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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K [ X ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2004 OR [   ]
    
    TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
    
    Commission File No. 0-27338
 ATARI, INC. (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3689915(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 417 Fifth Avenue, New York, NY 10016
(Address of principal executive offices) Registrants telephone number, including area code: (212) 726-6500 Securities registered pursuant to Section 12(b) of the Act: none Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [   ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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. [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [   ] The aggregate market value of the registrants common stock held by
non-affiliates of the registrant, based on the $4.04 closing sale price of the
common stock on September 30, 2003 as reported on the NASDAQ National Market,
was approximately $142,874,669. As of June 9, 2004, there were 121,275,614
shares of the registrants common stock outstanding. Documents Incorporated
by Reference 
 Portions of Registrants definitive proxy statement for its 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.




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ATARI, INC. AND SUBSIDIARIES
MARCH 31, 2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS PagePART IITEM 1.
    
    Business
    
    
    2ITEM 2.
    
    Properties
    
    
    20ITEM 3.
    
    Legal Proceedings
    
    
    21ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22PART IIITEM 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    23ITEM 6.
    
    Selected Financial Data
    
    
    24ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    26ITEM 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    41ITEM 8.
    
    Financial Statements and Supplementary Data
    
    
    42ITEM 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    42ITEM 9A.
    
    Controls and Procedures
    
    
    42PART IIIITEM 10.
    
    Directors and Executive Officers
    
    
    43ITEM 11.
    
    Executive Compensation
    
    
    43ITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    43ITEM 13.
    
    Certain Relationships and Related Transactions
    
    
    43ITEM 14.
    
    Principal Accountant Fees and Services
    
    
    43PART IVITEM 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    44SIGNATURES
    
    
    52CONSOLIDATED
FINANCIAL STATEMENTS
    
    
    F-1DISTRIBUTION AGREEMENTSEVENTH AMENDMENT TO THE CREDIT AGREEMENTEIGHTH AMENDMENT TO THE CREDIT AGREEMENTDESCRIPTION OF EXECUTIVE BONUS PLAN FOR FISCAL '04CONSULTING AGREEMENTAMENDMENT #6 TO SUBLICENSE AGREEMENTPROMISSORY NOTEPROMISSORY NOTEPROMISSORY NOTELIST OF SUBSIDIARIESCONSENT OF DELOITTE & TOUCHE LLPPOWER OF ATTORNEYCERTIFICATIONCERTIFICATIONAMENDED AND RESTATED AUDIT COMMITTEE CHARTERCOMPENSATION COMMITTEE CHARTER, AS AMENDED
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This Annual Report contains statements that may constitute forward-looking
statements made pursuant to the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. We caution readers regarding certain
forward-looking statements in this Report, press releases, securities filings,
and all other documents and communications. All statements, other than
statements of historical fact, including statements regarding industry
prospects and future results of operations or financial position, made in this
Annual Report on Form 10-K are forward looking. The words believe, expect,
anticipate, intend and similar expressions generally identify
forward-looking statements. While we believe in the veracity of all
statements made herein, forward-looking statements are necessarily based upon a
number of 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 expressed in
any forward-looking statements made by, or on behalf of, us. We will not
necessarily update information if any forward-looking statement later turns out
to be inaccurate. Some of the factors that could cause actual results or future
events to differ materially or otherwise, include the following: the loss of
key customers; delays in product development and related product release
schedules; maintaining relationships with leading independent video game
software developers; adapting to the rapidly changing industry technology;
maintaining or acquiring licenses to intellectual property; the termination or
modification of our agreements with hardware manufacturers; an inability to
maintain or find debt financing on terms commercially reasonable to us; and
pricing of and demand for distributed products. For specific information
concerning these and other such factors please see the section entitled Risk
Factors on pages 13 to 20. Nintendo®, Game Boy®, Game Boy® Advance, Nintendo GameCube®, and Game Boy®
Color are trademarks and/or registered trademarks of Nintendo of America, Inc.
Sonys PlayStation® and PlayStation® 2 are trademarks and/or registered
trademarks of Sony Computer Entertainment, Inc. Microsoft Xbox is a
registered trademark of Microsoft Corporation. Asteroids®, Backyard
Basketball®, Backyard Sports,Centipede®, Civilization®, Civilization® III:
Conquests, Deer Hunter®, DRIV3R, Driver, Freddi Fish, Kya®, Missile
Command®, Shadow Ops: Red Mercury, Sid Meiers Civilization®, Stuntman®, Test
Drive®, and V-Rally® are trademarks and/or registered trademarks of Atari Inc.,
its subsidiaries, and its affiliated entities. All other trademarks are
property of their respective owners. 1




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PART I 
 ITEM 1. BUSINESS OVERVIEW We are a leading global publisher and developer of video game software for
both gaming enthusiasts and the mass-market audience, as well as a leading
distributor of video game software in North America. We publish and distribute
games for all platforms, including Sony PlayStation and PlayStation2; Nintendo
Game Boy, Game Boy Advance and GameCube; Microsoft Xbox; and personal
computers, referred to as PCs. We also publish and sub-license games for the
wireless, internet, and other evolving platforms. Our diverse portfolio of
products extends across every major video game genre, including: action,
adventure, strategy, children, family, driving and sports games. Our products are based on intellectual properties that we have either
created and own internally or which have been licensed from third parties,
including leading entertainment companies. We continually seek the best
available talent to join our internal development team, which we believe is one
of the most creative in the industry. Our internally developed franchises range across all genres and platforms,
and feature some of our most successful properties to date, including:  
    
    Driver(more than 6.0 million units sold in the U.S., including all installments);
    
    Test Drive(more than 5.8 million units sold in the U.S., including all installments);
    
    Backyard Sports(more than 6.5 million units sold in the U.S., including all sports and all installments);
    
    Freddi Fish(more than 2.6 million units sold in the U.S., including all installments); and
    
    Putt Putt(more than 2.4 million units sold in the U.S., including all installments). Our extensive library of licensed properties, which constitutes an
important component of our product strategy, includes some of the most
recognizable names in popular entertainment, which we believe reduces product
risk. A significant number of our licensed properties have come from the
television, motion picture and sports industries, including the following:  
    
    Warner Bros. Entertainment (The Matrix);
    
    Viacom / Nickelodeon (Mission: Impossible 2, Survivor,
Blues Cluesand Dora the Explorer);
    
    Sony Pictures (Godzilla);
    
    C2 Pictures (Terminator 3);
    
    Canal + (Terminatorand Terminator 2);
    
    Dreamworks (Sinbad);
    
    FUNimation (Dragon Ball Z);
    
    National Football League;
    
    National Hockey League;
    
    National Basketball Association; and
    
    Major League Baseball. In addition to our publishing and development activities, we also
distribute video game software in the United States and Canada, handling both
our own products as well as those titles developed by certain third-party
distributors with whom we have contracts. As a leading distributor of video
game software throughout the U.S., we maintain what we believe to be
state-of-the-art distribution operations and systems, reaching well in excess
of 30,000 retail outlets nationwide. Additionally, through our relationship
with our majority stockholder, Infogrames Entertainment S.A., or IESA, a French
corporation, listed on Euronext, our products are distributed exclusively by
IESA throughout Europe, Asia and other regions. See our risk factor regarding
our dependence upon IESA. Similarly, we exclusively distribute IESAs products
in the United States and Canada. Through our distribution agreement with IESA, we have the rights to
publish and sub-license certain intellectual properties either owned or
licensed by IESA or Atari Interactive, Inc. Those properties include key
franchises such as Roller Coaster Tycoon and Sid Meiers Civilization, Atari
classics such as Asteroids, Missile Command and Centipede and Hasbro properties
such as TRANSFORMERS and Dungeons & Dragons. 2




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For the year ended March 31, 2004, we reported net revenues of $468.9
million and net income of $0.7 million. During this twelve month period, on
the strength of several of our key releases, particularly Enter the Matrix and
several Dragon Ball Ztitles, we ranked third among PC game publishers and
fifth among third-party video game publishers in market share based on video
game software dollar sales, according to data provided by NPD Group, Inc.
(NPD), an independent market research company. Atari, Inc. (formerly known as Infogrames, Inc.) was organized in Delaware
in 1992. In May 2003, we changed our name to Atari, Inc. and changed our
trading symbol on the NASDAQ National Market to ATAR. Effective March 28,
2003, we changed our fiscal year-end from June 30 to March 31. Our corporate
office and U.S. headquarters is located at 417 Fifth Avenue, New York, New York
10016 (main telephone: (212) 726-6500). We maintain a worldwide website at
www.atari.com. Information contained on the website should not be deemed part
of this Annual Report. INDUSTRY OVERVIEW The video game software industry primarily comprises software for
dedicated game consoles or platforms (such as GameCube, PlayStation2 and Xbox),
handhelds (such as Game Boy Advance) and PCs. Publishers of video game software
include the console manufacturers, or first-party publishers, and third-party
publishers such as ourselves whose sole role is the development, publishing and
distribution of video game software. Additionally, the use of wireless devices
(such as mobile phones and personal digital assistants) as a gaming platform,
known as mobile gaming, is growing rapidly. According to International Data
Group (IDG), an independent technology, media, research, and event company, the
worldwide video game software market is expected to be $21.3 billion in 2004. The Console and Handheld Market Console platforms as they exist today have made significant technological
advances since the introduction of the first generation of modern consoles by
Nintendo in 1985. Hardware manufacturers have historically introduced a new and
more technologically advanced gaming console platform every four to five years.
Handhelds have also made advances since their introduction. However, handhelds
have typically experienced longer product cycles. With each new cycle, the
customer base for video game software has expanded as gaming enthusiasts mature
and advances in video game hardware and software technology engage new
participants, generating greater numbers of console units purchased than the
prior cycle. The beginning of each cycle is largely dominated by console sales
as consumers upgrade to the next-generation technology. As the cycle matures,
consumers focus shifts to software, resulting in a period of rapid growth for
the video game software industry. The current generation of video game console hardware leverages CD-ROM and
DVD-ROM technology. Handheld platforms, however, still rely on cartridge
technology. Use of disc-based technology in consoles has been an important
advancement in the industry as it provides greater memory capacity, shorter
manufacturing lead times and decreased manufacturing costs. Another important
technological advancement has been the introduction of backward
compatibility, or the ability of current generation consoles to operate
software from the previous generation of consoles. This provides additional
market longevity to both prior generation hardware and software. Sony was the
first manufacturer to introduce the current generation of console hardware with
the introduction of the PlayStation 2 platform in 2000. Nintendo introduced its
current generation platforms a year later, launching the GameCube and Game Boy
Advance in 2001. This generation also saw the entrance of Microsoft into the
industry with the introduction of the Xbox console. PlayStation 2s early
introduction helped establish it as the leading hardware platform, with a
projected installed base in North America of 30.1 million households in 2004,
compared to 10.6 million and 12.3 million households for GameCube and Xbox,
respectively, according to IDG. This cycle, in particular, has been defined by an increased rate of change
and complexity in the technological innovations of video game hardware and
software. In addition to these technological innovations, there has been
greater competition for shelf space and creative talent as well as increased
buyer selectivity. As a result, the video game industry has become increasingly
hit-driven, which has led to higher per game production budgets, longer and
more complex development processes, and generally shorter product life cycles.
The importance of the timely release of hit titles, as well as the increased
scope and complexity of the product development process, have increased the
need for disciplined product development processes that limit cost and
overruns. This in turn has increased the importance of leveraging the
technologies, characters or storylines of existing hit titles into additional
video game software franchises in order to spread development costs among
multiple products. 3




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Personal computers Advances in personal computer technology take place at a more rapid pace
than console and handheld technology. Advances in microprocessors, graphics
chips, hard-drive capacity, operating systems and memory capacity have greatly
enhanced the ability of the PC to serve as a video game platform. These
technological advances have enabled developers to introduce video games for PCs
with enhanced game play technology and superior graphics. The fact that this
market has typically not been subject to video game industry cycles and that
publishers are not required to pay hardware royalties and high manufacturing
costs makes this an attractive market for video game publishers. Consolidation We and other publishers have used acquisitions to obtain creative talent
as well as independently developed intellectual properties. We believe
economies of scale will be increasingly important as the complexity and costs
associated with video game development continue to increase. In addition, the
acquisition of proven intellectual properties has become increasingly important
as publishers seek to diversify and expand their product portfolio, while
limiting exposure to unsuccessful product development efforts. Given these
facts, we expect consolidation within the video game software industry to
continue. RECAPITALIZATION AND SECONDARY OFFERING During the second quarter of fiscal 2004, we completed a recapitalization
through the issuance of new shares pursuant to (i) an agreement with our
majority stockholder (through direct and indirect stock holdings), IESA and
(ii) a public offering. Per the agreement with IESA, on September 18, 2003, we
issued an aggregate of 39,029,877 shares of our common stock, valued at $4.25
per share, to IESA and its wholly-owned subsidiary California U.S. Holdings,
Inc., or CUSH, in satisfaction of approximately $165.9 million of our net
indebtedness to IESA. The converted debt consisted of the following
outstanding amounts at September 18, 2003: $48.3 million of a medium-term loan,
$44.8 million of a revolving credit agreement with IESA, $46.3 million of
non-interest bearing subordinated convertible notes and $73.1 million of 5%
subordinated convertible notes. The 5% subordinated convertible notes were
converted into shares of our common stock at a more favorable rate than was
available under the original terms of such notes. The incremental value of the
additional stock issued was treated as a non-cash dividend to IESA. The
recapitalization agreement provided for an offset of previously provided
advances to Atari Interactive and Atari Australia Pty Ltd. of $44.7 million and
$1.9 million, respectively. Accordingly, upon completion of the
recapitalization, no debt was owed to IESA or its subsidiaries pursuant to the
above financing arrangements. On September 24, 2003, IESA sold 17,179,412 of the shares issued as part
of the recapitalization at $4.25 per share in a public offering. We also sold
9,820,588 new shares of our common stock in the public offering at $4.25 per
share, generating net proceeds to us of approximately $34.9 million. After
these transactions and the exercise of the underwriters over-allotment option
on October 21, 2003, IESA owns approximately 67% of our common stock directly
and through its subsidiaries CUSH and Atari Interactive. In connection with the recapitalization, Atari Interactive extended the
term of the license under which we use the Atari name to ten years expiring on
December 31, 2013. We issued 2,000,000 shares of our common stock to Atari
Interactive for the extended license and will pay a royalty equal to 1% of our
net revenues during years six through ten of the extended license. There shall
be no royalty payments due in years one through five. RELATIONSHIP WITH IESA IESA renders management services to us and we render management services
to Atari Interactive, which is based in Beverly, Massachusetts. Atari
Interactive develops videogames, and owns the name Atari and the Atari logo,
which we use under our license. As discussed further in the Distribution
section of this Report, IESA is also the distributor of our products in Europe,
Asia and certain other regions and we are the distributor of IESAs and its
affiliates products in the United States and Canada. IESA has incurred significant losses from operations and is highly
leveraged. Should IESA experience liquidity issues, among other things, this
may result in its inability to fund the development efforts of Atari
Interactive, and our results of operations may suffer because, as the North
American distributor of the games developed by Atari Interactive, our revenue
could significantly decrease. Such a reduction of our revenue, among other
things, could result in a breach of one or more of the covenants contained in our GECC senior credit facility. In the event
any of the above contingencies occur, management is prepared to take various
actions which may include, but not be limited to, a reduction in our
expenditures for internal and external new product development and a reduction
in overhead expenses. These actions, should they become necessary, may result
in a significant reduction in the size of our operations. 4




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PRODUCTS Our core strength has typically been in titles for the action, adventure,
strategy, children, family, racing and sports genres. We have built a leading
childrens entertainment portfolio and have successfully transitioned a number
of proven television and movie franchises to successful video game franchises.
We continually seek to expand our product portfolio with proven intellectual
properties and through the creation of sequels and expansion of successful
titles. The following table lists our 25 top selling titles (based on dollar
sales) during the year ended March 31, 2004. Title
    
    Platform
    
    Genre
    
    Initial releaseEnter the Matrix
    
    PS2/ Xbox/ GC/ PC
    
    Action
    
    Summer-03Dragon Ball Z: Budokai 2
    
    PS2
    
    Action
    
    Winter-03Dragon Ball Z: Budokai
    
    PS2/GC
    
    Action
    
    Winter-02Dragon Ball Z: The Legacy of Goku II
    
    GBA
    
    Adventure
    
    Summer-03Terminator 3: Rise of the Machines
    
    PS2/ Xbox/GBA
    
    Action
    
    Winter-03Dragon Ball Z: Taiketsu
    
    GBA
    
    Action
    
    Winter-03Mission Impossible: Operation Surma
    
    PS2/ Xbox/GBA/GC
    
    Action
    
    Winter-03Beyblades: Ultimate Blader Jam
    
    GBA/GC
    
    Action
    
    Fall-03Test Drive Greatest Hits
    
    PS2/ Xbox/GBA/PC
    
    Driving
    
    Summer-02Unreal Tournament 2004
    
    PC
    
    Action
    
    Spring-04Dragon Ball Z: Ultimate Battle 22
    
    PSone
    
    Adventure
    
    Spring-03Magic the Gathering: Battle Ground
    
    Xbox
    
    Action
    
    Winter-03Unreal II: The Awakening
    
    Xbox/PC
    
    Action
    
    Spring-03Dungeons & Dragons: Heroes
    
    Xbox
    
    Adventure
    
    Fall-03Temple of Elemental Evil: A Greyhawk Adventure
    
    PC
    
    Adventure
    
    Fall-03Nascar Dirt to Daytona
    
    PS2/GC
    
    Racing
    
    Winter-02Neverwinter Nights: The Hordes of the Underdark
    
    PC
    
    Strategy
    
    Winter-03Neverwinter Nights: The Shadows of Undrentide
    
    PC
    
    Strategy
    
    Summer-03Yu Yu Hakusho: Spirit Detective
    
    GBA
    
    Action
    
    Winter-03Godzilla: Destroy all Monsters
    
    Xbox/ GBA/GC
    
    Action
    
    Winter-02Neverwinter Nights Gold
    
    PC
    
    Strategy
    
    Winter-03Dragon Ball Z: The Legacy of Goku
    
    GBA
    
    Adventure
    
    Spring-02Backyard Basketball
    
    PS2/PC
    
    Children
    
    Winter-01Roller Coaster Tycoon Deluxe
    
    PC
    
    Strategy
    
    Spring-03Wheel of Fortune 3
    
    PS2/PC
    
    Social
    
    Winter -02
   GBA = Game Boy Advance 
GC = GameCube 
PSone = PlayStation 
PS2 = PlayStation 2 For fiscal 2004, we had one title, Enter the Matrix, published on four
different platforms, which represented approximately 20% of our consolidated
revenues. 5




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PUBLISHING Our
publishing activities include the management of development, marketing, packaging and
sales of video game software for all platforms, including PlayStation,
PlayStation2, Game Boy, Game Boy Advance, GameCube, Xbox, and PC. During the
year ended March 31, 2004, on the strength of several of our key releases,
particularly Enter the Matrix and several Dragon Ball Ztitles, we ranked third among PC game publishers and fifth
among third-party video game publishers in market share based on video game
software dollar sales, according to data provided by NPD. During the year
ended March 31, 2004, our publishing operations were organized as follows:  
    
    Santa Monica StudioSanta Monica, CaliforniaWith an emphasis on
action, adventure, driving and sports games, our Santa Monica studio
publishes titles that are developed both internally and externally.
With proximity to the Hollywood community, the Santa Monica Studio is
strategically positioned to acquire and manage key titles licensed
from the motion picture and television studios. Key titles released
by the Santa Monica studio during fiscal 2004 included: Enter the
Matrix, Unreal Tournament 2004, Terminator 3: Rise of the Machines,
Mission Impossible: Operation Surma, Magic the Gathering: Battle
Ground, Unreal II: The Awakening, Temple of Elemental Evil: A Greyhawk
Adventure, Neverwinter Nights: The Hordes of the Underdark,
Neverwinter Nights: The Shadows of Undrentide,and Godzilla: Destroy
all Monsters, among others.

The Santa Monica Studio published 15 new titles in fiscal 2004,
generating approximately 39% of our publishing revenue for the year.  
    
    Beverly StudioBeverly, MassachusettsThe Beverly studio focuses on
developing and publishing a range of products, from interactive
entertainment for children and the mass market to strategy and
adventure games for more seasoned gamers. The Beverly studios
publishing lineup includes those titles previously published under the
Hasbro Interactive label, which was acquired by IESA in 2001 and is
now named Atari Interactive. Pursuant to our management agreement
with IESA, we manage this facility and are responsible for publishing
the games for which development is managed by Atari Interactive in the
United States and Canada. Key titles published by the Beverly Studio
in fiscal 2004 included: all titles within the Dragon Ball Zand
Backyard Sportsfranchises, Civilization III: Conquests, Roller
Coaster Tycoon II, Dungeons & Dragons: Heroes, Kya,and Yu Yu Hakusho:
Spirit Detective, among others.

The Beverly Studio published 38 titles in fiscal 2004 and generated
approximately 33% of our publishing revenue for the year. With a lineup that spans from hardcore games through mass market titles,
we publish games at various price points, ranging from value-priced titles to
premium-priced products. Pricing is determined by a variety of factors,
including but not limited to: licensed or franchise property; internal or
external development; single or multiple platform development; production
costs and volumes; target audience; and distribution territory. DEVELOPMENT Internal and Related-Party Development We leverage both internal and external resources in the development of our
games, assessing each project independently to determine which development team
is best suited to handle the product based on technical expertise and
historical development experience, among other factors. In addition to the two publishing studios described above, we own studios
and manage the development of product at studios owned by IESA that focus
solely on game development. Titles from these locations range in genre and are
published for various audiences on the full array of gaming platforms. Development studios owned by Atari include:  
    
    Humongous EntertainmentSeattle, WashingtonThe Humongous Studio
focuses solely on the development of childrens titles, and the Studio
has developed some of the most successful childrens interactive
franchises in the industry. Among its critically and commercially
successful character series of games, its Freddi Fishand Putt Putt
franchises have to date sold in excess of 2.6 million units and 2.4
million units, respectively, in the United States, and its Backyard
Sportsfranchise, the leading interactive sports series for children,
has sold more than 6.5 million units in the United States to date. 6




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
    
    ReflectionsNewcastle, EnglandReflections is responsible for the
creation and development of our hit Driverfranchise, which has sold
more than 12 million units worldwide to date, as well as Stuntman,
which was released in June 2002. Reflections is currently working on
DRIV3R,which is scheduled to be released in June 2004.
    
    Shiny Entertainment, Inc.Newport Beach, CaliforniaWe acquired Shiny
in April 2002, along with the rights to develop console and PC games
based on The Matrixfilm trilogy. Shiny developed Enter the Matrix,
which was released simultaneously with The Matrix Reloaded,the second
film in The Matrixtrilogy, in May 2003 and has sold in excess of 5
million units worldwide to date.
    
    Minneapolis StudioMinneapolis, MinnesotaPrior to being closed in
March 2004, the Minneapolis studio developed games focusing primarily
on action and adventure genres for the casual gamer. Given the nature
of these products and their broad audience appeal, a large percentage
of the Minneapolis studios lineup was published for the PC.
Franchises and licenses previously developed in Minneapolis are now
being overseen by the Beverly Studio, which had handled all marketing
and support services for Minneapolis, prior to the Studios closing in
March 2004.
    
    Legend EntertainmentChantilly, Virginia  Legend, which was closed in
January 2004, focused primarily on certain games developed under the
Unreallicense. Upon completion of Unreal II: The Awakeningfor the
holiday 2003 season, which was its only remaining project, the Studio was
closed. In addition to the Studios we own, we also manage development of product
at several studios owned by IESA:  
    
    Paradigm Entertainment, Inc.Dallas, TexasParadigm is the studio
behind the successful Pilot Wingsgame. Paradigm developed several of
our recently released titles, including Mission Impossible: Operation
Surmaand the upcoming Terminator 3: The Redemption.
    
    Atari InteractiveBeverly, MassachusettsAtari Interactives studio is
responsible for managing franchises such as Roller Coaster Tycoon,
Civilizationand Monopoly Tycoon,as well as TRANSFORMERS, which was
released in May 2004.
    
    Eden Studios SASLyon, FranceEden Studios developed the successful
V-Rallyseries, which, to date, has sold more than 3.8 million units
worldwide. Most recently, Eden developed Kya, which was released for
the holiday 2003 season.
    
    Atari Melbourne House Pty LtdMelbourne, AustraliaAtari Melbourne
House is the studio behind our recently released TRANSFORMERSgame
(May 2004). Previously, the Studio had developed Grand Prix
Challenge.
    
    Hunt ValleyHunt Valley, MarylandThe Hunt Valley Studio, which was
closed in November 2003, developed several games, including Dungeons &
Dragons: Heroes,which was released for the holiday 2003 season and
was the final title developed by the Studio. External development In addition to developing products ourselves or through IESA wholly-owned
subsidiaries, we publish video game software developed by some of the
industrys most highly regarded independent external developers. These
developers include, among others:  
    
    BioWare Corp. (Neverwinter Nights);  
    
    Chris Sawyer (Roller Coaster Tycoonseries);  
    
    Deep Red (Monopoly Tycoon); 7




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
    
    Digital Extremes (Unreal Championship);  
    
    Digital Fiction (Yu Yu Hakusho);  
    
    Epic Games (Unreal Tournament 2004 and Unreal Tournament 2003);  
    
    Firaxis Entertainment (Civilization and Pirates!);  
    
    Monster Games (Test Drive: Eve of Destruction);  
    
    Stormfront Studios (Forgotten Realms: Demon Stone);  
    
    Webfoot Technologies (Dragon Ball Z: The Legacy of Goku); and  
    
    Zombie Studios (Shadow Ops: Red Mercury). Products which are acquired from these external developers are marketed
under the Atari name, as well as the name of the external developer. The
agreements with external developers typically provide us with exclusive
publishing and distribution rights for a specific period of time for specified
platforms and territories. The agreements may grant us the right to publish
sequels, enhancements and add-ons to the products originally developed and
produced by the external developer. We pay the external developer a royalty
based on sales of its products. A portion of this royalty may be in the form of
advances against future royalties payable at the time of execution of the
development agreement, with additional payments tied to the completion of
detailed performance and development milestones by the developer. We manage external development projects by appointing a producer to
oversee each products development and to work with the external developer to
design, develop and test the products. The producer also helps ensure that
development milestones are met in a timely manner. We generally have the right
to suspend or terminate making payments to an external developer if the
developer fails to meet its development milestones in a timely fashion. Also,
we generally have the option to terminate these agreements at relatively low
costs. SALES AND MARKETING Our sales and marketing programs emphasize four areas:  
    
    launching new products;  
    
    raising the publics awareness of new brands and franchises;
    
    extending the life of existing products and properties to the greatest degree possible; and  
    
    exploiting the marketability of our intellectual property and
products through licensing arrangements that expand application into other consumer product categories. To achieve maximum benefit from our sales and marketing programs, we employ a
wide range of marketing techniques, including:  
    
    on-line marketing on the Internet and direct mailings;
    
    advertising in video gaming, computer, and general consumer publications; 8




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
    
    in-store promotions utilizing display towers and endcaps;  
    
    advertising on television and radio;  
    
    guerilla or underground marketing techniques, in which marketing materials
are placed in locations which are frequented by the targeted groups of
consumers;  
    
    viral marketing techniques in which consumers pass along our messages to
other targeted groups of consumers; and  
    
    promotional partnerships with other consumer product companies and third-parties. We believe the Internet is integral to our marketing efforts. We use it,
in part, to generate awareness of and buzz about titles months prior to their
market debut. We incorporate the Internet into our marketing programs by
creating product-dedicated mini-sites and on-line promotions. In addition, in
the months leading up to the release of a new product, we provide extensive
editorial material to on-line publications that reach the core gaming audience. In addition, central to supporting all marketing, promotions and sales
efforts for each title are customized public relations programs designed to
create awareness of our products with all relevant audiences, including core
gamers and mass entertainment consumers. These public relations efforts have
resulted in our coverage in key computer and video gaming publications, as well
as major consumer newspapers, magazines and broadcast outlets. We monitor and measure the effectiveness of our marketing strategies
throughout the life cycle of each product. To maximize our marketing efforts,
we may begin to deploy an integrated marketing program for a product more than
a year in advance of its release. Historically, we have devoted a substantial
portion of our marketing resources to support our key products and intend to do
so in the future. We believe that integrated marketing strategies for our key
products are essential for other product successes and brand-name loyalty. In order to improve efficiency, our sales efforts are handled internally
by a single sales organization. We currently have three sales regions, each
managed by a vice president of sales. Two of these regions focus on selling our
products to retailer and reseller accounts. The third region deals with sales
derived from the licensing of our intellectual property and products. Within
each region, we have five sales directors who serve as the primary contacts
with our approximately 35 largest retail and licensing customers. INTELLECTUAL PROPERTY Licenses Licensed properties Our strategy includes the creation of games based on licensed properties
that have attained a high level of consumer recognition or acceptance. We have
entered into licensing agreements with a number of licensors, including Warner
Bros., Viacom/ Nickelodeon, Sony Pictures, Canal +, Dreamworks, Major League
Baseball, National Hockey League, National Basketball Association and the
National Football League. We pay royalties at variable rates based on our net sales of the
corresponding title. We frequently make advance payments against minimum
guaranteed royalties over the license term. License fees tend to be higher for
properties with proven popularity and less perceived risk of commercial
failure. Licenses are of variable duration and may in some instances be
renewable upon payment of minimum royalties or the attainment of specified
sales levels. Other licenses are not renewable upon expiration, and we cannot
be sure that we will reach agreement with the licensor to extend the term of
any particular license. Our property licenses usually grant us exclusive use of
the property for the specified titles, on specified platforms, worldwide or
within a defined territory, during the license term. Licensors typically retain
the right to exploit the property for all other purposes and to license other
developers with regard to other properties. 9




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Hardware licenses We currently develop software for use with PlayStation and PlayStation 2,
GameCube, Game Boy and Game Boy Advance, Xbox and other video game consoles
pursuant to licensing agreements with each of the respective hardware
developers. Each license allows us to create one or more products for the
applicable system, subject to certain approval rights, which are reserved by
each hardware licensor. Each license also requires us to pay the hardware
licensor a per-unit license fee for the product produced. The following table sets forth information with respect to our platform
licenses: Manufacturer
    
    Platform
    
    Agreement
    
    Territory*
    
    Expiration DateSony
    
    PlayStation
    
    Licensed Publisher
Agreement, dated
January 19, 2003
    
    US, Canada, Mexico
and Latin America
    
    January 18, 2007Sony
    
    PlayStation2
    
    Licensed Publisher
Agreement, dated
June 6, 2000
    
    US and Canada
    
    March 31, 2005,
with automatic one 
year renewalsMicrosoft
    
    Xbox
    
    Publisher License
Agreement, dated
April 18, 2001
    
    Determined on a 
title-by-title
basis
    
    November 14, 2004Nintendo
    
    Game Boy, Game Boy
Color, Game Boy
Pocket
    
    License Agreement,
dated April 14,
1999
    
    Western Hemisphere
    
    January 24, 2004**Nintendo
    
    Game Boy Advance
    
    License Agreement,
dated September 24,
2001
    
    Western Hemisphere
    
    September 23, 2004Nintendo
    
    GameCube
    
    License Agreement,
dated March 29,
2002
    
    Western Hemisphere
    
    March 28, 2005
   *        IESA, our parent entity and the distributor of our products in Europe, has
entered into similar agreements with each of the manufactures for applicable
European territories. **     The renewal of this contract is currently being negotiated. In the interim,
we are operating in accordance with the historical terms of the License
Agreement. We currently are not required to obtain any license for the publishing of
video game software for PCs. Accordingly, our per-unit manufacturing cost for
such software products is less than the per-unit manufacturing cost for console
products. Protection We develop proprietary software titles and have obtained the rights to
publish and distribute software titles developed by third parties. Our
products are susceptible to unauthorized copying. Unauthorized third parties
may be able to copy or to reverse engineer our titles to obtain and use
programming or production techniques that we regard as proprietary. In
addition, our competitors could independently develop technologies
substantially equivalent or superior to our technologies. We attempt to
protect our software and production techniques under copyright, trademark and
trade secret laws as well as through contractual restrictions on disclosure,
copying and distribution. Although we generally do not hold any patents, we
seek to obtain trademark and copyright registrations for our products. In
addition, each manufacturer incorporates security devices in its platform to
prevent unlicensed use. 10




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DISTRIBUTION United States and Canada Throughout the United States and Canada, we distribute our own products,
as well as the products of other publishers, utilizing our distribution
operations and systems. We are the exclusive distributors for IESA in the
United States and Canada. Utilizing our point-of-sale replenishment systems and
electronic data interchange links with our largest customers, we are able to
efficiently handle high sales volume and manage and replenish inventory on a
store by store basis. We also utilize what we believe to be state-of-the-art
systems for our entire supply chain management, i.e., manufacturing, EDI/order
processing, inventory management, purchasing, and tracking of shipments. We
believe these systems help us:  
    
    increase the efficiency, accuracy and integrity of order processing and payments;  
    
    shorten order turnaround time; and  
    
    ensure prompt delivery of desired titles. Our strength in distribution in the United States and Canada ensures
access to favorable shelf space for our products. We believe that we are one of
the largest distributors of video game software to mass merchants in the United
States. We distribute our products to a variety of outlets, including
mass-merchant retailers such as Wal-Mart and Target; major retailers, such as
Best Buy, Circuit City, and Toys R Us; specialty stores such as Electronics
Boutique and GameStop; rental chains such as Blockbuster and Hollywood Video;
and warehouse clubs such as Sams Club and Costco. Additionally, our games are
made available through various on-line retail and e-tail companies (i.e.
Amazon.com). Based on the strength of our distribution operations, we have successfully
attracted other publishers to utilize our mass merchant distribution
capabilities for their products. Other publishers products are generally
acquired by us and distributed under the name of the publisher of such
products, who is, in turn, responsible for the publishing, packaging, marketing
and customer support of such products. Our agreements with these publishers
typically provide for retail distribution rights in designated territories for
a specific period of time, which are typically renewable. Our sales and
distribution programs for other publishers products are an integral part of
our overall approach to the United States and Canadian marketplace, providing
value-added services to both publishers and retailers alike and an additional
source of revenue for us. We outsource our warehouse operations in the United States to Arnold
Logistics, which is located in Lancaster, Pennsylvania. The warehouse
operations include the receipt and storage of inventory as well as the
distribution of inventory to mass market and other retailing customers. Europe, Asia and Other Regions Because of IESAs strong presence in Europe, Asia and certain other
regions worldwide, IESA distributes our products in these regions pursuant to a
distribution agreement we entered into with IESA. We believe that IESAs strong
presence in Europe, Asia and certain other regions provides effective
distribution in these regions of our titles while allowing us to focus our
efforts in the United States and Canada. IESA distributes our products to
several major retailers in Europe, Asia and certain other regions; these
retailers include Auchan, Carrefour, Mediamarket and Tesco. IESA has extensive
access to retail outlets in these regions. See our risk factor regarding our
dependence upon IESA. Under our distribution agreement with IESA, we are
entitled to receive 30.0% of the gross profit of the products distributed by
IESA, or 130.0% of the royalty rate due to the developer, whichever is greater. Backlog We typically ship products within three days of receipt of orders. As a
result, backlog is not material to our business. 11




