ATAR Avatar Ventures Corp (CE)

417 Fifth Avenue
New York, New York 10016

 

To the stockholders of Atari, Inc.:

 

You are cordially invited to attend a special meeting of the stockholders of Atari, Inc. (“Atari”) to be held at Atari’s offices, 417 Fifth Avenue, New York, New York 10016, on [          ], 2008 at [          ], local time.

 

At the special meeting Atari is asking its stockholders to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of April 30, 2008, by and among Atari, Infogrames Entertainment S.A. (“Infogrames”), and Irata Acquisition Corp., a wholly owned indirect subsidiary of Infogrames (“Merger Sub”), pursuant to which Merger Sub will be merged with and into Atari, with Atari continuing as the surviving corporation in the merger as a wholly owned indirect subsidiary of Infogrames. If the merger is completed, each share of Atari common stock outstanding at the effective time of the merger (other than shares held by holders who have perfected and not withdrawn a demand for appraisal rights, and shares beneficially owned by Infogrames) will be cancelled and converted into the right to receive US$1.68 in cash, without interest. Shares beneficially owned by Infogrames will be cancelled with no consideration paid therefor.

 

The Special Committee of the board of directors of Atari, which was established to evaluate transactions between Atari and Infogrames and its affiliates, reviewed and negotiated the proposed transaction. Atari’s board of directors, acting on the recommendation of the Special Committee, has approved the merger agreement. Both the Special Committee and Atari’s board of directors have determined that the merger and the merger agreement are fair and advisable to and in the best interests of Atari’s stockholders (other than Infogrames and its affiliates). Therefore, acting on the recommendation of the Special Committee, the board of directors of Atari recommends that you vote “FOR” the adoption and approval of the merger agreement.

 

Approval of the merger requires the affirmative vote of at least a majority of Atari’s outstanding common stock entitled to vote on the merger. As of [          ], the record date for the special meeting, Infogrames directly or indirectly controlled approximately 51.6% of the voting securities of Atari, which is sufficient to adopt and approve the merger agreement. As a result, approval of the merger agreement will occur upon the vote in favor of the merger agreement by Infogrames, regardless of the vote of any other stockholder of Atari.

 

Regardless of the number of shares you own, and whether or not you plan to attend the meeting, please complete, sign, date and return the enclosed proxy card or submit a proxy over the Internet or by phone as described on the proxy card (or, if your shares are held in “street name”, follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares). You retain the right to revoke the proxy at any time before it is actually voted by giving notice in writing to the Secretary of Atari, by giving notice at the special meeting, or by submitting a duly executed proxy bearing a later date. If you have instructed a broker, nominee, fiduciary or other custodian to vote your shares, you must follow its directions to change or revoke your voting instructions. The failure to vote will have the same effect as a vote against the merger agreement . Finally, if you do not vote in favor of approval of the merger agreement and you fulfill other procedural requirements, which are summarized in the accompanying proxy statement, Delaware law entitles you to a judicial appraisal of the fair value of your shares.

 

The enclosed proxy statement provides you with information about the proposed merger, the merger agreement and the special meeting. Atari urges you to read it and its annexes carefully.

 

Very truly yours,

 

Eugene I. Davis

Chairman of the Board of Directors

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of this transaction or passed upon the merits or fairness of this transaction or the adequacy or accuracy of the disclosure in the enclosed proxy statement. Any representation to the contrary is a criminal offense.

 

The enclosed proxy statement is dated [          ], 2008 and is first being mailed to stockholders on or about [          ], 2008.

417 Fifth Avenue
New York, New York 10016

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
OF
ATARI, INC.

To Be Held [          ], 2008

 

 

To the stockholders of Atari, Inc.:

 

Atari will hold a special meeting of stockholders of Atari, Inc. (“Atari”) on [          ], 2008 at [          ], local time, at Atari’s offices, 417 Fifth Avenue, New York, New York 10016. The purpose of the meeting is:

 

1. to consider and vote upon a proposal to adopt and approve the Agreement and Plan of Merger, dated as of April 30, 2008, by and among Atari, Infogrames Entertainment S.A. (“Infogrames”) and Irata Acquisition Corp. (“Merger Sub”); and

 

2. to transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.

 

Atari has described the merger agreement and the related merger in the accompanying proxy statement and annexes, which you should read in their entirety before voting. A copy of the merger agreement is attached as Annex A to the proxy statement. The record date to determine stockholders entitled to vote at the special meeting is [          ], 2008. Only holders of Atari common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting.

 

To make sure your shares are represented at the special meeting, you should, as soon as possible, complete, sign, date and return the enclosed proxy card or submit a proxy over the Internet or by phone as described on the proxy card (or, if your shares are held in “street name”, follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares). You retain the right to revoke the proxy at any time before it is actually voted by giving notice in writing to the Secretary of Atari, by giving notice in open meeting at the special meeting or by submitting a duly executed proxy bearing a later date. If you have instructed a broker, nominee, fiduciary or other custodian to vote your shares, you must follow its directions to change or revoke your voting instructions. The failure to vote will have the same effect as a vote against the merger agreement . If you do not vote in favor of approval of the merger agreement and you fulfill other procedural requirements, which are summarized in the accompanying proxy statement, Delaware law entitles you to a judicial appraisal of the fair value of your shares.

 

By Order of the Board of Directors

 

Kristina K. Pappa

Secretary

 

Dated: [          ], 2008

 

Whether or not you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy in the accompanying self-addressed postage pre-paid envelope or submit a proxy over the Internet or by phone as described on the proxy card (or, if your shares are held in “street name”, follow the directions given by the broker, nominee, fiduciary or other custodian regarding how to instruct it to vote your shares) as soon as possible.

TABLE OF CONTENTS

 

 

You are being asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of April 30, 2008, by and among Atari, Inc. (“Atari”), Infogrames Entertainment S.A. (“Infogrames”) and Irata Acquisition Corp. (“Merger Sub”), which is referred to in this proxy statement as the merger agreement. The merger agreement provides for the merger of Merger Sub with and into Atari, which would be the surviving corporation in the merger, and, immediately following the merger, Infogrames would have beneficial ownership of all of the outstanding capital stock of Atari. This summary term sheet briefly describes the material terms of the proposed merger and may not contain all of the information that is important to you. Atari urges you to read carefully the entire proxy statement, including the annexes hereto. Each item in this summary term sheet includes a page reference directing you to a more complete description of that item.

 

 

 

 

Pursuant to the merger agreement, Merger Sub will be merged with and into Atari. Atari will continue its corporate existence under Delaware law as the surviving corporation in the merger and Atari will become a wholly owned indirect subsidiary of Infogrames.

 

At the effective time of the merger, pursuant to the merger agreement and Delaware law:

 

 

 

For the purposes of this proxy statement, shares of common stock of Atari beneficially owned by Infogrames and holders who have perfected and not withdrawn a demand for appraisal rights are collectively referred to as “excluded shares”.

 

Atari’s purpose in undertaking the merger is to allow its stockholders (other than Infogrames and its affiliates) to realize the value of their investment in Atari in cash at a price that represents a 6.3% premium to the 5-day trading price prior to the date of Infogrames’ announcement of its offer, and a 58.5% premium to the 30-day trading price prior to the date of Infogrames’ announcement of its offer, of Atari’s common stock on the Nasdaq Stock Market.

 

Infogrames’ purpose for engaging in the merger is to acquire all of the shares of common stock (approximately 49.4%) not already beneficially owned by Infogrames. In reaching its decision to effect the merger, the Infogrames board, in consultation with its management, focused primarily on the benefits and synergies of having its products distributed in the United States by a wholly owned company that would no longer be incurring the costs involved with being a public company, and the ability of Infogrames to rebuild and develop Atari for the long term without immediate concerns about its potential liquidation or bankruptcy. See “Special Factors — Purposes for the Merger — Infogrames’ Purpose for the Merger”.

 

Among other results of the merger, the stockholders of Atari (other than Infogrames and its affiliates) will no longer have any interest in, and will no longer be stockholders of, Atari and will not participate in any future earnings or growth of Atari, and Infogrames will beneficially own all of the outstanding shares of Atari. Following the merger, Atari will no longer file periodic reports and other information with the SEC. Furthermore, Atari’s common stock will no longer be publicly traded and price quotations with respect to sales of shares of Atari’s common stock on the public market will no longer be available. Currently, Atari’s common stock is quoted on the “Pink Sheets” as a consequence of being delisted from the Nasdaq Global Market on May 9, 2008 after a Nasdaq Listing Qualifications Panel determined to delist Atari’s securities because Atari had failed to regain compliance with the requirements of Nasdaq Marketplace Rule 4450(b)(3) regarding the aggregate market value of Atari’s publicly held shares. The merger is considered a “going private” transaction under applicable SEC regulations.

 

Prior to and at the time of Infogrames’ proposal, three of Atari’s directors had certain conflicts of interest in evaluating the merger. Atari’s special committee of independent directors, consisting of Eugene Davis, Wendell Adair, Bradley Scher and James Shein (the “Special Committee”), was therefore charged with negotiating and evaluating a potential transaction with Infogrames and, if appropriate, recommending the transaction to Atari’s board.

 

Both the Special Committee and the board of directors of Atari (other than Mr. Coppee, who did not participate in the decision), after careful consideration of numerous factors, have determined that the merger agreement and the merger are fair and advisable to and in the best interests of Atari’s stockholders (other than Infogrames and its

affiliates). For further information regarding Atari’s reasons for entering into the merger, see “Special Factors — Atari’s Reasons For the Merger; Recommendations of the Special Committee and the Atari Board of Directors”.

 

Acting with the recommendation of the Special Committee, the board of directors approved the merger agreement. The board of directors, based in part on the recommendation of the Special Committee, recommends that Atari’s stockholders vote for the adoption and approval of the merger agreement.

 

In connection with the merger, Duff & Phelps LLC (“Duff & Phelps”) rendered its opinion on April 28, 2008 to the Special Committee that, subject to the qualifications and limitations set forth therein, as of that date, the per share merger consideration of US$1.68 in cash to be paid to Atari’s unaffiliated stockholders in the merger was fair to such holders from a financial point of view.

 

The full text of the Duff & Phelps opinion, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Duff & Phelps in connection with the opinion, is attached as Annex B to this proxy statement and is incorporated into this proxy statement by reference. You are urged to read Duff & Phelps’ opinion carefully in its entirety. Duff & Phelps’ opinion was provided to the Special Committee in connection with its evaluation of the per share merger consideration to be paid in the merger, did not address any other aspect of the merger and did not constitute a recommendation to any holder of Atari common stock as to how such holder should vote or act with respect to any matters relating to the merger.

