receipts less a distribution fee paid to us equal to
30% of net receipts. IESA also agreed to pay us a royalty equal to 8% of the online net revenues
that IESA receives via the online platform attributable to such games in exchange for the grant of
a trademark license for Atari.com, which IESA was given the right to operate. The term of
exclusivity rights under the Short Form Distribution Agreement is three years, unless shortened or
terminated earlier in accordance with the agreement.
•Termination and Transfer of Assets Agreement. We entered into a Termination and Transfer of
Agreement (the “Termination and Transfer Agreement”) with IESA (together with its affiliate)
that terminated the Production Services Agreement, between us and IESA, dated as of March 31, 2006.
Under the Termination and Transfer Agreement, IESA agreed to hire a significant part of our
Production Department team and certain related assets were transferred to IESA. In consideration of
the transfer, IESA agreed to pay us approximately $0.1 million, representing, in aggregate, the
agreed upon current net book value for the fixed assets being transferred and the replacement cost
for the development assets being transferred. Certain team members hired by IESA are permitted to
continue providing oversight and supervisory services to us until January 31, 2008 at either no
cost or at a discounted cost plus a fee.
•QA Services Agreement. We entered into a QA Services Agreement with IESA (together with two
of its affiliates), dated March 31, 2006, pursuant to which we would either directly or indirectly
through third party vendors provide IESA with certain quality assurance services until March 31,2008 and for which IESA agreed to pay us the cost of the quality assurance services plus a 10%
premium. In addition, IESA agreed to pay certain retention bonuses payable to employees providing
the services to IESA or its affiliates who work directly on IESA projects or are otherwise general
QA support staff.
•Intercompany Services Agreement. We entered into an Intercompany Services Agreement with
IESA (together with two of its affiliates) that supersedes the Management and Services Agreement
and the Services Agreement, each between us and IESA dated March 31, 2006. Under the Intercompany
Services Agreement, we provide to IESA and its affiliates certain intercompany services, including
legal, human resources and payroll, finance, IT and management information systems (MIS), and
facilities management services, at the costs set forth therein. The annualized fee is approximately
Test Drive Intellectual Property License. On November 8, 2007, we entered into two separate
license agreements with IESA pursuant to which we granted IESA the exclusive right and license to
create, develop, distribute and otherwise exploit licensed products derived from our series of
interactive computer and video games franchise known as “Test Drive” and “Test Drive Unlimited” for
a term of seven years. IESA paid us a non-refundable advance, fully recoupable against royalties to
be paid under each of the license agreements, of (i) $4 million under a trademark agreement (the
“Trademark Agreement”) and (ii) $1 million under an intellectual property agreement (the “IP
Agreement”), both advances of which shall accrue interest at a yearly rate of 15% throughout the
term of the applicable agreement (collectively, the “Advance Royalty”). Under the Trademark
Agreement, the base royalty rate is 7.2% of net revenue actually received by IESA from the sale of
licensed products, or, in lieu of the foregoing royalties, 40% of net revenue actually received by
IESA from the exploitation of licensed products on the wireless platform. Under the IP Agreement,
the base royalty rate is 1.8% of net revenue actually received by IESA from the sale of licensed
products, or, in lieu of the foregoing royalties, 10% of net revenue actually received by IESA from
the exploitation of licensed products on the wireless platform.
Atari Trademark License. In May 2003, we licensed the Atari name and trademark rights from
IESA, which license, as extended in September 2003, expires on December 31, 2013. We issued 200,000
shares of common stock to Atari Interactive for the September 2003 extension to the license and
will pay a royalty equal to 1% of our net revenues from 2008 through 2013. We recorded a deferred
charge of $8.5 million, which was being amortized monthly and which became fully amortized during
the first quarter of fiscal 2007. The monthly amortization was based on the total estimated cost to
be incurred by us over the ten-year license period. In fiscal 2006, we recorded expense of $3.1
million. In fiscal 2007, we recorded expense of $2.2 million.
Sale of Hasbro Licensing Rights. On July 18, 2007, IESA agreed to terminate a license under
which it and Atari, and their sublicensees, had developed, published and distributed video games
using intellectual property owned by Hasbro, Inc. In connection with that termination, IESA agreed
to pay us $4.0 million.
Transactions Between Us and BlueBay High Yield
We and BlueBay High Yield have entered into the following agreements:
Credit Agreement with BlueBay High Yield and Subsequent Amendments and Forbearances. On
October 18, 2007, we consented to the transfer of the loans outstanding under the Credit Agreement,
dated as of November 3, 2006, among us, the lenders party thereto and Guggenheim Corporate Funding,
LLC, as Administrative Agent, providing for a senior secured credit facility under funds affiliated
with BlueBay High Yield and to the appointment of BlueBay High Yield, as successor administrative
agent (the “BlueBay Credit Facility”). Subsequently, we and BlueBay have entered into amendments,
dated November 6, 2007 and December 4, 2007, regarding the loan availability under the credit
facility, which is currently $14 million and fully drawn, and waivers and forbearances regarding
the entry by us into material agreements with IESA and the
failure by us to meet certain operational and financial covenants. In addition, please see “—
Agreements Related to the Merger” for the fourth amendment to the credit agreement with BlueBay
High Yield, entered into on April 30, 2008.