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MANUFACTURING Disk duplication and the printing of user manuals and packaging materials
are performed to our specifications by outside sources. To date, we have not
experienced any material difficulties or delays in the manufacture and
assembly of our products, or material returns due to product defects. There is
some concentration for the supply of our publishing needs, but a number of
other outside vendors are also available as sources for these manufacturing and
replication services. Sony, Nintendo and Microsoft control the manufacture of our products that
are compatible with their respective video game consoles, as well as the
manuals and packaging for these products, and ship the finished products to us,
either directly or through third party vendors, for distribution. Sony
PlayStation and PlayStation 2 and Nintendo GameCube and Microsoft Xbox products
consist of proprietary format CD-ROMs and are typically delivered to us within
a relatively short lead time (approximately 2-3 weeks). Manufacturers of other
Nintendo products, which use a cartridge format, typically deliver these
products to us within 45 to 60 days after receipt of a purchase order. To date,
we have not experienced any material difficulties or delays in the manufacture
and assembly of our products. However, manufacturers difficulties, which are
beyond our control, could impair our ability to bring products to the
marketplace in a timely manner. EMPLOYEES As
of the end of fiscal 2004, we have 486 employees domestically, with
223 in product development, 96 in administration (i.e., senior management,
human resources, legal, IT and facilities), 55 in finance, 48 in sales and 64 in
marketing. During the fiscal year, we had operations in New York, New York;
Beverly, Massachusetts; Minneapolis, Minnesota (Studio closed in March 2004);
Seattle, Washington; Sunnyvale, California; Santa Monica, California;
Chantilly, Virginia (Studio closed in January 2004); and Newport Beach, California. We also have operations
internationally at our Reflections Studio located in Newcastle, England, which
has 109 employees. COMPETITION The video game software publishing industry is intensely competitive, and
relatively few products achieve market acceptance. The availability of
significant financial resources has become a major competitive factor in the
industry primarily as a result of the increasing development, acquisition,
production and marketing, as well as potential licensing costs, required to
publish quality titles. We compete with other third-party publishers of video
game software, including Electronic Arts, Inc., THQ, Inc., Activision, Inc.,
Take Two Interactive, Inc., and SEGA, among others. In addition, we compete
with first-party publishers such as Sony, Nintendo, and Microsoft, who in some
instances publish their own products in competition with third-party publisher
licenses. Atari Interactive has granted us a license to use the name Atari. We
believe that the Atari brand, which is largely credited with launching the
video game industry, continues to carry a level of recognition that can be used
as a competitive advantage. We believe that a number of additional factors
provide us with competitive opportunities in the industry, including our
extensive catalogue of multi-platform products, strength in the mass-market,
and strong sales forces in the United States and Canada and, through IESA, in
Europe, Asia and other regions. We believe that popular franchises such as
Driver, Test Drive, Civilization,the Backyard Sportsseries, Deer Hunterand
Roller Coaster Tycoon,and attractive licenses such as The Matrix, Terminator,
Unreal, Dragon Ball Z, Blues Clues, Major League Baseballand the National
Football League, provide us with a competitive angle to market our products. SEASONALITY Our business is highly seasonal with sales typically significantly higher
during the calendar year-end holiday season. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION We operate in three reportable segments: publishing, distribution and
corporate. Please see the discussion regarding segment reporting in Note 19 of
the Notes to Consolidated Financial Statements, included in Items 7 and 8 of
this Report. Please see Note 19 of the Notes to Consolidated Financial Statements,
included in Items 7 and 8 of this Report, for information related to geographic
information with respect to our revenues from external customers and our
long-lived assets. 12




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RISK FACTORS RISKS RELATED TO OUR BUSINESS The loss of Wal-Mart, Best Buy, Target or GameStop as key customers could
negatively affect our business. Our sales to Wal-Mart, Best Buy, Target and GameStop accounted for
approximately 24.6%, 11.2%, 9.9% and 8.4%, respectively, of net revenues for
the year ended March 31, 2004. Our gross accounts receivable from these
retailers were approximately $9.6 million, $8.2 million, $6.1 million and $4.8
million, respectively, as of March 31, 2004. Our business, results of
operations and financial condition would be adversely affected if:  
    
    we lost any of these retailers as a customer;  
    
    any of these retailers purchased significantly fewer products supplied by us;  
    
    we were unable to collect receivables from any of these retailers on a timely
basis or at all; or  
    
    we experienced any other adverse change in our relationship with any of these
retailers. We do not have any written agreements or understandings with Wal-Mart,
Best Buy, Target or GameStop. Consequently, our relationship with Wal-Mart,
Best Buy, Target or GameStop could end or change at any time. We cannot assure
you that Wal-Mart, Best Buy, Target and GameStop will continue to use us as a
major supplier of video game software, or at all. Fluctuations in our quarterly net revenues and results of operations may lead
to reduced prices for our stock. Our quarterly net revenues and results of operations have varied in the
past and can be expected to vary in the future. Our business experiences
substantial seasonality, and typically, our net revenue is significantly higher
during our third fiscal quarter (which ends on December 31) than during our
other quarters because of increased consumer demand during the calendar
year-end holiday season. Other factors that cause fluctuations include:  
    
    the timing of our release of new titles;  
    
    the popularity of new titles and titles released in prior periods;  
    
    changes in the mix of titles with varying profit margins;  
    
    the timing of customer orders; and  
    
    fluctuations in the size and rate of growth of consumer demand for titles for
different platforms. In other particular fiscal quarters, our net revenues may be lower and
vary significantly. As a result, we cannot assure you that our results of
operations will be consistent on a quarterly or annual basis. If our results of
operations in a quarter fall below our expectations and the expectations of
market analysts or investors, the price of our common stock will likely
decrease. Our revenues will decline and our competitive position will be adversely
affected if we are unable to introduce successful new products on a timely
basis. Our performance in the video game software publishing business depends on
the timely introduction of successful new products, sequels or enhancements of
existing products to replace declining revenues from older products. Our
inability to introduce compelling new products, sequels or enhancements, or
significant delays in their release, could materially and adversely affect the
ultimate success of our products and, in turn, our business, results of
operations and financial condition. The process of introducing new products,
sequels or product enhancements is extremely complex, time consuming and
expensive, and will become more complex as new platforms and technologies
emerge. Competitive factors in our industry demand that we create increasingly
sophisticated products, which in turn makes it difficult to produce and release
compelling products on a predictable schedule. We may be unable to develop and publish new products if we are unable to secure
or maintain relationships with leading independent video game software
developers. Although we have substantially increased our internal video game software
development capabilities over the last five years, we are still dependent, to a
meaningful degree, upon leading independent software developers. Consequently,
our 13




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success depends in part on our continued ability to obtain or renew product
development agreements with leading independent video game software developers.
However, we cannot assure you that we will be able to obtain or renew these
product development agreements on favorable terms, or at all, nor can we assure
you that we will be able to obtain the rights to sequels of successful products
which were originally developed for us by leading independent video game
software developers. Many of our competitors have greater financial resources
and access to capital than we do, which puts us at a competitive disadvantage
when bidding to attract leading independent video game software developers to
enter into publishing agreements with us. We may be unable to secure or
maintain relationships with leading independent video game software developers
if our competitors can offer them better shelf access, better marketing
support, more development funding, higher royalty rates, or other advantages.
Usually, our agreements with independent software developers are easily
terminable, often without notice, if either party declares bankruptcy, becomes
insolvent, ceases operations or materially breaches its agreement and fails to
cure that breach within a designated time frame. In addition, many leading
independent video game software developers have limited financial resources.
Many are small companies with a few key individuals without whom a project may
be difficult or impossible to complete. Consequently, we are exposed to the
risk that these developers will go out of business before completing a project,
or simply cease work on a project for which we have hired them. Our results of operations and competitive position may be adversely affected if
we are unable to anticipate and adapt to rapidly changing technology, including
new console technology. The video game software industry is characterized by rapidly changing
technology. The introduction of new technologies, including new console
technology, software media formats, and delivery channels could render our
previously released products obsolete or unmarketable. We must continually
anticipate the emergence of, and adapt our products to, new technologies and
systems. In addition, the development cycle for products designed to operate on
new systems has been defined by an increased rate of change and complexity in
the technological innovations of video game hardware and software. When we
choose to publish or develop a product for a new system, we may need to make a
substantial development investment one or two years in advance of when we
actually ship products for that system. If we develop products for a new system
that is ultimately unpopular, our net revenues from that product may be less
than expected and we may not be able to recoup our investment as quickly as
anticipated, if at all. Conversely, if we choose not to publish products for a
new system that is ultimately popular, our revenue growth and competitive
position may be adversely affected. If we are unable to maintain or acquire licenses to intellectual property, our
operating results will be adversely impacted. Many of our products are based on or incorporate intellectual property
owned by others. For example, several of our titles such as Enter the Matrix,
Mission Impossible: Operation Surma, and Terminator 3: Rise of the Machines,
are based on key film licenses. We expect that many of the products we publish
in the future will also be based on intellectual property owned by others. The
rights we enjoy to licensed intellectual property may vary based on the
agreement we have with the licensor. Competition for these licenses is intense
and many of our competitors have greater resources to take advantage of
opportunities for such licenses. We are currently in the process of negotiating
renewals for several third party licenses. If we are unable to maintain our
current licenses and obtain additional licenses with significant commercial
value, we believe our sales will decline. In addition, obtaining licenses for
popular franchises owned by others could require us to expend significant
resources and the licenses may require us to pay relatively high royalty rates.
If these titles are ultimately unpopular, we may not recoup our investment made
to obtain such licenses. Furthermore, in many instances we do not have
exclusive licenses for intellectual property owned by others. In these cases,
we may face direct competition from other publishers holding a similar license. Termination or modification of our agreements with hardware manufacturers will
adversely affect our business. We are required to obtain a license to develop and distribute software for
each of the video game consoles. We currently have licenses from Sony to
develop products for PlayStation and PlayStation 2, from Nintendo to develop
products for Game Boy Advance and GameCube, and from Microsoft to develop
products for Xbox. These licenses are non-exclusive, and as a result, many of
our competitors also have licenses to develop and distribute video game
software for these systems. These licenses must be periodically renewed, and if
they are not, or if any of our licenses are terminated or adversely modified,
we may not be able to publish games for such platforms or we may be required to
do so on less attractive terms. In addition, our contracts with these
manufacturers often grant them approval rights over new products and control
over the manufacturing of our products. In some circumstances, this could
adversely affect our business, results of operations or financial condition by: 14




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
    
    terminating a project for which we have expended significant resources;
    
    leaving us unable to have our products manufactured and shipped to customers;
    
    increasing manufacturing lead times and expense to us over the lead times and costs we could
achieve if we were able to manufacture our products independently;
    
    delaying the manufacture and, in turn, the shipment of products; and
    
    requiring us to take significant risks in prepaying for and holding an inventory of products. The loss of our senior management and skilled personnel could negatively affect
our business. Our future success will depend to a significant degree upon the
performance and contribution of our senior management team and upon our ability
to attract, motivate and retain highly qualified employees with technical,
management, marketing, sales, product development, creative and other skills.
In the video game software industry, competition for highly skilled and
creative employees is intense and costly. We expect this competition to
continue for the foreseeable future, and we may experience increased costs in
order to attract and retain skilled employees. We cannot assure you that we
will be successful in attracting and retaining skilled personnel. Generally we
do not enter into any employment contracts with members of senior management.
Our business, operating results and financial condition could be materially and
adversely affected if we lost the services of senior management or key
technical or creative employees or if we failed to attract additional highly
qualified employees. Significant competition in our industry could adversely affect our business. The video game software market is highly competitive and relatively few
products achieve significant market acceptance. Currently, we compete primarily
with other publishers of video game software for both video game consoles and
PCs. Our competitors include Activision, Inc., Electronic Arts, Inc., Midway
Games, Inc. Take Two Interactive, Inc., and THQ, Inc., among others. In
addition, console manufacturers including Microsoft, Nintendo, and Sony publish
products for their respective platforms. Media companies and film studios, such
as Warner Brothers, are increasing their focus on the video game software
market and may become significant competitors. These current and future
competitors may also gain access to wider distribution channels than we do. As
a result, these current and future competitors may be able to:  
    
    respond more quickly to new or emerging technologies or changes in customer preferences;  
    
    carry larger inventories;  
    
    undertake more extensive marketing campaigns;  
    
    adopt more aggressive pricing policies; and  
    
    make higher offers or guarantees to software developers and licensors than us. We may not have the resources required for us to respond effectively to market
or technological changes or to compete successfully with current and future
competitors. Increased competition may also result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on our business, results of operations or financial condition.
We cannot assure you that we will be able to successfully compete against our
current or future competitors or that competitive pressures will not have a
material adverse effect on our business, results of operations and financial
condition. Retailers of our products typically have a limited amount of shelf space
and promotional resources, and there is intense competition among consumer
interactive entertainment software products for high quality retail shelf space
and 15




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promotional support from retailers. To the extent that the number of
products and platforms increases, competition for shelf space may intensify and
may require us to increase our marketing expenditures. Due to increased
competition for limited shelf space, retailers and distributors are in an
increasingly better position to negotiate favorable terms of sale, including
price discounts, price protection, marketing and display fees and product
return policies. We cannot be certain that retailers will continue to purchase
our products or to provide our products with adequate levels of shelf space and
promotional support on acceptable terms. A prolonged failure in this regard
may significantly harm our business and financial results. We may face limitations on our ability to integrate additional acquired
businesses or to find suitable acquisition opportunities. We intend to pursue additional acquisitions of companies, properties and
other assets which we believe can be operated profitably. Some of these
transactions could be material in size and scope. Although we continue to
search for additional acquisition opportunities, we may not be successful in
identifying suitable acquisition opportunities. As the video game software
industry continues to consolidate, we face significant competition in seeking
and consummating acquisition opportunities. We may not be able to consummate
potential acquisitions or an acquisition that is consummated may not enhance
our profitability. In the future, we may issue additional shares of our common
stock in connection with one or more acquisitions, which may dilute our
existing stockholders. Future acquisitions could also divert substantial
management time and result in short-term reductions in earnings or special
transaction or other charges. In addition, we cannot guarantee that we will be
able to successfully integrate the businesses that we may acquire into our
existing business. Our stockholders may also not have the opportunity to
review, vote on or evaluate future acquisitions. Revenues from our distribution business may decline as competition increases
and Internet technology improves. During the years ended March 31, 2003 and March 31, 2004, net revenues
from our distribution business were approximately 18.0% and 13.4%,
respectively, of our total net revenues. This decrease as a percentage of net
revenues is primarily a result of our decision to reduce our lower margin
third-party distribution arrangements. New video game systems and electronic
delivery systems may also be introduced into the software market and potential
new competitors may enter the software development and distribution market,
resulting in greater competition. Revenues from our distribution business may
be adversely affected as Internet technology is improved to enable consumers to
purchase and download full-version software products or order products directly
from publishers or from unauthorized or illegal sources over the Internet. Revenues from our distribution business may decline if the products which we
distribute for third-party developers become unavailable to us. As part of our distribution business, we earn revenues by distributing to
retailers our own products and products of others, including products published
by our competitors. We cannot assure you that these competitors will continue
to provide us with their products for distribution to our mass merchant
customers. Our inability to obtain software titles developed or published by
our competitors, coupled with our inability to obtain these titles from other
distributors, could have a material adverse effect on our relationships with
retailers and our ability to obtain shelf space for our own products, as well
as our own revenues that we earn from our distribution activities. This, in
turn, could have a material adverse effect on our business, results of
operations and financial condition. If our distribution arrangements with IESA are adversely modified or
terminated, we may lose revenue or incur disruption in the distribution of our
products. Pursuant to agreements we have in place with IESA, we distribute products
on their behalf in the United States and Canada and IESA distributes products
on our behalf in Europe, Asia and certain other regions throughout the world.
If these agreements are terminated or amended in a manner adverse to us, we
may:  
    
    obtain new distribution arrangements for our products which may be on less favorable terms;  
    
    lose revenue from the distribution of IESAs products;  
    
    experience difficulties or other delays in the distribution of our products outside the United States and Canada; 16




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
    
    incur an increase in the cost of distributing our products outside the United States and Canada; or  
    
    incur problems with retailers to whom we distribute IESAs products or to whom IESA distributes our products. We may face increased competition and downward price pressure if we are unable
to protect our intellectual property rights. Our business is heavily dependent upon our confidential and proprietary
intellectual property. We sell a significant portion of our published software
under licenses from independent software developers and, in these cases, we do
not acquire the copyrights for the underlying work. We rely primarily on a
combination of confidentiality and non-disclosure agreements, patent,
copyright, trademark and trade secret laws, as well as other proprietary rights
laws and legal methods, to protect our proprietary rights and the intellectual
property rights of our developers. However, current U.S. and international laws
afford us only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy our products or
franchises, or obtain and use information that we regard as proprietary.
Software piracy is also a persistent problem in the video game software
industry. Policing unauthorized use of our products is extremely difficult
because video game software can be easily duplicated and disseminated.
Furthermore, the laws of some foreign countries may not protect our proprietary
rights to as great an extent as U.S. law. Our business, results of operations
and financial condition could be adversely affected if a significant amount of
unauthorized copying of our products were to occur or if other parties develop
products substantially similar to our products. We cannot assure you that our
attempts to protect our proprietary rights will be adequate or that our
competitors will not independently develop similar or competitive products. We may face intellectual property infringement claims which would be costly to
resolve. As the number of available video game software products increases, and
their functionality overlaps, software developers and publishers may
increasingly become subject to infringement claims. We are not aware that any
of our products infringe on the proprietary rights of third parties. However,
we cannot assure you that third parties will not assert infringement claims
against us in the future with respect to past, current or future products.
There has been substantial litigation in the industry regarding copyright,
trademark and other intellectual property rights. We have also initiated
litigation to assert our intellectual property rights. Whether brought by or
against us, these claims can be time consuming, result in costly litigation and
divert managements attention from our day-to-day operations, which can have a
material adverse effect on our business, operating results and financial
condition. If returns and other concessions given to our customers exceed our reserve, our
business may be negatively affected. To cover returns and other concessions, we establish a reserve at the time
we ship our products. We estimate the potential for future returns and other
concessions based on, among other factors, managements evaluation of
historical experience, market acceptance of products produced, retailer
inventory levels, budgeted customer allowances, the nature of the title and
existing commitments to customers. While we are able to recover the majority of
our costs when third-party products we distribute are returned, we bear the
full financial risk when our own products are returned. In addition, the
license fees we pay Sony, Microsoft and Nintendo are non-refundable and we
cannot recover these fees when our products are returned. Although we believe
we maintain adequate reserves with respect to product returns, we cannot assure
you that actual returns will not exceed our reserves, which could adversely
affect our business, results of operations and financial condition. We may be burdened with payment defaults and uncollectible accounts if our
customers do not or cannot satisfy their payment obligations. Distributors and retailers in the video game software industry have, from
time to time, experienced significant fluctuations in their businesses, and a
number of them have become insolvent. The insolvency or business failure of any
significant retailer or distributor of our products could materially harm our
business, results of operations and financial condition. We typically make
sales to most of our retailers and some distributors on unsecured credit, with
terms that vary depending upon the customers credit history, solvency, credit
limits and sales history. In addition, while we maintain a reserve for
uncollectible receivables, the reserve may not be sufficient in every
circumstance. As a result, a payment default by a significant customer could
significantly harm our business and results of operations. 17




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Our software is subject to governmental restrictions or rating systems. Legislation is periodically introduced at the local, state and federal
levels in the United States and in foreign countries to establish systems for
providing consumers with information about graphic violence and sexually
explicit material contained in video game software. In addition, many foreign
countries have laws that permit governmental entities to censor the content and
advertising of video game software. We believe that mandatory government-run
rating systems may eventually be adopted in many countries that are potential
markets for our products. We may be required to modify our products or alter
our marketing strategies to comply with new regulations, which could increase
development costs and delay the release of our products in those countries. Due
to the uncertainties regarding such rating systems, confusion in the
marketplace may occur, and we are unable to predict what effect, if any, such
rating systems would have on our business. In addition to such regulations, certain retailers have in the past
declined to stock some of our competitors video game products because they
believed that the content of the packaging artwork or the products would be
offensive to the retailers customer base. Although to date these actions have
not impacted our business, we cannot assure you that similar actions by our
distributors or retailers in the future would not cause material harm to our
business. We may become subject to litigation which could be expensive or disruptive. Similar to our competitors in the video game software industry, we have
been and will likely become subject to litigation. Such litigation may be
costly and time consuming and may divert managements attention from our
day-to-day operations. In addition, we cannot assure you that such litigation
will be ultimately resolved in our favor or that an adverse outcome will not
have a material adverse effect on our business, results of operations and
financial condition. RISKS RELATED TO OUR CORPORATE STRUCTURE AND FINANCING ARRANGEMENTS IESA controls us and could prevent a transaction favorable to our other
stockholders. IESA beneficially owns approximately 67% of our common stock, which gives
it sufficient voting power to prevent any transaction that it finds
unfavorable, including an acquisition, consolidation or sale of assets
desirable to our other stockholders. IESA also has sufficient voting power to
elect a majority of our Board of Directors. Four of the nine members of our
Board of Directors are employees or former employees (within three years) of
IESA or its affiliates. One of the remaining five directors is currently
affiliated with us. Therefore, only four of the total nine directors are
considered independent. This concentration of control could be disadvantageous
to other stockholders whose interests differ from those of IESA. Our success may be impacted by IESAs success, ability and willingness to
continue to support us. IESA has incurred significant losses from operations and is highly
leveraged. Should IESA experience liquidity issues, among other things, this
may result in its inability to fund the development efforts of Atari
Interactive, and our results of operations may suffer because, as the North
American distributor of the games developed by Atari Interactive, our revenue
could significantly decrease. Such a reduction of our revenue, among other
things, could result in a breach of one or more of the covenants contained in
our GECC senior credit facility. In the event any of the above contingencies
occur, management is prepared to take various actions which may include, but
not be limited to, a reduction in our expenditures for internal and external
new product development and a reduction in overhead expenses. These actions,
should they become necessary, may result in a significant reduction in the size
of our operations. Our affiliates retain considerable control over the Atari trademarks, and their
oversight or exploitation of such trademarks could affect our business. Atari Interactive, a wholly owned subsidiary of IESA, has granted us the
right to use the Atari name for software video games in the United States and
Canada. In connection with recapitalization, Atari Interactive extended the
term of the license under which we use the Atari name to ten years expiring
December 31, 2013, for which we have issued 2,000,000 shares of our common
stock to Atari Interactive. In addition, we will pay a royalty equal to 1% of
our net revenues during years six through ten of the extended license. We are
subject to quality control oversight for our use of the Atari name. Any
disputes over our performance under the trademark license agreement could
materially affect our business. Furthermore, Atari Interactives use of the
Atari mark (either through itself, its affiliates or third parties) to exploit
products in the video game industry or related sectors could affect the
reputation or value associated with the Atari mark, and therefore materially
affect our business. Therefore, we are dependent upon the cooperation and
business actions of IESA and its affiliates with regard to the Atari trademark. 18




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Our senior credit facility could be terminated. We utilize the proceeds of our senior credit facility with General
Electric Capital Corporation (GECC) to fund our working capital needs,
including the manufacturing and development of products. The credit documents
which we entered into with GECC to obtain this credit facility contain numerous
covenants and conditions which may cause a default upon breach thereof by us.
Although we are currently in full compliance under the credit documents and no
event of default has occurred that has not been waived, there can be no
assurance that we will continue to remain in compliance. If an event of default
occurs under any credit document and GECC opts not to waive such default, the
senior credit facility may be terminated and all debt outstanding accelerated,
in which case we will need to raise additional capital or seek other
alternatives, many of which may adversely affect our stock price. We may need to seek additional capital. We have in the past generated significant financial losses. If we generate
significant financial losses in the future, our cash resources and senior
credit facility may not be adequate to fund our operations. This will require
us to seek additional capital, including through the issuance of debt or
equity, or through other financing. If we borrow funds, we likely will be
obligated to make periodic interest or other debt service payments, and the
terms of this debt may impose burdensome restrictions on our ability to operate
our business. If we seek financing through the sale of equity securities, our
current stockholders may suffer dilution in their percentage ownership of
common stock. Additionally, we are not certain as to our ability to raise
additional capital in the future or under what terms capital would be
available. If we are unable to raise capital when needed, our business will be
negatively affected, which could cause our stock price to decline. RISKS RELATED TO OUR COMMON STOCK Our stock price is highly volatile. The trading price of our common stock has been and could continue to be
subject to wide fluctuations in response to certain factors, including, but not
limited to, the following:  
    
    quarter to quarter variations in results of operations;  
    
    our announcements of new products;  
    
    our competitors announcements of new products;  
    
    our product development or release schedule;  
    
    general conditions in the video game software, entertainment, media or electronics industries;  
    
    our ability to successfully negotiate licenses with third parties;  
    
    timing of the introduction of new platforms and delays in the actual release of new platforms;  
    
    changes in earnings estimates; or  
    
    investor perceptions and expectations regarding our products, plans and strategic position
and those of our competitors and customers. Additionally, the public stock markets experience extreme price and
trading volume volatility, particularly in high technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons often unrelated to the
operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock. As of
March 31, 2004, of the 121,231,196 shares of our outstanding common stock, only 39,565,915 shares (approximately 33%)
were not held by our affiliates. This stock ownership structure and general
lack of liquidity may also be a cause of volatility in our market price. 19




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The large number of shares eligible for public sale could cause our stock price
to decline. IESA holds a substantial number of shares of our common stock that it is
able to sell in the public market. We generally cannot control the timing of
any sale made by IESA. Large sales by IESA could significantly reduce the
market price of our common stock. These potential sales also could impede our
ability to raise future capital. AVAILABLE INFORMATION We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings, including our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act, are available to the public free of charge over the Internet at
our website at http://www.atari.com or at the SECs web site at
http://www.sec.gov. Our SEC filings will be available on our website as soon
as reasonably practicable after we have electronically filed or furnished them
to the SEC. You may also read and copy any document we file at the SECs
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. 
 ITEM 2. PROPERTIES New York.Our principal administrative and sales facilities are located in
approximately 90,000 square feet of space at 417 Fifth Avenue in New York City
under a lease which commenced in December 1996 and is to expire in December
2006. We subleased 10,000 square feet of this space beginning in May 2003
through December 2006. We also lease two corporate apartments in New York City
for use by our executive officers, directors, consultants and relocating
executives. Those leases expire in August 2004 and December 2004,
respectively. California. We have a lease for approximately 17,400 square feet of office
space in Santa Monica, California, which expires in May 2006. We leased
interim-office space for Shiny of approximately 14,800 square feet in Aliso
Viejo, California under a lease which, following a two month holdover period,
expired in August 2003. Upon expiration of that short term lease, we leased
approximately 13,000 square feet of office space in Newport Beach, California
for long-term use by Shiny. This lease expires in August 2007. Additionally,
during fiscal 2004, we maintained two leases totaling approximately 11,500 square
feet of office space (a portion of which we sublet) in Woodland Hills,
California, both of which expired in October 2003. We have a lease for
approximately 15,000 square feet of office space in Sunnyvale, California,
which expires in June 2004. Washington. We lease approximately 65,500 square feet of office space in
Bothell, Washington, under a lease which expires in May 2008. This office space
is occupied by Humongous. Under this lease, Humongous subleases an approximate
total of 10,870 square feet under three subleases which expire in May 2005, April 2008 and May 2008, respectively. Minnesota. We lease 14,291 square feet of office space in Plymouth,
Minnesota, under a lease which expires in March 2006. This office space was
occupied by the Minneapolis Studio and our intention is to sublet the space. Beverly.In Beverly, Massachusetts, for the Beverly Studio, we occupy a
portion of the 53,184 square feet of the office space leased by Atari
Interactive. Our lease expires in June 2007. Other States in the U.S.In Scottsdale, Arizona, we lease 25,000 square
feet of office space under a lease which expires in March 2006, which we
subleased. During fiscal 2004, we maintained the Legend development studio, in
Chantilly, Virginia, pursuant to a lease for approximately 10,500 square feet.
The lease terminated in February 2004. Europe.For our internal Reflections studio, we maintain two leases: one
for a property in Gateshead Tyne and Wear, United Kingdom and the second for a
property in New Castle Upon Tyne, United Kingdom. The lease for the Gateshead
Tyne and Wear office space expires in September 2010, and in March 2002, we
executed a sublease for this office 20




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space which expires in September 2004. The lease for the Newcastle Upon
Tyne property is for approximately 23,285 square feet of office space and it
expires in August 2011. 
 ITEM 3. LEGAL PROCEEDINGS The
following litigation matters are still pending or were terminated during the fourth quarter
of fiscal 2004. We continue to believe, with respect to the pending matter,
that the underlying complaint is without merit and we intend to defend
ourselves vigorously against this action. Our
management believes that the ultimate resolution of the KBK complaint
summarized below and/or any other claims which are not stated herein will not
have a material adverse effect on our liquidity, financial condition or results
of operations. KBK On September 16, 2002, Knight Bridging Korea Co. Ltd., or KBK, a
distributor of electronic games via the Internet and local area networks, filed
a lawsuit against Gamesonline, a subsidiary of Interplay, and us in Superior
Court of California, Orange County. KBK alleges that on or about December 15,
2001, KBK entered into a contract with Gamesonline to obtain the right to
localize (i.e., right to translate games into the local language of the country
where the games are distributed) and to electronically distribute in Korea,
Neverwinter Nights and certain other games which were previously released. The
complaint further alleges that Gamesonline and we conspired to prevent KBK from
entering the market with Neverwinter Nights or any previously released games of
Gamesonline. The complaint alleges the following causes of action against us:
misappropriation of trade secrets under the California Uniform Trade Secrets
Act; common law misappropriation; intentional interference with contract;
negligent interference with contract; intentional interference with prospective
economic advantage; negligent interference with prospective economic advantage;
and violation of Business & Professions Code Section 17200 et seq. The
complaint seeks $98.8 million for each of these causes of action. An amended complaint was filed on December 3, 2002, alleging all of the
foregoing against us, adding Atari Interactive (formerly known as Infogrames
Interactive, Inc.) as a named defendant, and alleging that we managed and
directed Atari Interactive to engage in the foregoing alleged acts. We and
Atari Interactive filed answers on January 9, 2003. On or about January 28,
2003, Gamesonline answered the original complaint and served a cross-complaint
against KBK. On April 29, 2003, KBK named as defendants Infogrames Asia
Pacific, Infogrames Korea, and Interplay, Inc.. On October 29, 2003,
Interplay filed a cross-complaint against us, Atari Interactive, Inc.,
Infogrames Korea and Roes 101 through 200. We and Atari Interactive filed an
answer on December 3, 2003. On March 25, 2004 KBK filed a Second Amended
Complaint for Damages adding new causes of action for fraud against Gamesonline
and Interplay; seeking rescission of the Electronic Distribution Agreement
between KBK and Gamesonline; for breach of third party beneficiary rights
against Atari Interactive, Inc.; for unlawful restraint of trade against all
defendants; for RICO Act violations against all defendants; and for civil
conspiracy against all defendants; and adds allegations of alter ego status
between Gamesonline and Interplay and as between us, Atari Interactive, Inc,
and Atari Korea. Discovery is ongoing. On March 10, 2004 the Court entered a stipulation among the parties
referring the matter to a private judge. The private judge, retired Superior
Court Judge Harvey Schneider, will be presiding over all aspects of the case,
including the non-jury trial. The trial is currently set for July 19, 2004 but
is likely to be continued until sometime in the fall or winter of 2004. We and Atari Interactive have filed a Motion for Leave to File a
Cross-Complaint against Interplay Entertainment Corp. and Gamesonline.com, Inc.
We and Atari Interactive, Inc. also have filed a Motion for Summary
Adjudication on the RICO Act claim and a Demurrer on various of the causes of
action. The Motion for Leave, Motion for Summary Adjudication and Demurrer all
will be heard on June 17, 2004. KBK has purported to serve in Korea an entity it called Atari Korea with
a Summons and Complaint in this case. Atari Korea Ltd. is planning to file a
Motion to Quash Service based on failure to comply with the terms of the Hague
Convention and/or lack of personal jurisdiction over that entity. 21