 

In considering the recommendation of the board of directors, you should be aware that certain of Atari’s executive officers and directors, Infogrames and Merger Sub have interests in the transaction that are different from, or are in addition to, the interests of Atari’s unaffiliated stockholders generally. The Special Committee and the board of directors were aware of these conflicts of interest and considered them along with other matters when they determined to recommend the merger. These interests, which are discussed in detail in the section entitled “Special Factors — Interests of Certain Persons in the Merger”, include the following:

 

 

 

The merger agreement contains restrictions on Atari’s and the board’s ability to (i) initiate, solicit, knowingly encourage or facilitate any inquiries, offers or proposals relating to a takeover proposal, or (ii) engage in or continue discussions or negotiations with, or provide any non-public information relating to Atari or any of its subsidiaries, to any person who has made or indicated an intention to make a takeover proposal.

 

Atari and its board of directors may, however, if specified conditions are satisfied and the board of directors determines in good faith after consultation with outside legal counsel that the failure to take such action could constitute a breach of its fiduciary duties to Atari’s stockholders under applicable law, engage in negotiations or discussions with, and provide information about Atari to, any third party that makes an unsolicited bona fide written takeover proposal that the board of directors determines, in good faith, constitutes a superior proposal (as defined in the merger agreement) or is reasonably likely to result in a superior proposal. However, nothing in the merger agreement obligates Infogrames in any way to vote in favor of a superior proposal.

 

The merger agreement also provides that Atari’s board of directors shall not directly or indirectly withdraw, modify or amend (or propose or resolve to withdraw, modify or amend), in a manner adverse to Infogrames, its recommendation with respect to the merger or approve, endorse or recommend (or propose to approve, endorse or recommend) any takeover proposal other than the merger, except that before the stockholders approve the merger, Atari’s board of directors may withhold or withdraw its recommendation if Atari’s board of directors determines in good faith, after consultation with its legal and financial advisors, that the failure to do so would reasonably be expected to result in a violation of the directors’ fiduciary duties to Atari’s stockholders under applicable law, provided that Atari’s board of directors has provided Infogrames with at least three business days’ prior notice of its intention to change its recommendation. In the event of a change of recommendation due to the existence of a superior proposal, Atari’s board of directors shall give Infogrames written notice of its intention to change its recommendation at least five business days prior to making a change of recommendation. At any time Infogrames will be permitted to propose to Atari’s board of directors, revisions to the terms of the transactions contemplated by the merger agreement, and the board of directors is required to negotiate in good faith regarding any such revisions, and Atari’s board of directors may withhold or withdraw its recommendation on the basis of the superior proposal only in the event that it continues to be a superior proposal in light of any revisions to the terms of the transaction contemplated by the merger agreement to which Infogrames and Atari’s board of directors have agreed.

 

The respective obligation of each party to complete the merger is subject to the merger agreement being adopted by the requisite Atari stockholder vote.

 

The obligation of Infogrames to complete the merger is subject to the satisfaction or waiver of various conditions specified in the merger agreement, including conditions relating to, among other things:

 

 

The obligation of Atari to complete the merger is subject to the satisfaction or waiver of conditions relating to, among other things:

 

 

The merger agreement may be terminated at any time prior to the effective time of the merger by mutual written consent of Infogrames and Atari (through action by, or with approval of, the Special Committee).

 

The merger agreement may be terminated by either Atari (through action by, or with approval of, the Special Committee) or Infogrames at any time prior to the effective time if:

 

 

The merger agreement may be terminated by Infogrames at any time prior to the effective time if:

 

 

The merger agreement may be terminated by Atari (through action by, or with approval of, the Special Committee) at any time prior to the effective time of the merger if Infogrames breaches any of its representations, warranties, covenants, or agreements contained in the merger agreement, if such breach would have a material adverse effect on Infogrames, or if Infogrames fails to materially perform its obligations under the merger agreement, and in either case such breach is not cured within 20 business days.

 

Atari will pay Infogrames a termination fee of US$450,000 if the agreement is terminated:

 

 

 

On April 18, 2008, attorneys representing Christian M. Stanley, a purported stockholder of Atari (“Plaintiff”), filed a Verified Class Action Complaint against Atari, certain of its directors and former directors, and Infogrames, in the Delaware Court of Chancery. In summary, the complaint alleges that the director defendants breached their fiduciary duties to Atari’s unaffiliated stockholders by entering into an agreement that allows Infogrames to acquire the outstanding shares of Atari’s common stock at an unfairly low price. An Amended Complaint was filed on May 20, 2008, updating the allegations of the initial complaint to challenge certain provisions of the definitive merger agreement. On the same day, Plaintiff filed motions to expedite the suit and to preliminarily enjoin the merger.

 

Plaintiff alleges that the US$1.68 per share offering price represents no premium over the closing price of Atari stock on March 5, 2008, the last day of trading before Atari announced the proposed merger transaction. Plaintiff alleges that in light of Infogrames’ approximately 51.6% ownership of Atari, Atari’s unaffiliated stockholders have no voice in deciding whether to accept the proposed merger transaction, and Plaintiff challenges certain of the “no shop” and termination fee provisions of the merger agreement. Plaintiff claims that the named directors are engaging in self-dealing and acting in furtherance of their own interests at the expense of those of Atari’s unaffiliated stockholders. Plaintiff asks the court to enjoin the proposed merger transaction, or alternatively, to rescind it in the event that it is consummated. In addition, Plaintiff seeks damages suffered as a result of the directors’ violation of their fiduciary duties. The parties have agreed to expedited proceedings contemplating a hearing in mid-August on Plaintiff’s motion for a preliminary injunction.

 

Atari believes the suit to be entirely without merit and intends to oppose the action vigorously.

 

The receipt of the cash merger consideration pursuant to the merger by Atari’s unaffiliated U.S. stockholders will be a taxable transaction for U.S. federal income tax purposes. A U.S. stockholder whose shares of Atari common stock are converted to cash in the merger will recognize capital gain or loss for United States federal income tax purposes equal to the excess, if any, of the cash received in the merger over the U.S. holder’s adjusted tax basis in the shares converted into the merger consideration. Such gain or loss will be long-term capital gain or loss provided that the U.S. holder’s holding period for such shares is more than one year at the time the merger is completed. The deductibility of capital losses is subject to limitations.

 

The receipt of the cash merger consideration pursuant to the merger by Atari’s unaffiliated non-U.S. stockholders generally will not be subject to United Stated federal income tax except under certain circumstances.

 

Tax matters are very complex, and the tax consequences of the merger to you will depend on the facts of your own situation. You should consult your tax advisor for a full understanding of the tax consequences of the merger to you, including the federal, state, local and foreign tax consequences of the merger. See “Special Factors — Material United States Federal Income Tax Consequences”.

 

Stockholders who do not vote in favor of approval of the merger agreement and who comply with the procedures for perfecting appraisal rights under the applicable statutory provisions of Delaware law summarized elsewhere in this proxy statement may be entitled to payment of the “fair value” of their shares in cash determined in accordance with Delaware law. See “Special Factors — Appraisal Rights”.

 

 

The following questions and answers, presented for your convenience only, briefly address some commonly asked questions about the special meeting and the merger. You should still carefully read the entire proxy statement, including the annexes hereto.

 

 

 

 

Atari

 

Atari, Inc.
417 Fifth Avenue
New York, New York 10016
Telephone: (212) 726-6500

 

Atari publishes and distributes interactive entertainment software in North America. The 1,000+ published titles distributed by Atari include hard-core, genre-defining franchises such as Test Drive , and mass-market and children’s franchises such as Dragon Ball Z .

 

Infogrames beneficially owns approximately 51.6% of Atari’s common stock through its wholly owned subsidiary, California U.S Holdings, Inc., a California corporation (“CUSH”). CUSH’s executive offices are located at 417 Fifth Avenue, New York, NY 10016, c/o Atari, Inc. Atari is a Delaware corporation. Atari’s fiscal year end is March 31.

 

Additional information about Atari is contained in its Annual Report on Form 10-K for the fiscal year ended March 31, 2007, which is attached hereto as Annex D.   See “Where You Can Find More Information” on page 85.

 

Infogrames

 

Infogrames Entertainment S.A.
1 place Verrazzano
69252 Lyon Cedex 09 France
Telephone: +33 (0) 4 37 64 30 00

 

Infogrames Entertainment S.A., the parent company of the Atari Group, is listed on the Paris Euronext stock exchange (Euronext — ISIN: FR-0010478248) and has two principal subsidiaries: Atari and Atari Europe, a privately held company. The Atari Group is a major international producer, publisher and distributor of interactive games for consoles (Microsoft, Nintendo and Sony), and PC CD-ROMs. The Atari Group is a global publisher of interactive games for the whole family, with a catalog that includes popular franchises, including Alone in the Dark , V-Rally , Test Drive and Backyard , and international licenses, including Dragon Ball Z and Dungeons & Dragons . The Atari Group develops, publishes and distributes interactive entertainment software for all existing platforms such as Sony’s PSP, PlayStation 3, PlayStation 2, Microsoft’s Xbox 360 and Nintendo’s DS, Wii and GameBoy Advance, as well as for personal computers.

 

The Atari Group sells interactive games in more than 60 countries through a worldwide network of 27 subsidiaries, branches and offices. Atari games are sold by major international retailers, including Wal-Mart, Toys R Us, Auchan, Metro and Carrefour, as well as by large national or regional retail chains, discount stores, specialized retailers and convenience stores.

 

For the fiscal year ended March 31, 2008, Infogrames had consolidated net revenues (including Atari’s results) of €290.7 million. Of such consolidated net revenues, the Atari Group’s European operations accounted for 71%, U.S. operations of Atari, Inc. accounted for 18% and Infogrames’ Asian operations accounted for 11% of sales.

 

Games published by the Atari Group are developed and produced by its own staff located in Europe (France) or by independent studios. The Atari Group also contracts with third-party publishers for the distribution or joint publishing of their products, either worldwide or in a specific region.

 

Other than entities affiliated with BlueBay High Yield, which collectively hold approximately 31.5% of the outstanding common stock of Infogrames on a fully diluted basis and are also eligible to redeem certain warrants and convert convertible bonds to hold 54.9% of Infogrames, no other shareholder of Infogrames owns more than approximately 5% of its shares.

 

Infogrames beneficially owns approximately 51.6% of Atari’s common stock. As a result of the merger, Infogrames will beneficially own 100% of Atari.

Merger Sub

 

Irata Acquisition Corp.
1 place Verrazzano
69252 Lyon Cedex 09 France
Telephone: +33 (0) 4 37 64 30 00

 

Irata Acquisition Corp (“Merger Sub”) is a newly formed Delaware corporation that is a direct wholly owned subsidiary of CUSH. Merger Sub’s sole purpose is to effect the merger. Merger Sub’s corporate existence will terminate upon consummation of the merger.