Agreements with Executive Officers
Employment Agreement with Bruno Bonnell. In addition to being a former executive officer of
us, Bruno Bonnell was the Chief Executive Officer and Chairman of the Board of Directors of IESA
until April 4, 2007. Mr. Bonnell had separate employment agreements with us and IESA, from both of
which he derived compensation. The compensation derived from his employment with us is as follows.
Under the Bonnell Employment Agreement, which became effective on April 1, 2004, Mr. Bonnell
was to serve as the Chief Executive Officer, Chief Creative Officer and Chairman of the Board of
our Company, reporting directly to the Board of Directors. The Bonnell Employment Agreement
permitted Mr. Bonnell and our Board to agree that an additional senior executive should be
appointed as our Chief Executive Officer to assume some of the day-to-day duties theretofore
undertaken by Mr. Bonnell, in order to enable Mr. Bonnell to devote more of his time to his
creative role for us. In accordance with the Bonnell Employment Agreement, in November 2004, the
Board elected James Caparro to be our President and Chief Executive Officer. Mr. Caparro served in
those capacities until June 2005. Upon Mr. Caparro’s resignation, Mr. Bonnell again assumed the
Chief Executive Officer position, and he held that position until September 2006, when David Pierce
became Chief Executive Officer. The term of the Bonnell Employment Agreement was to continue
through March 31, 2009, and was subject to renewal. However, on April 4, 2007, Mr. Bonnell resigned
from all positions he holds as an officer or director of the Company or any of its subsidiaries.
Under the Bonnell Employment Agreement, Mr. Bonnell received an annual salary of €500,000
retroactive to April 1, 2004, such salary to be reviewed annually for increase in the Compensation
Committee’s sole discretion. Additionally, Mr. Bonnell was eligible to receive an annual bonus of
up to 100% of his base salary (30% based upon the creative performance of the Company and 70% based
on the overall financial performance of the Company). Upon execution of the Bonnell Employment
Agreement, Mr. Bonnell received a grant of stock options to purchase 200,000 shares of our Common
Stock at the then per share market price of $22.40 (both after giving effect to a subsequent
one-for-ten reverse split of our common stock).
Mr. Bonnell also was to receive a housing allowance that provided reimbursement for Mr.
Bonnell’s actual and documented rent, security deposit and broker commissions or fees of up to
$7,600 per month through December 31, 2004, $8,360 per month in calendar 2005, $12,200 per month in
calendar 2006 and thereafter, an amount that is equal to or above $12,200 per month in accordance
with reasonable market standards. Instead of reimbursing Mr. Bonnell for rent, we leased apartments
in New York City that Mr. Bonnell occupied.
If Mr. Bonnell’s employment was terminated without cause or he resigned for good reason
without there being a change in control event, Mr. Bonnell was to receive (i) his base salary for
12 months, (ii) a bonus payment equal to the target bonus amount for the year of termination, and
(iii) 100% vesting of options which remain exercisable for a period of one year thereafter or, if
less, the remainder of the term of the grant. If Mr. Bonnell’s employment was terminated without
cause or he resigned for good reason within 24 months after a change in control event, Mr. Bonnell
was to receive (i) two times the sum of his then current base salary and bonus for the immediately
preceding bonus year (or if higher, the bonus payment made to Mr. Bonnell with respect to the full
fiscal year immediately preceding the change of control event), in 24 monthly installments, (ii)
payment of any accrued amounts and the pro rata portion of his bonus for the termination year, and
(iii) 100% vesting of options, which would remain exercisable for a period of one year thereafter
or, if less, the remainder of their specified terms.