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Interplay On September 19, 2003, Interplay, commenced a wrongful termination and
breach of contract action (the Action) in New York State Supreme Court, New
York County in which it named Atari Interactive and us as defendants, seeking,
among other things, a judgment declaring that a computer game license agreement
between Interplay and Atari Interactive continues to be in full force and
effect. On September 23, 2003, Interplay obtained a preliminary injunction that
prevents termination of the computer game license agreement. On October 9,
2003, Atari Interactive answered the complaint, denying all claims, asserting
several affirmative defenses and counterclaims for breach of contract and one
counterclaim for a judgment declaring the computer game license agreement
terminated. Atari Interactives answer also asserted that we were incorrectly
named as the defendant in this Action. Both sides sought damages in an amount
to be determined at trial. We, Atari Interactive and Interplay reached an agreement with respect to
the scope and terms of the computer game license agreement and accordingly,
filed with the court a Stipulation of Dismissal, dated December 22, 2003. The
court ordered dismissal of the matter on January 6, 2004. 
 ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended March 31, 2004. 22




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the NASDAQ National Market. The high and
low sale prices for the common stock as reported by the NASDAQ National Market
for the fiscal years ended March 31, 2003 and March 31, 2004 are summarized
below. These over-the-counter market quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions. High
    
    LowFiscal 2003First Quarter
    
    $
    3.40
    
    
    $
    2.19Second Quarter
    
    $
    2.79
    
    
    $
    1.34Third Quarter
    
    $
    2.50
    
    
    $
    1.69Fourth Quarter (1)
    
    
    N/A
    
    
    
    N/AFiscal 2004First Quarter
    
    $
    6.59
    
    
    $
    1.91Second Quarter
    
    $
    5.20
    
    
    $
    4.00Third Quarter
    
    $
    4.60
    
    
    $
    3.45Fourth Quarter
    
    $
    4.94
    
    
    $
    2.70
 (1) Effective March 28, 2003, we changed our fiscal year-end from June 30
to March 31; accordingly, fiscal 2003 represents nine months of
operations. On June 9, 2004, the last reported sale price of the common stock on the
NASDAQ National Market was $2.78. As of June 9, 2004, there were approximately
299 record owners of our common stock. We currently anticipate that we will retain all of our future earnings for
use in the expansion and operation of our business. We have not paid any cash
dividends nor do we anticipate paying any cash dividends on our common stock in
the foreseeable future. In addition, the payment of cash dividends may be
limited by financing agreements entered into by us. Recent Sales of Unregistered Securities On August 18, 2003, we issued 12,573 shares of our common stock to
National Bank of Canada pursuant to the cashless exercise of warrants to
purchase an aggregate of 12,600 shares of our common stock at an exercise price
of $0.05 per share (after giving effect to the one-for-five reverse stock split
effected in June 2000). The warrants were issued on June 29, 1999 in
connection with the amendment of our then effective Credit Agreement, dated
September 30, 1998, with First Union National Bank (now known as Wachovia Bank
National Association), as agent for a syndicate of banks. National Bank of
Canada was a member of such syndicate. Pursuant to a Service Agreement by and among us, Reflections (our
wholly-owned subsidiary) and Martin Lee Edmondson, as of October 15, 2003, we
issued 279,989 unregistered shares to Martin Lee Edmonson, as payment of $1.2
million in bonus compensation. Mr. Edmondson is an employee of Reflections
Interactive Ltd., the studio primarily responsible for the development of our
Driverfranchise. Pursuant to the Service Agreement, Reflections has the
option to pay Mr. Edmondson bonuses due in either cash or common stock of
Atari. Please refer to the Recapitalization and Secondary Offering section of
this Report for a discussion of the issuance of unregistered shares of our
common stock to IESA and Atari Interactive in connection with the settlement of
our related party debt, recapitalization and secondary offering. We believe that the issuance of the foregoing securities was exempt
from registration under either (i) Section 4(2) of the Securities Act as
transactions not involving any public offering, or (ii) Rule 701 under the
Securities Act as transactions made pursuant to a written compensatory
benefit plan or pursuant to a written contract relating to compensation. 23




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##### Table of Contents



Securities Authorized for Issuance under Equity Compensation Plans The
table setting forth this information is included in Part III - Item
12. Security Ownership of Certain Beneficial Owners and Management. 
 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected consolidated financial information
which, for the year ended March 31, 2000, the three months ended June 30, 2000,
the years ended June 30, 2001 and 2002, the nine months ended March 31, 2003
and the year ended March 31, 2004, is derived from our audited consolidated
financial statements. The consolidated financial information for the year
ended June 30, 2000, the nine months ended March 31, 2002 and the year ended
March 31, 2003, is derived from unaudited financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements. The consolidated financial
information set forth has been combined as of December 16, 1999 with Infogrames
North America, Inc., or INA, a wholly-owned subsidiary of its majority
shareholder Infogrames SA, with which we merged on October 2, 2000. The INA
Merger was accounted for on an as if pooled basis effective December 16,
1999, the date as of which we and INA have been under the common control of
IESA. Effective April 1, 2000, we changed our fiscal year-end from March 31 to
June 30. Effective March 28, 2003, we changed our fiscal year-end from June 30
to March 31. These tables should be read in conjunction with our Consolidated Financial
Statements, including the notes thereto, appearing elsewhere in this Form 10-K.
See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations. ThreeYear
    
    Months
    
    Years
    
    Nine Months
    
    YearsEnded
    
    Ended
    
    Ended
    
    Ended
    
    EndedMarch 31,
    
    June 30,
    
    June 30,
    
    March 31,
    
    March 31,2000
    
    2000
    
    2000
    
    2001
    
    2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    
    
    
    
    (unaudited)
    
    
    
    
    
    (unaudited)(in thousands, except per share data)Statement of Operations Data:Net revenues
    
    $
    373,596
    
    
    $
    47,781
    
    
    $
    306,264
    
    
    $
    291,388
    
    
    $
    419,045
    
    
    $
    289,442
    
    
    $
    404,645
    
    
    $
    534,248
    
    
    $
    468,944Cost of goods sold
    
    
    307,292
    
    
    
    25,283
    
    
    
    270,432
    
    
    
    125,940
    
    
    
    212,380
    
    
    
    152,355
    
    
    
    203,858
    
    
    
    263,883
    
    
    
    248,981Gross profit
    
    
    66,304
    
    
    
    22,498
    
    
    
    35,832
    
    
    
    165,448
    
    
    
    206,665
    
    
    
    137,087
    
    
    
    200,787
    
    
    
    270,365
    
    
    
    219,963Selling and distribution expenses
    
    
    140,175
    
    
    
    20,076
    
    
    
    133,135
    
    
    
    72,450
    
    
    
    84,628
    
    
    
    62,862
    
    
    
    72,005
    
    
    
    93,771
    
    
    
    85,031General and administrative expenses
    
    
    77,447
    
    
    
    17,602
    
    
    
    85,737
    
    
    
    67,341
    
    
    
    37,423
    
    
    
    28,924
    
    
    
    32,685
    
    
    
    41,184
    
    
    
    33,310In process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,400
    
    
    
    
    
    
    
    
    
    
    
    7,400
    
    
    
    Research and development
    
    
    71,184
    
    
    
    17,275
    
    
    
    72,093
    
    
    
    56,617
    
    
    
    70,798
    
    
    
    49,399
    
    
    
    62,797
    
    
    
    84,197
    
    
    
    88,343Gain on sale of development project
to a related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,744
    )Restructuring and other charges
    
    
    37,948
    
    
    
    11,081
    
    
    
    49,029
    
    
    
    3,539
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    INA merger costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of line of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,501
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization(1)
    
    
    25,654
    
    
    
    5,788
    
    
    
    27,557
    
    
    
    20,297
    
    
    
    5,454
    
    
    
    3,537
    
    
    
    5,859
    
    
    
    7,777
    
    
    
    9,155Operating (loss) income
    
    
    (286,104
    )
    
    
    (49,324
    )
    
    
    (331,719
    )
    
    
    (50,995
    )
    
    
    962
    
    
    
    (7,635
    )
    
    
    27,441
    
    
    
    36,036
    
    
    
    7,868Interest expense, net
    
    
    (18,123
    )
    
    
    (4,328
    )
    
    
    (20,492
    )
    
    
    (13,399
    )
    
    
    (11,956
    )
    
    
    (7,887
    )
    
    
    (9,598
    )
    
    
    (13,667
    )
    
    
    (7,658
    )Other (expense) income
    
    
    (418
    )
    
    
    (497
    )
    
    
    (622
    )
    
    
    1,358
    
    
    
    (3,272
    )
    
    
    287
    
    
    
    632
    
    
    
    (2,926
    )
    
    
    (2,363
    )(Loss) income before provision for (benefit from)
income taxes
    
    
    (304,645
    )
    
    
    (54,149
    )
    
    
    (352,833
    )
    
    
    (63,036
    )
    
    
    (14,266
    )
    
    
    (15,235
    )
    
    
    18,475
    
    
    
    19,443
    
    
    
    (2,153
    )Provision for (benefit from)
income taxes
    
    
    40,891
    
    
    
    1,251
    
    
    
    44,251
    
    
    
    (2,368
    )
    
    
    (3,336
    )
    
    
    (5,014
    )
    
    
    405
    
    
    
    2,083
    
    
    
    (2,919
    )(Loss) income from continuing
operations
    
    
    (345,536
    )
    
    
    (55,400
    )
    
    
    (397,084
    )
    
    
    (60,668
    )
    
    
    (10,930
    )
    
    
    (10,221
    )
    
    
    18,070
    
    
    
    17,360
    
    
    
    766Discontinued operations:Loss on disposal of One Zero
Media, Inc.
    
    
    (477
    )
    
    
    
    
    
    
    (477
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    (477
    )
    
    
    
    
    
    
    (477
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (346,013
    )
    
    
    (55,400
    )
    
    
    (397,561
    )
    
    
    (60,668
    )
    
    
    (10,930
    )
    
    
    (10,221
    )
    
    
    18,070
    
    
    
    17,360
    
    
    
    766Dividend to
parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,351
    )
 24




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##### Table of Contents



ThreeYear
    
    Months
    
    Years
    
    Nine Months
    
    YearsEnded
    
    Ended
    
    Ended
    
    Ended
    
    EndedMarch 31,
    
    June 30,
    
    June 30,
    
    March 31,
    
    March 31,2000
    
    2000
    
    2000
    
    2001
    
    2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    
    
    
    
    (unaudited)
    
    
    
    
    
    (unaudited)(Loss) income attributable to
common stockholders
    
    $
    (346,013
    )
    
    $
    (55,400
    )
    
    $
    (397,561
    )
    
    $
    (60,668
    )
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    (38,585
    )Basic (loss) income per share from
continuing operations
    
    $
    (21.00
    )
    
    $
    (2.68
    )
    
    $
    (22.10
    )
    
    $
    (1.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    0.01Basic (loss) per share from
discontinued operations
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.03
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic (loss) per share related to
dividend to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.41
    )Basic (loss) income per share
attributable to common stockholders
    
    $
    (21.03
    )
    
    $
    (2.68
    )
    
    $
    (22.13
    )
    
    $
    (1.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    (0.40
    )Weighted average shares
outstanding(2)
    
    
    16,451
    
    
    
    20,646
    
    
    
    17,963
    
    
    
    56,839
    
    
    
    69,722
    
    
    
    69,686
    
    
    
    69,878
    
    
    
    69,864
    
    
    
    96,990Diluted (loss) income per share
from continuing operations
    
    $
    (21.00
    )
    
    $
    (2.68
    )
    
    $
    (22.10
    )
    
    $
    (1.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    0.01Diluted (loss) per share from
discontinued operations
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.03
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted (loss) per share related to
dividend to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (0.41
    )Diluted (loss) income per share
attributable to common stockholders
    
    $
    (21.03
    )
    
    $
    (2.68
    )
    
    $
    (22.13
    )
    
    $
    (1.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    (0.40
    )Weighted average shares
outstanding(2)
    
    
    16,451
    
    
    
    20,646
    
    
    
    17,963
    
    
    
    56,839
    
    
    
    69,722
    
    
    
    69,686
    
    
    
    70,055
    
    
    
    70,058
    
    
    
    96,990
  (1)
    
    We adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets effective July 1, 2001. The adoption has
eliminated the goodwill amortization prospectively from the effective
date.  (2)
    
    Reflects the one-for-five reverse stock split approved by our Board of
Directors which became effective on June 26, 2000. All periods have been
restated to reflect the reverse stock split. March 31,
    
    June 30,
    
    March 31,2000
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004Balance Sheet Data:Cash and cash equivalents
    
    $
    25,857
    
    
    $
    13,463
    
    
    $
    4,752
    
    
    $
    5,403
    
    
    $
    815
    
    
    $
    9,621Working (deficit) capital
    
    
    (146,088
    )
    
    
    (191,469
    )
    
    
    (57,345
    )
    
    
    (51,547
    )
    
    
    (91,648
    )
    
    
    24,914Total assets
    
    
    222,514
    
    
    
    170,475
    
    
    
    145,084
    
    
    
    241,863
    
    
    
    232,082
    
    
    
    193,956Total debt
    
    
    217,476
    
    
    
    257,357
    
    
    
    149,308
    
    
    
    236,211
    
    
    
    220,061
    
    
    
    Stockholders (deficit) equity
    
    
    (182,777
    )
    
    
    (242,220
    )
    
    
    (106,536
    )
    
    
    (115,329
    )
    
    
    (96,918
    )
    
    
    115,063
 25




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview Business and Operating Segments We are a leading global publisher and developer of video game software for
both gaming enthusiasts and the mass-market audience. Development, publishing and distribution of video game software are our
major activities. Development activities include development of games by both
internal and external development studios. Internal studios are studios owned
by us for the sole purpose of game development and external development studios
are independent studios with which we or IESA and its subsidiaries have
contracts for the development of specific titles. Our publishing activities
include overseeing development, sales, marketing and packaging of video game
software. Distribution activities primarily include the sale of games produced
by other publishers. The distribution channels for interactive software have expanded
significantly in recent years. Consumers have access to interactive software
through a variety of outlets, including mass-merchant retailers such as
Wal-Mart and Target; major retailers, such as Best Buy, CompUSA, and Toys R
Us; and specialty stores such as Electronics Boutique and GameStop.
Additionally, our games are made available through various Internet and on-line
networks. Our sales to key customers Wal-Mart, Best Buy, Target and GameStop accounted for
approximately 24.6%, 11.2%, 9.9% and 8.4%, respectively, of net revenues for
the year ended March 31, 2004. Key Challenges The video game software industry has experienced an increased rate of
change and complexity in the technological innovations of video game hardware
and software. In addition to these technological innovations, there has been
greater competition for shelf space and creative talent as well as increased
buyer selectivity. As a result, the video game industry has become
increasingly hit-driven, which has led to higher per game production budgets,
longer and more complex development processes, and generally shorter product
life cycles. The importance of the timely release of hit titles, as well as
the increased scope and complexity of the product development process, have
increased the need for disciplined product development processes that limit
cost and overruns. This, in turn, has increased the importance of leveraging
the technologies, characters or storylines of existing hit titles into
additional video game software franchises in order to spread development costs
among multiple products. In this environment, we are determined to achieve
balances between internal and external development, and licensed and
proprietary products. Key Developments Atari Name In May 2003, we changed our name to Atari, Inc. and changed our trading
symbol on the NASDAQ National Market to ATAR. We obtained rights to use the
Atari name through a license from IESA, which IESA acquired as a part of the
acquisition of Hasbro Interactive. We believe that the Atari brand, which is
largely credited with launching the video game industry, continues to carry a
level of respect, recognition and legacy for innovation that will enhance our
reputation and improve consumer recognition of our products. As of May 2003,
all of our products are published, distributed and marketed under the Atari
brand. Recapitalization and Offering During the second quarter of the year ended March 31, 2004, we completed a
recapitalization through the issuance of new shares pursuant to an agreement
with our majority stockholder, IESA, and a public offering. Per the agreement
with IESA, on September 18, 2003, we issued an aggregate of 39,029,877 shares
of our common stock, valued at $4.25 per share, to IESA and its wholly-owned
subsidiary CUSH, in satisfaction of approximately $165.9 million of our net
indebtedness to IESA. On September 24, 2003, IESA sold 17,179,412 of such
shares at $4.25 per share in a public offering. We did not receive any proceeds
from the sale by IESA of our common stock. We also sold 9,820,588 new shares of our
common stock in a public offering at $4.25 per share, generating net proceeds
of approximately $34.9 million. After these transactions, on October 21, 2003, the underwriters exercised
their over-allotment option, purchasing 3,855,400 shares at a purchase price of
$4.25 per share. The option shares were purchased from IESA, reducing IESAs
direct and indirect ownership to approximately 67% of our common stock directly
and through its wholly-owned subsidiaries CUSH and Atari Interactive. We did
not receive any of the proceeds from the exercise of the over-allotment option. Atari License In connection with the Recapitalization Agreement, Atari Interactive extended
the term of the license under which we use the Atari name for ten years
expiring on December 31, 2013. We issued 2,000,000 shares of our common stock
to Atari Interactive for the extended license and will pay a royalty equal to
1% of our net revenues during years six through ten of the extended license. 26




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##### Table of Contents



Year-End Changes Effective March 28, 2003, we changed our fiscal year-end from June 30 to
March 31. Accordingly, the discussion of financial results set forth below
compares the twelve months ended March 31, 2004 to the twelve months ended
March 31, 2003 (unaudited), the nine months ended March 31, 2003 to the nine
months ended March 31, 2002 (unaudited), and the year ended June 30, 2002 to
the year ended June 30, 2001. Critical Accounting Policies Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to accounts and notes receivable, inventories, intangible assets,
investments, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
materially from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Sales returns, price protection, other customer related allowances and
allowance for doubtful accounts Sales are recorded net of estimated future returns, price protection and
other customer related allowances. We are not contractually obligated to
accept returns; however, based on facts and circumstances at the time a
customer may request approval for a return, we may permit the return or
exchange of products sold to certain customers. In addition, we may provide
price protection, co-operative advertising and other allowances to certain
customers in accordance with industry practice. These reserves are determined
based on historical experience, market acceptance of products produced,
budgeted customer allowances and existing commitments to customers. Although
management believes it provides adequate reserves with respect to these items,
actual activity could vary from managements estimates and such variances could
have a material impact on reported results. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make payments when due or
within a reasonable period of time thereafter. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make required payments, additional allowances may be required. For the year ended June 30, 2002, the nine months ended March 31, 2002
(unaudited) and 2003, and the years ended March 31, 2003 (unaudited) and 2004,
we recorded allowances for bad debts, returns, price protection and other
customer promotional programs of approximately $111.9 million, $81.0 million,
$82.3 million, $110.9 million and $108.5 million, respectively. As of March
31, 2003 and March 31, 2004, the aggregate reserves against accounts receivable
for bad debts, returns, price protection and other customer promotional
programs were approximately $40.3 million and $36.3 million, respectively. Inventories We write down our inventories for estimated slow-moving or obsolete
inventories equal to the difference between the cost of inventories and
estimated market value based upon assumed market conditions. If actual market
conditions are less favorable than those assumed by management, additional
inventory write-downs may be required. For the year ended June 30, 2002, the
nine months ended March 31, 2002 (unaudited) and 2003, and the years ended
March 31, 2003 (unaudited) and 2004, we recorded obsolescence expense of
approximately $0.8 million, $(0.8) million, $3.4 million, $5.0 million and $1.7
million, respectively. As of March 31, 2003 and March 31, 2004, the aggregate
reserve against inventories was approximately $4.9 million and $2.1 million,
respectively. External developer royalty advances and milestone payments Rapid technological innovation, shelf-space competition, shorter product
life cycles and buyer selectivity have made it extremely difficult to determine
the likelihood of individual product acceptance and success. As a result, we
follow the policy of expensing external developer royalty advances (also known
as developer advances) as incurred, treating such costs as research and
development expenses. Generally, developers are paid an advance upon the
signing of a contract with us. Subsequent payments are due as the specific
contractual milestones are met by the developer and approved by us. The timing
of when these contracts are entered into and when milestone payments are made
could vary significantly from budgeted amounts and, because these payments are
expensed as incurred, they could have a material impact on reported results in
a given period. 27




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##### Table of Contents



Income taxes As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our current tax exposures
in each jurisdiction including the impact, if any, of additional taxes
resulting from tax examinations as well as making judgments regarding the
recoverability of deferred tax assets. To the extent recovery of deferred tax
assets is not likely based on our estimation of future taxable income in each
jurisdiction, a valuation allowance is established. The estimated effective
tax rate is adjusted for the tax related to significant unusual items. Changes
in the geographic mix or estimated level of annual pre-tax income can affect
the overall effective tax rate. As of March 31, 2004, we have combined net operating loss carryforwards of
approximately $464.9 million for federal tax purposes. These loss
carryforwards are available to offset future taxable income, if any, and will
expire beginning in the years 2011 through 2024. In addition, the amount and
expiration of net operation loss carryforwards may differ for state tax
purposes. We experienced an ownership change in 1999 as a result of the
acquisition by IESA. Under Section 382 of the Internal Revenue Code, when
there is an ownership change, the pre-ownership-change loss carryforwards are
subject to an annual limitation which could reduce or defer the utilization of
these losses. Pre-acquisition losses of approximately $186.8 million are
subject to an annual limitation (approximately $7.2 million). A full valuation
allowance has been recorded against the net deferred tax asset based on our
historical operating results and the conclusion that such asset may not be
realized. Management reassesses its position with regard to the valuation
allowance on a quarterly basis. Related Party Transactions We are involved in numerous related party transactions with IESA and its
subsidiaries. These related party transactions include, but are not limited
to, the purchase and sale of product, game development, management and support
services and distribution agreements. (See Note 12 to the Consolidated
Financial Statements for information on related party transactions.) 28




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##### Table of Contents



Results of Operations Year ended March 31, 2004 versus year ended March 31, 2003 (unaudited) Consolidated Statement of Operations (dollars in thousands): Year
    
    
    
    YearEnded
    
    
    
    EndedMarch 31,
    
    % ofNet
    
    March 31,
    
    % ofNet
    
    Increase/2003
    
    Revenues
    
    2004
    
    Revenues
    
    (Decrease)Net revenues
    
    $
    534,248
    
    
    
    100.0
    %
    
    $
    468,944
    
    
    
    100.0
    %
    
    $
    (65,304
    )Cost of goods sold
    
    
    263,883
    
    
    
    49.4
    %
    
    
    248,981
    
    
    
    53.1
    %
    
    
    (14,902
    )Gross profit
    
    
    270,365
    
    
    
    50.6
    %
    
    
    219,963
    
    
    
    46.9
    %
    
    
    (50,402
    )Selling and distribution expenses
    
    
    93,771
    
    
    
    17.6
    %
    
    
    85,031
    
    
    
    18.1
    %
    
    
    (8,740
    )General and administrative
expenses
    
    
    41,184
    
    
    
    7.6
    %
    
    
    33,310
    
    
    
    7.1
    %
    
    
    (7,874
    )In-process research and
development
    
    
    7,400
    
    
    
    1.4
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (7,400
    )Research and development
    
    
    84,197
    
    
    
    15.8
    %
    
    
    88,343
    
    
    
    18.8
    %
    
    
    4,146Gain on sale of development
project to a related party
    
    
    
    
    
    
    0.0
    %
    
    
    (3,744
    )
    
    
    (0.8
    )%
    
    
    3,744Depreciation and amortization
    
    
    7,777
    
    
    
    1.5
    %
    
    
    9,155
    
    
    
    2.0
    %
    
    
    1,378Operating income
    
    
    36,036
    
    
    
    6.7
    %
    
    
    7,868
    
    
    
    1.7
    %
    
    
    (28,168
    )Interest expense, net
    
    
    (13,667
    )
    
    
    (2.6
    )%
    
    
    (7,658
    )
    
    
    (1.7
    )%
    
    
    (6,009
    )Other expense
    
    
    (2,926
    )
    
    
    (0.5
    )%
    
    
    (2,363
    )
    
    
    (0.5
    )%
    
    
    (563
    )Income (loss) before provision
for (benefit from) income
taxes
    
    
    19,443
    
    
    
    3.6
    %
    
    
    (2,153
    )
    
    
    (0.5
    )%
    
    
    (21,596
    )Provision for (benefit from)
income taxes
    
    
    2,083
    
    
    
    0.4
    %
    
    
    (2,919
    )
    
    
    (0.7
    )%
    
    
    (5,002
    )Net income
    
    $
    17,360
    
    
    
    3.2
    %
    
    $
    766
    
    
    
    0.2
    %
    
    $
    (16,594
    )Dividend to parent
    
    
    
    
    
    
    0.0
    %
    
    
    (39,351
    )
    
    
    (8.4
    )%
    
    
    39,351Income (loss) attributable to
common stockholders
    
    $
    17,360
    
    
    
    3.2
    %
    
    $
    (38,585
    )
    
    
    (8.2
    )%
    
    $
    (55,945
    )
 Net Revenues Net Revenues by Segment (dollars in thousands): YearsEndedMarch 31,2003
    
    2004
    
    (Decrease)Publishing
    
    $
    438,114
    
    
    $
    405,983
    
    
    $
    (32,131
    )Distribution
    
    
    96,134
    
    
    
    62,961
    
    
    
    (33,173
    )Total
    
    $
    534,248
    
    
    $
    468,944
    
    
    $
    (65,304
    )
 Net revenues for the year ended March 31, 2004 decreased approximately $65.3
million or 12.2% from $534.2 million to $468.9 million.  
    
    Our publishing net revenues were driven this period by strong sales
from new products and existing franchises. Led by Enter the Matrix
(PlayStation2, Xbox, PC and GameCube), with approximately 3.2 million
units shipped in the United States, our new title releases generated
approximately 72.3% of publishing net revenues. Other major new
releases in the year ended March 31, 2004 include three Dragon Ball Z
titles Budokai 2 (PlayStation2), Legacy of Goku II (Game Boy Advance)
and Taiketsu (Game Boy Advance) for a total of over 2.4 million units
shipped. Although we had many successful product releases during the
year, our publishing net revenues decreased approximately $32.1 million
or 7.3%. This decrease is attributable to the delayed launch of DRIV3R
into the first quarter of fiscal 2005, our decision to release a lighter
slate of new titles in the second and fourth quarters and reduced
replenishment orders during our holiday season. 29




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##### Table of Contents




    
    Publishing net revenue includes international royalty income earned
on IESAs international sales of our titles, which are up by $8.5
million from $20.4 million in the year ended March 31, 2003 to $28.9
million in the comparable 2004 period. The increase includes a
favorable exchange rate impact in the current fiscal year of
approximately $4.3 million from the weakening US dollar against the euro
and strong 2004 period international sales of Enter the Matrix.
    
    Additionally, we recognized $3.5 million of previously deferred
revenue in sublicensing income as a result of the termination of our
sublicensing arrangement with Microsoft and the retention of the
previously collected nonrefundable advance. See Note 6 of the Notes of
these Consolidated Financial Statements for additional information
related to this transaction.
    
    Total distribution net revenues decreased $33.2 million from
continued general industry softness in productivity software, fewer new
titles launched by our third party distributors in the current period
and managements decision to reduce our third party distribution
operations in the specific instances where margins are considered
insufficient. Gross Profit Platform mix for the year ended March 31, 2003 and 2004 is summarized below: Publishing Platform Mix2003
    
    2004Playstation2
    
    
    30.3
    %
    
    
    35.0
    %PC
    
    
    39.5
    %
    
    
    29.5
    %Xbox
    
    
    10.0
    %
    
    
    13.5
    %Game Boy Advance B
    
    
    10.7
    %
    
    
    12.1
    %Game Cube
    
    
    4.2
    %
    
    
    7.1
    %Playstation
    
    
    4.0
    %
    
    
    2.7
    %Game Boy Color
    
    
    1.2
    %
    
    
    0.1
    %Other
    
    
    0.1
    %
    
    
    0.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Gross profit decreased to $220.0 million for the year ended March 31, 2004
from $270.4 million in the comparable 2003 period primarily from decreased
sales volume while, as a percentage of net revenues, gross profit decreased
from 50.6% to 46.9%. The benefit of a sales mix shift out of the higher cost
distribution business and into the lower cost publishing business is largely
being offset by a continuing sales mix shift within the publishing business
toward the more costly console product and away from the less costly PC
product, which is consistent with current industry trends. Approximately 70.5%
of the publishing business shipments consisted of console sales during the
year ended March 31, 2004 versus 60.5% in the comparable 2003 period. For the
year ended March 31, 2004, the distribution business accounted for 13.4% of our
net revenues as compared to 18.0% for the comparable 2003 period. Finally, a
higher mix of royalty-bearing products sold in the current period also
contributed to lower margins. In the year ended March 31, 2004, royalty expense
included in cost of goods sold was 15.9% of net revenues, while in the 2003
period royalty expense was 12.3% of net revenues. Selling and Distribution Expenses During the year ended March 31, 2004, selling and distribution expenses
decreased approximately $8.8 million, or 9.4%, to $85.0 million from $93.8
million in the comparable 2003 period due to lower advertising expense from
fewer new product releases as well as lower variable costs (mainly freight and
handling) from decreased net revenues. Advertising expenses decreased $2.4
million or 4.2% and variable freight and distribution expenses decreased $3.3
million from the comparable 2003 period. The selling and distribution expenses
remained relatively unchanged as a percentage of net revenues at 18.1% for the
year ended March 31, 2004 from 17.6% in the comparable 2003. General and Administrative Expenses The general and administrative expenses of $33.3 million are significantly
below the March 2003 periods expenses of $41.2 million. This decrease is
primarily from a $2.1 million one-time bonus tied to the closing of the GECC
senior credit facility and a $3.8 million bonus charge from increased
performance incentives which were achieved and incurred in the year ended March 31, 2003. Without the one-time 30




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incentive compensation in the
2003 period, general and administrative expense as a percentage of net revenues
of 7.6% would have been reduced to 7.3% in the 2003 period. In-Process Research and Development Expense In-process research and development costs of $7.4 million were incurred
during the year ended March 31, 2003 and represents a portion of the purchase
price paid for Shiny during that period. The allocation of the purchase price
to in-process research and development was based on an independent third-party
valuation and all such costs were expensed at the date of the acquisition.
There were no comparable costs incurred during the year ended March 31, 2004. Research and Development Expenses Research and development expenses for the year ended March 31, 2004
increased approximately $4.1 million, or 4.9%, to $88.3 million from $84.2
million in the comparable 2003 period, primarily from the increase of
approximately $7.1 million in amortization and write-off of capitalized
licenses and the timing of milestone completions upon which this expense is
based. This increase in research and development has been offset by reductions
in internal studio development costs due to the completion of certain titles
early in the 2004 period. Internal costs represented 42.9% of the total
research and development costs for the year ended March 31, 2004, while
internal costs were 48.5% of total research and development costs for the
comparable 2003 period. Gain on Sale of a Development Project to a Related Party During the third quarter of the year ended March 31, 2004, we sold a
development project to Atari Interactive for $3.7 million resulting in a gain
of an equal amount. The project involved a license owned by Atari Interactive
for which development rights were transferred to us in the fourth quarter of
the year ended March 31, 2003 at no cost to us. Management believes that the
value of the development rights was minimal at the time of the transfer. The
sales price to Atari Interactive was equal to the development costs incurred by
us which were expensed during the period of development, principally in the
first six months of the year ended March 31, 2004. The sale was initiated as a
result of concerns expressed by the original third party licensor relating to
our development efforts. Depreciation and Amortization Depreciation and amortization for the year ended March 31, 2004, increased
by $1.4 million, or 17.9%, to $9.2 million from $7.8 million in the comparable
2003 period due primarily to amortization expense from our license with Atari
Interactive for the rights to the Atari name offset by lower depreciation
expense from assets which were fully depreciated during the period. Interest Expense, net Interest expense, net, decreased approximately $6.0 million to $7.7
million for the year ended March 31, 2004 from $13.7 million in the comparable
2003 period. The decrease is a result of our September 2003 recapitalization
whereby all outstanding related party debt was converted to equity. Since the
recapitalization, interest and financing fees have consisted solely of expenses
incurred under our credit facility arrangement with GECC. Furthermore,
interest expense has been further reduced by interest income received from
advances to related parties of approximately $1.1 million earned through the
date of the Recapitalization Agreement. Offsetting this decrease in interest
expense, we expensed the full $1.3 million remaining deferred financing fees
outstanding with IESA as a result of the conversion of all outstanding related
party debt to equity in the September 2003 quarter. Other Expense Other expense in the year ended March 31, 2004 included a net $1.7 million
write-down related to the Oddworld Inhabitants, Inc. or Oddworld transaction
(see Note 6 of the Notes of these Consolidated Financial Statements for
additional information related to this transaction). Other expense in the
comparable 2003 period included an initial write-down of the Oddworld
investment of approximately $3.6 million. As of March 31, 2004, we no longer
own an investment in Oddworld. The 2003 period also included $0.6 million of
commission income recorded by us as compensation for negotiating a sale-lease
back transaction for a related-party. 31




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Provision for (Benefit from) Income Taxes During the year ended March 31, 2004, we recorded a tax benefit of
approximately $2.9 million, which resulted primarily from a June 30, 2001
amended federal tax return to recover taxes paid in 1996 and refunds of
estimated state tax payments made during the tax year ended June 30, 2003.
During the year ended March 31, 2003, we recorded a provision for taxes of $2.1
million, primarily from foreign tax liabilities from our foreign operations. Dividend to Parent In connection with the Recapitalization Agreement, we issued stock at a
more favorable rate than was available, at the holders option, under the
original terms of the 5% subordinated convertible notes. The incremental value
of the additional stock issued was reported as a dividend to IESA for $39.4
million, which had no impact on total stockholders equity and has been
reported as a charge in computing income (loss) attributable to common
stockholders. Nine months ended March 31, 2003 versus nine months ended March 31, 2002 (unaudited) Consolidated Statement of Operations (dollars in thousands): Nine Months
    
    
    
    Nine MonthsEnded
    
    
    
    EndedMarch 31,
    
    % of Net
    
    March 31,
    
    % of Net
    
    Increase/2002
    
    Revenues
    
    2003
    
    Revenues
    
    (Decrease)Net revenues
    
    $
    289,442
    
    
    
    100.0
    %
    
    $
    404,645
    
    
    
    100.0
    %
    
    $
    115,203Cost of goods sold
    
    
    152,355
    
    
    