 

BlueBay

 

BlueBay High Yield Investments (Luxembourg S.A.R.L.)
c/o BlueBay Asset Management plc
77 Grosvenor Street
London, W1K 3JR, United Kingdom
+44 (0)20 7389 3700

 

BlueBay High Yield is a lender to Atari under a credit facility. The BlueBay Funds, as disclosed in the Schedule 13D/A dated May 8, 2008 filed with the SEC, collectively hold approximately 31.5% of shares of common stock of Infogrames. The BlueBay Funds are also eligible to redeem certain warrants and convert convertible bonds into shares of Infogrames, whereby, upon redemption and exercise of such stock warrants, the BlueBay Funds would collectively hold approximately 54.9% of the outstanding stock of Infogrames (on a fully diluted basis). The BlueBay Funds may be deemed by Rule 13d-3(d)(1) of the Exchange Act to be beneficial owners of Atari stock held by Infogrames.

 

The special meeting will be held on [          ], 2008, at [          ], local time, at Atari’s offices, 417 Fifth Avenue, New York, New York 10016.

 

At the special meeting Atari is asking stockholders to consider and vote upon a proposal to approve the merger agreement.

 

Atari has fixed [          ], 2008, as the record date for the special meeting. Only holders of record of Atari common stock as of the close of business on the record date are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement thereof. As of the close of business on the record date, there were [          ] shares of Atari common stock issued and outstanding held by approximately [          ] holders of record. Each share of Atari common stock is entitled to one vote.

 

The holders of shares of voting stock representing a majority of the voting power of the outstanding shares of voting stock issued, outstanding and entitled to vote at a meeting of stockholders, represented in person or by proxy at such meeting, will constitute a quorum at the special meeting.

 

Stockholder adoption and approval of the merger agreement requires the affirmative vote of a majority of Atari outstanding common stock entitled to vote on the merger. Since Infogrames beneficially owns approximately 51.6% of Atari’s common stock, Infogrames has the ability to ensure that the merger agreement will be adopted and approved by the holders of a majority of Atari’s outstanding common stock entitled to vote on the merger, as required by Delaware law.

 

A failure to vote, a vote to abstain or a “broker non-vote” will have the same effect as a vote AGAINST the proposal to adopt and approve the merger agreement.

 

If the special meeting is adjourned or postponed for any reason, at any subsequent reconvening of the special meeting, all proxies that have not been revoked or withdrawn will be voted in the same manner as they would have been voted at the original convening of the meeting.

 

You may vote by (i) attending the special meeting and voting in person by ballot, (ii) by completing the enclosed proxy card and then signing, dating and returning it in the postage pre-paid envelope provided, (iii) by telephone by following the directions listed on the enclosed proxy card, or (iv) over the internet by logging onto www.proxyvote.com and following the instructions on the website using the information provided on the enclosed proxy card. Submitting a proxy now will not limit your right to vote at the special meeting if you decide to attend the special meeting in person. If your shares are held of record in “street name” by a broker, nominee, fiduciary or other custodian and you wish to vote in person at the special meeting, you must obtain from the record holder a proxy issued in your name.

 

Shares represented by a properly executed proxy on the accompanying proxy card will be voted at the special meeting and, when instructions have been given by the stockholder, will be voted in accordance with those instructions. If you submit a proxy without giving voting instructions, the persons named as proxies on the proxy card will vote your shares FOR the approval of the merger agreement.

As of the date of this proxy statement, Atari does not expect a vote to be taken on any matters at the special meeting other than the proposal to adopt and approve the merger agreement. The accompanying proxy card gives the persons named as proxies on the proxy card authority to vote in their discretion with respect to any other matters that properly come before the special meeting.

 

You may revoke your proxy at any time before it is actually voted by giving notice in writing to the Secretary of Atari, by giving notice in open meeting at the special meeting or by submitting a duly executed proxy bearing a later date. Attendance at the special meeting will not, by itself, revoke a proxy. If you have given voting instructions to a broker, nominee, fiduciary or other custodian that holds your shares in “street name”, you may revoke those instructions by following the directions given by the broker, nominee, fiduciary or other custodian.

 

This proxy statement is being furnished in connection with the solicitation of proxies by Atari’s board of directors. Atari and Infogrames will share the costs of soliciting proxies equally. These costs include the preparation, assembly and mailing of the proxy statement, the notice of the special meeting of stockholders and the enclosed proxy, as well as the cost of forwarding these materials to the beneficial owners of Atari common stock and third party solicitation efforts, if any. Atari’s directors, officers and regular employees may, without compensation other than their regular compensation, solicit proxies by mail, e-mail or telephone, in person or via the Internet.

 

Stockholders who do not vote in favor of approval of the merger agreement and who comply with the procedures for perfecting appraisal rights under the applicable statutory provisions of Delaware law summarized elsewhere in this proxy statement may be entitled to payment of the “fair value” of their shares in cash determined in accordance with Delaware law. See “Special Factors — Appraisal Rights”.

 

If the special meeting is adjourned to a different place, date or time, Atari need not give notice of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned, provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat and each stockholder entitled to such notice.

 

In order to attend the special meeting in person, you must be a stockholder of record on the record date, hold a valid proxy from a record holder or be an invited guest of Atari. You will be asked to provide proper identification at the registration desk on the day of the meeting or any adjournment of the meeting.

 

The proposed transaction is a merger of Merger Sub with and into Atari. Atari will continue its corporate existence under Delaware law as the surviving corporation in the merger and Atari will become a wholly owned indirect subsidiary of Infogrames.

 

The principal steps that will accomplish the merger are as follows:

 

The Merger.   Following the satisfaction or waiver of all conditions to the merger, the following will occur in connection with the merger:

 

 

See “The Merger Agreement”.

 

As a result of the merger:

 

 

Board of Directors of Atari.   The board of directors of Atari after the completion of the merger will consist of the directors of Merger Sub at the effective time of the merger, until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal.

For additional details regarding the merger and interests of Infogrames in the transaction, see “Special Factors — Interests of Certain Persons in the Merger” and “The Merger Agreement”.

 

Prior to Infogrames’ acquisition of an interest in Atari in 1999, Infogrames and Atari completed a series of transactions that were intended to provide Infogrames with a distribution platform for Infogrames’ products in North America and to strengthen the respective businesses of Infogrames and Atari.

 

On December 16, 1999, GT Interactive Software Corp. (Atari’s predecessor) (“GTI”) entered into an exclusive distribution agreement with Infogrames. Shortly thereafter, Infogrames, through its wholly owned subsidiary CUSH, became the majority stockholder of GTI by purchasing via various transactions common stock and convertible securities of GTI. As of May 15, 2000, Infogrames beneficially held 71.8% of the voting securities of GTI.

 

On February 11, 2000, Bruno Bonnell, chairman of the board of directors and Chief Executive Officer of Infogrames, also became the chairman of the board of directors and Chief Executive Officer of GTI.

 

In May 2000, in connection with Infogrames’ acquisition of its majority stake, GTI changed its name to Infogrames, Inc. and announced that all of its products would be marketed under the Infogrames brand. Infogrames’ European presence allowed Infogrames, Inc. to begin the process of closing its European operations. Infogrames, Inc. also amended its exclusive distribution agreement with Infogrames, expanding Infogrames’ distribution territories to include Asia, South America and other regions. Infogrames, Inc. also entered into an agreement with Infogrames North America, Inc. (“INA”), a wholly owned subsidiary of Infogrames, to act as sales agent for INA’s products in North America.

 

On October 2, 2000, INA merged with and into Infogrames, Inc., with Infogrames, Inc. the surviving corporation. In connection with this merger, Infogrames, Inc. and Infogrames entered into a new distribution agreement that provided for the distribution by Infogrames, Inc. of Infogrames’ products in North America. Under the agreement, Infogrames, Inc. was entitled to retain 70% of the gross profit for the distribution of the products by it, subject to certain adjustments.

 

In December 2000, Infogrames acquired Hasbro Interactive and the rights to the “Atari” name. In May 2003, Infogrames licensed the rights to use the “Atari” name to Infogrames, Inc., which then changed its name to Atari, Inc. and its trading symbol on the Nasdaq National Market to “ATAR”. Subsequently, in September 2003, Infogrames and Atari extended the term and expanded the scope of the trademark license.

 

Between 2000 and 2006, Infogrames and Atari amended their distribution agreements with each other and entered into various intercompany management and services agreements.

 

By 2001, Infogrames, through CUSH’s acquisitions of additional common stock and convertible securities, beneficially held 89.8% of Atari’s outstanding voting securities.

 

In September 2003, Atari completed a recapitalization through the issuance of new shares pursuant to an agreement with Infogrames and a secondary public offering. On September 18, 2003, Atari converted certain outstanding indebtedness to Infogrames into shares of common stock, and on September 24, 2003, Infogrames sold shares of Atari common stock in the secondary offering, which reduced its beneficial ownership percentage to approximately 67.6% of Atari’s outstanding voting securities immediately following the completion of the offering. From time to time thereafter, Infogrames sold additional shares of Atari common stock, until its beneficial ownership interest was reduced in September 2005 to approximately 51.6% of the outstanding voting securities of Atari.

 

Between 2004 and 2007, Atari experienced significant declines in annual net revenue and operating income due to, among other reasons, underperformance from new product launches, product launch delays and reduced revenue after discontinued product development and sales of intellectual property assets. As a result of these declines and its limited ability to raise additional capital, Atari experienced significant financial difficulties.

Until 2005, Atari was actively involved in developing video games and in financing development of video games by independent developers, which Atari and Infogrames would publish and distribute under licenses from the developers. Beginning in 2005, because of cash constraints, Atari began to substantially reduce its involvement in development of video games and to divest itself of internal development studios. During fiscal 2006 and 2007, Atari sold a number of intellectual properties and development facilities in order to obtain cash to fund its operations. During fiscal 2007, Atari sold the rights to its “Driver” game franchise and certain other intellectual property, and sold its Reflections Interactive and Shiny Entertainment studios. By the end of fiscal 2007, Atari did not own any development studios.

 

On May 9, 2006, Atari’s board established the Special Committee of directors unaffiliated with Infogrames and empowered it to review and approve any transaction outside the ordinary course of business, including any proposal by Infogrames and/or its affiliated entities to acquire Atari or any of its material assets, any other transactions with Infogrames or in which Infogrames may have different interests and any other related party transactions.

 

On November 3, 2006, Atari established a secured credit facility for which Guggenheim Corporate Funding LLC (“Guggenheim”) was the administrative agent. The credit facility consisted of a secured, committed, revolving line of credit in the initial amount of up to US$15 million. As of June 30, 2007, Atari was not in compliance with the financial covenants of the credit facility. On October 1, 2007, Guggenheim provided a waiver of covenants of default as of June 30, 2007 but reduced the aggregate loan availability under the credit facility to US$3 million, representing the then-current outstanding balance. As a result of these events and restrictions in the credit agreement, Atari did not have the liquidity necessary to sustain its operations over the long term and had limited prospects for raising additional capital.