Termination of Mr. Bonnell’s Employment. On April 4, 2007, after Mr. Bonnell was informed by
IESA that termination of his officership as CEO and Chairman of the Board of IESA and of his
offices with the other IESA group companies was under consideration due to material divergences
regarding the business plan of IESA and its group, Mr. Bonnell and IESA entered into an agreement
under which Mr. Bonnell agreed to resign from his duties as a Director and CEO of IESA and from all
the offices he held with subsidiaries of IESA, including us and our subsidiaries, and IESA agreed
to pay Mr. Bonnell (a) €350,000 for the work he did in restructuring IESA’s indebtedness, (b)
€900,000 as severance indemnity, (c) a housing allowance of €300,000, (d) €350,000 for an
agreement not to compete in the European Union (other than through a new U.S. company that would be
engaging in a business in which we were proposing to engage), (e) €300,000 for agreeing not to
solicit employees of IESA or any of its subsidiaries, (f) €100,000 for agreeing that for two
years he would not purchase equity or debt of IESA or any of its subsidiaries, including us, other
than through exercise of stock options, (g) €100,000 (as well as an agreement that IESA’s board
of directors would not disparage Mr. Bonnell) for agreeing not to make any comment regarding IESA,
its subsidiaries, their managers, directors,
officers or shareholders which may discredit or prejudice them, and (h) up to €25,000 as
reimbursement for legal expenses in connection with the agreement.
Neither our Board of Directors nor any member of our management was consulted about the
agreement between IESA and Mr. Bonnell or at any time requested any of the things to which Mr.
Bonnell agreed, and our management was not provided with a copy of the agreement until more than
two months after it was signed. Mr. Bonnell resigned as a director and officer of us and of our
subsidiaries on April 4, 2007, and shortly after that he and we agreed (subject to approval of our
Board, which was subsequently given) that his resignation was a voluntary termination that did not
involve good reason, and that we would permit Mr. Bonnell to continue to occupy apartments we were
renting until December 31, 2007. Despite the fact that we did not participate in the preparation
of, or know the terms of, the agreement between Mr. Bonnell and IESA, and that IESA, not we, made
all the payments under that agreement, to the extent that we benefited from the payments made by
IESA to Mr. Bonnell, we are required to treat the payments on our financial statements as an
expense which was offset by a contribution to our capital by IESA. Our Board approved a
determination that $770,540 of the payments IESA made should be allocated to benefit we received,
and our income statement for the year ended March 31, 2007 reflects a charge for that amount.
In addition to entering into the termination agreement, IESA agreed to invest €1 million in
Mr. Bonnell’s new U.S. company, which was formed to engage in a business in which we are proposing
Employment Agreement with Jean-Marcel Nicolai. Jean-Marcel Nicolai was an employee of IESA
until he became our Senior Vice President and Chief Technology Officer. We assumed Mr. Nicolai’s
employment agreement with IESA, which ran until June 2006. In June 2006, we entered into a letter
agreement with Mr. Nicolai to extend the terms of his employment with us in the United States for
one year according to the same terms and conditions as outlined in the terms of employment
contract, dated October 25, 2004, between us and Jean-Marcel Nicolai. Under the agreement, Mr.
Nicolai served as our Senior Vice President, Product Development Operations and Chief
Technology Officer. Mr. Nicolai received an annual base salary
of $280,000 and was eligible to receive an annual bonus of up to 40% of his then-current base salary. Under the
agreement, Mr. Nicolai was granted options to purchase 150,000 shares of our common stock at
fair market value.
Mr. Nicolai’s employment was terminated without cause, for good reason due to disability,
Mr. Nicolai would receive: (i) his annual base salary for a period of 12 months, (ii)
his housing allowance through the completion of the lease and school allowance through the
completion of the school term in which the termination occurred, and (iii) relocation expenses back
to France. If. Mr. Nicolai’s employment terminated for any other reason, Mr. Nicolai
would not receive any further payment or benefits.
Mr. Nicolai terminated his employment with us, and became an employee of Atari Interactive (a
wholly owned subsidiary of IESA) when his Employment Agreement with us terminated on August 31,2007. Mr. Nicolai has since terminated his employment with Atari Interactive.
Employment Agreement with David Pierce. We entered into an Employment Agreement with David
Pierce on September 1, 2006. Under the Pierce Employment Agreement, we agreed to employ Mr. Pierce
as our President and Chief Executive Officer for a term running from September 5, 2006 until August31, 2009. We also agreed to enter into good faith discussions regarding an extension or renewal of
that agreement at least 180 days before the end of its term, although we are not obligated to renew
the term of his Employment Agreement, Mr. Pierce received a base salary at the
rate of $600,000 per year, and was eligible to receive a bonus equal to 50% of his base salary if agreed upon
revenue and profit targets were met or exceeded, plus an additional 50% of his base salary if the
Compensation Committee determined that agreed upon strategic
objectives had been met or exceeded
(or lesser percentages to the extent revenue and profit targets or
strategic objectives were not
Employment Agreement terminated because of Mr. Pierce’s death or disability, he (or his
estate) would receive the base salary to which he would have been entitled during the remainder of
the term of the agreement plus a pro rata portion of the bonus to which he would have been entitled
with regard to the year during which the Employment Agreement
terminated. In addition, all stock
options that Mr. Pierce held when the Employment Agreement
terminated would vest and be exercisable
for a year after the Employment Agreement terminated or until any earlier dates on which they would
have terminated if the Employment Agreement had not terminated. If we
terminated Mr. Pierce’s
employment during the term of the Employment Agreement without cause,
or Mr. Pierce terminated the
Employment Agreement during its term for good reason, Mr. Pierce
would be entitled to his base
salary for six months whether or not he obtains other employment, and
would be entitled to his base
salary for two additional three month periods if he has not obtained alternate employment. In
addition, all stock options he held would vest and be exercisable for three months (or after he has
been employed for a year, six months) after the Employment Agreement
was terminated, or until any
earlier dates on which they would have expired if the Employment Agreement had not terminated. If
Mr. Pierce terminated the Employment Agreement without good
reason, or we terminated the Employment
Agreement for cause, Mr. Pierce would not be entitled to anything other than his accrued salary and
benefits up to the date of termination, and all his stock options
would terminate. If there was a
change of control of us, all Mr. Pierce’s stock options
would immediately vest and any restricted
stock he held would immediately become non-forfeitable.