    52.6
    %
    
    
    203,858
    
    
    
    50.4
    %
    
    
    51,503Gross profit
    
    
    137,087
    
    
    
    47.4
    %
    
    
    200,787
    
    
    
    49.6
    %
    
    
    63,700Selling and distribution expenses
    
    
    62,862
    
    
    
    21.7
    %
    
    
    72,005
    
    
    
    17.8
    %
    
    
    9,143General and administrative expenses
    
    
    28,924
    
    
    
    10.0
    %
    
    
    32,685
    
    
    
    8.1
    %
    
    
    3,761Research and development
    
    
    49,399
    
    
    
    17.1
    %
    
    
    62,797
    
    
    
    15.5
    %
    
    
    13,398Depreciation and amortization
    
    
    3,537
    
    
    
    1.2
    %
    
    
    5,859
    
    
    
    1.4
    %
    
    
    2,322Operating income
    
    
    (7,635
    )
    
    
    (2.6
    )%
    
    
    27,441
    
    
    
    6.8
    %
    
    
    35,076Interest expense, net
    
    
    (7,887
    )
    
    
    (2.8
    )%
    
    
    (9,598
    )
    
    
    (2.4
    )%
    
    
    1,711Other income
    
    
    287
    
    
    
    0.1
    %
    
    
    632
    
    
    
    0.2
    %
    
    
    345(Loss) income before (benefit
from)
provision for income taxes
    
    
    (15,235
    )
    
    
    (5.3
    )%
    
    
    18,475
    
    
    
    4.6
    %
    
    
    33,710(Benefit
from) provision for income taxes
    
    
    (5,014
    )
    
    
    (1.8
    )%
    
    
    405
    
    
    
    0.1
    %
    
    
    (5,419
    )Net (loss) income
    
    $
    (10,221
    )
    
    
    (3.5
    )%
    
    $
    18,070
    
    
    
    4.5
    %
    
    $
    28,291
 Net Revenues Net revenues for the nine months ended March 31, 2003 increased
approximately $115.2 million or 39.8% from $289.4 million to $404.6 million.
This increase is attributable to our growth in our publishing business, offset
by a slight decrease in our third-party distribution business. Total publishing net revenues for the nine months ended March 31, 2003
increased approximately $117.9 million or 55.6% to $329.8 million from $211.9
million in the comparable 2002 period. This increase is due to the success of
both new releases and catalogue titles, as well as an increase in royalty
income earned from sales of our product sold internationally. Our top fifty
selling published products for the nine months ended March 31, 2003 generated
revenues of approximately $223.2 million, an increase of $87.4 million or
64.4%, from $135.8 million in the comparative 2002 period. Included in the
$223.2 million of the top fifty selling published products were the top four
new releases for the 2003 period accounting for approximately $86.7 million of
the revenues generated as compared to $44.5 million from the top four new
releases during the nine months ended March 31, 2002. This is an increase of
approximately $42.2 million or 94.8% as compared to the top four new releases
in comparable 2002 period and 48.3% of the total increase in top fifty selling
published products compared to the comparable 2002 period. The top four new
releases during the nine months ended March 31, 2003 were expansions from some
of our most successful franchises and include Dragon Ball Z: Budokaifor
PlayStation 2, Unreal Championshipfor Xbox, Unreal Tournament 2for the PC and
Roller Coaster Tycoon 2for the PC. Additionally, we increased our royalty
income generated from international sales of our products. International
royalties were $18.8 million for the nine months ended March 31, 2003, an
increase from $3.2 million in the comparable 2002 period. Total third-party
distribution net 32




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revenues for the nine months ended March 31, 2003 decreased slightly by
approximately $2.7 million or 3.5% to $74.8 million from $77.5 million in the
comparable 2002 period due primarily to a reduction in the Australian
operations distribution business. Gross Profit Gross profit increased to $200.8 million for the nine months ended March
31, 2003 from $137.1 million in the comparable 2002 period due mainly to
increased sales volume. Gross profit as a percentage of net revenues increased
to 49.6% for the nine months ended March 31, 2003 from 47.4% in the comparable
2002 period. This increase was the result of our product mix shift out of the
lower margin distribution business and into the publishing business and a
stronger publishing product offering, offset partially by a shift within the
publishing business from higher margin PC product to console product. For the
nine months ended March 31, 2003, the distribution business accounted for 18.5%
of our net revenues as compared to 26.8% for the comparable period in 2002.
Approximately 58% of the publishing businesses shipments were console sales
during the nine months ended March 31, 2003 versus 30% in the comparable 2002
period. As a result, the higher costs of console product lowered the overall
margin of the publishing business as a percentage of net revenues for the nine
months ended March 31, 2003 to 55.0% from 56.3% in the comparable 2002 period. Selling and Distribution Expenses During the nine months ended March 31, 2003, selling and distribution
expenses increased approximately $9.1 million, or 14.5%, to $72.0 million from
$62.9 million in the comparable 2002 period. The increase in selling and
distribution expenses was primarily the result of an increase in advertising
expenses and variable selling expenses related to the increase in sales from
the nine months ended March 31, 2003 over the comparable 2002 period, partially
offset by a decrease in certain fixed expenses. Advertising expenditures
increased $15.1 million, or 50.7%, to approximately $44.9 million during the
nine months ended March 31, 2003 as compared to $29.8 million in the comparable
2002 period as a result of increased advertising to support new product
releases in the 2003 period. Fixed costs, including salaries and consulting
expenses, decreased by $3.4 million, to $13.9 million during the nine months
ended March 31, 2003 as compared to $17.3 million in the 2002 period. This
decrease was primarily attributed to our centralization and streamlining of
marketing and publishing functions. Additionally, efficiencies in selling and
distribution expenses due to increased volume created a decrease in these
expenses as a percentage of net revenues to 17.8% for the nine months ended
March 31, 2003 from 21.7% in the comparable 2002 period. Distribution expenses
decreased 16.5% to approximately $13.2 million during the nine months ended
March 31, 2003 as compared to $15.8 million in the comparable 2002 period. This
decrease is due to lower costs associated with our distribution business
stemming from increased shipments to customer distribution centers as opposed
to individual customers stores and our product mix shift from PC to console
product, which cost less to handle and ship. General and Administrative Expenses General and administrative expenses for the nine months ended March 31,
2003 increased approximately $3.8 million, or 13.1%, to $32.7 million from
$28.9 million in the comparable 2002 period. The increase resulted primarily
from the payment of bonuses which were offset partially by decreased bad debt
expense. We paid a one-time bonus of $2.1 million in the quarter ended December
31, 2002 tied to the closing of the GECC senior credit facility. Furthermore,
we met increased performance incentives and incurred additional bonus expense
of $3.8 million in the current period versus the prior period. This increase
was partially offset by a decrease in bad debt expense of $3.1 million to $3.8
million from $6.9 million for the nine months ended March 31, 2003 and 2002,
respectively. The nine months ended March 31, 2002 included a $4.2 million bad
debt charge related to the Kmart bankruptcy, compared to a $0.3 million charge
in the comparable 2003 period relating to the bankruptcy of one of our
customers, FAO Inc. General and administrative expenses as a percentage of net
revenues decreased slightly to 8.1% for the months ended March 31, 2003 from
10.0% in the comparable 2002 period. Research and Development Expenses Research and development expenses for the nine months ended March 31, 2003
increased approximately $13.4 million, or 27.1%, to $62.8 million from $49.4
million in the comparable 2002 period. The primary reason for the increase in
research and development expense was from increased spending by our internal
development studios, which include Humongous, Legend, Reflections and Shiny.
Much of the increase related to the costs associated with the development of
the Enter the Matrixvideo game on all platforms incurred by Shiny, which we
acquired in April 2002. 33




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During the nine months ended March 31, 2003, our internal development
studios incurred expenses of $31.6 million, an increase of $9.7 million or
44.3% from $21.9 million in the comparable 2002 period. In relation to total
research and development expenses, the internal costs represented 50.3% of the
total research and development costs for the nine months ended March 31, 2003,
while internal costs were 44.3% of total research and development costs for the
comparable 2002 period. Research and development expenses, as a percentage of
net revenues, decreased slightly to 15.5% for the nine months ended March 31,
2003 from 17.1% in the comparable 2002 period. Depreciation and Amortization Depreciation and amortization for the nine months ended March 31, 2003
increased approximately $2.4 million, or 68.6%, to $5.9 million from $3.5
million in the comparable 2002 period. The increase is due to the depreciation
on capital expenditures and projects completed since the prior period.
Additionally, the 2003 period includes the amortization of intangibles related
to the April 2002 acquisition of Shiny in the amount of $0.6 million. Interest Expense, net Interest expense, net, increased approximately $1.7 million to $9.6
million for the nine months ended March 31, 2003 from $7.9 million in the
comparable 2002 period. This increase in the nine months ended March 31, 2003
is due from a higher level of average borrowings in 2003 as compared to the
2002 period attributable to the new medium-term loan with IESA and the senior
credit facility with GECC, offset partially by a repayment of amounts
outstanding under the revolving credit facility with BNP Paribas and interest
income earned on advances to related parties. (Benefit from) Provision for Income Taxes During the nine months ended March 31, 2003, we recorded a provision for
income taxes of approximately $0.4 million as compared to a $5.0 million
benefit from income taxes in the prior comparable period. The charge in the
2003 period relates to estimated federal and state alternative minimum tax
provisions of $1.0 million to be paid by us based on our current taxable
income. This provision is offset by $0.5 million in federal income tax benefits
resulting from loss carryback refund claims filed in the current period with
respect to our fiscal 2002 federal income tax return and an amended 2001
federal income tax return. For the nine months ended March 31, 2002, we
received a tax benefit of $5.0 million based on federal tax law changes
enabling us to carryback our June 30, 2001 loss and recover taxes paid in 1996. Twelve months ended June 30, 2002 versus twelve months ended June 30, 2001 Consolidated Statement of Operations (dollars in thousands): Year
    
    
    
    YearEnded
    
    
    
    EndedJune 30,
    
    % ofNet
    
    June 30,
    
    % ofNet
    
    Increase/2001
    
    Revenues
    
    2002
    
    Revenues
    
    (Decrease)Net revenues
    
    $
    291,388
    
    
    
    100.0
    %
    
    $
    419,045
    
    
    
    100.0
    %
    
    $
    127,657Cost of goods sold
    
    
    125,940
    
    
    
    43.2
    %
    
    
    212,380
    
    
    
    50.7
    %
    
    
    86,440Gross profit
    
    
    165,448
    
    
    
    56.8
    %
    
    
    206,665
    
    
    
    49.3
    %
    
    
    41,217Selling and distribution expenses
    
    
    72,450
    
    
    
    24.9
    %
    
    
    84,628
    
    
    
    20.2
    %
    
    
    12,178General and administrative expenses
    
    
    67,341
    
    
    
    23.1
    %
    
    
    37,423
    
    
    
    8.9
    %
    
    
    (29,918
    )In-process research and development
    
    
    
    
    
    
    0.0
    %
    
    
    7,400
    
    
    
    1.8
    %
    
    
    7,400Research and development
    
    
    56,617
    
    
    
    19.4
    %
    
    
    70,798
    
    
    
    16.9
    %
    
    
    14,181Restructuring and other charges
    
    
    3,539
    
    
    
    1.2
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (3,539
    )INA merger costs
    
    
    1,700
    
    
    
    0.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    (1,700
    )Gain on sale of line of business
    
    
    (5,501
    )
    
    
    (1.9
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (5,501
    )Depreciation and amortization
    
    
    20,297
    
    
    
    7.0
    %
    
    
    5,454
    
    
    
    1.3
    %
    
    
    (14,843
    )Operating (loss) income
    
    
    (50,995
    )
    
    
    (17.5
    )%
    
    
    962
    
    
    
    0.2
    %
    
    
    51,957Interest expense, net
    
    
    (13,399
    )
    
    
    (4.6
    )%
    
    
    (11,956
    )
    
    
    (2.9
    )%
    
    
    (1,443
    )Other income (expense)
    
    
    1,358
    
    
    
    0.5
    %
    
    
    (3,272
    )
    
    
    (0.7
    )%
    
    
    (4,630
    )(Loss) before (benefit
from)
income taxes
    
    
    (63,036
    )
    
    
    (21.6
    )%
    
    
    (14,266
    )
    
    
    (3.4
    )%
    
    
    (48,770
    )(Benefit from) income taxes
    
    
    (2,368
    )
    
    
    (0.8
    )%
    
    
    (3,336
    )
    
    
    (0.8
    )%
    
    
    968Net (loss)
    
    $
    (60,668
    )
    
    
    (20.8
    )%
    
    $
    (10,930
    )
    
    
    (2.6
    )%
    
    $
    (49,738
    )
 34




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##### Table of Contents



Net Revenues Net revenues for the twelve months ended June 30, 2002 increased
approximately $127.6 million or 43.8% from $291.4 million to $419.0 million.
This increase is attributable to our growth in both the publishing and
distribution businesses. Total publishing net revenues for the twelve months ended June 30, 2002
increased approximately $102.8 million or 47.3% to $320.2 million from $217.4
million in the comparable 2001 period. This increase is due to the success of
major new releases, the continued success of prior releases, and the sales of
the former Hasbro Interactive titles for twelve months compared to five months
in the 2001 period. Net revenues generated from sales of the ten most
successful titles released during the 2002 period, excluding titles under
Hasbro Interactive, were approximately $113.6 million, an increase of
approximately $48.2 million compared to the top ten releases of 2001 of
approximately $65.4 million. Major new releases in 2002 included Stuntmanand
Splashdownfor PlayStation 2, Neverwinter Nightsfor the PC, Dragon Ball Z: The
Legacy of Gokufor Game Boy Advance and Test Drive 2001for PlayStation 2 and
Xbox. Comparatively, major new releases in 2001 included Driver Greatest Hits
and Driver 2for PlayStation, Unreal Tournamentfor PlayStation 2, Deer Hunter
4for the PC, and Alone in the Darkfor the PC. Net revenues decreased
approximately $38.9 million as a result of the decline in sales of the major
new releases in 2001 listed above. The former Hasbro Interactive titles
contributed an additional $97.4 million to publishing net revenues in the 2002
period compared to 2001. Total distribution net revenues for the twelve months
ended June 30, 2002 increased approximately $24.8 million or 33.5% to $98.8
million from $74.0 million in the comparable 2001 period. During the 2002
period, we expanded our relationships with third-party vendors resulting in an
increase in distribution net revenues. Gross Profit Gross profit increased to $206.7 million for the twelve months ended June
30, 2002 from $165.4 million in the comparable 2001 period due mainly to
increased sales volume, while gross profit as a percentage of net revenues
decreased to 49.3% for the twelve months ended June 30, 2002 from 56.8% in the
comparable 2001 period. This margin decrease is due to our change in product
mix. The former Hasbro Interactive products represented 32.0% of the sales in
the twelve months ended June 30, 2002 as compared to 12.6% in the comparable
2001 period. Additionally, the decrease in gross profit as a percentage of net
revenues is attributed to the increase in lower margin distribution revenues of
$24.8 million or 33.5%. Selling and Distribution Expenses During the twelve months ended June 30, 2002, selling and distribution
expenses increased approximately $12.1 million, or 16.7%, to $84.6 million from
$72.5 million in the comparable 2001 period. The increase in selling and
distribution expenses resulted primarily from an increase in variable selling
expenses resulting from the increase in sales from the twelve months ended June
30, 2001 to the comparable 2002 period, offset by a more efficient use of
marketing and sales staff and distribution efficiencies during the 2002 period.
Advertising expenditures increased 61.3% to approximately $34.2 million during
the twelve months ended June 30, 2002 as compared to $21.2 million in the
comparable 2001 period, due to the increase in new product releases in the
current period offset by continued efforts to improve efficiency. Distribution
expenses increased 21.4% to approximately $21.0 million during the twelve
months ended June 30, 2002 as compared to $17.3 million in the comparable 2001
period due to the increase in net revenues offset by distribution efficiencies
such as reduction in express shipments and increased shipments to customer
distribution centers as opposed to individual customers stores. The overall
efficiencies in selling and distribution expenses created a decrease as a
percentage of net revenues to 20.2% for the twelve months ended June 30, 2002
as compared to 24.9% in the comparable 2001 period. A decrease of approximately
$4.6 million in selling and distribution expenses resulted from personnel
related costs as a result of headcount and salary reductions, as well as
reductions in travel expenditures. General and Administrative Expenses General and administrative expenses in the twelve months ended June 30,
2002 decreased approximately $29.9 million, or 44.4%, to $37.4 million from
$67.3 million in the comparable 2001 period. General and administrative
expenses as a percentage of net revenues decreased to 8.9% for the twelve
months ended June 30, 2002 from 23.1% in the comparable 2001 period. This
decrease is primarily due to decreased professional fees (legal and other
outside consultant fees) and decreased salaries from the consolidation of
various functions and the integration of INA and us during the 2001 period.
Professional fees decreased 44.7% to approximately $4.2 million for the twelve
months ended June 30, 2002 as compared to $7.6 million in the comparable 2001
period. Salaries decreased 36.8% to approximately $13.9 million during the 35




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twelve months ended June 30, 2002 as compared to $22.0 million in the
comparable 2001 period. We incurred charges of $20.7 million in the 2001 period
related to additional provisions for receivables while the 2002 period includes
a $4.2 million charge related to the Kmart bankruptcy. Without these additional
provisions, general and administrative expenses would have decreased by
approximately $11.2 million or 24.0%, to $35.4 million for the twelve months
ended June 30, 2002 compared to $46.6 million for the comparable 2001 period. In-Process Research and Development Expense In process research and development costs of $7.4 million were incurred
during the twelve months ended June 30, 2002. On April 30, 2002, we acquired
all of the outstanding shares of common stock of Shiny, a videogame development
studio (the Shiny Acquisition). These costs were associated with the Shiny
Acquisition. The allocation of the purchase price of Shiny was based on an
independent third-party valuation obtained by us which determined that in
process research and development totaled $7.4 million which was expensed at the
date of the acquisition. There were no comparable costs incurred during the
twelve months ended June 30, 2001. Research and Development Expenses Research and development expenses for the twelve months ended June 30,
2002 increased approximately $14.2 million, or 25.1%, to $70.8 million from
$56.6 million in the comparable 2001 period due to our signing of additional
arrangements with external developers and the achievement by our developers of
more milestones in the development process during the 2002 period. Expenses
associated with the use of our internal development studios, which include
Humongous, Legend, Reflections and Shiny, also increased from approximately
$24.8 million for the twelve months ended June 30, 2001 to $31.1 million in the
comparable 2002 period. In relation to total research and development expenses,
the internal costs represented 43.9% of the total research and development
costs for the twelve months ended June 30, 2002, while costs were 43.8% of
total research and development costs for the comparable period of 2001.
Research and development expenses, as a percentage of net revenues, decreased
to 16.9% for the twelve months ended June 30, 2002 from 19.4% in the comparable
2001 period. Restructuring and Other Charges We incurred restructuring charges of $3.5 million for the twelve months
ended June 30, 2001, with no such costs incurred during the 2002 period.
Effective March 14, 2001, we announced and commenced a plan to shutdown our San
Jose, California facility and recorded a charge of $2.1 million. The charge
consisted primarily of employee severance packages and the disposal of assets
that were no longer being used. In the fourth quarter of fiscal 2001, we
initiated a restructuring of our Humongous Entertainment business to refocus
the operations primarily on internal development rather than publishing and
incurred a $1.1 million charge. In the 2001 period, we also incurred an
additional $0.3 million charge related to the move of our technical support
operations to a central location in Seattle, Washington. INA Merger Costs We incurred expenses of $1.7 million or 0.6% of net revenue related to the
INA Merger during the twelve months ended June 30, 2001. The costs include
various consulting, legal, and accounting fees. No costs were incurred in the
2002 period. Gain on Sale of Line of Business We recorded a gain on sale of line of business for the twelve months ended
June 30, 2001 of approximately $5.5 million from the sale of the Duke Nukem
franchise. Depreciation and Amortization Depreciation and amortization for the twelve months ended June 30, 2002
decreased approximately $14.8 million, or 72.9%, to $5.5 million from $20.3
million in the comparable 2001 period. Approximately $11.6 million of this
decrease is attributable to the cessation of goodwill amortization under
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets. Depreciation and amortization was further reduced by the
prior write-off of assets due to the consolidation of functions in conjunction
with the INA Merger. 36




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Interest Expense, net Interest expense, net decreased approximately $1.4 million to $12.0
million for the twelve months ended June 30, 2002 from $13.4 million in the
comparable 2001 period. The decrease is partly attributable to lower interest
rates driven by the average three month LIBOR rate decrease from 5.64% in the
twelve months ended June 30, 2001 to 2.29% in the comparable 2002 period.
Additionally, the decrease in interest expense is due to lower average
borrowings in 2002 as compared to the 2001 period. Benefit from Income Taxes For the twelve months ended June 30, 2002, we received a tax benefit of
$5.0 million based on a provision contained in The Job Creation and Worker
Assistance Act of 2002, signed by the President of the United States on March
9, 2002, which changed the allowable carryback period for net operating losses
from two years to five years. This provision enabled us to carryback our June
30, 2001 loss and recover taxes paid in 1996. Liquidity and Capital Resources Overview As of March 31, 2004, management believes that we have sufficient capital
resources to finance our operational requirements for the next twelve months,
including the funding of the development, production, marketing and sale of new
products, the purchases of equipment, and the acquisition of intellectual
property rights for future products. On November 12, 2002 (last amended May 20, 2004), we obtained a 30-month
$50.0 million senior credit facility with GECC which was used to fund our
working capital and general corporate needs and to provide funding to certain
related parties which are wholly-owned by IESA. As part of the most recent
amendments under the GECC senior credit facility, we no longer provide funding
to related parties beyond amounts previously advanced without GECCs consent. We also utilize the GECC senior credit facility to open
letters of credit with overseas manufacturers for the production of console
games. On September 4, 2003, we entered into a Recapitalization Agreement
exchanging all of our related party debt, net of certain advances, with IESA
and certain of its wholly-owned subsidiaries into shares of our common stock.
Subsequently, on September 24, 2003, we issued new shares of our common stock
in a secondary public offering generating net proceeds of $34.9 million, of
which $3.9 million was used to repay the outstanding balance of the senior
credit facility with GECC. The remaining proceeds from such offering were used
to pay costs of developing video game software and to meet general working
capital needs. Cash Flows (in thousands) March 31,
    
    March 31,2003
    
    2004Cash
    
    $
    815
    
    
    $
    9,621Working (deficit) capital
    
    $
    (91,648
    )
    
    $
    24,914Year
    
    YearEnded
    
    EndedMarch 31,
    
    March 31,2003
    
    2004Cash provided by operating activities
    
    $
    68,412
    
    
    $
    11,877Cash (used in) investing activities
    
    
    (72,278
    )
    
    
    (28,067
    )Cash (used in) provided by financing activities
    
    
    (73
    )
    
    
    24,846Effect of exchange rates on cash
    
    
    69
    
    
    
    150Net (decrease) increase in cash
    
    $
    (3,870
    )
    
    $
    8,806
 During the year ended March 31, 2004, the cash provided by operating
activities of $11.9 million was significantly lower than the 2003 period of
$68.4 million. This decline of $56.5 million was primarily the result of
decreased net income attributable to the delayed launch of 37




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DRIV3Rinto the first quarter of
fiscal 2005, our decision to release a lighter schedule of new titles in the
second and fourth quarters of the year ended March 31, 2004, reduction in our
distribution business and reduced replenishment orders during our holiday
season. Further reduction in our operating cash flows came from increased
payments for accounts payable, accrued liabilities and royalty payables in the
year ended March 31, 2004 as compared to the 2003 period. We saw a decrease in cash used in investing activities of approximately
$44.2 million to a usage of $28.1 in the year ended March 31, 2004 as compared
to $72.3 of usage in the comparable 2003 period. The primary reason for this
decrease is due to the acquisition of Shiny for approximately $34.0 million in
the 2003 period. No such purchases were made in the 2004 period. Furthermore,
a reduction in advances to related parties of approximately $17.8 million
offset by issuance of notes receivable to related parties of approximately $8.6
million further reduced the cash usage under investing activities. During the year ended March 31, 2004, our financing activities provided
cash of approximately $24.8 million, an increase of $24.9 million as compared
to the 2003 period. This increase in cash is primarily attributable to the
$34.9 million of proceeds received from our equity offering. During the 2003
period, we borrowed approximately $58.9 million, made payments to reduce debt
of approximately $59.3 and received nominal amounts of cash from stock
incentive programs netting a usage of cash from financing activities of
approximately $0.1 million. We expect continued volatility in the use of cash due to seasonality of
the business, receivable payment cycles and quarterly working capital needs to
finance our publishing businesses and growth objectives. Our outstanding accounts receivable balance varies significantly on a
quarterly basis due to the seasonality of our business and the timing of new
product releases. There were no significant changes in the credit terms with
customers during the twelve month period. We do not currently have any material commitments with respect to any
capital expenditures. However, we do have commitments to pay royalty and
license advances, milestone payments, and operating lease obligations. Our ability to maintain sufficient levels of cash could be affected by
various risks and uncertainties including, but not limited to, customer demand
and acceptance of our new versions of our titles on existing platforms and our
titles on new platforms, our ability to collect our receivables as they become
due, risks of product returns, successfully achieving our product release
schedules and attaining our forecasted sales goals, seasonality in operating
results, fluctuations in market conditions and the other risks described in the
Risk Factors (See Risk Factors on page 13). IESA has incurred significant losses from operations and is highly
leveraged. Should IESA experience liquidity issues, among other things, this
may result in its inability to fund the development efforts of Atari
Interactive, and our results of operations may suffer because, as the North
American distributor of the games developed by Atari Interactive, our revenue
could significantly decrease. Such a reduction of our revenue, among other
things, could result in a breach of one or more of the covenants contained in
our GECC senior credit facility. In the event any of the above contingencies
occur, management is prepared to take various actions which may include, but
not be limited to, a reduction in our expenditures for internal and external
new product development and a reduction in overhead expenses. These actions,
should they become necessary, may result in a significant reduction in the size
of our operations. We are also party to various litigation arising in the course of our
business. Management believes that the ultimate resolution of these matters
will not have a material adverse effect on our liquidity, financial condition
or results of operations. Credit Facilities GECC Senior Credit Facility On November 12, 2002 (last amended May 20, 2004), we obtained a senior
credit facility with GECC, to fund our working capital and general corporate
needs, as well as to fund advances to Paradigm and Atari Interactive, each a
related party. Loans under the senior credit facility were based on a
borrowing base comprised of the value of our accounts receivable and short term
marketable securities. The senior credit facility bears interest at prime plus
1.25% for daily borrowings or LIBOR plus 3% for borrowings with a maturity of
30 days or greater. A commitment fee of 0.5% on the average unused portion of
the facility was payable monthly and we paid $0.6 million as an initial
commitment fee at closing. The senior credit facility contains certain
financial covenants and named certain related entities, such as Atari
Interactive and Paradigm, as guarantors. In addition, amounts outstanding
under the senior credit facility are secured by our assets. There 38




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were no borrowings outstanding but $0.4 million of letters of credit were
outstanding as of March 31, 2004 under the senior credit facility. As of March
31, 2004, accrued interest of approximately $0.2 million was included in
accrued liabilities and we were in compliance with all financial covenants. Under an amendment to the senior credit facility, dated December 23, 2003,
Atari Interactive and Paradigm have been removed as guarantors. Furthermore,
under this amendment, we are no longer permitted to fund advances to Atari
Interactive and Paradigm unless otherwise approved by GECC. All outstanding
related party notes receivable have been approved. BNP Paribas Credit Facility In connection with the September 2000 merger with the INA Merger, we
assumed a $35.0 million revolving credit facility. The BNP Credit Facility,
with BNP Paribas, or BNP, which was to mature on September 17, 2001 and
subsequently extended until November 30, 2001. On November 30, 2001, the
facility was extended to May 31, 2002, with an amendment reducing the amount
available in the facility by $5.0 million a month beginning February 1, 2002
and maturing August 31, 2002. The amended facility charged interest at a rate
equal to the lenders cost of funds plus 1.5% on domestic term loans and at
LIBOR plus 1.5% on Eurodollar term loans, payable at maturity. We had $15.0
million outstanding under this facility at June 30, 2002 and paid the balance
of principal and interest in full on August 30, 2002. IESA credit facilities and debt Credit Agreement We maintained a revolving credit agreement with IESA (the Credit
Agreement) which provided for an aggregate commitment of $75.0 million which
bore interest at LIBOR plus 2.5%. Effective December 31, 2002, the maturity
date of the Credit Agreement was extended to April 1, 2004. This agreement
required that we comply with certain financial covenants and, among other
items, restricted capital expenditures. As of September 30, 2003, all
outstanding borrowings were exchanged for 10,541,105 newly issued common shares
under the terms of the Recapitalization Agreement. As of March 31, 2004, no
accrued interest or fees remain outstanding. Medium-Term Loan In connection with the Shiny Acquisition, we obtained a $50.0 million
medium-term loan from IESA. Interest was based on the three month LIBOR rate
plus 2.75% and payable on a quarterly basis, in arrears. An unused commitment
fee of 0.50% per annum was based on the aggregate amount of the facility less
outstanding loans. As of September 30, 2003, all outstanding borrowings have
been exchanged for 11,359,319 newly issued common shares under the terms of the
Recapitalization Agreement. Additionally, as of March 31, 2004, no accrued
interest remains outstanding. Long-Term Related Party Debt 0% Notes In conjunction with the 1999 purchase of us by IESA, we issued to GAP the
0% Notes in exchange for our 600,000 shares of our Series A Preferred Stock and
$20.0 million of subordinated notes held by us. The 0% Notes were to mature in
December 2004 and had a redemption value of $50.0 million at maturity. In lieu
of payment at maturity, the 0% Notes were convertible at any time, at the
holders option, into shares of our common stock at $20.00 per share. On
December 28, 2001, IESA assumed the 0% Notes from GAP in exchange for shares of
IESA common stock. IESA did not change any of the terms of the 0% Notes
(renamed the IESA 0% subordinate convertible note) as they relate to us.
Interest on the IESA 0% subordinate convertible note was accreted at the rate
of 7% per annum. Under the terms of the September 4, 2003 Recapitalization Agreement, the
IESA 0% subordinated convertible note has been fully offset against the
advances to related parties. 5% Notes In conjunction with the 1999 purchase of us by IESA, we issued to CUSH, 5%
subordinated convertible notes, 5% CUSH Notes, in exchange for $25.0 million in
cash and $35.6 million in debt and accrued interest. The 5% CUSH
Notes were to mature in December 2004 and 39




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had a principal amount of $60.6
million. In lieu of payment at maturity, the 5% CUSH Notes were convertible at
any time, at the holders option, into shares of our common stock at $9.25 per
share. Under the terms of the September 4, 2003 Recapitalization Agreement, the
5% CUSH Notes, net of the remaining advances to related parties, have been
fully converted to 17,129,453 of our newly issued common shares at a
fair-market value of $4.25 per share. The common shares issued by us were at a
more favorable rate than that available under the original terms of the 5% CUSH
Notes. The resulting incremental value of the additional stock issued was
recorded as a dividend to IESA of $39.4 million. In September 2003, we expensed the full $1.3 million of remaining deferred
financing fees related to the IESA 0% subordinated convertible note and the 5%
CUSH Notes as a result of the Recapitalization Agreement. Contractual Obligations As of March 31, 2004, royalty and license advance obligations, milestone
payments and future minimum lease obligations under non-cancelable operating
leases are summarized as follows (in thousands): Payments Due by PeriodFiscal Years Ended March 31,2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalRoyalty and license advances (1)
    
    $
    3,618
    
    
    $
    513
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,131Milestone payments (2)
    
    
    18,252
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,852Operating lease obligations (3)
    
    
    5,869
    
    
    
    5,283
    
    
    
    4,026
    
    
    
    2,068
    
    
    
    2,562
    
    
    
    19,808Total
    
    $
    27,739
    
    
    $
    6,396
    
    
    $
    4,026
    
    
    $
    2,068
    
    
    $
    2,562
    
    
    $
    42,791
  (1)
    
    We have committed to pay advance payments under certain royalty
and license agreements. The payments of these obligations are not
dependent on the delivery of the contracted services by the
developers.(2)
    
    Milestone payments represent royalty advances to third-party
developers for products that are currently in development. Although
milestone payments are not guaranteed, we expect to pay if all
deliverables and milestones are met timely and accurately.(3)
    
    We account for our leases as operating leases, with expiration
dates ranging from 2005 through 2012. These are future minimum annual
rental payments under the leases, including the related party
sub-lease with Atari Interactive. Recent Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. In December 2003, the FASB issued FIN 46-R to address
certain FIN 46 implementation issues. This interpretation requires that the
assets, liabilities, and results of activities of a VIE be consolidated into
the financial statements of the enterprise that has a controlling interest in
the VIE. FIN 46-R also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation is effective no later than
the end of the first interim or reporting period ending after March 15, 2004,
except for those VIEs that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or
annual reporting period ending after December 15, 2003. For all entities that
were acquired subsequent to January 31, 2003, this interpretation is effective
as of the first interim or annual period ending after December 31, 2003. The
adoption of the provisions of this interpretation did not have a material
effect on our financial condition or results of operations. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, by requiring that contracts with comparable characteristics be accounted
for in a similar fashion. In particular, the Statement: (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133;
(2) clarifies when a derivative contains a financing component; (3) amends the
definition of the term underlying to conform it to language used in FIN No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others; and (4) amends
certain other existing pronouncements. This Statement is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. We do not have any derivative
instruments as defined in SFAS No. 149. Accordingly, this pronouncement is
currently not applicable to us. 40