 

In May 2007, Atari undertook a plan to reduce its total workforce by approximately 20%, primarily from general and administrative functions. Also in May 2007, Infogrames engaged Lazard Frères SAS (“Lazard”) to provide it advice regarding its strategic alternatives with respect to its majority interest in Atari. On September 18, 2007, Atari filed its Annual Report on Form 10-K for the fiscal year ending March 31, 2007, in which Atari’s auditor, Deloitte & Touche LLP, gave a qualified opinion expressing doubt that Atari could continue as a going concern.

 

On October 5, 2007, Infogrames, through its wholly owned subsidiary CUSH, executed a stockholder action by written consent removing the five directors of Atari unaffiliated with Infogrames. In a letter dated October 5, 2007 (attached as an exhibit to its amended Schedule 13D filed with the SEC on October 9, 2007), Infogrames stated that it was taking this action in order to preserve the value of Atari for all stockholders and to take immediate action to implement necessary restructuring of Atari’s operations. Between October 10, 2007 and October 12, 2007, Messrs. Wendell Adair, Eugene Davis, Bradley Scher and James Shein were appointed by the remaining members of Atari’s board as new independent directors to fill four of the five vacancies on Atari’s board of directors created after removal of the previous directors.

 

On October 10, 2007, Atari retained AlixPartners LLP, a restructuring consulting firm, to assist Atari in evaluating and implementing strategic and tactical options through Atari’s restructuring process. Also on October 10, 2007, Curtis G. Solsvig III, a managing director at AlixPartners LLP, was appointed Atari’s Chief Restructuring Officer. Between October 2007 and April 2008, AlixPartners LLP and Mr. Solsvig worked with Atari management to create and implement a restructuring plan, which included refocusing Atari’s operations on its distribution business and phasing out development of new titles.

 

On October 11, 2007, Atari’s board of directors appointed Messrs. Wendell Adair, Eugene Davis, Bradley Scher and James Shein, the four independent members of the board of directors, to Atari’s Special Committee to make recommendations regarding and to approve transactions with related parties, particularly Infogrames and its affiliates.

 

On October 18, 2007, Guggenheim, with the consent of Atari, transferred the US$3 million in outstanding loans under the credit facility to BlueBay High Yield and agreed to the appointment of BlueBay High Yield as successor administrative agent. The BlueBay Funds, investment funds affiliated with BlueBay High Yield, are stockholders of Infogrames. See “Security Ownership of Certain Beneficial Owners and Management”. On

October 23, 2007, BlueBay High Yield and Atari entered into a waiver and amendment agreement to waive the existing defaults, amend the financial and other covenants, amend the conditions to availability of loans under the credit facility and increase the credit facility to US$10 million.

 

On October 30, 2007, David Pierce informed Atari that he was resigning from his position as President and Chief Executive Officer of Atari. In his resignation notice, Mr. Pierce cited provisions in his employment agreement regarding the termination of his employment under certain circumstances, and referred specifically to the provisions regarding (i) a material diminution or adverse change in his position, office or duties, which he believed would be caused by the October 10, 2007 appointment of Mr. Solsvig as Atari’s Chief Restructuring Officer, and (ii) the replacement of a majority of Atari’s board of directors in a given year, where such replacement was not approved by the board of directors as constituted at the beginning of such year, which replacement he noted Infogrames had effected earlier in the month. After discussion with members of the board, Mr. Pierce rescinded any purported resignation but reserved his rights to take subsequent action. During the following two weeks, Atari and Mr. Pierce negotiated the terms of his separation.

 

In November 2007, Atari undertook a plan to lower operating expenses by, among other things, reducing headcount. The plan included (i) a reduction in force to consolidate certain operations, eliminate certain non-critical functions, and refocus certain engineering and support functions, and (ii) the transfer of certain product development and business development employees to Infogrames in connection with the termination of a production services agreement between Atari and Infogrames. The plan, when completed, is expected to reduce headcount by 30%.

 

On November 4, 2007, the board of directors of Atari determined that each member of the Special Committee shall receive a retainer of US$10,000 (with the exception of the Chairman of the Special Committee, who shall receive US$25,000). In addition, each member of the Special Committee will receive US$2,000 for each Special Committee meeting attended in person and US$1,000 for each Special Committee meeting attended by telephone. Such fees are payable whether or not the merger is completed, and were approved prior to the receipt of Infogrames’ proposal and were not changed by the board of directors thereafter.

 

In light of its extremely limited liquidity and its need to raise additional capital, on November 8, 2007, Atari and Infogrames entered into exclusive licensing agreements under which Atari granted Infogrames the exclusive right to develop and distribute licensed products derived from Atari’s “Test Drive” video game franchise for a term of seven years. Atari also granted Infogrames the exclusive right to distribute any versions of the “Test Drive” and “Test Drive Unlimited” games throughout the world (except in North America). Infogrames paid Atari a non-refundable advance royalty of US$5 million and agreed to develop and commercially release at least two games based on the franchise during the five years following the licensing agreements. The transaction was reviewed and approved by the Special Committee.

 

Also on November 8, 2007, Atari entered into a Waiver and Second Amendment to the Credit Agreement between Atari and BlueBay High Yield in order to obtain the waiver of its violations of certain operating covenants under its credit facility that had occurred and were existing as of that date and to obtain BlueBay High Yield’s consent to Atari’s entering into the licensing agreements with Infogrames.

 

On November 13, 2007, Mr. Pierce resigned from his position as President and Chief Executive Officer of Atari, and Atari and Mr. Pierce executed a Separation Agreement and general release as of such date. Atari’s board of directors began an executive search for Mr. Pierce’s replacement.

 

During the period from November 2007 to early December 2007, representatives of Atari together with AlixPartners had discussions regarding the terms of new intercompany arrangements and the repositioning of Atari’s business.

 

On December 4, 2007, Atari entered into a Global Memorandum of Understanding Regarding Restructuring of Atari, Inc. (“GMU”) with Infogrames. The GMU was approved by the Special Committee on November 30, 2007. Pursuant to this agreement, Atari agreed to terminate its existing distribution agreements with respect to new products as well as other intercompany agreements that it had previously entered into with Infogrames. Atari and Infogrames then entered into a new distribution agreement under which Atari was given the exclusive right to contract with Infogrames for distribution rights in North America and Mexico for all interactive software games developed by or on behalf of Infogrames that are released in packaged media format. The GMU also contemplated the execution of a Waiver, Consent and Third Amendment to the Credit Agreement between Atari and BlueBay

High Yield. Under the Waiver, Consent and Third Amendment, BlueBay High Yield increased the availability under Atari’s credit facility to US$14 million and again waived Atari’s violations of certain operating covenants that had occurred and were existing as of that date, conditioned on the entry into the new agreements.

 

As of December 31, 2007, Atari was in violation of certain weekly cash flow covenants contained in its credit facility with BlueBay High Yield. These violations continued until April 30, 2008. BlueBay High Yield entered into two forbearance agreements with Atari and on April 30, 2008, as further discussed below, entered into the Fourth Credit Facility Amendment.

 

On December 21, 2007, Atari received a notice from The Nasdaq Stock Market advising that Atari was not in compliance with Nasdaq Marketplace Rule 4450(b)(3) because the aggregate market value of Atari’s publicly held shares was less than US$15 million for 30 consecutive business days prior to such date.

 

Between 2000 and 2007, in addition to credit facilities with, among others, Guggenheim and BlueBay High Yield, Atari has relied on Infogrames to provide it financial support through loans or purchases of Atari assets. In order to explore opportunities that might provide value for Atari’s stockholders, Atari’s management engaged from time to time in discussions with representatives of Infogrames regarding possible strategic relationships and other transactions. Representatives from Atari met with representatives from Infogrames and Blue Bay from time to time between December 2007 and February 2008.

 

On March 2, 2008, Lazard made a presentation to the board of directors of Infogrames, as described below under “Special Factors — Summary of Presentation by the Financial Advisor to Infogrames”.

 

On March 5, 2008, Atari received the following letter from Infogrames:

 

March 5, 2008

 

Board of Directors
Atari, Inc.
417 Fifth Avenue
New York, NY 10016

 

Gentlemen:

 

We are pleased to submit this letter summarizing the principal terms upon which Infogrames Entertainment S.A. (“IESA”) and/or our affiliates would potentially acquire the remaining equity interests in Atari, Inc. (“Atari”)). As Atari’s largest single shareholder, IESA is prepared to work expeditiously on the Acquisition (defined below) which we believe will be in the best interests of Atari and its public shareholders.

 

1.  Proposed Terms.   We are proposing to acquire all of the remaining outstanding shares of common stock of Atari, other than the shares held IESA and its affiliates (which would be cancelled), for a cash amount per share of US$1.68 (the “Acquisition”). The Acquisition would not be subject to any financing condition.

 

2.  Due Diligence.   IESA would only require a limited amount of due diligence. IESA intends to have its due diligence investigation completed prior to entering into a definitive agreement regarding the Acquisition.

 

THIS LETTER IS A NON-BINDING EXPRESSION OF INTENT. IESA RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REVISE OR WITHDRAW THE PROPOSAL CONTAINED IN THIS LETTER AT ANY TIME AND FOR ANY REASON PRIOR TO THE EXECUTION AND DELIVERY OF A SEPARATE DEFINITIVE AGREEMENT REGARDING THE ACQUISITION. THE PARTIES SHALL HAVE NO OBLIGATION TO CONSUMMATE THE ACQUISITION UNLESS AND UNTIL A SEPARATE DEFINITIVE AGREEMENT IS EXECUTED AND DELIVERED BY EACH PARTY HERETO AND SUBJECT IN ALL RESPECTS TO THE SATISFACTION OF THE CONDITIONS CONTAINED IN SUCH AGREEMENT.

 

IESA and its advisors are prepared to work diligently on the Acquisition. We would appreciate a response prior to 5:00 pm EST on March 11, 2008.

Please contact me at * * * if you have any questions regarding the contents of this letter. I look forward to the successful completion of the discussions contemplated by this letter.

 

Very truly yours,

 

David Gardner
Chief Executive Officer
Infogrames Entertainment S.A.

 

The closing price per share of the Atari common stock on March 5, 2008 was US$1.68. On March 6, 2008, Atari issued a press release announcing Atari’s receipt of Infogrames’ non-binding indication of intent and that it intended a thorough evaluation of the proposal.