On April 10, 2007, Mr. Pierce’s Employment Agreement was amended, at his suggestion, to state
that if before April 30, 2007 we paid bonuses totaling at least $250,000 to our employees and our
subsidiaries in accordance with recommendations he had made to the Compensation Committee of our
Board of Directors, Mr. Pierce’s base salary would be reduced during the year ending March 31, 2008
from $600,000 to $500,000. The bonuses were paid and Mr. Pierce’s base salary was reduced in
accordance with the amendment.
resigned as our Chief Executive Officer and President on
November 13, 2007.
Parent Company and Basis of Control
Throughout fiscal 2008, IESA owned, through California U.S. Holdings, Inc., a wholly-owned
subsidiary, approximately 51% of our common stock.
Under applicable SEC and NASDAQ rules, a director will only qualify as an “independent
director” if (a) the director meets certain objective tests of independence (including not having
been an employee within the past three years and not controlling us) and (b) in the opinion of our
Board of Directors, that person does not have a relationship which would interfere with the
exercise of independent judgment in carrying out the responsibilities of a director. Our Board has
recently evaluated all relationships between each director and us and has determined that Messrs.
Adair, Davis, Shein and Scher are “independent directors” as that term is defined in the NASDAQ
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
J.H. Cohn LLP audited our and our subsidiaries’ consolidated financial statements for the
fiscal year ended March
31, 2008. Deloitte & Touche LLP audited our and our subsidiaries’ consolidated financial
statements for the fiscal years 2000 through 2007. The reports of J.H. Cohn LLP and Deloitte &
Touche LLP, respectively, for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to audit scope or accounting principles, other
than an additional paragraph in each of the reports regarding uncertainty about our continuing as a
“going concern.” During the fiscal years ended March 31, 2008 and 2007, there were no disagreements
with either J.H. Cohn LLP or Deloitte & Touche LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of either J.H. Cohn LLP or Deloitte & Touche LLP, respectively,
would have caused them to make reference to the subject matter of the disagreements in connection
with either of their reports, nor were there any “reportable events,” as that term is described in
Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, except for the material weaknesses identified and
described in this Report on Form 10-K and our Report on Form 10-K for the fiscal year ended
March 31, 2007.
Fees of Independent Auditors
The aggregate fees billed by J.H. Cohn LLP for fiscal 2008 and Deloitte & Touche LLP for
fiscal 2007 with regard to various categories of services are set forth below:
The Audit Committee of our Board of Directors pre-approves the engagement of our independent
registered public accounting firm to perform audit and other services for us and for our
subsidiaries. The Audit Committee’s procedures for pre-approval are intended to comply with SEC
regulations regarding pre-approval of services. Services subject to these SEC requirements include
audit services, audit related services, tax services and other services. The audit engagement is
specifically approved, and the auditors are appointed and retained, by the Audit Committee. In some
instances, the Audit Committee pre-approves a particular category or group of services for up to a
year, subject to budget limitations and to regular management reporting. The Audit Committee
authorized the engagement of J. H. Cohn LLP to provide auditing services for fiscal 2008 and has
given its approval for up to a year in advance for J. H. Cohn LLP to provide particular categories
or types of audit-related, tax and permitted non-audit services, in each case subject to budget
limitations. For fiscal 2007 and 2008, the Audit Committee approved 100% of the audit-related fees,
tax fees and other fees billed by either J.H. Cohn LLP or Deloitte & Touche LLP.
The Audit Committee considered and determined that the fees of Deloitte & Touche LLP for
services other than audit and audit related services that it provided were compatible with
maintaining Deloitte & Touche LLP’s independence. Deloitte & Touche LLP also served as IESA’s
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No.1 on Form 10-K/A to be signed on its behalf
by the undersigned, thereunto duly authorized.