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In May 2003, the FASB issued SFAS No. 150, Accounting for Financial
Instruments with the Characteristics of Both Liabilities and Equities. SFAS
No. 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such
freestanding financial instruments (i.e., those entered into separately from an
entitys other financial instruments or equity transactions or that are legally
detachable and separately exercisable) must be classified as liabilities or, in
some cases, assets. In addition, SFAS No. 150 requires that financial
instruments containing obligations to repurchase the issuing entitys equity
shares and, under certain circumstances, obligations that are settled by
delivery of the issuers shares be classified as liabilities. The Statement is
effective for financial instruments entered into or modified after May 31, 2003
and for other instruments at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this new principle did not have
a material impact on our financial condition or results of operations. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our carrying value of cash, trade accounts receivable, accounts payable,
accrued liabilities, royalties payable, revolving credit facility, related
party credit facilities, related party notes receivable, amounts due to and
from related parties and our existing lines of credit are a reasonable
approximation of their fair value. Foreign Currency Exchange Rates As of March 31, 2004, foreign operations represented 0.0% and 1.7% of
consolidated net revenues and total assets, respectively. We also recorded
approximately $9.0 million in operating expenses attributed to foreign
operations related primarily to a development studio located outside the United
States. Currently, substantially all of our business is conducted in the
United States where revenues and expenses are transacted in U.S. dollars. As a
result, the majority of our results of operations are not subject to foreign
exchange rate fluctuations. We earn royalties on sales of our product sold
internationally. These revenues, which are based on various foreign currencies
and are billed and paid in U.S. dollars, represented $28.9 million of our
revenue for fiscal 2004. We do not hedge against foreign exchange rate
fluctuations due to the limited financial exposure we face with respect to such
risk. We purchase certain of our inventories from foreign developers. We also
pay royalties primarily denominated in euros to IESA from the sale of IESA
products in North America. Our business in this regard is subject to certain
risks, including, but not limited to, differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Our future results could be materially
and adversely impacted by changes in these or other factors. 41




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our Consolidated Financial Statements, and notes thereto, and our
Financial Statement Schedule, are presented on pages F-1 through F-35 hereof as
set forth below: PAGEATARI, INC. AND SUBSIDIARIESReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets as of March 31, 2003 and March 31, 2004
    
    
    F-2Consolidated Statements of Operations and Comprehensive Income (Loss) for the Year
Ended June 30, 2002, the Nine Months Ended March 31, 2002 (unaudited) and 2003,
and the Years Ended March 31, 2003 (unaudited) and 2004
    
    
    F-3Consolidated Statements of Cash Flows for the Year Ended June 30, 2002,
the Nine Months Ended March 31, 2002 (unaudited) and 2003, and the Years
Ended March 31, 2003 (unaudited) and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity (Deficiency) for the Year
Ended June 30, 2002, the Nine Months Ended March 31, 2003, and the Year
Ended March 31, 2004
    
    
    F-6Notes to the Consolidated Financial Statements
    
    F-8 to F-35FINANCIAL STATEMENT SCHEDULEYear Ended
June 30, 2002, Nine Months Ended March 31, 2003, and Year Ended March 31, 2004
Schedule IIValuation and Qualifying Accounts
    
    
    F-36
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures. As of March 31, 2004,
with the participation of our management, our Chief Executive Officer and
Acting Chief Financial Officer evaluated our disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 (the Exchange Act) Rules
13a-15(e) and 15d-15(e)). In designing and evaluating our disclosure controls
and procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Based on this evaluation, our Chief
Executive Officer and Acting Chief Financial Officer concluded that, except as
set forth below, as of March 31, 2004, our disclosure controls and procedures
were (1) designed to ensure that material information relating to us, including
our consolidated subsidiaries, is made known to our Chief Executive Officer and
Acting Chief Financial Officer by others within those entities, particularly
during the period in which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. In connection with the rules, we are continuing
the process of reviewing and documenting our disclosure controls and
procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business. Based upon managements evaluation, during the 2004 fiscal year, our
procedures for ensuring that directors, officers and ten percent (10%)
beneficial owners file transaction reports pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended (and the rules thereunder) were not
yet effective. We have recently assessed, improved and implemented appropriate
procedures and expect that, going forward, Section 16 reports will be accurate
and timely. Changes in Internal Controls over Financial Reporting. No change in our
internal control over financial reporting (as defined in the Exchange Act Rules
13a-15(f) and 15d-15(f)) occurred during the fiscal quarter ended March 31,
2004, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 42




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this Item is incorporated by reference to the
sections of our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, entitled Election of Directors and Executive Officers, to be
filed with the Securities and Exchange Commission within 120 days after the end
of the fiscal year covered by this Form 10-K. We have adopted a Code of Ethics, Standards of Conduct and Confidentiality
that applies to directors, executive officers, and all other senior financial
personnel. We will make copies of our Code of Ethics available to investors
upon request. Any such request should be sent by mail to Atari, Inc., 417
Fifth Avenue, New York, NY 10016, Attn: Corporate Legal Counsel or should be
made by telephone by calling Corporate Legal Counsel at (212) 726-6500. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the
section of our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, entitled Executive Compensation, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K. 
 ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                 
RELATED STOCKHOLDER MATTERS. The information required by this Item is incorporated by reference to the
section of our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, entitled Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, to be filed with the Securities
and Exchange Commission within 120 days after the end of the fiscal year
covered by this Form 10-K. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the
section of our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, entitled Certain Relationships and Related Transactions, to be
filed with the Securities and Exchange Commission within 120 days after the end
of the fiscal year covered by this Form 10-K. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference to the
section of our definitive Proxy Statement for our 2004 Annual Meeting of
Stockholders, entitled Principal Accountant Fees and Services, to be filed
with the Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K. 43




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules See Item 8 hereof. (a)(3) Exhibits  2.1
    
    Agreement and Plan of Reorganization by and among the Company, GT
Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders of
WizardWorks Group, Inc., dated June 24, 1996 is incorporated herein by
reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on July 9, 1996.2.2
    
    Escrow Agreement by and among the Company, Paul D. Rinde, as the
Stockholder Representative of WizardWorks Group, Inc., and Republic
National Bank of New York, as Escrow Agent, dated June 24, 1996 is
incorporated herein by reference to Exhibit 2.2 to the Companys Current
Report on Form 8-K filed on July 9, 1996.3.1
    
    Amended and Restated Certificate of Incorporation is incorporated herein
by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2000.3.2
    
    Amended and Restated By-laws are incorporated herein by reference to
Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.3.3
    
    Amendment No. 1 to Amended and Restated By-laws is incorporated by
reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q
for the quarter ended December 31, 2003.4.1
    
    Specimen form of stock certificate of Common Stock is incorporated herein
by reference to the Companys Registration Statement on Form S-1 (File No.
333-14441) initially filed with the SEC on October 20, 1995, and all
amendments thereto.4.2
    
    Stockholders Agreement by and among Joseph J. Cayre, Kenneth Cayre,
Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached
thereto and the Company is incorporated herein by reference to an exhibit
filed as a part of the Companys Registration Statement on Form S-1 filed
October 20, 1995.4.3
    
    Amendment to Stockholders Agreement, dated as of December 18, 1995, by
and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre,
the Trusts parties thereto and the Company is incorporated herein by
reference to Exhibit 10.30 to the Companys Annual Report on Form 10-K for
the year ended December 31, 1996.4.4
    
    Registration Rights Agreement by and among Joseph J. Cayre, Kenneth
Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I
attached thereto and the Company is incorporated herein by reference to an
exhibit filed as a part of the Companys Registration Statement on Form
S-1 filed October 20, 1995.4.5
    
    Amended and Restated Registration Rights Agreement, dated as of February
15, 2000, between California U.S. Holdings, Inc. and the Company is
incorporated herein by reference to Exhibit 4.5 to the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.4.6
    
    Second Amended and Restated Registration Rights Agreement, dated as of
October 2, 2000, between California U.S. Holdings, Inc. and the Company is
incorporated herein by reference to Exhibit 4.6 of the Companys
Registration Statement on Form S-2 (File No. 333-107819) initially filed
with the SEC on August 8, 2003, and all amendments thereto.10.1
    
    Distribution Agreement between Infogrames Entertainment SA, Infogrames
Multimedia SA and the Company, dated as of December 16, 1999, is
incorporated herein by reference to Exhibit 7 to the Schedule 13D filed by
Infogrames Entertainment SA and California U.S. Holdings, Inc. on January
10, 2000. 44




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##### Table of Contents



10.2
    
    Amendment to Distribution Agreement between Infogrames Entertainment SA
and the Company, dated as of July 1, 2000, is incorporated herein by
reference to Exhibit 10.26a to the Companys Annual Report on Form 10-K
for the fiscal year ended June 30, 2001.10.3
    
    Distribution Agreement between Infogrames Entertainment SA
and the Company, dated October 2, 2000, as supplemented on
November 2, 2002.**10.4
    
    Services Agreement, dated as of January 1, 2000, between Infogrames
Entertainment SA and the Company is incorporated herein by reference to
Exhibit 10.41 to the Companys Annual Report on Form 10-K for the fiscal
year ended March 31, 2000.10.5
    
    Services Agreement, dated as of January 26, 2001, between the Company and
Infogrames Interactive, Inc. (now known as Atari Interactive, Inc.), is
incorporated herein by reference to Exhibit 10.46 to the Companys Annual
Report on Form 10-K for the fiscal year ended June 30, 2001.10.6
    
    Warehouse Services Contract, dated March 2, 1999, by and between the
Company and Arnold Transportation Services, Inc. t/d/b/a Arnold Logistics
is incorporated herein by reference to Exhibit 10.50 to the Companys
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.10.7
    
    Credit Agreement, dated as of September 11, 1998, by and among the
Company, the Lenders thereto, NationsBanc Montgomery Securities, LLC, as
Syndication Agent, Fleet Bank, N.A., as Documentation Agent, and First
Union National Bank, as Administrative Agent, is incorporated herein by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.10.8
    
    Second Amendment, Waiver and Agreement, dated as of June 29, 1999, by and
among the Company, the Lenders thereto and First Union National Bank, as
Administrative Agent, is incorporated herein by reference to Exhibit 10.1
to the Companys Current Report on 8-K filed on August 5, 1999.10.9
    
    Third Amendment, Consent, Waiver and Agreement, dated as of November 15,
1999, by and among the Company, the Lenders thereto and First Union
National Bank, as Administrative Agent is incorporated herein by reference
to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on
November 19, 1999.10.10
    
    Fourth Amendment to the Credit Agreement, dated as of February 15, 2000,
by and between the Company and Infogrames Entertainment SA is incorporated
herein by reference to Exhibit 10.26j to the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2000.10.11
    
    Fifth Amendment to the Credit Agreement, dated as of March 31, 2000, by
and between the Company and Infogrames Entertainment SA is incorporated
herein by reference to Exhibit 10.26m to the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2000.10.12
    
    Sixth Amendment to the Credit Agreement, dated as of June 29, 2000, by
and between the Company and Infogrames Entertainment SA is incorporated
herein by reference to Exhibit 10.26n to the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2000.10.13
    
    Seventh Amendment to the Credit Agreement, dated as of September 30,
2000, by and between the Company and Infogrames Entertainment SA is
incorporated herein by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q filed on February 14, 2001.10.14
    
    Eighth Amendment to the Credit Agreement, dated as of December 22, 2000,
by and between the Company and Infogrames Entertainment SA is incorporated
herein by reference to Exhibit 10.3 to the Companys Quarterly Report on
Form 10-Q filed on February 14, 2001.10.15
    
    Ninth Amendment to the Credit Agreement, dated as of June 7, 2001, to
the Credit Agreement by and between the Company and Infogrames
Entertainment SA, is incorporated herein by reference to Exhibit 10.28o to
the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2001.10.16
    
    Tenth Amendment to the Credit Agreement, dated as of December 31, 2001,
to the Credit Agreement by and between the Company and Infogrames
Entertainment SA is incorporated herein by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q filed on February 14, 2002. 45




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##### Table of Contents



10.17
    
    Eleventh Amendment to the Credit Agreement, dated as of March 29, 2002,
to the Credit Agreement by and between the Company and Infogrames
Entertainment SA is incorporated herein by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q filed on May 15, 2002.10.18
    
    Twelfth Amendment to the Credit Agreement, dated as of June 30, 2002, to
the Credit Agreement by and between the Company and Infogrames
Entertainment SA is incorporated herein by reference to Exhibit 10.28r to
the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2002.10.19
    
    Thirteenth Amendment to the Credit Agreement, dated as of September 30,
2002, to the Credit Agreement by and between the Company and Infogrames
Entertainment SA is incorporated herein by reference to Exhibit 10.28s to
the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2002.10.20
    
    Fourteenth Amendment to the Credit Agreement, dated as of December 31,
2002, to the Credit Agreement by and between the Company and Infogrames
Entertainment SA is incorporated herein by reference to Exhibit 10.28t to
the Companys Transition Report on Form 10-K for the fiscal year ended
March 31, 2003.10.21
    
    Credit Agreement, dated as of November 12, 2002, among the Company, as
Borrower, the other credit parties signatory thereto, the lenders
signatory thereto from time to time, General Electric Capital Corporation,
as Administrative Agent, Agent and Lender, and GECC Capital Markets Group,
Inc., as Lead Arranger, is incorporated herein by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed on November 19,
2002.10.22
    
    First Amendment and Consent to the Credit Agreement, dated as of March
28, 2003, among the Company, as Borrower, the other credit parties
signatory thereto, the lenders signatory thereto from time to time,
General Electric Capital Corporation, as Administrative Agent, Agent and
Lender is incorporated herein by reference to Exhibit 10.57a to the
Companys Transition Report on Form 10-K for the fiscal year ended March
31, 2003.10.23
    
    Second Amendment and Consent to the Credit Agreement, dated as of April
15, 2003, among the Company, as Borrower, the other credit parties
signatory thereto, the lenders signatory thereto from time to time,
General Electric Capital Corporation, as Administrative Agent, Agent and
Lender is incorporated herein by reference to Exhibit 10.57b to the
Companys Transition Report on Form 10-K for the fiscal year ended March
31, 2003.10.24
    
    Third Amendment and Waiver to the Credit Agreement, dated as of July 11,
2003, among the Company, as Borrower, the other credit parties signatory
thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.57c to the Companys
Transition Report on Form 10-K for the fiscal year ended March 31, 2003.10.25
    
    Fourth Amendment and Consent to the Credit Agreement, dated as of
September 12, 2003, among the Company, as Borrower, the other credit
parties signatory thereto, the lenders signatory thereto from time to
time, General Electric Capital Corporation, as Administrative Agent, Agent
and Lender is incorporated herein by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2003.10.26
    
    Fifth Amendment to the Credit Agreement, dated as of October 15, 2003,
among the Company, as Borrower, the other credit parties signatory
thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30,
2003.10.27
    
    Sixth Amendment to the Credit Agreement, dated as of December 23, 2003,
among the Company, as Borrower, the other credit parties signatory
thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender is
incorporated herein by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2003.10.28
    
    Seventh Amendment to the Credit Agreement, dated as of March 31, 2004,
among the Company, as Borrower, the other credit parties signatory
thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender.** 46




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##### Table of Contents



10.29
    
    Eighth Amendment to the Credit Agreement, dated as of May 20, 2004,
among the Company, as Borrower, the other credit parties signatory
thereto, the lenders signatory thereto from time to time, General Electric
Capital Corporation, as Administrative Agent, Agent and Lender.**10.30
    
    Intercreditor and Subordination Agreement, dated as of November 12,
2002, among Infogrames Entertainment S.A, California U.S. Holdings, Inc.,
General Electric Capital Corporation and the Credit Parties signatory
thereto, is incorporated herein by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q filed on February 14, 2003.10.31
    
    First Amendment to Intercreditor and Subordination Agreement, dated as
of December 23, 2003, among Infogrames Entertainment S.A, California U.S.
Holdings, Inc., Atari Interactive, Inc., General Electric Capital
Corporation and the Credit Parties signatory thereto is incorporated
herein by reference to Exhibit 10.2 to the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2003.10.32
    
    Form of GAP 54 Note is incorporated herein by reference to Exhibit 4 to
the Schedule 13D filed by General Atlantic Partners, LLC and certain of
its affiliates on December 23, 1999.10.33
    
    Form of GAPCO II Note is incorporated herein by reference to Exhibit 5
to the Schedule 13D filed by General Atlantic Partners, LLC and certain of
its affiliates on December 23, 1999.10.34
    
    5% Subordinated Convertible Note of the Company is incorporated herein
by reference to Exhibit 6 to the Schedule 13D filed by Infogrames
Entertainment S.A. and California U.S. Holdings, Inc. on January 10, 2000.10.35
    
    Stock Purchase Agreement, dated February 8, 1999, among the Company,
General Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P.
is incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on 8-K filed on March 2, 1999.10.36
    
    Letter Agreement, dated June 29, 1999, among GAP 54, GAPCO II, Joseph J.
Cayre, Kenneth Cayre and Stanley Cayre is incorporated herein by reference
to Exhibit 2 to the Schedule 13D filed by General Atlantic Partners, LLC
and certain of its affiliates on August 10, 1999.10.37
    
    Form of Option Agreement, dated as of July 30, 1999, among GAP 54, GAPCO
II and the other parties named therein is incorporated herein by reference
to Exhibit 3 to the Schedule 13D filed by General Atlantic Partners, LLC
and certain of its affiliates on August 10, 1999.10.38
    
    Note Purchase Agreement, dated as of November 15, 1999, between certain
members of the Cayre Group and California U.S. Holdings, Inc. is
incorporated herein by reference to Exhibit 11B to the Schedule 13D filed
by Infogrames Entertainment S.A. and California U.S. Holdings, Inc. on
December 14, 1999.10.39
    
    Equity Purchase and Voting Agreement, dated as of November 15, 1999,
among Infogrames Entertainment S.A., California U.S. Holdings, Inc., GAP
16, GAP 19, GAP II, GAP 54, GAPCO and GAPCO II is incorporated herein by
reference to Exhibit 3 to the Schedule 13D filed by General Atlantic
Partners, LLC and certain of its affiliates on December 23, 1999.10.40
    
    Right of First Refusal Offer Agreement, dated November 15, 1999, by and
among California U.S. Holdings, Inc. and the Lenders named therein is
incorporated herein by reference to Exhibit 13 to the Schedule 13D filed
by Infogrames Entertainment SA and California U.S. Holdings, Inc. on
December 14, 1999.10.41
    
    Amended and Restated Unconditional Subsidiary Guaranty Agreement, dated
as of November 15, 1999, among certain subsidiaries of the Company,
California U.S. Holdings, Inc. and First Union National Bank, as
administrative agent, for the benefit of the Lenders is incorporated
herein by reference to Exhibit 15 to the Schedule 13D filed by Infogrames
Entertainment SA and California U.S. Holdings, Inc. on December 14, 1999.10.42
    
    Second Amended and Restated Security Agreement, dated as of November 15,
1999, by and among the Registrant, certain of its subsidiaries, First
Union National Bank, as Administrative Agent, and California U.S.
Holdings, Inc. is incorporated herein by reference to Exhibit 10.4 to the
Companys Current Report on Form 8-K filed on November 19, 1999. 47




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##### Table of Contents



10.43
    
    Second Amended and Restated Pledge Agreement, dated as of November 15,
1999, by the Company and certain of its subsidiaries in favor of First
Union National Bank, as Administrative Agent, and California U.S.
Holdings, Inc. is incorporated herein by reference to Exhibit 10.5 to the
Companys Current Report on Form 8-K filed on November 19, 1999.10.44
    
    Securities Purchase Agreement, dated as of November 15, 1999, by and
among Infogrames Entertainment S.A., California U.S. Holdings, Inc. and
the Company is incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on 8-K filed on November 19, 1999.10.45
    
    Securities Exchange Agreement, dated as of November 15, 1999, by and
among the Company, General Atlantic Partners 54, L.P., and GAP
Coinvestment Partners II, L.P. is incorporated herein by reference to
Exhibit 10.2 to the Companys Current Report on 8-K filed on November 19,
1999.10.46
    
    Promissory Note of the Company in the aggregate principal amount of
$25,000,000 payable to California U.S. Holdings, Inc. is incorporated
herein by reference to Exhibit 10.6 to the Companys Current Report on 8-K
filed on November 19, 1999.10.47
    
    Master Assignment and Acceptance, dated as of February 15, 2000, by and
among the Company, the Assignors and Infogrames Entertainment SA is
incorporated herein by reference to Exhibit 10.26g to the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.10.48
    
    Reimbursement and Cash Collateral Agreement, dated as of February 15,
2000, by and between the Company and First Union National Bank is
incorporated herein by reference to Exhibit 10.26k to the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.10.49
    
    Collateral Assignment Agreement, dated as of February 15, 2000, by and
among First Union National Bank, Infogrames Entertainment SA, the Company
and the Guarantors is incorporated herein by reference to Exhibit 10.26l
to the Companys Annual Report on Form 10-K for the fiscal year ended
March 31, 2000.10.50
    
    Letter Agreement, dated as of November 30, 2001, between the Company and
BNP Paribas is incorporated herein by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q filed on February 14, 2002.10.51
    
    Stock Purchase Agreement, dated as of April 23, 2002, by and among
Interplay Entertainment Corp., Shiny Entertainment, Inc., David Perry,
Shiny Group, Inc. and the Company is incorporated herein by reference to
Exhibit 2.1 to the Companys Current Report on Form 8-K filed on May 15,
2002.10.52
    
    Amendment No. 1 to Stock Purchase Agreement, dated as of April 30, 2002,
by and among Interplay Entertainment Corp., Shiny Entertainment, Inc.,
David Perry, Shiny Group, Inc. and the Company is incorporated herein by
reference to Exhibit 2.2 to the Companys Current Report on Form 8-K filed
on May 15, 2002.10.53
    *
    Letter of Employment, dated as of April 23, 2002, between David Perry
and the Company is incorporated herein by reference to Exhibit 10.53 to
the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2002.10.54
    *
    The 1995 Stock Incentive Plan (as amended on October 31, 1996) is
incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to the
Companys Registration Statement on Form S-1, filed December 6, 1996.10.55
    *
    The 1997 Stock Incentive Plan is incorporated herein by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.10.56
    *
    The 1997 Stock Incentive Plan (as amended on June 17, 1998) is
incorporated herein by reference to Exhibit 10.5 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.10.57
    *
    The 2000 Stock Incentive Plan is incorporated herein by reference to
Appendix B to the Companys proxy statement dated June 29, 2000.10.58
    *
    The 1998 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998. 48




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##### Table of Contents



10.59
    *
    Description of Registrants Executive Bonus Plan for fiscal 2004.**10.60
    *
    Employment Agreement, dated June 1, 2002, between the Company and Harry
M. Rubin is incorporated herein by reference to Exhibit 6.1 to the
Companys Annual Report on Form 10-K for the quarter ended June 30, 2002.10.61
    *
    Letter Agreement, dated April 20, 2000, by and between David Fremed and
the Company is incorporated herein by reference to Exhibit 10.15 to the
Companys Annual Report on Form 10-K for the fiscal year ended March 31,
2000.10.62
    *
    Letter Agreement, dated September 7, 2000, by and between Lisa Rothblum
and the Company is incorporated herein by reference to Exhibit 10.8 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2001.10.63
    *
    Consulting Agreement between the Company and Ann Kronen, dated as of
July 8, 2003.**10.64
    
    Medium Term Loan Agreement of Infogrames Entertainment SA, dated as of
April 22, 2002 by and between the Company and Infogrames Entertainment SA
is incorporated herein by reference to Exhibit 10.55 to Companys
Registration Statement on Form S-2 (File No. 333-107819) initially filed
with the SEC on August 8, 2003, and all amendments thereto.10.65
    
    Agreement of Lease, dated as of December 12, 1996, by and between the
Company and F.S. Realty Corp is incorporated herein by reference to
Exhibit 10.29 to the Companys Annual Report on Form 10-K for the year
ended December 31, 1996.10.66
    
    Lease Agreement between the Company and Netbreeders Realty LLC, dated
November 1, 1999, is incorporated herein by reference to Exhibit 10.11 to
the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2001.10.67
    
    Sublease Agreement between the Company and SAVI Technology, Inc., dated
May 30, 2001, is incorporated herein by reference to Exhibit 10.14 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2001.10.68
    
    Lease Agreement between the Company and Edward Silver, Co-Trustee of the
Silver Trust and Paul Weinstein, Co-Trustee of the Weinstein Trust (dba
PTL Realty), dated May 7, 2001, is incorporated herein by reference to
Exhibit 10.15 to the Companys Annual Report on Form 10-K for the fiscal
year ended June 30, 2001.10.69
    
    Lease Agreement between the Company and MV 1997, L.L.C., dated November
24, 1997, is incorporated herein by reference to Exhibit 10.16 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2001.10.70
    
    Lease Agreement between the Company and Northwest Properties Realty
Corp., dated February 22, 1999, is incorporated herein by reference to
Exhibit 10.17 to the Companys Annual Report on Form 10-K for the fiscal
year ended June 30, 2001.10.71
    
    Lease Agreement between the Company and Cimarron Airpark L.L.C. VIII,
dated June 1, 1995, is incorporated herein by reference to Exhibit 10.18
to the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2001.10.72
    
    Sublease Agreement between the Company and XPIDATA, Inc., dated December
6, 1996, is incorporated herein by reference to Exhibit 10.19 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2001. 49




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##### Table of Contents



10.73
    
    Lease Agreement between Parabola Estates Limited and Reflections
Interactive Limited dated September 10, 2001 is incorporated
herein by reference to Exhibit 10.56 to the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2002.10.74
    
    Lease Agreement between Prima Development Corp. and the Company dated
May 17, 2002 is incorporated herein by reference to Exhibit 10.55 to the
Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2002.10.75
    
    Licensed Publisher Agreement between the Company and Sony Computer
Entertainment America, Inc., dated January 19, 2003, is incorporated
herein by reference to Exhibit 10.62 to the Companys Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC
on August 8, 2003, and all amendments thereto.10.76
    
    Xbox Publisher License Agreement between the Company and Microsoft
Corporation, dated April 18, 2000, is incorporated herein by reference to
Exhibit 10.63 to the Companys Registration Statement on Form S-2 (File
No. 333-107819) initially filed with the SEC on August 8, 2003, and all
amendments thereto.10.77
    
    Sublicense Agreement between the Company and Funimation Productions,
Ltd., dated October 27, 1999, is incorporated herein by reference to
Exhibit 10.64 to the Companys Registration Statement on Form S-2 (File
No. 333-107819) initially filed with the SEC on August 8, 2003, and all
amendments thereto.10.78
    
    Amendment One to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated April 20, 2002, is incorporated herein
by reference to Exhibit 10.65 to the Companys Registration Statement on
Form S-2 (File No. 333-107819) initially filed with the SEC on August 8,
2003, and all amendments thereto.10.79
    
    Amendment Two to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated June 15, 2002, is incorporated herein
by reference to Exhibit 10.66 to the Companys Registration Statement on
Form S-2 (File No. 333-107819) initially filed with the SEC on August 8,
2003, and all amendments thereto.10.80
    
    Amendment Three to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated October 15, 2002, is incorporated
herein by reference to Exhibit 10.67 to the Companys Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC
on August 8, 2003, and all amendments thereto.10.81
    
    Amendment Four to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated November 13, 2002, is incorporated
herein by reference to Exhibit 10.68 to the Companys Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC
on August 8, 2003, and all amendments thereto.10.82
    
    Amendment Five to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated February 21, 2003, is incorporated
herein by reference to Exhibit 10.69 to the Companys Registration
Statement on Form S-2 (File No. 333-107819) initially filed with the SEC
on August 8, 2003, and all amendments thereto.10.83
    
    Amendment Six to the Sublicense Agreement between the Company and
Funimation Productions, Ltd., dated August 11, 2003.**10.84
    
    Agreement Regarding Satisfaction of Debt and License Amendment among the
Company, Infogrames Entertainment S.A. and California U.S. Holdings, Inc.,
dated September 4, 2003, is incorporated herein by reference to Exhibit
10.70 to the Companys Registration Statement on Form S-2 (File No.
333-107819) initially filed with the SEC on August 8, 2003, and all
amendments thereto.10.85
    
    Amended Trademark License Agreement between the Company and Infogrames
Entertainment S.A., dated September 4, 2003, is incorporated herein by
reference to Exhibit 10.71 to the Companys Registration Statement on Form
S-2 (File No. 333-107819) initially filed with the SEC on August 8, 2003,
and all amendments thereto.10.86
    
    Promissory Note of Atari Interactive, Inc., in the aggregate amount of
$5,122,625 payable to the Company.**10.87
    
    Promissory Note of Atari Interactive, Inc., in the aggregate amount of
$2,620,280 payable to the Company.**10.88
    
    Promissory Note of Paradigm Entertainment, Inc., in the aggregate amount
of $828,870 payable to the Company.** 50




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##### Table of Contents



21.1
    
    List of Subsidiaries.**23.1
    
    Consent of Deloitte & Touche LLP.**24.1
    
    Power of Attorney.**31.1
    
    Chief Executive Officer and Acting Chief Financial
Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**32.1
    
    Certification by the Chief Executive Officer and the Acting Chief
Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.**99.1
    
    Amended and Restated Audit Committee Charter (Amended January 29, 2004).**99.2
    
    Compensation Committee Charter, as amended January 29, 2004.** Exhibit indicated with an * symbol is a management contract or compensatory
plan or arrangement filed pursuant to Item 15(c) of Form 10-K. Exhibit indicated with an ** symbol is filed herewith.  Portions of this exhibit have been redacted pursuant to a confidential
treatment request filed with the SEC. A copy of any of the exhibits included in this Annual Report on Form 10-K may
be obtained by written request to Atari, Inc. upon payment of a fee of $0.10
per page to cover costs. Requests should be sent to Atari, Inc. at the address
set forth on the front cover, attention Director, Investor Relations. (c) Reports on Form 8-K We filed the following Current Reports on Form 8-K during the fourth quarter
ended March 31, 2004: Date of Report
    
    Item Reported
    
    Financial Statements FiledJanuary 27, 2004
    
    
    12
    (1)
    
    None.February 2, 2004
    
    
    12
    (2)
    
    None.
    (1)
    
    This Current Report was filed to report revisions to our previously
issued financial guidance for the fiscal quarter ended December 31, 2003
and the fiscal year ending March 31, 2004.(2)
    
    This Current Report was filed to report our financial results for the
fiscal quarter ended December 31, 2003. 51




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. ATARI, INC.By:
    
    /s/
    
    Bruno BonnellName:
    
    Bruno BonnellTitle:
    
    Chief Executive OfficerDate:
    
    June 14, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated. Signature
    
    Title(s)
    
    Date/s/ Bruno Bonnell
Bruno Bonnell
    
    Chairman of the Board of Directors,
Chief Executive
Officer
   (principal executive officer),
Acting Chief Financial Officer
   (principal financial officer) and Director
    
    June 14, 2004/s/ Denis Guyennot
Denis Guyennot
    
    Director and President, Chief Operating   Officer
and Secretary
    
    June 14, 2004/s/ Jodi Scheurenbrand
Jodi Scheurenbrand
    
    Controller (principal accounting officer)
    
    June 14, 2004/s/ James Ackerly
James Ackerly
    
    Director
    
    June 11, 2004/s/ James Caparro
James Caparro
    
    Director
    
    June 10, 2004/s/ Thomas A. Heymann

Thomas A. Heymann
    
    Director
    
    June 14, 2004/s/ Ann E. Kronen

Ann E. Kronen
    
    Director
    
    June 11, 2004/s/ Thomas J. Mitchell

Thomas J. Mitchell
    
    Director
    
    June 14, 2004/s/ Thomas Schmider
Thomas Schmider
    
    Director
    
    June 14, 2004/s/ David Ward
David Ward
    
    Director
    
    June 11, 2004
 52




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Atari, Inc.
New York, New York We have audited the accompanying consolidated balance sheets of
Atari, Inc. and subsidiaries (the Company) as of March 31, 2004 and
2003, and the related consolidated statements of operations and
comprehensive income (loss), stockholders equity (deficiency) and
cash flows for the year ended March 31, 2004, the nine months ended
March 31, 2003, and for the year ended June 30, 2002. Our audits also
included the consolidated financial statement schedule listed at Item
15. These consolidated financial statements and the consolidated
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial
statement schedule based on our audits. We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board in the United States of
America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Atari, Inc. and its subsidiaries as of March 31, 2004 and
2003, and the consolidated results of their operations and their cash
flows for the year ended March 31, 2004, nine months ended March 31,
2003, and for the year ended June 30, 2002 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. New York, New York
June 11, 2004 F-1




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands) March 31,
    
    March 31,2003
    
    2004ASSETSCurrent assets:Cash
    
    $
    815
    
    
    $
    9,621Receivables, net
    
    
    47,053
    
    
    
    37,707Inventories, net
    
    
    37,827
    
    
    
    27,520Income taxes receivable
    
    
    395
    
    
    
    2,320Due from related parties
    
    
    2,656
    
    
    
    4,175Prepaid expenses and other current assets
    
    
    16,958
    
    
    
    12,465Related party notes receivables
    
    
    
    
    
    
    8,571Total current assets
    
    
    105,704
    
    
    
    102,379Advances to related parties
    
    
    32,184

    
    
    
    Property and equipment, net
    
    
    14,727
    
    
    
    13,267Goodwill, net of accumulated amortization of $26,116 in both periods
    
    
    70,224
    
    
    
    70,224Other intangible assets, net of accumulated amortization of $619 and $1,294, at
March 31, 2003 and March 31, 2004, respectively
    
    
    2,081
    
    
    
    1,406Other assets
    
    
    7,162
    
    
    
    6,680Total assets
    
    $
    232,082
    
    
    $
    193,956LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current liabilities:Accounts payable
    
    $
    39,587
    
    
    $
    37,837Accrued liabilities
    
    
    31,872
    
    
    
    15,886Revolving credit facility
    
    
    10,651
    
    
    
    Current portion of related party medium-term loan
    
    
    40,000
    
    
    
    Related party credit facility
    
    
    44,800
    
    
    
    Royalties payable
    
    
    13,653
    
    
    
    14,481Income taxes payable
    
    
    1,965
    
    
    
    450Short-term deferred income
    
    
    2,077
    
    
    
    2,107Due to related parties
    
    
    12,747
    
    
    