 

At a meeting of the Special Committee held on March 6, 2008, Mr. Davis conveyed Infogrames’ offer to the Special Committee, and with Atari’s outside counsel, Milbank, Tweed, Hadley & McCloy LLP (“Milbank”), discussed a possible timeline for the transaction and retaining a financial advisor to assist the Special Committee’s evaluation of the offer. Between March 6, 2008 and March 8, 2008, the Special Committee requested and received proposals from various financial advisors to assist Atari’s evaluation and to issue a fairness opinion to the Special Committee.

 

At a meeting of the Special Committee held on March 9, 2008, the Special Committee discussed the proposals it had received from Duff & Phelps LLC (“Duff & Phelps”) and another financial advisor. After considering, among other things, the services offered by each advisor, the fees for such services and the backgrounds and capabilities of the members of the advisors’ teams, the Special Committee determined to engage Duff & Phelps.

 

On March 11, 2008, the Special Committee engaged Duff & Phelps as its financial advisor to provide an opinion to the Special Committee as to the fairness, from a financial point of view of the merger consideration to the unaffiliated stockholders of Atari.

 

Between March 11, 2008 and March 18, 2008, Duff & Phelps held meetings and discussions with Atari management, evaluated the Company and reached preliminary valuation findings. At the direction of the Special Committee, Duff & Phelps engaged in informal discussions with Lazard, Infogrames’ financial advisor with respect to the proposed transaction, regarding the US$1.68 per share consideration. On March 18, 2008, Lazard informed Duff & Phelps that Infogrames was not willing to increase the per share consideration. Lazard communicated on behalf of Infogrames their view that the per share consideration, while not at a premium to the March 5, 2008 closing price of Atari common stock, provided a premium to (i) Atari’s trading price five days and thirty days prior to the announcement and (ii) Atari’s net asset value per share at that date.

 

On March 17, 2008, BlueBay High Yield’s then current forbearance agreement with Atari expired.

 

On March 19, 2008, the Special Committee held a telephonic meeting, with all members present, in which Milbank and Duff & Phelps discussed with the Special Committee the Infogrames offer. Duff & Phelps also provided the Special Committee with its preliminary analysis of Atari’s valuation and Infogrames’ proposal. The March 19, 2008 presentation included Duff & Phelps’ preliminary analysis of Atari’s historical (between March 31, 2003 and March 31, 2007) and projected (Atari management’s projections through March 31, 2009) financial information; current and historical common stock trading statistics during the period March 19, 2007 through March 18, 2008; and analysis of comparable mergers and acquisition transactions with respect to both multiples of revenue and EBITDA and premiums paid by buyer. After discussion, the Special Committee directed Milbank to engage in discussions with Infogrames’ legal counsel, Morrison & Foerster LLP (“Morrison & Foerster”), to request clarification on: (i) Infogrames’ intention with respect to funding the Company’s operating losses and working capital needs through the completion of the transaction; (ii) Infogrames’ intention with respect to obtaining an extension of the forbearance agreements with BlueBay High Yield; and (iii) the Atari stockholder approval Infogrames was contemplating in order to approve the transaction.

Milbank subsequently discussed with Morrison & Foerster Atari’s need for funding between signing and closing the transaction, the legal form of the transaction, the closing conditions Infogrames would require (including the required stockholder vote), the proposed timeline for the transaction, any necessary regulatory approvals and any due diligence on Atari that Infogrames would require.

 

Effective March 21, 2008, Thomas Schmider, deputy managing director of Infogrames, resigned as a member of Atari’s board of directors.

 

From mid-March to mid-April 2008, Infogrames and its legal counsel conducted due diligence on areas identified by Infogrames, particularly Atari’s intellectual property assets.

 

On March 24, 2008, Mr. Davis, Milbank and members of Atari management discussed the need for a meeting among Atari, Infogrames and BlueBay High Yield to discuss major outstanding points regarding the primary terms of the merger transaction.

 

Also on March 24, 2008, Atari received a Staff Determination Letter from the Nasdaq Listing Qualifications Department stating that Atari had not gained compliance with the requirements of Nasdaq Marketplace Rule 4450(b)(3) and that its securities were subject to delisting from The Nasdaq Global Market.

 

On March 25, 2008, representatives of the Special Committee, Infogrames and BlueBay High Yield, and their respective legal counsel, held a telephonic conference call to discuss open issues regarding the primary terms of the merger transaction, including Atari’s need for funding, the legal form of the transaction, the closing conditions Infogrames would require (including the required stockholder vote), and required due diligence. BlueBay High Yield agreed to discuss extending further credit to Atari and committed to work with Atari management to analyze Atari’s cash needs. Infogrames’ counsel indicated that the intended form of transaction would be by reverse triangular merger, wherein a wholly owned subsidiary of Infogrames would be merged with and into Atari, with Atari surviving the merger and becoming a wholly owned subsidiary of Infogrames. Infogrames’ counsel further indicated that Infogrames was requiring that the only vote required to approve the transaction was the affirmative vote of the holders of a majority of Atari’s outstanding voting securities.

 

On March 31, 2008, Jim Wilson was appointed as Atari’s Chief Executive Officer and President.

 

Between March 25, 2008 and April 7, 2008, BlueBay High Yield and Atari management had numerous discussions regarding Atari’s cash disbursement projections and near-term cash needs. During that time, BlueBay High Yield approached Infogrames regarding Infogrames’ providing funding to Atari, as opposed to BlueBay High Yield’s increasing the availability under existing credit facility.

 

On April 7, 2008, the Special Committee and Infogrames, with the Special Committee’s and Infogrames’ respective legal counsel, held a telephonic meeting to discuss Infogrames’ offer, Infogrames’ interim funding to Atari and the parties’ next steps. It was agreed that Milbank would discuss with BlueBay High Yield’s counsel terms of a waiver or forbearance of Atari’s continuing violations of its financial and operational covenants under the BlueBay High Yield credit facility, as well as coordinate with Morrison & Foerster any required amendments to the BlueBay High Yield credit facility and any intercreditor agreements between BlueBay High Yield and Infogrames. Infogrames’ counsel also indicated that a draft merger agreement was forthcoming.

 

On April 11, 2008, Atari received the first draft of the merger agreement from Infogrames.

 

Between April 11 and April 30, 2008, Atari, Infogrames, BlueBay High Yield, the Special Committee and their respective legal counsel engaged in numerous discussions and draft revisions of the transaction documents.

 

At a meeting of the Special Committee held on April 16, 2008, the Special Committee discussed with Milbank the remaining major open points on the merger agreement, including the breadth of Atari’s representations and warranties, the pre-closing restrictive covenants, limitations on Atari’s ability to consider alternative transactions, the proposed termination fee, and the requirement that Atari call a meeting with no effective termination rights.

 

Also on April 16, 2008, Jean-Michel Perbet resigned as a member of Atari’s board of directors.

 

On April 19, 2008, Mr. Davis and Mr. Gardner, together with the Special Committee’s and Infogrames’ respective legal counsel, conducted a telephonic meeting at which the material terms of the merger agreement were

discussed, including the ability of Infogrames to accelerate Atari’s obligations under the proposed credit agreement and the source of Atari’s pre-closing operating and financial covenants, the appropriate date for the outside termination date of the merger agreement, the treatment of outstanding options to acquire Atari common stock granted under Atari’s stock incentive plans and the assumption of indemnification obligations and maintenance of the “tail” in Atari’s directors and officers liability insurance policy. Milbank and Mr. Davis also discussed with Infogrames Atari’s need for additional financing and requested that the proposed terms of interim financing to be provided by Infogrames be provided to Atari and its advisors as soon as possible.

 

On April 21, 2008, Infogrames’ counsel communicated that Infogrames insisted on a termination fee but would be willing to reduce it from approximately 15% to approximately 5% of the aggregate purchase price. Milbank agreed to convey Infogrames’ position to the Special Committee. Later that day, Atari received the first draft of the credit agreement from Infogrames.

 

On April 22, 2008, Milbank and Morrison & Foerster discussed issues regarding the draft credit agreement, including the restrictiveness of the representations, warranties, covenants and conditions, the required use of proceeds and the proposed terms of the intercreditor agreement between Infogrames and BlueBay High Yield.

 

On April 23, 2008, Atari received a draft intercreditor agreement from BlueBay High Yield.

 

On April 24, 2008, Lazard gave a presentation to the board of directors of Infogrames, as described below under “Special Factors — Summary of Presentation by the Financial Advisor to Infogrames”.

 

On April 28, 2008, the Special Committee held a meeting to evaluate the transaction documents and the terms of the transaction. Milbank summarized for the Special Committee the principal terms of each of the Transaction Documents. Duff & Phelps presented its fairness opinion to the Special Committee, which is summarized under “Special Factors — Opinion of the Financial Advisor to the Special Committee”, that, subject to the qualifications and limitations set forth therein, the per share merger consideration is fair from a financial point of view to the stockholders of Atari, other than Infogrames and its affiliates.

 

Following Milbank’s and Duff & Phelps’ presentations, the Special Committee discussed the benefits and risks associated with the proposed transaction to Atari’s unaffiliated stockholders and the Special Committee’s reasons for entering into the proposed transactions. After due deliberation, the Special Committee determined that the transaction was fair to the Atari stockholders (other than Infogrames and its affiliates) and recommended to the Board of Directors that the transaction be consummated. Also on April 28, 2008, the Board of Directors (with Mr. Coppee absent), following the recommendation of the Special Committee, approved the transaction.

 

On April 30, 2008, Atari, Infogrames, and BlueBay High Yield executed the transaction documents and on May 1, 2008, Atari and Infogrames issued press releases announcing the execution of the merger agreement. See “Certain Transactions with Directors, Executive Officers and Affiliates — Agreements Related to the Merger”.

 

Atari’s Purpose for the Merger

 

Atari’s purpose in undertaking the merger is to allow its stockholders (other than Infogrames and its affiliates) to realize the value of their investment in Atari in cash at a price that represents a 6.3% premium to the 5-day trading price prior to the date of Infogrames’ announcement of its offer, and a 58.5% premium to the 30-day trading price prior to the date of Infogrames’ announcement of its offer, of Atari’s common stock on the Nasdaq Stock Market.

 

Infogrames’ Purpose for the Merger

 

Infogrames’ purpose for engaging in the merger is to acquire all of the shares of common stock not already beneficially owned by Infogrames. In reaching its decision to effect the merger, the Infogrames board, in consultation with its management, focused on the following material factors:

 

 

 

Prior to and at the time of Infogrames’ proposal, three of Atari’s directors also served as directors of Infogrames or its direct or indirect subsidiaries. Because these directors had financial and other interests that could be different from, and in addition to, the interests of Atari stockholders (other than Infogrames and its affiliates) in transactions with Infogrames and its affiliates, including the proposed merger transaction, Atari’s board of directors decided that, in order to protect the interests of Atari’s unaffiliated stockholders in evaluating and negotiating the merger agreement, the Special Committee of independent directors who are not affiliated with Infogrames should evaluate and negotiate the merger agreement and, if appropriate, to recommend the merger and the terms of the merger agreement to Atari’s board. See “Special Factors — Interests of Certain Persons in the Merger — Atari Directors”.