    6,704Total current liabilities
    
    
    197,352
    
    
    
    77,465Related party debt
    
    
    124,610
    
    
    
    Deferred income
    
    
    4,131
    
    
    
    555Other long-term liabilities
    
    
    2,907
    
    
    
    873Total liabilities
    
    
    329,000
    
    
    
    78,893Commitments and contingenciesStockholders equity (deficiency):Preferred stock, $0.01 par value, 5,000 shares authorized, none issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 300,000 shares authorized, 69,920 and 121,231
shares issued and outstanding at March 31, 2003 and March 31, 2004,
respectively
    
    
    699
    
    
    
    1,212Additional paid-in capital
    
    
    486,053
    
    
    
    735,964Accumulated deficit
    
    
    (586,851
    )
    
    
    (625,436
    )Accumulated other comprehensive income
    
    
    3,181
    
    
    
    3,323Total stockholders (deficiency) equity
    
    
    (96,918
    )
    
    
    115,063Total liabilities and stockholders (deficiency) equity
    
    $
    232,082
    
    
    $
    193,956
 The accompanying notes are an integral part of these consolidated financial statements. F-2




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data) Year
    
    Nine Months
    
    YearsEnded June 30,
    
    Ended March 31,
    
    Ended March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Net revenues
    
    $
    419,045
    
    
    $
    289,442
    
    
    $
    404,645
    
    
    $
    534,248
    
    
    $
    468,944Cost of goods sold
    
    
    212,380
    
    
    
    152,355
    
    
    
    203,858
    
    
    
    263,883
    
    
    
    248,981Gross profit
    
    
    206,665
    
    
    
    137,087
    
    
    
    200,787
    
    
    
    270,365
    
    
    
    219,963Selling and distribution expenses
    
    
    84,628
    
    
    
    62,862
    
    
    
    72,005
    
    
    
    93,771
    
    
    
    85,031General and administrative expenses
    
    
    37,423
    
    
    
    28,924
    
    
    
    32,685
    
    
    
    41,184
    
    
    
    33,310In-process research and development
    
    
    7,400
    
    
    
    
    
    
    
    
    
    
    
    7,400
    
    
    
    Research and development
    
    
    70,798
    
    
    
    49,399
    
    
    
    62,797
    
    
    
    84,197
    
    
    
    88,343Gain on sale of development project
to a related party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,744
    )Depreciation and amortization
    
    
    5,454
    
    
    
    3,537
    
    
    
    5,859
    
    
    
    7,777
    
    
    
    9,155Operating income (loss)
    
    
    962
    
    
    
    (7,635
    )
    
    
    27,441
    
    
    
    36,036
    
    
    
    7,868Interest expense, net
    
    
    (11,956
    )
    
    
    (7,887
    )
    
    
    (9,598
    )
    
    
    (13,667
    )
    
    
    (7,658
    )Other (expense) income
    
    
    (3,272
    )
    
    
    287
    
    
    
    632
    
    
    
    (2,926
    )
    
    
    (2,363
    )(Loss) income before (benefit from)
provision for income taxes
    
    
    (14,266
    )
    
    
    (15,235
    )
    
    
    18,475
    
    
    
    19,443
    
    
    
    (2,153
    )(Benefit from) provision for income taxes
    
    
    (3,336
    )
    
    
    (5,014
    )
    
    
    405
    
    
    
    2,083
    
    
    
    (2,919
    )Net (loss) income
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    766Dividend to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,351
    )(Loss) income attributable to
common stockholders
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    (38,585
    )Basic and diluted (loss) income per
share attributable to common
stockholders
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    (0.40
    )Basic weighted average shares
outstanding
    
    
    69,722
    
    
    
    69,686
    
    
    
    69,878
    
    
    
    69,864
    
    
    
    96,990Diluted weighted average shares
outstanding
    
    
    69,722
    
    
    
    69,686
    
    
    
    70,055
    
    
    
    70,058
    
    
    
    96,990Net (loss) income
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    766Other comprehensive (loss) income:Foreign currency translation
adjustments
    
    
    777
    
    
    
    489
    
    
    
    46
    
    
    
    334
    
    
    
    142Unrealized (loss) on securities
    
    
    (57
    )
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    Reclassification adjustment for
realized gains included in net loss
    
    
    (388
    )
    
    
    (388
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive (loss) income
    
    $
    (10,598
    )
    
    $
    (10,177
    )
    
    $
    18,116
    
    
    $
    17,694
    
    
    $
    908
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Year
    
    Nine Months
    
    YearsEnded
    
    Ended
    
    EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    

    
    
    
    
    (unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    766Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    5,454
    
    
    
    3,537
    
    
    
    5,859
    
    
    
    7,777
    
    
    
    9,155Loss on sale of investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,750Write-down of investment
    
    
    3,622
    
    
    
    
    
    
    
    
    
    
    
    3,622
    
    
    
    Amortization of discount on related party debt
    
    
    2,870
    
    
    
    2,153
    
    
    
    2,153
    
    
    
    2,870
    
    
    
    1,339Accrued interest
    
    
    5,586
    
    
    
    2,911
    
    
    
    5,295
    
    
    
    6,141
    
    
    
    1,903Accretion of interest on short-term promissory notes
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred financing fees
    
    
    956
    
    
    
    717
    
    
    
    959
    
    
    
    1,061
    
    
    
    2,466Recognition of deferred income
    
    
    (1,750
    )
    
    
    (1,750
    )
    
    
    631
    
    
    
    2,438
    
    
    
    (3,577
    )Write-off of property and equipment
    
    
    547
    
    
    
    52
    
    
    
    363
    
    
    
    832
    
    
    
    38In-process research and development related to
acquisition of Shiny Entertainment, Inc.
    
    
    7,400
    
    
    
    
    
    
    
    
    
    
    
    7,400
    
    
    
    Gain on sale of marketable securities
    
    
    (388
    )
    
    
    (388
    )
    
    
    
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Receivables, net
    
    
    (43,683
    )
    
    
    (3,073
    )
    
    
    34,162
    
    
    
    (6,479
    )
    
    
    9,346Inventories, net
    
    
    (15,830
    )
    
    
    (13,191
    )
    
    
    7,420
    
    
    
    4,781
    
    
    
    10,307Due from related parties
    
    
    519
    
    
    
    (1,691
    )
    
    
    1,478
    
    
    
    3,743
    
    
    
    (793
    )Due to related parties
    
    
    (10,447
    )
    
    
    (10,219
    )
    
    
    2,884
    
    
    
    4,652
    
    
    
    (6,774
    )Prepaid expenses and other current assets
    
    
    (1,325
    )
    
    
    (2,543
    )
    
    
    (7,620
    )
    
    
    (7,384
    )
    
    
    6,229Accounts payable
    
    
    20,869
    
    
    
    2,420
    
    
    
    (19,708
    )
    
    
    (1,207
    )
    
    
    (1,840
    )Accrued liabilities
    
    
    3,810
    
    
    
    (4,027
    )
    
    
    (3,893
    )
    
    
    3,869
    
    
    
    (16,459
    )Royalties payable
    
    
    (3,047
    )
    
    
    (5,756
    )
    
    
    4,735
    
    
    
    7,448
    
    
    
    2,027Deferred income
    
    
    1,747
    
    
    
    1,940
    
    
    
    
    
    
    
    
    
    
    
    30Income taxes payable
    
    
    962
    
    
    
    
    
    
    
    507
    
    
    
    1,503
    
    
    
    (1,543
    )Income taxes receivable
    
    
    1,307
    
    
    
    (3,973
    )
    
    
    689
    
    
    
    5,984
    
    
    
    (1,909
    )Other long-term liabilities
    
    
    3,714
    
    
    
    1,618
    
    
    
    (233
    )
    
    
    (143
    )
    
    
    (298
    )Other assets
    
    
    5,759
    
    
    
    3,175
    
    
    
    (1,450
    )
    
    
    2,144
    
    
    
    (286
    )Net cash (used in) provided by operating activities
    
    
    (22,212
    )
    
    
    (38,309
    )
    
    
    52,301
    
    
    
    68,412
    
    
    
    11,877CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (8,571
    )
    
    
    (6,489
    )
    
    
    (4,067
    )
    
    
    (6,084
    )
    
    
    (5,128
    )Proceeds from sale of marketable securities
    
    
    497
    
    
    
    497
    
    
    
    
    
    
    
    
    
    
    
    Issuance of related party notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,571
    )Advances to related parties
    
    
    
    
    
    
    
    
    
    
    (32,184
    )
    
    
    (32,184
    )
    
    
    (14,368
    )Acquisition of Shiny Entertainment, Inc., net of nominal
cash acquired
    
    
    (34,010
    )
    
    
    
    
    
    
    
    
    
    
    (34,010
    )
    
    
    Net cash used in investing activities
    
    
    (42,084
    )
    
    
    (5,992
    )
    
    
    (36,251
    )
    
    
    (72,278
    )
    
    
    (28,067
    )
 F-4




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##### Table of Contents



Year
    
    Nine Months
    
    YearsEnded
    
    Ended
    
    EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings (payments) under related party credit facility,
net
    
    
    52,373
    
    
    
    54,000
    
    
    
    (16,632
    )
    
    
    (18,258
    )
    
    
    Borrowings from related party medium-term loan
    
    
    39,381
    
    
    
    
    
    
    
    8,896
    
    
    
    48,277
    
    
    
    Payments to third parties
    
    
    (7,291
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payments of BNP Paribus revolving credit facility
    
    
    (19,888
    )
    
    
    (10,000
    )
    
    
    (15,000
    )
    
    
    (25,000
    )
    
    
    Borrowings (payments) under General Electric Capital
Corporation Senior Credit Facility, net
    
    
    
    
    
    
    
    
    
    
    10,651
    
    
    
    10,651
    
    
    
    (10,651
    )Payments under short-term promissory notes
    
    
    
    
    
    
    
    
    
    
    (8,833
    )
    
    
    (16,058
    )
    
    
    Proceeds from exercise of stock options
    
    
    32
    
    
    
    32
    
    
    
    116
    
    
    
    116
    
    
    
    518Net proceeds from public stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,875Proceeds from employee stock purchase plan
    
    
    204
    
    
    
    127
    
    
    
    125
    
    
    
    199
    
    
    
    104Net cash provided by (used for) financing activities
    
    
    64,811
    
    
    
    44,159
    
    
    
    (20,677
    )
    
    
    (73
    )
    
    
    24,846Effect of exchange rates on cash
    
    
    136
    
    
    
    75
    
    
    
    39
    
    
    
    69
    
    
    
    150Net increase (decrease) in cash
    
    
    651
    
    
    
    (67
    )
    
    
    (4,588
    )
    
    
    (3,870
    )
    
    
    8,806Cash  beginning of fiscal year
    
    
    4,752
    
    
    
    4,752
    
    
    
    5,403
    
    
    
    4,685
    
    
    
    815Cash  end of fiscal year
    
    $
    5,403
    
    
    $
    4,685
    
    
    $
    815
    
    
    $
    815
    
    
    $
    9,621SUPPLEMENTAL CASH FLOW INFORMATIONSUPPLEMENTAL DISCLOSURE OF
OPERATING ACTIVITIES:Cash paid for interest
    
    
    2,770
    
    
    
    2,344
    
    
    
    3,599
    
    
    
    4,114
    
    
    
    5,984Cash paid for taxes
    
    
    
    
    
    
    
    
    
    
    450
    
    
    
    450
    
    
    
    739Income tax refunds
    
    
    6,861
    
    
    
    1,066
    
    
    
    1,157
    
    
    
    6,952
    
    
    
    18SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:Acquisition
of Shiny Entertainment, Inc.:Fair value of assets acquired
    
    $
    50,776
    
    
    $
    
    
    
    $
    
    
    
    $
    50,776
    
    
    $
    Less: Short-term promissory notes issued to seller and others
    
    
    (16,059
    )
    
    
    
    
    
    
    
    
    
    
    (16,059
    )
    
    
    Assumption of stock options
    
    
    (672
    )
    
    
    
    
    
    
    
    
    
    
    (672
    )
    
    
    Other payments due seller
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    Cash acquired
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    Acquisition, net of cash acquired
    
    $
    34,010
    
    
    $
    
    
    
    $
    
    
    
    $
    34,010
    
    
    $
    Acquisition of Atari license for 2,000 shares of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,500SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:Sale of treasury stock in lieu of partial royalty payment
    
    
    855
    
    
    
    855
    
    
    
    
    
    
    
    
    
    
    
    Assumption of Shiny Entertainment, Inc. employee stock purchase
plan
    
    
    672
    
    
    
    
    
    
    
    
    
    
    
    672
    
    
    
    Issuance of warrants to external developer
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    54
    
    
    
    Conversion
of warrants under cash - less exercise option
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares in lieu of partial royalty payment
    
    
    41
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    1,199Net debt exchanged for 39,030 shares of common stock:Related party debt, revolving credit facility and related party
medium-term loan prior to recapitalization of debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    212,429Less: Offset of advances to related parties against related
party debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,552
    )Net debt exchanged for common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    165,877
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
(in thousands) AccumulatedCommon
    
    
    
    
    
    Additional
    
    
    
    
    
    Other
    
    
    
    
    
    TreasuryStock
    
    Common
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    Treasury
    
    SharesShares
    
    Stock
    
    Capital
    
    Deficit
    
    Income
    
    Shares
    
    at Cost
    
    TotalBalance, July 1, 2001
    
    
    69,759
    
    
    $
    698
    
    
    $
    486,306
    
    
    $
    (593,991
    )
    
    $
    2,803
    
    
    
    235
    
    
    $
    (2,352
    )
    
    $
    (106,536
    )Issuance of common stock pursuant to
employee stock purchase plan
    
    
    30
    
    
    
    
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204Sales of treasury shares in lieu of
partial royalty payment
    
    
    
    
    
    
    
    
    
    
    (1,497
    )
    
    
    
    
    
    
    
    
    
    
    (235
    )
    
    
    2,352
    
    
    
    855Exercise of stock options
    
    
    5
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,930
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,930
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    777
    
    
    
    
    
    
    
    
    
    
    
    777Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    (57
    )Reclassification adjustment for
realized gains included in net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (388
    )
    
    
    
    
    
    
    
    
    
    
    (388
    )Assumption of stock options pursuant
to the acquisition of Shiny
Entertainment, Inc.
    
    
    
    
    
    
    
    
    
    
    672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    672Conversion of warrants under cashless exercise option
    
    
    21
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Issuance of common stock in lieu of
partial royalty payment
    
    
    11
    
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Balance, June 30, 2002
    
    
    69,826
    
    
    
    698
    
    
    
    485,759
    
    
    
    (604,921
    )
    
    
    3,135
    
    
    
    
    
    
    
    
    
    
    
    (115,329
    )Issuance of common stock pursuant to
employee stock purchase plan
    
    
    46
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Exercise of stock options
    
    
    48
    
    
    
    1
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116Issuance of warrants to external
developer
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,070Foreign currency translation
Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46
 F-6




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##### Table of Contents



AccumulatedCommon
    
    
    
    
    
    Additional
    
    
    
    
    
    Other
    
    
    
    
    
    TreasuryStock
    
    Common
    
    Paid-In
    
    Accumulated
    
    Comprehensive
    
    Treasury
    
    SharesShares
    
    Stock
    
    Capital
    
    Deficit
    
    Income
    
    Shares
    
    at Cost
    
    TotalBalance, March 31, 2003
    
    
    69,920
    
    
    
    699
    
    
    
    486,053
    
    
    
    (586,851
    )
    
    
    3,181
    
    
    
    
    
    
    
    
    
    
    
    (96,918
    )Issuance of common stock pursuant to
employee stock purchase plan
    
    
    47
    
    
    
    1
    
    
    
    103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104Exercise of stock options
    
    
    120
    
    
    
    1
    
    
    
    517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    766Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    142Cashless exercise of warrants
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock in lieu of
partial royalty payment
    
    
    280
    
    
    
    3
    
    
    
    1,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,199Issuance of 39,030 common shares as
part of the Companys recapitalization
in exchange for cancellation of
related party debt, related party credit
facility and related party medium-
term loan
    
    
    39,030
    
    
    
    390
    
    
    
    165,487
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165,877Dividend to parent as part of the
recapitalization of related party debt
to common shares
    
    
    
    
    
    
    
    
    
    
    39,351
    
    
    
    (39,351
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 2,000 common shares for
license of the Atari name
    
    
    2,000
    
    
    
    20
    
    
    
    8,480
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,500Issuance of 9,821 common shares in
secondary offering, net of expenses
    
    
    9,821
    
    
    
    98
    
    
    
    34,777
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,875Balance, March 31, 2004
    
    
    121,231
    
    
    $
    1,212
    
    
    $
    735,964
    
    
    $
    (625,436
    )
    
    $
    3,323
    
    
    
    
    
    
    $
    
    
    
    $
    115,063
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1  Operations and Summary of Significant Accounting Policies Nature of Business Atari, Inc., a Delaware corporation (the Company), is a leading
worldwide developer, publisher and distributor of interactive entertainment
software for use on various platforms, including personal computers (PCs),
Sony PlayStation and PlayStation2, Microsoft Xbox and Nintendo GameCube,
Game Boy and Game Boy Advance. The Company derives its revenues primarily from
the sale of its created, published, licensed and purchased products to mass
merchants, specialty software stores, computer superstores and distributors
located throughout North America and also in various international locations. In May 2003, the Company changed its name to Atari, Inc. and changed its
trading symbol on the NASDAQ National Market to ATAR. The Company obtained
rights to use the Atari name through a license from Infogrames Entertainment
SA, a French corporation (IESA) which IESA acquired as a part of the
acquisition of Hasbro Interactive Inc. (Hasbro Interactive). The Company
believes that the Atari brand, which is largely credited with launching the
video game industry, continues to carry a level of respect, recognition and
legacy for innovation that will enhance the Companys reputation and improve
consumer recognition of its products. As of May 2003, all of the Companys
products are published, distributed and marketed under the Atari brand. On November 12, 2002 (last amended May 20, 2004), the Company obtained a
30-month $50.0 million secured revolving credit facility (Senior Credit
Facility) with General Electric Capital Corporation (GECC) (Note 14) which
was used to fund the Companys working capital and general corporate needs and
to provide funding to related parties which are wholly-owned by IESA. IESA
owns approximately 67% of the Company, after the exercise of an underwriters
over-allotment option on October 21, 2003, directly and through its
wholly-owned subsidiaries California U.S. Holdings, Inc. (CUSH) and Atari
Interactive, Inc. (Atari Interactive). (See
Recapitalization and Offering
below.) As part of the recent amendments to the GECC Senior Credit Facility,
the Company no longer provides funding to related parties, beyond amounts previously advanced without GECCs consent. During September 2003, the Company entered into a series of transactions
to restructure the Companys debt and equity through a recapitalization of debt
and an underwritten secondary public offering of common stock (Offering). In
conjunction with the recapitalization of debt, the Company secured long-term
rights to the Atari name (Atari License). Recapitalization In September 2003, the Company, IESA, and CUSH entered into an agreement
(Recapitalization Agreement) resulting in the exchange of all of the
Companys net related party debt with IESA and certain of its wholly-owned
subsidiaries totaling $165.9 million into 39,029,877 shares of the Companys
common stock immediately prior to the Offering. The conversion price was
consistent with the Offering price of $4.25 per share. The converted debt
consisted of the following outstanding amounts at September 18, 2003: $48.3
million of a medium-term loan, $44.8 million of a revolving credit agreement
with IESA, $46.3 million of non-interest bearing subordinated convertible notes
and $73.1 million of 5% subordinated convertible notes. The Recapitalization
Agreement provided for an offset of previously provided advances to Atari
Interactive and Atari Australia Pty. Ltd. (Atari Australia) of $44.7 million
and $1.9 million, respectively. Accordingly, at March 31, 2004, no previously

outstanding amounts remain outstanding in Advances to Related Parties, Current
Portion of Related Party Medium-Term Loan, Related Party Credit Facility and
Related Party Debt. However, the Company has $8.6 million in related party
notes receivable outstanding at March 31, 2004, which arose after the
Recapitalization and are related to certain other transactions. Such notes are
permitted by the GECC Senior Credit Facility. In connection with the Recapitalization Agreement, the Company issued
stock at a more favorable rate than was available, at the holders option,
under the original terms of the 5% subordinated convertible notes. The
incremental value of the additional stock issued was reported as a dividend to
IESA for $39.4 million, which had no impact on total stockholders equity and
has been reported as a charge in computing (loss) income attributable to common
stockholders. F-8




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##### Table of Contents



Atari License In connection with the Recapitalization Agreement, Atari Interactive
extended the term of the license under which the Company uses the Atari name to
ten years expiring on December 31, 2013. The Company issued 2,000,000 shares
of its common stock to Atari Interactive for the extended license and will pay
a royalty equal to 1% of the Companys net revenues during years six through
ten of the extended license. The Company recorded a deferred charge of $8.5
million, which is being amortized at the rate of approximately $0.3 million per
month. The monthly amortization is based on the total estimated cost to be
incurred by the Company over the ten-year license period. At March 31, 2004,
$3.4 million of this charge is included in Prepaid Expenses and Other Current
Assets with the remaining $3.4 million, net of $1.7 million of amortization,
included in Other Assets. Offering On September 24, 2003, the Company offered to the public 9,820,588 new
shares of the Companys common stock at an offering price of $4.25 per share.
The net proceeds to the Company after all costs were $34.9 million.The
Company used $3.9 million of the net proceeds to repay indebtedness outstanding
under its credit facility with GECC. The remaining proceeds were used to pay
costs of developing video game software and to meet general working capital
needs. Additionally, on September 24, 2003, IESA sold 17,179,412 shares of the
Companys common stock as part of the Offering. The Company did not receive
any proceeds from the sale of IESAs common stock in the Company. Finally, on
October 21, 2003, the underwriters exercised their over-allotment option,
purchasing 3,855,400 shares at a purchase price of $4.25 per share. The option
shares were purchased from IESA, reducing IESAs direct and indirect ownership
to approximately 67% of the Company. The Company did not receive any of the
proceeds from the exercise of the over-allotment option. Change in Fiscal Year-end Effective March 28, 2003, the Company changed its fiscal year-end from
June 30 to March 31. Accordingly, the audited fiscal period ended March 31,
2003, represents nine months of operations and the audited fiscal period ended March
31, 2004, represents twelve months of operations. Unaudited Consolidated Financial Statements The unaudited consolidated financial statements and related notes for the
nine months ended March 31, 2002 and the year ended March 31, 2003 have been
prepared on the same basis as the audited consolidated financial statements. In
the opinion of management, such unaudited financial statements include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of this information. These financial statements are presented for
comparative purposes. Principles of Consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated. Revenue Recognition Revenue is recognized when title and risk of loss transfers to the
customer, provided that collection of the resulting receivable is deemed
probable by management. The Company is not contractually obligated to accept returns except for
defective product. However, the Company may permit its customers to return or
exchange product and provides allowances for estimated returns, price
concessions, or other allowances on a negotiated basis. The Company estimates
such returns and allowances based upon managements evaluation of historical
experience, market acceptance of products produced, retailer inventory levels,
budgeted customer allowances, the nature of the title and existing commitments
to customers. Such estimates are deducted from gross sales and provided for at
the time revenue is recognized. F-9




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##### Table of Contents



Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could materially
differ from those estimates. Cash Cash consists of cash in banks and highly liquid short-term investments
with original maturities of three months or less at the date acquired. Inventories Inventories are stated at the lower of cost (average cost method) or
market. Allowances are established to reduce the recorded cost of obsolete
inventory and slow moving inventory to its net realizable value. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the related assets. Goodwill and Other Intangible Assets On June 30, 2001, the Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets was issued. SFAS No. 142
eliminates goodwill amortization over its estimated useful life. However,
goodwill is subject to at least an annual assessment for impairment by applying
a fair-value based test. Additionally, acquired intangible assets are
separately recognized if the benefit of the intangible asset is obtained
through contractual or other legal rights, or if the intangible asset can be
sold, transferred, licensed, rented or exchanged, regardless of the Companys
intent to do so. Intangible assets with finite lives are amortized over their
useful lives. The Company adopted SFAS No. 142 effective July 1, 2001. Such
adoption did not result in an impairment of goodwill, based on an assessment of
fair value performed by an independent appraisal company. As of March 31,
2004, the Company has performed its annual fair-value based assessment which
did not result in any impairment of goodwill and intangibles. However, future
changes in the facts and circumstances relating to the Companys goodwill and
other intangible assets could result in an impairment of intangible assets in
subsequent periods. Other intangible assets approximate $2.1 million and $1.4 million, net of
accumulated amortization of $0.6 million and $1.3 million at March 31, 2003 and
March 31, 2004, respectively. Fair Values of Financial Instruments SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires certain disclosures regarding the fair value of financial instruments.
Cash, accounts receivable, accounts payable, accrued liabilities, royalties
payable, revolving credit facility, related party credit facilities, related
party notes receivable, and amounts due to and from related parties are
reflected in the consolidated financial statements at fair value due to the
short-term maturity and the denomination in US dollars of these instruments. Long-Lived Assets The Company reviews long-lived assets, such as fixed assets to be held,
for impairment annually or whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. If the
estimated fair market value of the asset is less than the carrying amount of
the asset plus the cost to dispose, an impairment loss is recognized as the
amount by which the carrying amount of the asset plus the cost to dispose
exceeds its fair value, as defined in SFAS No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. F-10




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##### Table of Contents



Research and Development Costs Research and development costs related to the design, development and
testing of new software products are charged to expense as incurred. Research
and development costs principally include payments for royalty advances
(Milestone Payments) to third-party developers for products that are
currently in development. Rapid technological innovation, shelf-space competition, shorter product
life cycles and buyer selectivity have made it extremely difficult to determine
the likelihood of individual product acceptance and success. As a result, the
Company follows the policy of expensing Milestone Payments as incurred,
treating such costs as research and development expenses. Licenses Payments made to third parties for licensing intellectual property are
capitalized and amortized over projected unit sales. Management evaluates the
carrying value of these capitalized licenses and records any impairment in
value, if any, as research and development expense. Advertising Expenses Advertising costs are expensed as incurred. Advertising expenses for the
year ended June 30, 2002, the nine months ended March 31, 2002 (unaudited) and
2003, and the years ended March 31, 2003 (unaudited) and 2004 amounted to
approximately $34.2 million, $29.8 million, $44.9 million, $55.9 million, and
$53.6 million, respectively. Income Taxes The Company accounts for income taxes using the asset and liability method
of accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax
rates in effect for the years in which the differences are expected to reverse.
The Company records a valuation to reduce tax assets to a realizable amount.
The Company monitors its tax liability on a quarterly basis and records the
estimated tax obligation based on the Companys current year-to-date taxable
income. Foreign Currency Assets and liabilities of foreign subsidiaries have been translated at
year-end exchange rates, while revenues and expenses have been translated at
average exchange rates in effect during the year. Cumulative translation
adjustments have been reported as a component of accumulated other
comprehensive income. Foreign Exchange Gains (Losses) Foreign exchange gains or losses arise from exchange rate fluctuations on
transactions denominated in currencies other than the functional currency. For
the year ended June 30, 2002 and the nine months ended March 31, 2002
(unaudited) and 2003, foreign exchange gains (losses) were nominal. For the
years ended March 31, 2003 (unaudited) and 2004, foreign exchange losses were
$0.1 million and $0.3 million, respectively. F-11




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##### Table of Contents



Shipping, Handling and Warehousing Costs Shipping, handling and warehousing costs incurred to move product to the
customer are charged to selling and distribution expense. For the year ended
June 30, 2002, the nine months ended March 31, 2002 (unaudited) and 2003, and
the years ended March 31, 2003 (unaudited) and 2004, these charges were
approximately $17.7 million, $15.8 million $13.2 million, $17.6 million, and
$14.0 million, respectively. (Loss) Income Per Share Attributable to Common Stockholders Basic (loss) income per share attributable to common stockholders is
computed by dividing loss or income attributable to common stockholders by the
weighted average number of shares of common stock outstanding for the period.
Diluted (loss) income per share attributable to common stockholders reflects
the potential dilution that could occur from shares of common stock issuable
through stock-based compensation plans including stock options, restricted
stock awards, and warrants using the treasury stock method and other
convertible securities. The following is an analysis of the difference between
the shares used in basic and diluted (loss) income per share attributable to
common stockholders (in thousands, except per share data): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Net (loss) income
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    766Dividend to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,351
    )(Loss) income attributable to common
stockholders
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    (38,585
    )Basic weighted average shares outstanding
    
    
    69,722
    
    
    
    69,686
    
    
    
    69,878
    
    
    
    69,864
    
    
    
    96,990Dilutive effect of stock options and warrants
    
    
    
    
    
    
    
    
    
    
    177
    
    
    
    194
    
    
    
    Diluted weighted average shares outstanding
    
    
    69,722
    
    
    
    69,686
    
    
    
    70,055
    
    
    
    70,058
    
    
    
    96,990Basic and diluted (loss) income per share
attributable to common stockholders
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    (0.40
    )
 The number of anti-dilutive shares that were excluded from the diluted earnings
per share calculation for the year ended June 30, 2002, the nine months ended
March 31, 2002 (unaudited) and 2003, and the years ended March 31, 2003
(unaudited) and 2004 were approximately 16,200,000, 16,100,000, 16,100,000,
16,000,000, and 11,800,000, respectively, from convertible debt, outstanding
for only a portion of the year ended March 31, 2004, and stock options and
warrants in which the exercise price is greater than the average market price
of the common shares during the respective periods. Stock-Based Compensation The Company accounts for its employee stock option plans under the
intrinsic value method prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. Any equity instruments issued to other than employees for
acquiring goods and services are accounted for using the fair value at the date
of grant. In fiscal 2003, the Company adopted the disclosure provisions of Financial
Accounting Standards Board (FASB) Statement No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an Amendment to FASB
Statement No. 123, which provides alternative methods of transition for a
voluntary change to the fair-value-based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements
of FASB No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
compensation and the effect of the methods used on reported results. At March 31, 2004, the Company had three stock option plans, which are
described more fully in Note 11. No compensation cost is reflected in net
(loss) income, as all options granted under those plans generally have an
exercise price equal to the market value of the F-12




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##### Table of Contents



underlying common stock on the date of
grant. The following table illustrates the effect on the net (loss) income and
(loss) income per share attributable to common stockholders if the Company had
applied the fair value recognition provisions of the FASB Statement No. 148,
Accounting for Stock-Based Compensation, to stock-based employee compensation
(in thousands, except per share data): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Net (loss) incomeAs reported
    
    $
    (10,930
    )
    
    $
    (10,221
    )
    
    $
    18,070
    
    
    $
    17,360
    
    
    $
    766Less: Fair value of
stock-based employee
compensation
expense, net of
related tax effects
    
    
    6,002
    
    
    
    4,460
    
    
    
    4,198
    
    
    
    5,737
    
    
    
    5,962Pro forma net (loss) income
    
    
    (16,932
    )
    
    
    (14,681
    )
    
    
    13,872
    
    
    
    11,623
    
    
    
    (5,196
    )Dividend to parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,351
    )Pro forma (loss) income
attributable to common
stockholders
    
    $
    (16,932
    )
    
    $
    (14,681
    )
    
    $
    13,872
    
    
    $
    11,623
    
    
    $
    (44,547
    )Basic and diluted (loss)
income per share attributable
to common stockholdersAs reported
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    0.26
    
    
    $
    0.25
    
    
    $
    (0.40
    )Pro forma basic and
diluted (loss) income per
share attributable to
common stockholders
    
    $
    (0.24
    )
    
    $
    (0.21
    )
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    (0.46
    )
 The fair market value of options granted under the stock option plans
during the year ended June 30, 2002, the nine months ended March 31, 2002
(unaudited) and 2003, and the years ended March 31, 2003 (unaudited) and 2004
was determined using the Black-Scholes option pricing model utilizing the
following assumptions: Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Anticipated volatility
    
    
    95
    %
    
    
    95
    %
    
    
    116
    %
    
    
    116
    %
    
    
    120
    %Weighted average risk-free interest rate
    
    
    4.51
    %
    
    
    4.51
    %
    
    
    2.60
    %
    
    
    2.60
    %
    
    
    2.44
    %Expected lives
    
    4 years
    
    4 years
    
    4 years
    
    4 years
    
    4 years
 Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
Consolidation of Variable Interest Entities. In December 2003, the FASB
issued FIN No. 46 (Revised) (FIN 46-R) to address certain FIN 46
implementation issues. This interpretation requires that the assets,
liabilities, and results of activities of a Variable Interest Entity (VIE) be
consolidated into the financial statements of the enterprise that has a
controlling interest in the VIE. FIN 46-R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. For
entities acquired or created before February 1, 2003, this interpretation is
effective no later than the end of the first interim or reporting period ending
after March 15, 2004, except for those VIEs that are considered to be special
purpose entities, for which the effective date is no later than the end of the
first interim or annual reporting period ending after December 15, 2003. For
all entities that were acquired subsequent to January 31, 2003, this
interpretation is effective as of the first interim or annual period ending
after December 31, 2003. The adoption of the provisions of this interpretation
did not have a material effect on the Companys financial condition or results
of operations. In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends SFAS No.
133, by requiring that contracts with comparable characteristics be accounted
for in a similar fashion. In particular, the Statement: (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133;
(2) clarifies when a derivative contains a financing component; (3) amends the definition of F-13