 

Both the Special Committee and the board of directors of Atari (with Mr. Coppee absent) have determined that the merger agreement and the merger are fair and advisable to and in the best interests of the stockholders of Atari other than Infogrames and its affiliates. The Special Committee unanimously recommended that the board of directors:

 

 

Based on the recommendation of the Special Committee, the board of directors (of which the directors present were the same as the Special Committee because of Mr. Coppee’s absence) approved and adopted the merger agreement, approved the merger and resolved to recommend to Atari’s stockholders that they vote for the adoption and approval of the merger agreement.

 

In reaching their determinations and making their recommendations, the Special Committee and the board of directors relied on Atari’s management including the Chief Restructuring Officer to provide financial information, projections and assumptions (based on the best information available to management at that time).

 

In reaching its determination and making its recommendation, the Special Committee considered factors including:

 

 

 

 

 

 

 

 

The Special Committee believes that each of these factors supported its conclusion that the merger is fair and advisable to and in the best interests of Atari’s stockholders (other than Infogrames and its affiliates). The Special Committee considered the valuation analyses presented by Duff & Phelps, some of which represented the sale of Atari as a continuing business and some of which represented Atari remaining as a stand-alone entity, and which included Duff & Phelps’ determination of Atari’s liquidation value, assuming an orderly liquidation of Atari. While the Special Committee did not believe that there is a single method for determining “going concern value”, the Special Committee believed that most of Duff & Phelps’ valuation methodologies represented a valuation of Atari as it continues to operate its business, and, to that extent, such analyses could be collectively characterized as forms of going concern valuations. For example, the Special Committee considered the public market trading analysis, which could be considered to represent the “stand-alone” valuation of Atari if it traded at the multiples calculated for the comparable companies. In addition, the net asset value analysis could be considered a “stand-alone” valuation of Atari based on Atari’s December 31, 2007 unaudited balance sheet and Atari’s estimated internal March 31, 2008 balance sheet. The Special Committee considered these analyses in the context of the other valuation analyses performed by Duff & Phelps in the preparation of its opinion, and, in that regard, such analyses factored into the Special Committee’s conclusions as to the fairness of the merger to the unaffiliated stockholders.

 

The Special Committee also considered a variety of risks and other potentially negative factors concerning the merger agreement and the transactions contemplated by it, including the merger. These factors included:

 

 

This discussion of the information and factors considered by the Special Committee in reaching its conclusions and recommendation includes the material factors considered by the Special Committee, but is not intended to be exhaustive. In view of the wide variety of factors considered by the Special Committee in evaluating the merger agreement and the transactions contemplated by it, including the merger, and the complexity of these matters, the Special Committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to those factors. In addition, different members of the Special Committee may have given different weight to different factors.

 

The Special Committee believes that sufficient procedural safeguards were and are present to ensure the fairness of the merger and to permit the Special Committee to represent effectively the interests of Atari’s unaffiliated stockholders even though (x) the merger does not require approval of Atari’s unaffiliated stockholders

and (y) Infogrames holds approximately 51.6% of Atari’s common stock, has the power to control Atari and has indicated its intention not to sell any portion of those shares. These procedural safeguards include the following:

 

 

In reaching its determination that the merger agreement and the merger are advisable, substantively and procedurally fair to and in the best interests of Atari’s unaffiliated stockholders, the board of directors (whose members in attendance were identical to the Special Committee because of Mr. Coppee’s absence) determined that the analysis of the Special Committee was reasonable and expressly adopted the analysis of the Special Committee as to the fairness to Atari’s unaffiliated stockholders of the merger consideration of US$1.68 per share and the other matters discussed above.

 

In view of the wide variety of factors considered by the board of directors in evaluating the merger and the complexity of these matters, the board of directors did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to those factors. In addition, different members of the board of directors may have given different weight to different factors.

 

Based in part upon the recommendation of the Special Committee, the board of directors (with Mr. Coppee absent) voted to approve and adopt the merger agreement and resolved to recommend that you vote FOR the adoption and approval of the merger agreement.

 

The members of the Special Committee and the Board do not own any shares of Atari common stock, and, accordingly, will not receive any consideration in the merger. Members of the Special Committee and the Board own, in the aggregate, 11,000 options to purchase Atari common stock. If the merger is consummated, members of the board of directors of Atari, based on their ownership of options to acquire Atari common stock, will be entitled to receive an aggregate of US$[          ] if such members choose to tender their options pursuant to the tender offer described in “The Merger Agreement — Stock Options”, but will not otherwise receive any merger consideration in respect of such options since the per share exercise price of such options exceeds US$1.68.

The board of directors, based on the recommendation of the Special Committee, recommends that Atari’s stockholders vote FOR the adoption and approval of the merger agreement . The recommendation of the board of directors was made after consideration of all the material factors, both positive and negative, as described above.

 

Infogrames believes that the merger is financially and procedurally fair to Atari’s unaffiliated stockholders. In reaching its determination regarding the substantive fairness of the merger, Infogrames considered the following factors:

 

 

In addition to the factors listed above, Infogrames also considered certain negative factors, including:

 

 

Infogrames also considered various factors in determining the procedural fairness of the merger. Infogrames believes that the merger is procedurally fair to the unaffiliated stockholders because:

 

 

Based on the foregoing and the factors described in “Special Factors — Summary of Presentation by the Financial Advisor to Infogrames”, as the beneficial owner of 51.6% of the outstanding voting securities of Atari, Infogrames has advised Atari that it intends to vote in favor of adopting the merger and the merger agreement at the Special Meeting.

 

The Special Committee retained Duff & Phelps LLC to act as its financial advisor to provide an opinion to the Special Committee regarding the fairness, from a financial point of view, to the public stockholders of Atari (other than Infogrames and its affiliates) of the US$1.68 per share consideration to be received by such public stockholders in the proposed merger (without giving effect to any impact of the proposed merger on any particular stockholder other than in its capacity as a stockholder). Duff & Phelps, a New York Stock Exchange listed company, is an internationally recognized independent financial advisory firm serving client needs in the areas of valuation, investment banking, transaction advice and dispute consulting.

 

On April 28, 2008, the Special Committee met to review the proposed merger. During this meeting, Duff & Phelps reviewed with the Special Committee its financial analyses, as described below, and rendered its oral opinion to the Special Committee, which was subsequently confirmed in writing, that, as of April 28, 2008, and based upon and subject to the various considerations and assumptions described in the opinion, the consideration to be received by Atari’s public stockholders (other than Infogrames and its affiliates) in the proposed merger was fair, from a financial point of view, to such public stockholders (without giving effect to any impact of the proposed merger on any particular stockholder other than in its capacity as a stockholder).

 

The full text of the written opinion of Duff & Phelps, dated April 28, 2008, is attached to this proxy statement as Annex B , and should be read carefully in its entirety for a description of the procedures

followed, assumptions made, matters considered and limitations on the review undertaken. The opinion of Duff & Phelps was directed to the Special Committee and addressed only the fairness, from a financial point of view, to Atari’s unaffiliated stockholders of the consideration to be received by such unaffiliated stockholders in the proposed merger (without giving effect to any impact of the proposed merger on any particular stockholder other than in its capacity as a stockholder), and did not constitute a recommendation as to how any stockholder should vote or act with respect to any matter relating to the proposed merger. Duff & Phelps’ opinion did not address any other aspect or implication of the proposed merger or any other agreement, arrangement or understanding entered into in connection with the proposed merger or otherwise. Furthermore, Duff & Phelps did not address the relative merits of the proposed merger as compared with any alternative transactions or business strategies that may have been considered by the Special Committee as alternatives to the proposed merger, nor did it address the underlying business decision of the Special Committee to proceed with the merger.

 

In connection with its fairness opinion, Duff & Phelps made such reviews, analyses and inquiries as Duff & Phelps deemed necessary and appropriate under the circumstances. No limits were placed on Duff & Phelps by Atari or the Special Committee with respect to the information to which Duff & Phelps had access or the matters Duff & Phelps could consider. Duff & Phelps’ due diligence with respect to the proposed merger included, but was not limited to, the items summarized below.

 

1. Discussed the operations, financial conditions, future prospects and projected operations and performance of Atari and regarding the proposed merger with the management of Atari;

 

2. Reviewed a draft dated April 23, 2008 of the merger agreement;

 

3. Reviewed a draft dated April 22, 2008 of the proposed credit agreement between Atari and Infogrames;

 

4. Reviewed certain publicly available financial statements and other business and financial information regarding Atari and Infogrames, respectively, and the industries in which they operate;

 

5. Reviewed certain internal financial statements and other financial and operating data concerning Atari, which Atari had identified as being the most current financial statements available;

 

6. Reviewed certain financial forecasts, as well as information relating to certain strategic, financial and operational benefits anticipated from the proposed merger, all as prepared by the management of Atari;

 

7. Reviewed the historical trading price and trading volume of Atari common stock, and the publicly traded securities of certain other companies that Duff & Phelps deemed relevant;

 

8. Compared the financial performance of Atari and the recent prices and trading activity of Atari common stock with those of certain other publicly traded companies that Duff & Phelps deemed relevant;

 

9. Compared certain financial terms of the proposed merger to financial terms, to the extent publicly available, of certain other business combination transactions that Duff & Phelps deemed relevant; and

 

10. Reviewed such other information and conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.

 

In connection with its review, Duff & Phelps did not independently verify any of the foregoing information and assumed that all information reviewed by it with respect to Atari and the proposed merger, whether supplied by Atari or its advisors or obtained by Duff & Phelps from publicly available sources, was true, correct and complete in all material respects and did not contain any untrue statements of material fact or omit to state a material fact necessary to make the information supplied to Duff & Phelps not misleading. Any inaccuracies in or omissions from the information on which Duff & Phelps relied could materially affect the conclusions reached by Duff & Phelps. In performing its analyses, Duff & Phelps made numerous assumptions with respect to industry performance and general business, market and economic conditions and other matters, many of which are beyond the control of any party to the proposed merger.

 

In advising the Special Committee, Duff & Phelps was not requested to make, and did not make, an independent evaluation of Atari’s solvency or an evaluation, appraisal or physical inspection of any of Atari’s

specific assets or liabilities (contingent or otherwise). In addition, Duff & Phelps was not requested to, and did not, provide a valuation opinion, credit rating or solvency opinion, nor did Duff & Phelps undertake an analysis of Atari’s or Infogrames’ creditworthiness or provide any tax advice or accounting advice.