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##### Table of Contents



the term underlying to conform it to language used in FIN No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company does not have any derivative instruments as
defined in SFAS No. 149. Accordingly, this pronouncement is currently not
applicable to the Company. In May 2003, the FASB issued SFAS No. 150, Accounting for Financial
Instruments with the Characteristics of Both Liabilities and Equities. SFAS
No. 150 establishes standards regarding the manner in which an issuer
classifies and measures certain types of financial instruments having
characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such
freestanding financial instruments (i.e., those entered into separately from an
entitys other financial instruments or equity transactions or that are legally
detachable and separately exercisable) must be classified as liabilities or, in
some cases, assets. In addition, SFAS No. 150 requires that financial
instruments containing obligations to repurchase the issuing entitys equity
shares and, under certain circumstances, obligations that are settled by
delivery of the issuers shares be classified as liabilities. The Statement is
effective for financial instruments entered into or modified after May 31, 2003
and for other instruments at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this new principle did not have
a material impact on the Companys financial condition or results of
operations. Note 2  Acquisition of Shiny Entertainment, Inc. On April 30, 2002, the Company acquired all of the outstanding shares of
common stock of Shiny Entertainment, Inc. (Shiny), a videogame development
studio (the Shiny Acquisition). Total consideration, including acquisition
costs and assumption of employee stock options to purchase shares of common
stock of Shiny was approximately $50.8 million. The Shiny Acquisition was
accounted for as a purchase. The purchase price was allocated to net assets
acquired, in process research and development, other intangible assets and
goodwill. Accordingly, $7.4 million of in process research and development was
expensed in the year ended June 30, 2002. Furthermore, $2.7 million of the
purchase price was allocated to other intangible assets and the balance was
allocated to net liabilities and goodwill. Other intangible assets are being
amortized over four years. The purchase price paid by the Company for the shares of Shiny consisted
of (i) $31.0 million in cash at closing, (ii) the issuance of short-term
promissory notes for an aggregate principal face amount of $16.2 million
payable by the Company in installments through July 31, 2002, (iii) $2.0
million paid to third-party licensors, (iv) assumption of employee stock
options granted to purchase shares of Shiny valued at $0.7 million and (v)
approximately $0.9 million in professional and legal costs. The Company
financed the purchase with borrowings from IESA, under a medium-term loan,
which guaranteed repayments of the short-term promissory notes. As of March 31,
2004, no amount remained outstanding under the medium-term loan which was
converted as part of the Recapitalization Agreement (Note 1). UNAUDITED PRO FORMA RESULTS OF OPERATIONS The following unaudited consolidated pro forma results of operations of
the Company for the year ended June 30, 2002 and the nine months ended March
31, 2002 give effect to the Shiny acquisition as if it had occurred on July 1,
2000. (in thousands, except per share data) Nine MonthsYear Ended
    
    EndedJune 30,
    
    March 31,2002
    
    2002Net revenues
    
    $
    419,364
    
    
    $
    289,761Loss before income taxes
    
    
    (14,615
    )
    
    
    (22,162
    )Net loss
    
    
    (11,279
    )
    
    
    (17,148
    )Loss attributable to common stockholders
    
    
    (11,279
    )
    
    
    (17,148
    )Basic and diluted loss per share
attributable to common stockholders
    
    $
    (0.16
    )
    
    $
    (0.25
    )
 F-14




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##### Table of Contents



In December 2002, Shiny was merged into the Company and now exists as a
division of the Company. Note 3  Receivables Receivables consist of the following (in thousands): March 31,
    
    March 31,2003
    
    2004Trade accounts
receivable
    
    $
    87,372
    
    
    $
    73,986Less: Allowances for bad debts, returns, price protection and other
customer promotional
programs
    
    
    (40,319
    )
    
    
    (36,279
    )$
    47,053
    
    
    $
    37,707
 Note 4  Inventories, net Inventories consist of the following (in thousands): March 31,
    
    March 31,2003
    
    2004Finished
goods
    
    $
    38,721
    
    
    $
    26,790Return
inventory
    
    
    2,786
    
    
    
    1,964Raw
materials
    
    
    1,223
    
    
    
    91142,730
    
    
    
    29,665Less: Obsolescence reserve
    
    
    (4,903
    )
    
    
    (2,145
    )$
    37,827
    
    
    $
    27,520
 F-15




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##### Table of Contents



Note 5  Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in
thousands): March 31,
    
    March 31,2003
    
    2004Licenses short-term
    
    $
    9,016
    
    
    $
    3,146Atari name license
    
    
    
    
    
    
    3,350Royalty receivables
    
    
    1,550
    
    
    
    1,208Prepaid insurance
    
    
    1,281
    
    
    
    1,094Deferred financing fees
    
    
    1,647
    
    
    
    694Other prepaid expenses and current assets
    
    
    3,464
    
    
    
    2,973$
    16,958
    
    
    $
    12,465
 Note 6  Oddworld Inhabitants, Inc. In 1996, the Company invested approximately $7.1 million in convertible
preferred stock of Oddworld Inhabitants, Inc. (Oddworld), a privately-held
developer of entertainment software, which was convertible into 50.0% of the
common equity. In the quarter ended June 30, 2002, the Company recorded an
impairment charge of approximately $3.6 million, included in other (expense)
income, in the investment in Oddworld, decreasing the investment to $3.5
million and representing the difference between the estimated fair market value
of the investment and its carrying value. During the quarter ended December 31, 2003, the Company and Oddworld
entered into a Settlement and Release Agreement (Oddworld Agreement), which
provided for the exchange of the Companys licensed publishing rights and the
remaining $3.5 million preferred stock investment in the developer, in return
for a release of Oddworlds interest in $1.8 million in publishing royalties
previously advanced to the Company by Microsoft Corporation (Microsoft). As part of the transaction, the Company amended its existing
Microsoft/Oddworld License Agreement, which, among other things, provides that
the Company retain, without any ongoing obligations, $3.5 million of
non-refundable publishing royalties previously advanced by Microsoft. The
foregoing transactions resulted in the recognition of $3.5 million of royalties
(included in net revenues) which were previously deferred and an impairment
charge on the disposition of the Companys preferred stock investment in
Oddworld of $1.7 million, which is included in other (expense) income. As of
March 31, 2004, there is no remaining investment in Oddworld. Note 7  Property and Equipment, net Property and equipment consists of the following (in thousands): March 31,
    
    March 31,2003
    
    2004Computer equipment
    
    $
    20,815
    
    
    $
    20,794Machinery and equipment
    
    
    289
    
    
    
    305Capitalized computer software
    
    
    13,267
    
    
    
    14,995Furniture and fixtures
    
    
    5,227
    
    
    
    5,377Leasehold improvements
    
    
    6,605
    
    
    
    7,62846,203
    
    
    
    49,099Less: accumulated depreciation
    
    
    (31,476
    )
    
    
    (35,832
    )$
    14,727
    
    
    $
    13,267
 Depreciation expense for the year ended June 30, 2002, the nine months
ended March 31, 2002 (unaudited) and 2003, and the years ended March 31, 2003
(unaudited) and 2004, amounted to approximately $5.5 million, $3.5 million,
$5.3 million, $7.2 million, and $6.7 million, respectively. F-16




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##### Table of Contents



Note 8  Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31,
    
    March, 312003
    
    2004Accrued salary and related costs
    
    $
    9,092
    
    
    $
    4,579Accrued advertising
    
    
    2,285
    
    
    
    3,036Accrued distribution services
    
    
    8,134
    
    
    
    1,848Accrued third-party development expenses
    
    
    4,286
    
    
    
    1,491Accrued professional fees and other services
    
    
    1,773
    
    
    
    1,295Accrued freight and processing fees
    
    
    1,306
    
    
    
    989Other
    
    
    4,996
    
    
    
    2,648$
    31,872
    
    
    $
    15,886
 Note 9  Income Taxes The components of the (benefit from) provision for income taxes are as
follows (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Federal:Current
    
    $
    (5,023
    )
    
    $
    (4,998
    )
    
    $
    43
    
    
    $
    27
    
    
    $
    (2,074
    )(5,023
    )
    
    
    (4,998
    )
    
    
    43
    
    
    
    27
    
    
    
    (2,074
    )State and local:Current
    
    
    
    
    
    
    
    
    
    
    463
    
    
    
    453
    
    
    
    (422
    )
    
    
    
    
    
    
    
    463
    
    
    
    453
    
    
    
    (422
    )Foreign:Current
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (423
    )Deferred
    
    
    1,186
    
    
    
    (16
    )
    
    
    (101
    )
    
    
    1,603
    
    
    
    1,687
    
    
    
    (16
    )
    
    
    (101
    )
    
    
    1,603
    
    
    
    (423
    )(Benefit from)
provision for
income taxes
    
    $
    (3,336
    )
    
    $
    (5,014
    )
    
    $
    405
    
    
    $
    2,083
    
    
    $
    (2,919
    )
 During the year ended June 30, 2002, the Company received a tax benefit of
$5.0 million based on a provision contained in The Job Creation and Worker
Assistance Act of 2002, which changed the allowable carryback period for net
operating losses from two years to five years. This provision enabled the
Company to carryback its June 30, 2001 loss and recover taxes paid in 1996. During the nine months ended March 31, 2003, the Company recorded federal
and state alternative minimum tax provisions of approximately $1.0 million.
This provision is offset by $0.5 million in federal income tax benefits
resulting from loss carryback refund claims filed in the current period with
respect to the Companys fiscal 2002 federal income tax return and an amended
2001 federal income tax return. During the year ended March 31, 2004, the Company recorded a tax benefit
of approximately $2.9 million, which resulted primarily from a June 30, 2001
amended federal tax return to recover taxes paid in 1996 and refunds of
estimated state tax payments made during the tax year ended June 30, 2003. A reconciliation of the (benefit from) provision for income taxes computed
at the Federal statutory rate to the reported (benefit from) provision for
income taxes is as follows (in thousands): F-17




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##### Table of Contents



Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)(Benefit from) provision for income taxes
computed at Federal statutory
rate
    
    $
    (4,993
    )
    
    $
    (6,543
    )
    
    $
    6,434
    
    
    $
    6,805
    
    
    $
    (754
    )(Benefit) expense from income
taxes resulting from:State and local taxes, net of
Federal tax effect
    
    
    (556
    )
    
    
    (761
    )
    
    
    793
    
    
    
    1,064
    
    
    
    258Domestic income tax expense (benefit)
in excess of foreign tax
    
    
    4,277
    
    
    
    (3,068
    )
    
    
    2,496
    
    
    
    4,638
    
    
    
    514Other, net
    
    
    475
    
    
    
    492
    
    
    
    233
    
    
    
    286
    
    
    
    (55
    )(Decrease) increase to deferred tax asset
valuation allowance
    
    
    (2,539
    )
    
    
    4,866
    
    
    
    (9,551
    )
    
    
    (10,710
    )
    
    
    (2,882
    )(Benefit from) provision for
income taxes
    
    $
    (3,336
    )
    
    $
    (5,014
    )
    
    $
    405
    
    
    $
    2,083
    
    
    $
    (2,919
    )
 Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Companys deferred tax asset are as follows (in thousands): March 31,
    
    March 31,2003
    
    2004Deferred tax asset:Inventory valuation
    
    $
    2,010
    
    
    $
    879Deferred income
    
    
    3,026
    
    
    
    874Tax loss carryforwards
    
    
    162,701
    
    
    
    175,825Restructuring reserve
    
    
    730
    
    
    
    Alternative minimum tax carryforward credit
    
    
    505
    
    
    
    330Allowances for bad debts, returns, price protection
and other customer promotional
programs
    
    
    10,397
    
    
    
    7,244Depreciation
    
    
    (1,077
    )
    
    
    (1,174
    )Related party interest to IESA
    
    
    7,361
    
    
    
    In process research and development
    
    
    2,832
    
    
    
    2,630Other
    
    
    2,299
    
    
    
    1,294190,784
    
    
    
    187,902Less valuation allowance
    
    
    (190,784
    )
    
    
    (187,902
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 As of March 31, 2004, the Company has combined net operating loss
carryforwards of approximately $464.9 million for federal tax purposes. These
loss carryforwards are available to offset future taxable income, if any, and
will expire beginning in the years 2011 through 2024. The Company experienced
an ownership change in 1999 as a result of its acquisition by IESA. Under
Section 382 of the Internal Revenue Code, when there is an ownership change,
the pre-ownership-change loss carryforwards are subject to an annual limitation
which could reduce or defer the utilization of these losses. Pre-acquisition
losses of approximately $186.8 million are subject to an annual limitation
(approximately $7.2 million). A full valuation allowance has been recorded against the net deferred tax
asset based on historical information that such an asset will not be realized;
however management reviews the asset quarterly to ensure the valuation
allowance is proper. As of March 31, 2004, there were no undistributed
earnings for the Companys 100% owned foreign subsidiaries. F-18




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##### Table of Contents



Note 10  Stockholders Equity (Deficit) As of March 31, 2003, and March 31, 2004, the Company had warrants,
excluding warrants related to the purchase of the Company by IESA, outstanding
to purchase an aggregate of approximately 397,172, and 271,889 shares,
respectively, of the Companys common stock. On October 19, 2001, approximately 235,000 shares of treasury stock were
issued to a developer in lieu of cash payments for royalties due. Such amount
approximated $0.9 million. On April 30, 2002, in connection with the acquisition of the shares of
Shiny, the Company assumed all of the options granted to purchase shares of
common stock of Shiny under Shinys 1995 Stock Incentive Plan. Such options
were converted into options to purchase an aggregate of approximately 240,000
shares of the Companys common stock. Such options are valued at approximately
$0.7 million at the acquisition date. In September 2003, the Company entered into a Recapitalization Agreement
resulting in the exchange of all of the Companys net related party debt with
IESA and certain of its subsidiaries, totaling $165.9 million into 39,029,887
shares of the Companys common stock. Additionally, on September 24, 2003, the
Company offered to the public 9,820,588 new shares of the Companys common
stock at an offering price of $4.25 per share. The net proceeds after all
costs were $34.9 million. Additionally, in connection with the
Recapitalization, the Company issued 2,000,000 shares of its common stock to
Atari Interactive in order to extend the term of the license under which the
Company uses the Atari name to ten years expiring on December 31, 2013. (See
Note 1, Recapitalizationand Offering.) On October 15, 2003, approximately 280,000 shares of common stock were
issued to a developer in lieu of cash payments for royalties due. Such amount
approximated $1.2 million. Note 11  Stock Options and Employee Stock Purchase Plan The Company has three stock option plans which began in 1995, 1997 and
2000 (the Plans). The Company accounts for these Plans under the provisions
of Accounting Principles Board Opinion No. 25, under which no compensation cost
has been recognized. Generally, under the Plans, options are granted to employees and directors
to purchase shares of the Companys common stock at no less than the fair
market value at the date of the grant, vest over a period of four or five years
and are exercisable for a period of ten years from the grant date. An aggregate summary of the status of the Companys Plans and changes
during the periods at June 30, 2002, March 31, 2003, and March 31, 2004 are as
follows: June 30, 2002Shares
    
    Weighted Average(in thousands)
    
    Exercise PriceOutstanding at beginning of
fiscal year
    
    
    6,005
    
    
    $
    14.47Granted
    
    
    1,400
    
    
    
    6.27Exercised
    
    
    (5
    )
    
    
    5.03Cancelled
    
    
    (545
    )
    
    
    21.64Outstanding at end of fiscal year
    
    
    6,855
    
    
    $
    12.23
 F-19




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##### Table of Contents



March 31, 2003Shares
    
    Weighted Average(in thousands)
    
    Exercise PriceOutstanding at beginning of
the nine months ended
    
    
    6,855
    
    
    $
    12.23Granted
    
    
    63
    
    
    
    2.58Exercised
    
    
    (48
    )
    
    
    0.34Cancelled
    
    
    (520
    )
    
    
    16.42Outstanding at end of nine months ended
    
    
    6,350
    
    
    $
    11.88
 March 31, 2004Shares
    
    Weighted Average(in thousands)
    
    Exercise PriceOutstanding at beginning of
the fiscal year
    
    
    6,350
    
    
    $
    11.88Granted
    
    
    1,332
    
    
    
    4.22Exercised
    
    
    (120
    )
    
    
    0.61Cancelled
    
    
    (684
    )
    
    
    11.54Outstanding at end of fiscal year
    
    
    6,878
    
    
    $
    10.62
 The following table summarizes information concerning currently outstanding and
exercisable options (shares in thousands): Range of
    
    Number
    
    WeightedAverageRemaining
    
    WeightedAverage
    
    Number
    
    WeightedAverageExercise Price
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$
    0.23-4.21
    
    
    
    1,265
    
    
    
    9.3
    
    
    $
    3.84
    
    
    
    101
    
    
    $
    1.06$
    4.30-6.25
    
    
    
    2,838
    
    
    
    6.7
    
    
    $
    5.64
    
    
    
    2,291
    
    
    $
    5.67$
    6.30-17.50
    
    
    
    1,658
    
    
    
    6.8
    
    
    $
    9.69
    
    
    
    1,172
    
    
    $
    10.10$
    19.69-97.50
    
    
    
    1,117
    
    
    
    3.5
    
    
    $
    32.35
    
    
    
    1,107
    
    
    $
    32.226,878
    
    
    
    
    
    
    
    
    
    
    
    4,671
 As
of March 31, 2004, there were approximately 6,878,000 options outstanding
at prices ranging from $0.23 to $97.50, of which 4,671,000 options were exercisable
at prices ranging from $0.23 to $97.50. Employee Stock Purchase Plan The Company had an employee stock purchase plan (ESPP) which provided
employees an opportunity to purchase common stock of the Company every six
months through payroll deductions. The purchase price of each share was 85% of
the lower of the fair market value on the first or last day of each six-month
period. Employees were allowed to purchase shares having a value not exceeding
10% of their gross compensation during a six-month period. Effective April 1,
2003, all shares of common stock reserved for issuance under the ESPP were
issued and, as a result, the Company terminated the ESPP as provided for under
the ESPP documents. F-20




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##### Table of Contents



Note 12  Related Party Transactions Transactions with IESA As of March 31, 2003 the Company had a net payable due to IESA of $1.9
million and as of March 31, 2004 the Company had a net receivable due from IESA
of $2.7 million. These balances resulted from the following transactions (in
thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Income (expense)Purchase of product and other various
services
    
    $
    (351
    )
    
    $
    (144
    )
    
    $
    (113
    )
    
    $
    (46
    )
    
    $
    (54
    )Sale of product and services
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    59Management fees (1)
    
    
    (3,081
    )
    
    
    (2,304
    )
    
    
    (2,346
    )
    
    
    (2,344
    )
    
    
    (3,000
    )Interest expense and facility fees (2)
    
    
    (3,542
    )
    
    
    (1,502
    )
    
    
    (3,945
    )
    
    
    (5,985
    )
    
    
    (2,143
    )Interest expense on 5% subordinated
convertible note (3)
    
    
    (3,334
    )
    
    
    (2,487
    )
    
    
    (2,614
    )
    
    
    (3,460
    )
    
    
    (1,680
    )Interest expense on non-interest bearing
subordinated convertible notes (4)
    
    
    (1,435
    )
    
    
    (718
    )
    
    
    (2,153
    )
    
    
    (2,870
    )
    
    
    (1,339
    )Royalty expense (5)
    
    
    (4,612
    )
    
    
    (3,532
    )
    
    
    (4,067
    )
    
    
    (5,147
    )
    
    
    (552
    )Royalty income (6)
    
    
    4,678
    
    
    
    3,158
    
    
    
    18,807
    
    
    
    20,412
    
    
    
    28,814Net (expense) income
    
    $
    (11,677
    )
    
    $
    (7,529
    )
    
    $
    3,573
    
    
    $
    564
    
    
    $
    20,105
 (1) IESA charges the Company monthly management fees for various global
management and systems support. (2) IESA charged the Company monthly interest and fees for the amount
outstanding on the related party credit facilities and the medium-term loan.
The interest rate was LIBOR plus 2.5% for the related party credit facility
and LIBOR plus 2.75% for the medium-term loan. (See Note 1, Recapitalization
and Note 14, Debt.) (3) IESA charged the Company monthly interest for the amount outstanding on
its long term related party 5.0% subordinated convertible note. The 5.0%
subordinated convertible note was terminated as part of the Companys
September 2003 Recapitalization. (See Note 1, Recapitalization.) (4) On December 28, 2001, IESA assumed from General Atlantic Partners, LLC
(GAP) the $50.0 million principal amount of non-interest bearing
subordinated convertible notes (the GAP 0% Notes) in exchange for IESA
shares of common stock. IESA did not change any of the terms of the former
GAP 0% Notes as they relate to the Company. Interest on these notes was
being accreted at the rate of 7% and had a redemption value of $50.0 million
at maturity. The GAP 0% notes were terminated as part of the Companys
September 2003 Recapitalization. (See Note 1, Recapitalization.) (5) The Company and IESA entered into a distribution agreement, which
provides for the distribution by the Company of IESAs (or any of its
subsidiaries) products in the United States, Canada and their territories
and possessions, pursuant to which the Company will pay IESA either 30.0% of
the gross profit on such products or 130.0% of the royalty rate due to the
developer, whichever is greater. The Company recognizes this amount as
royalty expense as part of cost of goods sold. (6) The distribution agreement with IESA also includes distribution rights
by IESA for the Companys products across Europe, Asia, and
certain other regions
pursuant to which IESA will pay the Company 30.0% of the gross profit on such
products or 130.0% of the royalty rate due to the developer, whichever is
greater. The Company recognizes this amount as royalty income as part of net
revenues. F-21




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##### Table of Contents




    
    IESA stock options granted On November 7, 2002, IESA granted stock options of approximately 510,000
shares to the senior management of the Company. All options granted were at
fair market value at the date of the grant and have a vesting period of four
years. IESA does not expense stock options granted to employees, therefore, no
charge was recorded in the Companys statement of operations for the nine
months ended and year ended (unaudited) March 31, 2003.  
    
    IESA liquidity IESA has incurred significant losses from operations and is highly
leveraged. Should IESA experience liquidity issues, among other things, this
may result in its inability to fund the development efforts of Atari
Interactive, and the Companys results of operations may suffer because, as the
North American distributor of the games developed by Atari
Interactive, the Companys
revenue could significantly decrease. Such a reduction of the Companys
revenues, among other things, could result in a breach of one or more of the
covenants contained in the Companys GECC Senior Credit Facility. In the event
any of the above contingencies occur, the Company is prepared to take various
actions which may include, but not be limited to, a reduction in the Companys
expenditures for internal and external new product development and a reduction
in overhead expenses. These actions, should they become necessary, may result
in a significant reduction in the size of the Companys operations. Transactions with Atari Interactive (formerly known as Infogrames Interactive,
Inc. and Hasbro Interactive, Inc.), a wholly-owned subsidiary of IESA As of March 31, 2003 and March 31, 2004, the Company had a net payable due
to Atari Interactive of $3.1 million and $3.2 million, respectively. These
balances resulted primarily from the following transactions (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Income (expense)Interest income on related party
advances (1)
    
    $
    
    
    
    $
    
    
    
    $
    398
    
    
    $
    398
    
    
    $
    1,065Rent expense (2)
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    (405
    )
    
    
    (612
    )(Purchase) sale of services (3)
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    1,234Royalty expense (4)
    
    
    (38,364
    )
    
    
    (32,682
    )
    
    
    (24,263
    )
    
    
    (29,945
    )
    
    
    (24,064
    )Management fees and other support (5)
    
    
    3,000
    
    
    
    2,250
    
    
    
    2,250
    
    
    
    3,000
    
    
    
    3,000Gain on sale of development project (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,744Net expense
    
    $
    (35,368
    )
    
    $
    (30,432
    )
    
    $
    (22,020
    )
    
    $
    (26,958
    )
    
    $
    (15,633
    )
 (1) Advances made to Atari Interactive, allowed through the GECC Senior
Credit Facility (Note 14), bore interest at prime plus 150 basis points and
was to be repaid from distribution royalties owed by the Company to Atari
Interactive in the ordinary course of operations (see Advances to Related
Partiesbelow). (2) The Company entered into a sub-lease agreement with Atari Interactive
through June 30, 2007. The rented space serves as the principal executive
and administrative offices of the Companys Beverly Studio located in
Beverly, Massachusetts (see Sale-Leasebackbelow). The Company
incurs rent
expense of approximately $0.1 million per month for this space. (3) The Company recorded income from the sale of services primarily for
quality and assurance testing of products in development. (4) The Company has a distribution arrangement with Atari Interactive. The
Company must pay a royalty of either 30.0% of its gross profit or 130.0% of
the royalty rate due to the developer, whichever is greater, for all Atari
Interactive products distributed by the Company. In the fourth quarter of
2002, the Company and Atari Interactive agreed to adjust the base
sales upon which the royalty is calculated. Accordingly, the Company reduced accrued and unpaid royalties due to Atari Interactive by
approximately $2.0 million. F-22




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##### Table of Contents



(5) The Company charges management fees to Atari Interactive primarily for
legal, financial, information systems and human resource management. (6) During the third quarter of fiscal 2004, the Company sold a development
project to Atari Interactive for $3.7 million resulting in a gain of an equal
amount. The project involved a license owned by Atari Interactive for which
development rights were transferred to the Company in the fourth quarter of
fiscal 2003 at no cost to the Company. Management believes that the value of
the development rights was minimal at the time of the transfer. The sales
price to Atari Interactive was equal to the development costs incurred by the
Company which were expensed during the period of development, principally in
the first six months of fiscal 2004. The sale was initiated as a result of
concerns expressed by the original third party licensor relating to the
Companys development efforts (see Related Party Notes Receivablebelow).  
    
    Sale-Leaseback In July 2002, the Company negotiated a sale-leaseback transaction between
Atari Interactive and an unrelated party. As part of this transaction, the
Company guaranteed the lease obligation of Atari Interactive. The lease
provides for minimum monthly rental payments of approximately $0.1 million
escalating nominally over the ten year term of the lease. The Company also
received indemnification from IESA from any costs, if any, that may be incurred
by the Company as a result of the full guaranty. The Company received a $1.3 million payment for its efforts in connection
with the sale-leaseback transaction. Approximately $0.6 million, an amount
equivalent to a third-party brokers commission, was recognized during the nine
months ended March 31, 2003 as other income, while the remaining balance of
$0.7 million was deferred and is being recognized over the life of the
sub-lease. Accordingly, during the year ended March 31, 2004, approximately
$0.1 million of income was recognized. As of March 31, 2003 and March 31,
2004, the remaining balances of approximately $0.7 million and $0.6 million,
respectively, are deferred and are being recognized over the life of the
sub-lease.  
    
    Settlement of customer returns, price concessions and other allowances Customers of Atari Interactive, who are current customers of the Company,
reduced payments of receivables on current invoices of the Company for returns,
price concessions and other allowances. These deductions related to
pre-acquisition sales of Atari Interactive. Accordingly, the Company, IESA and
Atari Interactive agreed to a settlement reimbursing the Company an aggregate
of approximately $6.7 million for these deductions for the year ended June 30,
2002 and the nine months ended March 31, 2002 (unaudited). No amounts were
outstanding for these items at March 31, 2003. During fiscal 2004, a customer
made a deduction of $2.6 million which remained outstanding and is payable to
the Company in the form of an interest bearing note (see Related
Party Notes Receivablebelow).  
    
    Milestone payments advanced Advances were as follows (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Advances for milestone payments (1)
    
    $
    1,354
    
    
    $
    
    
    
    $
    534
    
    
    $
    1,888
    
    
    $
    1,379
 (1) The Company has advanced, on behalf of Atari Interactive, funds to
third-party developers for the development of properties owned and managed by
Atari Interactive. The amount outstanding for these items at March 31, 2004
is payable in the form of an interest-bearing note (see Related Party Notes
Receivablebelow). F-23




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##### Table of Contents




    
    Warrants issued in relation to Atari Interactive On November 18, 2002, 24,999 warrants of the Company stock were issued to
a third-party developer to enhance a development agreement between the
developer and Atari Interactive. The warrants were valued using the
Black-Scholes model for approximately $0.1 million. These expenses remained
outstanding at March 31, 2003. As of March 31, 2004, no balance remains
outstanding. Atari Interactive reimbursed the Company for expenses incurred
related to the issuance of these warrants. Transactions with Atari Australia, a wholly-owned subsidiary of IESA As of March 31, 2003 and March 31, 2004, the Company had a net receivable
due from Atari Australia of $0.4 million and $0.3 million, respectively. These
balances resulted from the following transactions (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Income (expense)Management fees (1)
    
    $
    315
    
    
    $
    283
    
    
    $
    204
    
    
    $
    224
    
    
    $
    211Distribution income (2)
    
    
    5,460
    
    
    
    4,164
    
    
    
    
    
    
    
    
    
    
    
    Distribution expense (2)
    
    
    (4,374
    )
    
    
    (3,703
    )
    
    
    
    
    
    
    
    
    
    
    Royalty income (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Purchase of other support services
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    Sale of product and other support services
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    630
    
    
    
    874Net income
    
    $
    1,401
    
    
    $
    744
    
    
    $
    799
    
    
    $
    854
    
    
    $
    1,121
 (1) Effective August 25, 2000, the Company began charging Atari Australia
yearly management fees primarily for the management and maintenance of
information systems. (2) During the year ended June 30, 2002 and the nine months ended March 31,
2002, the Companys Australian operations used the distribution facilities of
Atari Australia who distributed product on behalf of the Company, recording
distribution revenue and related distribution expenses. During the nine months
ended March 31, 2003, the activity between the Companys Australian
operations and Atari Australia ceased. As part of the
Recapitalization Agreement, IESA and the Company agreed to offset the
receivable balance owed by Atari Australia against amounts due under the
related party debt. (See Note 1, Recapitalization.) (3) The Company and IESA entered into a distribution agreement, which
provides for the distribution by the Company of IESAs (or any of its
subsidiaries) products in the United States, Canada and their territories
and possessions, pursuant to which the Company will pay IESA either 30.0% of
the gross profit on such products or 130.0% of the royalty rate due to the
developer, whichever is greater. The Company recognizes this amount as
royalty expense as part of cost of goods sold. The distribution agreement
with IESA also includes distribution rights by IESA for the Companys
products across Europe, Asia, and certain other regions pursuant to which IESA will pay
the Company 30.0% of the gross profit on such products or 130.0% of the
royalty rate due to the developer, whichever is greater. The Company
recognizes this as royalty income as part of net revenues. F-24




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##### Table of Contents



Transactions with
Paradigm Entertainment Inc. (Paradigm), a wholly-owned
subsidiary of IESA As of March 31, 2003, the Company had a net payable due to Paradigm of
$4.3 million. As of March 31, 2004, the Companys related party balances with
Paradigm were netted, creating a short term note receivable (see below). The
related party balances primarily resulted from the transactions discussed
below.  
    