 

With respect to the financial forecasts for Atari that Duff & Phelps reviewed, Duff & Phelps was advised by management of Atari, and assumed, that such forecasts were reasonably prepared on a basis reflecting the best currently available estimates and judgments of Atari’s management as to the future financial performance of Atari. Duff & Phelps assumed that the final merger agreement would conform to the draft dated April 23, 2008 of the proposed merger agreement reviewed by Duff & Phelps in all respects material to its analyses. Duff & Phelps also assumed that in the course of obtaining any regulatory or third party consents, approvals or agreements in connection with the merger, no modification, delay, limitation, restriction or condition would be imposed that would have an adverse effect on Atari or the proposed merger.

 

The Duff & Phelps opinion was necessarily based upon information available to Duff & Phelps as of the date of the opinion and upon financial, economic, market and other conditions as they existed and could be evaluated on the date of the opinion. It should be understood that developments subsequent to the date of the Duff & Phelps opinion may affect the conclusion expressed in the Duff & Phelps opinion, and that Duff & Phelps assumed no undertaking or obligation to update, revise or reaffirm its opinion or to advise any person of any change in any fact or matter affecting its opinion. Additionally, the Duff & Phelps opinion was not intended to confer any rights or remedies upon any employee, stockholder or creditor of Atari.

 

The Special Committee selected Duff & Phelps to act as its financial advisor in connection with the merger based on Duff & Phelps’ qualifications, experience and reputation. During the past two years, Duff & Phelps has not provided financial advisory or financing services to Atari or Infogrames or their respective affiliates other than with respect to the services Duff & Phelps rendered to the Special Committee in connection with the delivery of its fairness opinion.

 

Atari agreed to pay Duff & Phelps, for its financial advisory services in connection with the proposed merger, an aggregate fee of US$290,000, US$145,000 of which was paid in cash upon execution of the engagement letter and the remaining US$145,000 of which was paid in cash upon Duff & Phelps’ informing the Special Committee that it was prepared to deliver its opinion. Furthermore, Duff & Phelps is to be paid additional fees at Duff & Phelps’ standard hourly rates for any time incurred reviewing or assisting in the preparation of any proxy materials or other SEC filings or documents associated with the proposed merger. Atari has also agreed to reimburse Duff & Phelps for its out-of-pocket expenses and to indemnify and hold harmless Duff & Phelps and its affiliates and any other person, director, employee or agent of Duff & Phelps or any of its affiliates, or any person controlling Duff & Phelps or its affiliates, for certain losses, claims, damages, expenses and liabilities relating to or arising out of services provided by Duff & Phelps as financial advisor to the Special Committee. The terms of the fee arrangement with Duff & Phelps, which the Special Committee and Duff & Phelps believe are customary for transactions of this nature, were negotiated at arm’s length between the Special Committee and Duff & Phelps.

 

Opinion and Analyses by Duff & Phelps

 

The discussion below summarizes the analyses and factors that Duff & Phelps deemed material in its presentation to the Special Committee. This discussion does not contain a comprehensive description of all analyses and factors considered by Duff & Phelps. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or a summary description. The process of rendering a fairness opinion involves judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. To evaluate the fairness of the proposed merger consideration, Duff & Phelps employed several different analytical methodologies and no one methodology should be regarded as critical to the overall conclusion reached by Duff & Phelps. In arriving at its opinion, Duff & Phelps did not attribute any particular weight to any particular analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor that it considered. Accordingly, Duff & Phelps believes that its analyses must be considered as a whole and that selecting portions of its

analyses and of the factors considered by it, without considering all analyses and factors may not provide a complete or accurate understanding of the evaluation process underlying its opinion.

 

Each analytical methodology has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular methodologies. The conclusion reached by Duff & Phelps was based on all analyses and factors, taken as a whole, and also on application of Duff & Phelps’ own experience and judgment. This conclusion inherently involved significant elements of subjective judgment and qualitative analysis. Duff & Phelps gave no opinion as to the value or merit standing alone of any one or more parts of the analysis it performed. The estimates contained in the analyses of Duff & Phelps and the range of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold in the future. Accordingly, the estimates used in, and the results derived from, Duff & Phelps’ analyses are inherently subject to uncertainty.

 

Financial Analyses

 

Set forth below is a summary of the material financial analyses performed by Duff & Phelps in reaching its fairness conclusions as of April 28, 2008, which were reviewed with the Special Committee on April 28, 2008. The financial analyses summarized below include information in tabular format. In order to fully understand Duff & Phelps’ analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the methodologies, may not provide a complete or accurate understanding of Duff & Phelps’ financial analyses.

 

In determining whether the merger consideration to be received in the proposed merger would be fair, from a financial point of view, to Atari’s public stockholders (other than Infogrames and its affiliates), Duff & Phelps considered, among other factors, the current, historical and projected financial performance of Atari based on a review of information relating to Atari, as well as Duff & Phelps’ discussions with Atari’s management and Atari’s advisors.

 

No company, transaction or business used for comparative purposes in Duff & Phelps’ analyses is identical to Atari, its business or the proposed merger, and therefore an evaluation of the results of those analyses is not entirely mathematical.

 

Duff & Phelps considered several generally accepted valuation approaches to establish valuation benchmarks against which to compare the proposed merger. A discounted cash-flow analysis was not utilized, as Atari’s management does not prepare projections past one year. The valuation approaches used by Duff & Phelps are discussed below.

 

Public Market Valuation — Duff & Phelps analyzed the closing price and trading volume of Atari common stock over the past 12 months. This analysis was used to determine the range of fair market value the public market ascribed to Atari’s common stock prior to and on the date of the announcement of the proposed merger.

 

Duff & Phelps noted that Atari, a NASDAQ listed company, had 13,477,920 shares outstanding. Atari’s shares have been thinly traded, with average daily trading volume of 27,424 shares in the three months preceding April 25, 2008. In the last twelve months, Atari’s shares have traded above and below the proposed merger consideration and Atari’s volume weighted share price was US$1.45. On April 22, 2008, Atari’s common stock closed at US$1.50, below the merger consideration and down approximately 61% from its 52-week high of US$3.84.

 

Duff & Phelps noted that during the period since the release of Atari’s most recent report on Form 10-Q on February 13, 2008 (covering the quarter ended December 31, 2007) through April 22, 2008, Atari’s volume-weighted share price was US$1.55. Duff & Phelps observed that the proposed merger consideration was in excess of this amount.

 

Selected Public Company Analysis — Duff & Phelps reviewed valuation multiples of selected publicly traded companies and applied valuation multiples to selected recent operating results of Atari. Duff & Phelps noted that Atari had experienced negative earnings before interest, taxes, depreciation and amortization (“EBITDA”), which

limited the relevance for Atari’s proposed merger of the methodology involving the application of enterprise value to revenue multiples for the selected companies.

 

None of the companies utilized for comparative purposes, as reflected in Duff & Phelps’ analysis, is identical to Atari. Accordingly, Duff & Phelps concluded that a complete valuation analysis cannot be limited to a quantitative review of the selected companies and involves complex considerations and judgments concerning differences in financial and operating characteristics of such companies, as well as other factors that could affect their value relative to that of Atari.

 

The companies selected by Duff & Phelps consisted of six publicly traded entities that Duff & Phelps determined to be relevant to its analysis, falling under two categories: small-cap video game developers, publishers and distributors and packaged media distributors. Duff & Phelps used certain methodologies to select companies, including the following Primary and Secondary SIC Codes: 7372 (prepackaged software), 5045 (computers and computer peripheral equipment and software) and 7822 (motion picture and video tape distribution. Duff & Phelps reviewed various SEC documents and equity research reports for details regarding the nature of each selected company’s business and financial performance. Duff & Phelps excluded companies with a market capitalization equal to or greater than US$1 billion. In view of Atari’s decision to reduce its involvement in the development of games, Duff & Phelps deemed the analysis of selected video game developers, publishers and distributors to be of less relevance than the analysis of packaged media distributors.

 

The public companies selected by Duff & Phelps were as follows:

 

Small-Cap Video Game Developers, Publishers and Distributors:

 

 

Packaged Media Distributors:

 

 

Duff & Phelps analyzed the last twelve months (“LTM”) revenues and EBITDA for each of these six publicly traded companies as well as their projected revenues and EBITDA. Duff & Phelps then analyzed the peer group’s trading multiples of enterprise value to their respective LTM and projected revenues and EBITDA. For each company, enterprise value was calculated as the sum of the equity market value (diluted shares outstanding multiplied by the current stock price) and net indebtedness. Duff & Phelps computed, for each company, the enterprise value as a multiple of its LTM revenue. (Although Duff & Phelps recognized that revenue multiples may have limited relevance as a valuation metric, Duff & Phelps believed that EBITDA multiples were not applicable in this situation as Atari had experienced negative EBITDA over the preceding twelve-month period.) Duff & Phelps then determined an implied enterprise value of Atari by considering the enterprise value to LTM revenue multiples of the packaged media distributors included in the peer group. In determining Atari’s enterprise value under this methodology, Duff & Phelps applied a range of LTM revenue multiples for Atari which represented a portion of the range of revenue multiples observed for the peer group companies. Duff & Phelps selected this range of multiples for Atari based upon Atari’s financial and operating performance in comparison to the peer group companies. These steps yielded a per share equity value range for Atari of US$0.38 to US$1.75, as indicated in the following table. Duff & Phelps noted that the proposed merger consideration was at the high end of this range.

Atari, Inc.
Selected Public Company Analysis
($ in 000s except Equity Value Per Share Outstanding)

 

 

 

 

Selected M&A Transaction Analysis (Multiples Valuation)  — Duff & Phelps reviewed valuation multiples of selected merger and acquisition transactions involving target companies that Duff & Phelps determined to be relevant to its analysis and applied these valuation multiples to selected recent operating results of Atari. Duff & Phelps identified eight relevant transactions in the video game development, publishing and distribution and packaged media distribution industries that had been announced since January 1, 2002 and for which adequate information was available to derive meaningful valuation multiples. Duff & Phelps computed the LTM revenues and EBITDA for each of the target companies. Duff & Phelps then calculated the implied enterprise value for each transaction to the target’s respective LTM revenue and EBITDA. Duff & Phelps restricted the search to include only transactions with enterprise values less than US$500 million. None of the transactions utilized for comparative purposes in the following analysis is, of course, identical to the proposed merger. Accordingly, a complete valuation analysis cannot be limited to a quantitative review of the selected transactions and involves complex considerations and judgments.

 

In determining the relevant comparable transactions, Duff & Phelps considered the Primary and Secondary SIC Codes: 7372 (prepackaged software), 5045 (computers and computer peripheral equipment and software) and 7822 (motion picture and video tape distribution). Duff & Phelps reviewed the transaction histories of the relevant comparable companies. Because of a limited sample size, Duff & Phelps included transactions involving foreign targets as well as U.S. based targets. In view of Atari’s decision to reduce its involvement in the development of games, Duff & Phelps deemed the analysis of selected video game developers, publishers and distributors to be of less relevance than the analysis of packaged media distributors.