    Purchase of services and advances to fund expenses Paradigm, a wholly-owned subsidiary of IESA, is a product developer
located in the United States. Paradigm performs such services as program
development and design for the Company. Service fees provided and charged to
the Company are as follows (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Development expenses
    
    $
    7,406
    
    
    $
    5,405
    
    
    $
    7,133
    
    
    $
    9,135
    
    
    $
    10,099
 Additionally, since July 1, 2001, the Company has advanced funds in
payment of certain Paradigm expenses. As of March 31, 2003, $1.0 million of
such payments were reported in due to related parties. Additionally, as of March
31, 2003, $1.5 million of cash was transferred to the Company from Paradigm and
was included in due to related parties. As of March 31, 2004, the Company had
a receivable due from Paradigm of $2.5 million for funds advanced to Paradigm
and $1.7 million outstanding of development expenses charged to the Company by
Paradigm, which were netted and included in a short term note receivable (see
below). Transactions with other related parties wholly-owned by IESA The net related party balances with other IESA subsidiaries are as follows
(in thousands): March 31, 2003
    
    March 31, 2004Receivable (payable)Atari Melbourne House Pty Ltd
    
    $
    (18
    )
    
    $
    (42
    )Atari Studio Asia Pty Ltd
    
    
    (44
    )
    
    
    Atari Studio Ltd
    
    
    (9
    )
    
    
    (10
    )Eden Studio SAS
    
    
    
    
    
    
    (606
    )Atari Asia Pacific Pty Ltd
    
    
    53
    
    
    
    24Atari United Kingdom Ltd
    
    
    (1,342
    )
    
    
    (1,800
    )Atari Japan
    
    
    8
    
    
    
    (20
    )Net payable
    
    $
    (1,352
    )
    
    $
    (2,454
    )
 The following transactions occurred with the Company and other related
parties wholly-owned by IESA (in thousands): Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Income (expense)Development expense (1):Atari Melbourne House Pty Ltd
    
    $
    (256
    )
    
    $
    (1
    )
    
    $
    (81
    )
    
    $
    (112
    )
    
    $
    (307
    )Atari Studio Asia Pty Ltd
    
    
    
    
    
    
    
    
    
    
    (694
    )
    
    
    (694
    )
    
    
    (84
    )Atari Studio Ltd
    
    
    
    
    
    
    
    
    
    
    (756
    )
    
    
    (747
    )
    
    
    Eden Studio
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (611
    )Sale of product:Atari Asia Pacific Pty Ltd
    
    
    457
    
    
    
    170
    
    
    
    141
    
    
    
    428
    
    
    
    163
 F-25




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##### Table of Contents



Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Atari United Kingdom Ltd
    
    
    73
    
    
    
    73
    
    
    
    55
    
    
    
    55
    
    
    
    Purchase of product/services:Atari United Kingdom Ltd
    
    
    (54
    )
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    Royalty expense (2):Atari Japan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (373
    )Miscellaneous sale of product
and services, net  other (3)
    
    
    80
    
    
    
    (29
    )
    
    
    (398
    )
    
    
    (412
    )
    
    
    190Net income (expense)
    
    $
    300
    
    
    $
    161
    
    
    $
    (1,733
    )
    
    $
    (1,482
    )
    
    $
    (1,022
    )
 (1) Atari Melbourne House Pty Ltd, Atari Studio Asia Pty Ltd, Atari Studio
Ltd, and Eden Studios, wholly-owned subsidiaries of IESA, develop product for
the Company. The subsidiaries provide services such as product development,
design, and testing for the Company. (2) As a part of the Companys distribution agreement with IESA, the Company
must pay a royalty of either 30.0% of its gross profit or 130.0% of the
royalty rate due to the developer, whichever is greater, for all Atari Japan
products distributed by the Company. (3) The Company has entered into various nominal transactions with certain
other IESA subsidiaries located in North America, Europe, Asia, and
certain other regions. As of March 31, 2003 and March 31, 2004, the Company had aggregate
net receivables from these subsidiaries of $0.2 million in each period. Related Party Notes Receivable Related party notes receivable consist of the following amounts (in
thousands): March 31, 2003
    
    March 31, 2004Development rights and advances  Atari Interactive (1)
    
    $
    
    
    
    $
    5,122Customer deductions  Atari Interactive (2)
    
    
    
    
    
    
    2,620Loans  Paradigm (3)
    
    
    
    
    
    
    829Total related party notes receivable (4)
    
    $
    
    
    
    $
    8,571
 (1) At March 31, 2004, a short term note receivable from Atari Interactive
results from the sale of certain development rights for $3.7 million and
milestone advances made on behalf of Atari Interactive of $1.4 million. This
note is payable at the earlier of the release of the development project to
the public or December 31, 2004. The note bears interest at a rate of prime
plus 1.25%. (2) At
March 31, 2004, a short term note receivable was issued for amounts outstanding
for deductions taken by a current customer of the Company which related to
preacquisition sales of Atari Interactive. This note is payable on September
30, 2004. The note bears interest at a rate of prime plus 1.25%. (3) At March 31, 2004, the Company obtained a short term note receivable with
Paradigm, bearing interest at a rate of prime plus 1.25%. The note
receivable is for net advances made to Paradigm which are outstanding as of
March 31, 2004. The note is due on September 30, 2004. (4) As security for the related party notes receivable, Atari Interactive
has agreed to not transfer, assign, sell, pledge or otherwise dispose of or
encumber the 2,000,000 shares of the Companys common stock given to Atari
Interactive as part of the Atari License. (See Note 1, Atari
License.) The Company has the right to receive the 2,000,000 shares or the
proceeds of sales of such shares in the event Atari Interactive or Paradigm
default on the related party notes receivable or payment is not made timely
at maturity. Additionally, as part of the latest GECC Senior Credit Facility
amendment dated May 20, 2004, such notes have been provided to GECC as
additional security. F-26




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##### Table of Contents



Advances to Related Parties Advances to related parties consist of the following amounts (in
thousands): March 31, 2003
    
    March 31, 2004Atari Interactive
    
    $
    30,495
    
    
    $
    Atari Australia
    
    
    1,689
    
    
    
    Total advances to related parties
    
    $
    32,184
    
    
    $
    
 The GECC Senior Credit Facility (Note 14) originally allowed the Company
to make advances to Atari Interactive through related party loans. These loans
bore interest at prime plus 150 basis points and, prior to the Recapitalization
Agreement, was payable from distribution royalties owed by the Company to Atari
Interactive in the ordinary course of operations. Additionally, normal trade
activities with Atari Interactive were netted against the loan balance
outstanding when the invoices became due (generally in 45 days). At March 31,
2003, loans due from Atari Interactive were $30.5 million. On July 3, 2003, the Company entered into an offset agreement with Atari
Interactive and IESA. The agreement provides that on the date of termination
of the Senior Credit Facility with GECC (Note 14), the Company may offset any
amount outstanding from Atari Interactive for advances, loans and current
accounts receivable against amounts due under the revolving credit agreement
with IESA (Credit Agreement). On July 3, 2003, the Company, Atari Australia and IESA entered into an
offset agreement, the effect of which provides the Company with the ability to
offset approximately $1.7 million, the amount owed to the Company as of March
31, 2003, or any portion of that amount outstanding, if any, on July 3, 2005,
against amounts owed under the Credit Agreement with IESA. As part of the Recapitalization Agreement, Atari Interactive, Atari
Australia, IESA and the Company agreed to offset the amount due from Atari
Interactive for advances, loans and current accounts receivable and the
outstanding receivable balance owed from Atari Australia against amounts due
under the $50.0 million principal amount of non-interest bearing subordinated
convertible notes and the 5% subordinated convertible notes to IESA. During
the first half of the year ended March 31, 2004, the Company advanced
additional funds of $14.2 million to Atari Interactive and Atari Australia
through intercompany loans. As of September 18, 2003, the Company had
approximately $44.7 million due from Atari Interactive and $1.9 million
outstanding from Atari Australia that was offset against the outstanding
balance of the $50.0 million principal amount of non-interest bearing
subordinated convertible notes and the 5% subordinated convertible notes.
(See Note 1, Recapitalization.) Accordingly, at March 31, 2004, no amounts
remain outstanding in advances to related parties that are not evidenced by
related party notes receivable approved by GECC. The amended GECC Senior
Credit Facility no longer permits funding to related parties beyond amounts
previously advanced without GECCs consent. For the year ended March 31, 2004, the Company recognized interest income
on the advances of approximately $1.1 million, of which no amount remained
outstanding at March 31, 2004. Transactions with current and former Officers Employment Agreement with Harry M. Rubin The Company and Harry M. Rubin entered into an employment agreement (the
Rubin Employment Agreement), which is effective as of June 1, 2002. The
Term of the Rubin Employment Agreement will continue through May 31, 2007, and
may be extended for five additional years under terms that are identical to
those contained in the Rubin Employment Agreement. Under the Rubin Employment Agreement, Mr. Rubin receives an annual salary
of $0.4 million retroactive to January 1, 2002, and is eligible to receive an
annual increase in the base salary of five percent. Additionally, Mr. Rubin is
eligible to receive an annual bonus of up to 50.0% of his base salary and
receives a car allowance of $3,000 per month. F-27




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Humongous Loan The Company extended a demand promissory note to the former President of
Humongous Entertainment, a division of the Company. The note bears interest at
a rate of 8.75% per annum and is secured by security interest in all shares of
common stock of the Company owned beneficially by such individual. The balance
outstanding, including interest, at March 31, 2000 was approximately $2.5
million. During June 2000, the Company exchanged the shares owned by the former
President and reduced the amount outstanding to approximately $1.5 million. As
part of the exchange, the Company negotiated a repayment schedule for this
outstanding loan which provided for a first installment of approximately
$37,000 to be paid on July 1, 2001. During the year ended June 30, 2001, the
Company recorded a reserve against this loan of approximately $0.7 million.
Payment of the loan was not received and the Company pursued collection of the
outstanding loan by exploring various legal remedies which it had available.
After further negotiations during the year ended June 30, 2002, the amount
outstanding was reduced to $0.8 million with the remaining balance forgiven by
the Company, resulting in a nominal charge to operations. Payments were
received during February and April of 2002 for a total of $0.8 million. As of
March 31, 2003 and March 31, 2004, there were no amounts due the Company in
connection with this loan. Note 13  Leases The Company accounts for its leases as operating leases, with expiration
dates ranging from 2005 through 2012. Future minimum annual rental payments
under the leases, including the related party sub-lease with Atari Interactive,
are as follows for the fiscal years then ended (in thousands): 2005
    
    $
    5,8692006
    
    
    5,2832007
    
    
    4,0262008
    
    
    2,0682009
    
    
    870Thereafter
    
    
    1,692$
    19,808
 Total rent expense charged to operations for the year ended June 30, 2002,
the nine months ended March 31, 2002 (unaudited) and 2003, and the years ended
March 31, 2003 (unaudited) and 2004, amounted to approximately $4.5 million,
$3.7 million, $4.2 million, $5.6 million, and $6.5 million, respectively. Note 14  Debt Credit Facilities GECC Senior Credit Facility On November 12, 2002 (last amended May 20, 2004), the Company obtained a
30-month $50.0 million Senior Credit Facility with GECC, to fund the Companys
working capital and general corporate needs, as well as to fund advances to
Paradigm and Atari Interactive, each a related party (Note 12). Loans under
the Senior Credit Facility were based on a borrowing base comprised of the
value of the Companys accounts receivable and short term marketable
securities. The Senior Credit Facility bears interest at prime plus 1.25% for
daily borrowings or LIBOR plus 3% for borrowings with a maturity of 30 days or
greater. A commitment fee of 0.5% on the average unused portion of the
facility was payable monthly and the Company paid $0.6 million as an initial
commitment fee at closing. The Senior Credit Facility contains certain
financial covenants and named certain related entities, such as Atari
Interactive and Paradigm, as guarantors. In addition, amounts outstanding
under the Senior Credit Facility are secured by the Companys assets. There
were no borrowings outstanding but $0.4 million of letters of credit were
outstanding as of March 31, 2004 under the Senior Credit Facility. As of March
31, 2004, accrued interest of approximately $0.2 million was included in
accrued liabilities and the Company was in compliance with all financial
covenants. Under an amendment to the Senior Credit Facility, dated December 23, 2003,
Atari Interactive and Paradigm have been removed as guarantors. Furthermore,
under the amendment, the Company is no longer permitted to fund advances to
Atari Interactive and Paradigm unless otherwise approved by GECC. All
outstanding related party notes receivable have been approved. F-28




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BNP Paribas Credit Facility In connection with the September 2000 merger with Infogrames North
America, Inc. (INA), a wholly-owned subsidiary of its majority shareholder
IESA, (the INA Merger), the Company assumed a $35.0 million revolving credit
facility (the BNP Credit Facility) with BNP Paribas (BNP), which was to
mature on September 17, 2001 and subsequently extended until November 30, 2001.
On November 30, 2001, the facility was extended to May 31, 2002, with an
amendment reducing the amount available in the facility by $5.0 million a month
beginning February 1, 2002 and maturing August 31, 2002. The amended facility
charged interest at a rate equal to the lenders cost of funds plus 1.5% on
domestic term loans and at LIBOR plus 1.5% on Eurodollar term loans, payable at
maturity. The Company had $15.0 million outstanding under this facility at
June 30, 2002 and paid the balance of principal and interest in full on August
30, 2002. IESA credit facilities and debt with the Company Credit Agreement The Company maintained a Credit
Agreement which provided for an aggregate commitment of $75.0 million which
bore interest at LIBOR plus 2.5%. Effective December 31, 2002, the maturity
date of the Credit Agreement was extended to April 1, 2004. This agreement
required that the Company comply with certain financial covenants and, among
other items, restricted capital expenditures. As of September 30, 2003, all
outstanding borrowings were exchanged for 10,541,105 newly issued common shares
under the terms of the Recapitalization Agreement. As of March 31, 2004, no
accrued interest or fees remain outstanding. (See Note 1, Recapitalization.) Medium-Term Loan In connection with the Shiny Acquisition (Note 2), the Company obtained a
$50.0 million medium-term loan from IESA. Interest was based on the three
month LIBOR rate plus 2.75% and payable on a quarterly basis, in arrears. An
unused commitment fee of 0.50% per annum was based on the aggregate amount of
the facility less outstanding loans. As of September 30, 2003, all outstanding
borrowings have been exchanged for 11,359,319 newly issued common shares under
the terms of the Recapitalization Agreement. Additionally, as of March 31,
2004, no accrued interest remains outstanding. (See Note 1, Recapitalization.) Long-Term Related Party Debt 0% Notes In conjunction with the 1999 purchase of the Company by IESA, the Company
issued to GAP the 0% Notes in exchange for 600,000 shares of Series A Preferred
Stock and $20.0 million of subordinated notes of the Company. The 0% Notes
were to mature in December 2004 and had a redemption value of $50.0 million at
maturity. In lieu of payment at maturity, the 0% Notes were convertible at any
time, at the holders option, into shares of the Companys common stock at
$20.00 per share. On December 28, 2001, IESA assumed the 0% Notes from GAP in
exchange for shares of IESA common stock. IESA did not change any of the terms
of the 0% Notes (renamed the IESA 0% subordinate convertible note) as they
relate to the Company. Interest on the IESA 0% subordinate convertible note
was accreted at the rate of 7% per annum. Under the terms of the September 4, 2003 Recapitalization Agreement, the
IESA 0% subordinated convertible note has been fully offset against the
advances to related parties (Notes 1 and 12). 5% Notes In conjunction with the 1999 purchase of the Company by IESA, the Company
issued to CUSH, 5% subordinated convertible notes (5% CUSH Notes) in exchange
for $25.0 million in cash and $35.6 million in debt and accrued interest. The
5% CUSH Notes were to mature in December 2004 and had a principal amount of
$60.6 million. In lieu of payment at maturity, the 5% CUSH Notes were convertible at any time, at the holders
option, into shares of the Companys common stock at $9.25 per share. F-29




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##### Table of Contents



Under the terms of the September 4, 2003 Recapitalization Agreement, the
5% CUSH Notes, net of the remaining advances to related parties, have been
fully converted to 17,129,453 of the Companys newly issued common shares at a
fair-market value of $4.25 per share. The common shares issued by the Company
were at a more favorable rate than that available under the original terms of
the 5% CUSH Notes. The resulting incremental value of the additional stock
issued was recorded as a dividend to IESA of $39.4 million (Note 1 and 12). In September 2003, the Company expensed the full $1.3 million of remaining
deferred financing fees related to the IESA 0% subordinated convertible note
and the 5% CUSH Notes as a result of the Recapitalization Agreement. Note 15  Legal Proceedings Litigation During the year ended March 31, 2004, no significant claims were asserted
against or by the Company that in managements opinion the likely resolution of
which would have a material adverse affect on the Companys liquidity,
financial condition or results of operations, although the Company is involved
in various legal actions arising in the ordinary course of business. The
following litigation matters are still pending or were terminated during the
year ended March 31, 2004. The Company continues to believe that, with respect
to pending matters, the underlying complaints are without merit and intends to
defend itself vigorously against these actions. The Companys management believes that the ultimate resolution of any of
the actions summarized below or any other actions which are not specifically
described herein will not have a material adverse effect on the Companys
liquidity, financial condition or results of operations. KBK On September 16, 2002, Knight Bridging Korea Co. Ltd. (KBK), a
distributor of electronic games via the Internet and local area networks, filed
a lawsuit against Gamesonline, a subsidiary of Interplay, and the Company in
Superior Court of California, Orange County. KBK alleges that on or about
December 15, 2001, KBK entered into a contract with Gamesonline to obtain the
right to localize (i.e., right to translate games into the local language of
the country where the games are distributed) and to electronically distribute
in Korea, Neverwinter Nights and certain other games which were previously
released. The complaint further alleges that Gamesonline and the Company
conspired to prevent KBK from entering the market with Neverwinter Nights or
any previously released games of Gamesonline. The complaint alleges the
following causes of action against the Company: misappropriation of trade
secrets under the California Uniform Trade Secrets Act; common law
misappropriation; intentional interference with contract; negligent
interference with contract; intentional interference with prospective economic
advantage; negligent interference with prospective economic advantage; and
violation of Business & Professions Code Section 17200 et seq. The complaint
seeks $98.8 million for each of these causes of action. An amended complaint was filed on December 3, 2002, alleging all of the
foregoing against the Company, adding Atari Interactive as a named defendant,
and alleging that the Company managed and directed Atari Interactive to engage
in the foregoing alleged acts. The Company and Atari Interactive filed answers
on January 9, 2003. On or about January 28, 2003, Gamesonline answered the
original complaint and served a cross-complaint against KBK. On April 29, 2003,
KBK named as defendants Infogrames Asia Pacific, Infogrames Korea, and
Interplay, Inc.. On October 29, 2003, Interplay filed a cross-complaint
against the Company, Atari Interactive, Infogrames Korea and Roes 101 through
200. The Company and Atari Interactive filed an answer on December 3, 2003. On
March 25, 2004 KBK filed a Second Amended Complaint for Damages adding new
causes of action for fraud against Gamesonline and Interplay; seeking
rescission of the Electronic Distribution Agreement between KBK and
Gamesonline; for breach of third party beneficiary rights against Atari
Interactive; for unlawful restraint of trade against all defendants; for RICO
Act violations against all defendants; and for civil conspiracy against all
defendants; and adds allegations of alter ego status between Gamesonline and
Interplay and as between the Company, Atari Interactive, and Atari Korea.
Discovery is ongoing. F-30




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##### Table of Contents



On March 10, 2004 the Court entered a stipulation among the parties
referring the matter to a private judge. The private judge, retired Superior
Court Judge Harvey Schneider, will be presiding over all aspects of the case,
including the non-jury trial. The trial is currently set for July 19, 2004 but
is likely to be continued until sometime in the fall or winter of 2004. The Company and Atari Interactive have filed a Motion for Leave to File a
Cross-Complaint against Interplay Entertainment Corp. and Gamesonline.com, Inc.
The Company and Atari Interactive also have filed a Motion for Summary
Adjudication on the RICO Act claim and a Demurrer on various of the causes of
action. The Motion for Leave, Motion for Summary Adjudication and Demurrer all
will be heard on June 17, 2004. KBK has purported to serve in Korea an entity it called Atari Korea with
a Summons and Complaint in this case. Atari Korea Ltd. is planning to file a
Motion to Quash Service based on failure to comply with the terms of the Hague
Convention and/or lack of personal jurisdiction over that entity. Interplay On September 19, 2003, Interplay, commenced a wrongful termination and
breach of contract action (the Action) in New York State Supreme Court, New
York County in which it named Atari Interactive and the Company as defendants,
seeking, among other things, a judgment declaring that a computer game license
agreement between Interplay and Atari Interactive continues to be in full force
and effect. On September 23, 2003, Interplay obtained a preliminary injunction that
prevents termination of the computer game license agreement. On October 9,
2003, Atari Interactive answered the complaint, denying all claims, asserting
several affirmative defenses and counterclaims for breach of contract and one
counterclaim for a judgment declaring the computer game license agreement
terminated. Atari Interactives answer also asserted that the Company was
incorrectly named as the defendant in this Action. Both sides sought damages in
an amount to be determined at trial. The Company, Atari Interactive and Interplay reached an agreement with
respect to the scope and terms of the computer game license agreement and
accordingly, filed with the court a Stipulation of Dismissal, dated December
22, 2003. The court ordered dismissal of the matter on January 6, 2004. Note 16  Employee Savings Plan The Company maintains an Employee Savings Plan (the Plan) which
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. The Plan is available to all United States employees who meet
the eligibility requirements. Under the Plan, participating employees may
elect to defer a portion of their pretax earnings, up to the maximum allowed by
the Internal Revenue Service with matching of 100% of the first 3% and 50% of
the next 6% of the employees contribution provided by the Company. Generally,
the Plans assets in a participants account will be distributed to a
participant or his or her beneficiaries upon termination of employment,
retirement, disability or death. All Plan administrative fees are paid by the
Company. Generally, the Company does not provide its employees any other
post-retirement or post-employment benefits, except discretionary severance
payments upon termination of employment. Plan expense approximated, $1.3
million, $0.9 million, $1.0 million, $1.4 million, and $1.4 million for the
year ended June 30, 2002, the nine months ended March 31, 2002 (unaudited) and
2003, and the years ended March 31, 2003 (unaudited) and 2004, respectively. F-31




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##### Table of Contents



Note 17  Royalty and License Advances The Company has committed to pay advance payments under certain royalty
and license agreements. The payments of these obligations are not dependent on
the delivery of the contracted services by the developers. Future advances due
under these agreements are as follows for the fiscal years then ended (in
thousands): 2005
    
    $
    3,6182006
    
    
    5132007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    $
    4,131
 Note 18  Concentration of Credit Risk The Company extends credit to various companies in the retail and mass
merchandising industry for the purchase of its merchandise which results in a
concentration of credit risk. This concentration of credit risk may be
affected by changes in economic or other industry conditions and may,
accordingly, impact the Companys overall credit risk. Although the Company
generally does not require collateral, the Company performs ongoing credit
evaluations of its customers and reserves for potential losses are maintained. The percentage of net revenues earned from sales of its top two customers
for the fiscal years then ended are as follows: Nine MonthsYear Ended
    
    Ended
    
    Years EndedJune 30,
    
    March 31,
    
    March 31,2002
    
    2002
    
    2003
    
    2003
    
    2004(unaudited)
    
    
    
    
    
    (unaudited)Top customer
    
    
    26
    %
    
    
    28
    %
    
    
    24
    %
    
    
    25
    %
    
    
    25
    %Second customer
    
    
    11
    %
    
    
    11
    %
    
    
    11
    %
    
    
    10
    %
    
    
    11
    %Top two customers
    
    
    37
    %
    
    
    39
    %
    
    
    35
    %
    
    
    35
    %
    
    
    36
    %
 Accounts receivable due from three of the most significant customers of
each period aggregated 31% and 35% of accounts receivable at March 31, 2003 and
March 31, 2004, respectively. Note 19  Operations by Reportable Segments and Geographic Areas The Company has three reportable segments: publishing, distribution and
corporate. Publishing is comprised of three studios located in Santa Monica,
California; Beverly, Massachusetts; and Minneapolis, Minnesota (Studio was
closed in March 2004). Distribution constitutes the sale of other publishers
titles to various mass merchants and other retailers. Corporate includes the
costs of senior executive management, legal, finance, and administration. The
majority of depreciation expense for fixed assets is charged to the corporate
segment and a portion is recorded in the publishing segment. This amount
consists of depreciation on computers and office furniture in the publishing
unit. Historically, the Company does not separately track or maintain records,
other than fixed asset records, which identify assets by segment and,
accordingly, such information is not available. The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating results of these segments. F-32




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##### Table of Contents



The Companys reportable segments are strategic business units with
different associated costs and profit margins. They are managed separately
because each business unit requires different planning, and where appropriate,
merchandising and marketing strategies. The following summary represents the consolidated net revenues, operating
income (loss), depreciation and amortization, and  (expense) income by
reportable segment for the year ended June 30, 2002, the nine months ended
March 31, 2002 (unaudited) and 2003, and the years ended March 31, 2003
(unaudited) and 2004 (in thousands): Publishing
    
    Distribution
    
    Corporate
    
    TotalYear ended June 30, 2002:Net revenues
    
    $
    320,204
    
    
    $
    98,841
    
    
    $
    
    
    
    $
    419,045Operating income (loss)
    
    
    12,781
    
    
    
    10,590
    
    
    
    (22,409
    )
    
    
    962Depreciation and amortization
    
    
    (2,113
    )
    
    
    (545
    )
    
    
    (2,796
    )
    
    
    (5,454
    )Interest (expense) income
    
    
    (58
    )
    
    
    103
    
    
    
    (12,001
    )
    
    
    (11,956
    )Nine months
ended March 31, 2002 (unaudited):Net revenues
    
    $
    211,902
    
    
    $
    77,540
    
    
    $
    
    
    
    $
    289,442Operating income (loss)
    
    
    1,205
    
    
    
    7,699
    
    
    
    (16,539
    )
    
    
    (7,635
    )Depreciation and amortization
    
    
    (1,219
    )
    
    
    (401
    )
    
    
    (1,917
    )
    
    
    (3,537
    )Interest
income (expense)
    
    
    
    
    
    
    75
    
    
    
    (7,962
    )
    
    
    (7,887
    )Nine months
ended March 31, 2003:Net revenues
    
    $
    329,813
    
    
    $
    74,832
    
    
    $
    
    
    
    $
    404,645Operating income (loss)
    
    
    37,998
    
    
    
    14,433
    
    
    
    (24,990
    )
    
    
    27,441Depreciation and amortization
    
    
    (3,009
    )
    
    
    (438
    )
    
    
    (2,412
    )
    
    
    (5,859
    )Interest income (expense)
    
    
    
    
    
    
    151
    
    
    
    (9,749
    )
    
    
    (9,598
    )Year ended March 31, 2003 (unaudited):Net revenues
    
    $
    438,114
    
    
    $
    96,134
    
    
    $
    
    
    
    $
    534,248Operating income (loss)
    
    
    49,936
    
    
    
    16,962
    
    
    
    (30,862
    )
    
    
    36,036Depreciation and amortization
    
    
    (3,903
    )
    
    
    (582
    )
    
    
    (3,292
    )
    
    
    (7,777
    )Interest (expense) income
    
    
    (58
    )
    
    
    179
    
    
    
    (13,788
    )
    
    
    (13,667
    )Year ended March 31, 2004:Net revenues
    
    $
    405,983
    
    
    $
    62,961
    
    
    $
    
    
    
    $
    468,944Operating income (loss)
    
    
    24,670
    
    
    
    10,856
    
    
    
    (27,658
    )
    
    
    7,868Depreciation and amortization
    
    
    (3,611
    )
    
    
    (190
    )
    
    
    (5,354
    )
    
    
    (9,155
    )Interest income (expense)
    
    
    
    
    
    
    22
    
    
    
    (7,680
    )
    
    
    (7,658
    )
 Information about the Companys operations in the United States and other
geographic locations for the year ended June 30, 2002, the nine months ended
March 31, 2002 (unaudited) and 2003, and the years ended March 31, 2003
(unaudited) and 2004 are presented below (in thousands): OtherUnited
    
    
    
    
    
    GeographicStates
    
    Europe
    
    Locations
    
    TotalYear ended June 30, 2002:Net revenues
    
    $
    413,663
    
    
    $
    606
    
    
    $
    4,776
    
    
    $
    419,045Operating income (loss)
    
    
    8,585
    
    
    
    (6,267
    )
    
    
    (1,356
    )
    
    
    962Capital expenditures
    
    
    7,382
    
    
    
    1,189
    
    
    
    
    
    
    
    8,571Total assets
    
    
    236,985
    
    
    
    3,138
    
    
    
    1,740
    
    
    
    241,863Nine months ended March 31, 2002 (unaudited):Net revenues
    
    $
    285,577
    
    
    $
    
    
    
    $
    3,865
    
    
    $
    289,442Operating (loss)
    
    
    (2,064
    )
    
    
    (4,950
    )
    
    
    (621
    )
    
    
    (7,635
    )Capital expenditures
    
    
    5,484
    
    
    
    1,005
    
    
    
    
    
    
    
    6,489Total assets
    
    
    159,344
    
    
    
    3,100
    
    
    
    6,014
    
    
    
    168,458Nine months ended March 31, 2003:Net revenues
    
    $
    404,638
    
    
    $
    
    
    
    $
    7
    
    
    $
    404,645Operating income (loss)
    
    
    33,467
    
    
    
    (5,461
    )
    
    
    (565
    )
    
    
    27,441
 F-33




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##### Table of Contents



OtherUnited
    
    
    
    
    
    GeographicStates
    
    Europe
    
    Locations
    
    TotalCapital expenditures
    
    
    3,371
    
    
    
    540
    
    
    
    156
    
    
    
    4,067Total assets
    
    
    223,960
    
    
    
    2,953
    
    
    
    5,169
    
    
    
    232,082Year ended March 31, 2003 (unaudited):Net revenues
    
    $
    532,724
    
    
    $
    604
    
    
    $
    920
    
    
    $
    534,248Operating income (loss)
    
    
    44,115
    
    
    
    (6,778
    )
    
    
    (1,301
    )
    
    
    36,036Capital expenditures
    
    
    5,203
    
    
    
    726
    
    
    
    155
    
    
    
    6,084Total assets
    
    
    223,960
    
    
    
    2,953
    
    
    
    5,169
    
    
    
    232,082Year ended March 31, 2004:Net revenues
    
    $
    468,944
    
    
    $
    
    
    
    $
    
    
    
    $
    468,944Operating income (loss)
    
    
    16,787
    
    
    
    (8,776
    )
    
    
    (143
    )
    
    
    7,868Capital expenditures
    
    
    4,776
    
    
    
    352
    
    
    
    
    
    
    
    5,128Total assets
    
    
    190,607
    
    
    
    3,318
    
    
    
    31
    
    
    
    193,956
 United States net revenues include royalties on sales of our product sold
internationally. For the year ended June 30, 2002, nine months ended March
31, 2002 (unaudited) and March 31, 2003, and the years ended March 31, 2003
(unaudited) and March 31, 2004, the royalties were $13.6 million, $3.2 million,
$18.8 million, $20.4 million, and $28.9 million, respectively. Note 20  Quarterly Financial Data (unaudited) Summarized quarterly financial data for the fiscal year ended June 30, 2002 is
as follows (in thousands, except per share amounts): September 30,
    
    December 31,
    
    March 31,
    
    June 30,Net revenues
    
    $
    78,527
    
    
    $
    160,410
    
    
    $
    50,505
    
    
    $
    129,603Gross profit
    
    
    40,794
    
    
    
    81,094
    
    
    
    15,199
    
    
    
    69,578Operating income (loss)
    
    
    3,393
    
    
    
    15,161
    
    
    
    (26,189
    )
    
    
    8,597Net income (loss)
    
    
    552
    
    
    
    12,174
    
    
    
    (22,947
    )
    
    
    (709
    )Income (loss) attributable to common stockholders
    
    
    552
    
    
    
    12,174
    
    
    
    (22,947
    )
    
    
    (709
    )Basic and diluted income (loss) per share
attributable to common stockholders
    
    
    0.01
    
    
    
    0.17
    
    
    
    (0.33
    )
    
    
    (0.01
    )Weighted
average shares outstanding - basic
    
    
    69,524
    
    
    
    69,738
    
    
    
    69,799
    
    
    
    69,825Weighted
average shares outstanding - diluted
    
    
    70,007
    
    
    
    70,008
    
    
    
    69,799
    
    
    
    69,825
 Summarized quarterly financial data for the nine months ended March 31, 2003 is
as follows (in thousands, except per share amounts): September 30,
    
    December 31,
    
    March 31,Net revenues
    
    $
    109,367
    
    
    $
    210,594
    
    
    $
    84,684Gross profit
    
    
    55,472
    
    
    
    106,452
    
    
    
    38,863Operating income (loss)
    
    
    3,496
    
    
    
    33,672
    
    
    
    (9,727
    )Net income (loss)
    
    
    731
    
    
    
    30,054
    
    
    
    (12,715
    )Income (loss) attributable to common stockholders
    
    
    731
    
    
    
    30,054
    
    
    
    (12,715
    )Basic and diluted income (loss) per share
attributable to common stockholders
    
    
    0.01
    
    
    
    0.43
    
    
    
    (0.18
    )Weighted
average shares outstanding - basic
    
    
    69,826
    
    
    
    69,891
    
    
    
    69,918Weighted
average shares outstanding - diluted
    
    
    69,952
    
    
    
    69,984
    
    
    
    69,918
 Summarized quarterly financial data for the fiscal year ended March 31, 2004 is
as follows (in thousands, except per share amounts): F-34




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##### Table of Contents



June 30,
    
    September 30,
    
    December 31,
    
    March 31,Net revenues
    
    $
    151,357
    
    
    $
    60,575
    
    
    $
    190,608
    
    
    $
    66,404Gross profit
    
    
    80,511
    
    
    
    22,625
    
    
    
    96,692
    
    
    
    20,135Operating income (loss)
    
    
    27,657
    
    
    
    (25,436
    )
    
    
    25,433
    
    
    
    (19,786
    )Net income (loss)
    
    
    23,792
    
    
    
    (28,731
    )
    
    
    23,018
    
    
    
    (17,313
    )Income (loss) attributable to common stockholders
    
    
    23,792
    
    
    
    (68,082
    )
    
    
    23,018
    
    
    
    (17,313
    )Basic income (loss) per share attributable to
common stockholders
    
    
    0.34
    
    
    
    (0.90
    )
    
    
    0.19
    
    
    
    (0.14
    )Diluted income (loss) per share attributable to
common stockholders
    
    
    0.32
    
    
    
    (0.90
    )
    
    
    0.19
    
    
    
    (0.14
    )Weighted
average shares outstanding - basic
    
    
    69,974
    
    
    
    75,594
    
    
    
    121,170
    
    
    
    121,214Weighted
average shares outstanding - diluted
    
    
    80,499
    
    
    
    75,594
    
    
    
    121,325
    
    
    
    121,214
 During the fourth quarter of the year ended March 31, 2004, the Company
recorded approximately $3.7 million of additional royalties due as part of a
negotiation and settlement regarding disputes with respect to a contract with a
third party licensor. Additionally, the Company recorded approximately $5.4
million of additional reserves for returns, price protection, and other
customer promotional allowances that management deemed necessary to accurately
reflect market conditions at that time. During the third quarter of the nine months ended March 31, 2003, the
Company reduced its royalty payable by approximately $2.0 million as returns,
price protection and other customer promotional allowances of certain royalty
bearing products were greater than the amounts estimated during the second
quarter. During the fourth quarter of 2002, based on an agreement to sell
pre-petition Kmart receivables at an amount substantially below face value, the
Company determined it was required to pay certain royalties only on receivables
collected. Accordingly, the Company reduced its royalty accrual at June 30,
2002 by approximately $0.7 million. The per share amounts are calculated independently for each of the
quarters presented. The sum of the quarters may not equal the full year per
share amounts. F-35




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##### Table of Contents



ATARI, INC. AND SUBSIDIARIES SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS (in thousands) Additions
    
    AdditionsBalance
    
    Charged to
    
    Charged to
    
    
    
    
    
    BalanceBeginning
    
    Net
    
    Operating
    
    
    
    
    
    EndDescription
    
    of Period
    
    Revenues
    
    Expenses
    
    Deductions
    
    of PeriodAllowance for bad debts, returns, price
protection
and other customer promotional programs:Year ended March 31, 2004
    
    $
    40,319
    
    
    $
    104,051
    
    
    $
    4,422
    
    
    $
    (112,513
    )
    
    $
    36,279Nine months ended March 31, 2003
    
    $
    50,451
    
    
    $
    78,483
    
    
    $
    3,814
    
    
    $
    (92,429
    )
    
    $
    40,319Year ended June 30, 2002
    
    $
    56,554
    
    
    $
    103,711
    
    
    $
    8,192
    
    
    $
    (118,006
    )
    
    $
    50,451
 Additions
    
    AdditionsBalance
    
    Charged to
    
    Charged to
    
    
    
    
    
    BalanceBeginning
    
    Cost of
    
    Operating
    
    
    
    
    
    EndDescription
    
    of Period
    
    Goods Sold
    
    Expenses
    
    Deductions
    
    of PeriodReserve for obsolescence:Year ended March 31, 2004
    
    $
    4,903
    
    
    $
    1,713
    
    
    $
    
    
    
    $
    (4,471
    )
    
    $
    2,145Nine months ended March 31, 2003
    
    $
    7,695
    
    
    $
    3,416
    
    
    $
    
    
    
    $
    (6,208
    )
    
    $
    4,903Year ended June 30, 2002
    
    $
    20,360
    
    
    $
    813
    
    
    $
    
    
    
    $
    (13,478
    )
    
    $
    7,695
 F-36