 

Duff & Phelps calculated an implied enterprise value of Atari by considering the enterprise value to LTM revenue multiples of selected transactions in which the target was a packaged media distributor. (Although Duff & Phelps recognized that revenue multiples may have limited relevance as a valuation metric, EBITDA multiples were considered inapplicable in this situation as Atari had experienced negative EBITDA over the prior twelve-month period.) In determining Atari’s enterprise value under his methodology, Duff & Phelps applied a range of LTM revenue multiples for Atari which was below the range of revenue multiples observed for the peer group companies. Duff & Phelps selected this range of multiples for Atari based upon Atari’s financial and operating performance in comparison to the peer group companies. These steps yielded a per share equity value range of US$0.72 to US$1.41, as shown in the following table. Duff & Phelps noted that the proposed merger consideration was above this range.

Atari, Inc.
Selected M&A Transaction Analysis
($ in 000s except Equity Value Per Share Outstanding)

 

 

 

 

Selected M&A Transaction Analysis (Premiums Paid) — Duff & Phelps reviewed the premiums paid over market price for 26 public-to-private transactions announced from January 1, 2003 through April 22, 2008 in which the majority stockholder acquired the remaining outstanding minority shares in a U.S. publicly traded company. In each case, the transaction involved at least 10% of the outstanding shares.

 

Duff & Phelps also reviewed the transaction premiums paid over market price for 36 public-to-private transactions of a U.S. publicly traded company announced from October 1, 2007 through April 22, 2008. These transactions involved an acquisition of 100% of the outstanding shares or situations in which the acquiror held a minority and acquired the majority of the outstanding shares. In addition, Duff & Phelps analyzed premiums paid in eleven situations in which the target business was deemed to be distressed (defined as situations in which the target company had a negative EBITDA margin).

 

Duff & Phelps compared the premiums over the 1-day, 5-day, and 30-day trading prices prior to the announcement of such public-to-private transaction to the implied premium associated with the proposed merger. In reviewing the 26 transactions in which the majority stockholder purchased the remaining outstanding shares of a publicly traded subsidiary, Duff & Phelps observed the mean and median of the premiums paid over the 1-day, 5-day and 30-day trading prices prior to announcement.

 

 

In reviewing the eleven distressed transactions in which the majority stockholder purchased the remaining outstanding shares of a publicly traded subsidiary, Duff & Phelps observed the mean and median of the premiums paid over the 1-day, 5-day and 30-day trading prices prior to announcement.

 

 

Duff & Phelps observed that the merger consideration in the proposed Atari merger represented premiums paid of 0.0%, 6.3% and 58.5% over the 1-day, 5-day and 30-day trading prices of Atari’s common stock, respectively, preceding Infogrames’ announcement of the proposed transaction on March 6, 2008.

 

Duff & Phelps noted that the premiums paid analysis was of limited relevance for Atari because of Atari’s dependence on Infogrames, its majority stockholder, for new product releases. Duff & Phelps noted that most of the

other transactions that Duff & Phelps considered did not involve a similar degree of dependence by the target company on the acquiring party.

 

Net Asset Value Analysis — Duff & Phelps reviewed Atari’s audited balance sheet as of December 31, 2007 and Atari’s preliminary estimated internal balance sheet as of March 31, 2008 to determine the net asset value (“NAV”) of Atari and added the fair market value of Atari’s intellectual property. In determining the fair market value of the intellectual property, Duff & Phelps relied, without independent verification, on information provided by management, including third party appraisals.

 

As of December 31, 2007, Atari’s total assets and total liabilities were US$43.5 million and US$60.3 million, respectively, resulting in a negative NAV of US$16.8 million. Estimated as of March 31, 2008, Atari’s total assets and total liabilities were US$32.6 million and US$52.9 million, respectively, resulting in a negative NAV of US$20.3 million.

 

Liquidation Analysis — Duff & Phelps also considered Atari’s current liquidity position and its prospects for obtaining additional cash infusions from persons other than its affiliate, Infogrames. Duff & Phelps observed that, as a result of substantial operating losses and significant cash requirements to fund working capital, Atari was liquidity constrained and its ability to secure additional financing from sources other than Infogrames was uncertain.

 

Since Atari was in violation of its weekly cash flow covenants on its BlueBay credit facility, Duff & Phelps analyzed the potential recoveries by holders of Atari’s common stock in a Chapter 11 bankruptcy. Duff & Phelps prepared its liquidation analysis assuming an orderly liquidation in which Atari would realize 70% of book value for accounts receivable, 50% of book value for inventory and 70% of book value for property, plant and equipment. To this amount, Duff & Phelps added the book value of cash and marketable securities. Additionally, Atari owns certain intellectual property that is not reflected on the balance sheet. In a liquidation scenario, Duff & Phelps assumed that Atari would realize 100% of the estimated fair market value of the intellectual property. A 25% discount for bankruptcy costs was applied and the resulting value was discounted back one and one-half years to present value at a 20% discount rate to adjust for the time period required to complete the liquidation. Based on its experience, Duff & Phelps believed these various recovery and discount percentages were reasonable estimates. As indicated in the following table, as a result of its liquidation analysis, Duff & Phelps determined that Atari’s common stock would have no value in a liquidation scenario.

 

Atari, Inc.

Liquidation Analysis ($ in million)

 

 

 

Notes:

 

 

 

Summary Analysis

 

Based on its analyses, and subject to the factors discussed above, Duff & Phelps concluded that the consideration to be received by Atari’s unaffiliated stockholders in the proposed merger was fair, as of April 28, 2008, from a financial point of view, to such unaffiliated stockholders (without giving effect to any impact of the proposed merger on any particular stockholder other than in its capacity as a stockholder).

 

The Duff & Phelps fairness opinion to the Special Committee was one of many factors taken into consideration by the Special Committee in making its determination to approve the proposed merger. Consequently, the analyses described above should not be viewed as determinative of the opinion of the Special Committee with respect to the merger consideration or of whether the Special Committee would have been willing to recommend a merger transaction with different merger consideration.

 

In May 2007, Infogrames engaged Lazard to act as its financial advisor to advise it of its strategic alternatives with respect to its majority interest in Atari.

 

Prior to discussing the offer and the merger agreement with Atari, the board of directors of Infogrames had discussions with Lazard with respect to a potential transaction and Lazard provided a presentation to Infogrames’ board of directors. The following is a summary of the material financial analyses contained in Lazard’s presentation. However, it does not purport to be a complete description of the analyses performed by Lazard or of its discussions with the board of directors of Infogrames. Infogrames did not request, and Lazard did not provide, any opinion to Infogrames, to Atari or to Atari’s stockholders as to the fairness of the merger consideration or any valuation of Atari for the purpose of assessing the fairness of the merger consideration. Had Lazard been requested to provide an opinion or recommend or provide support for a fair or appropriate valuation of the shares of Atari common stock not held by Infogrames and its affiliates, the information, comparisons and analyses presented by Lazard in the presentation to Infogrames’ board of directors may have been different.

 

The following summary is included here only for informational purposes and to comply with applicable disclosure requirements. The analyses described herein and the order in which they are presented and the results of the analyses do not represent relative importance or weight given to these analyses by Lazard. The summary of the presentation set forth below is qualified in its entirety by reference to the full text of the presentation materials. Holders of shares of Atari common stock are urged to, and should, read such presentation materials in their entirety. Lazard’s advisory services were provided solely for the information of the board of directors of Infogrames in its evaluation of the merger and neither the presentation materials nor this summary constitutes a recommendation as to how holders of shares of Atari common stock should vote their shares at the special meeting or as to any other action any holder should take or refrain from taking in connection with the merger.

 

Lazard made presentations to Infogrames’ board of directors on March 2, 2008 (the “March Presentation”) and April 24, 2008 (the “April Presentation” and, together with the March Presentation, the “Lazard Presentation”). The April Presentation was substantially similar to the March Presentation. The figures and analyses described below are based on the March Presentation.

 

Lazard believes that its analysis and the summary set forth above must be considered as a whole and that selecting portions of its analysis, without considering all factors and analyses, could create an incomplete view of the process underlying the analyses set forth in the Lazard Presentation. The Lazard Presentation was prepared solely for the purposes discussed above and is not an appraisal or reflection of the prices at which businesses or

securities actually may be sold. Analyses based upon projected future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, as they are based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Infogrames’ personnel or any other person assumes responsibility if the future results are materially different from those projected.

 

In preparing the Lazard Presentation, Lazard assumed and relied on the accuracy and completeness of all information supplied or otherwise made available to it, discussed with or reviewed by or for it, or publicly available, and did not independently verify the information or independently evaluate or appraise any of the assets or liabilities of Atari. In addition, Lazard was not provided with such evaluation or appraisal and it not assume any obligation to conduct any physical inspection of the properties or facilities of Atari.

 

The Lazard Presentation is necessarily based upon market, economic and other conditions as they exist and can be based on the information made available to it as of the date of the Lazard Presentation. Lazard assumed that in the course of obtaining any necessary regulatory or other consents or approvals (contractual or otherwise) for the merger and the merger agreement, no restrictions, including any divestiture requirements or amendments or modifications, will be imposed that will have a material adverse effect on the contemplated benefits of the merger. Lazard’s analyses were prepared solely as part of Lazard’s presentation in connection with Infogrames’ consideration of the merger.

 

Lazard also assumed that there have been no material changes in Atari’s condition, results of operations, business or prospects since the date of the most recent financial statements made available to Lazard and Lazard does not have any obligation to update, revise or reaffirm the materials presented by it to Infogrames. Lazard based its analyses on assumptions that it deemed reasonable, including assumptions concerning general business and economic conditions and industry-specific factors. Lazard’s analyses are not necessarily indicative of actual values or actual future results that might be achieved, which values may be higher or lower than those indicated.

 

In providing financial advice and preparing financial analysis, Lazard, among other things:

 

 

Lazard noted that although various valuation methodologies could theoretically be used, the specific situation of Atari (recovery situation) and the absence of a management business plan or analyst’s projections led to an analysis based on (i) two net asset value (NAV) analyses, (ii) trading comparable companies multiples and (iii) buy-out offer premia observed in minority buy-out transactions in the United States.

 

The following analyses were not used for the following reasons:

 

 

 

Lazard did not specifically factor a control premium into its analyses as Infogrames already controlled approximately 52% of Atari’s common stock.

 

Lazard observed that the methodologies it used led to significant variations in its results notably compared to those of the buy-out premium approach because of the trading multiples levels of Atari, which are well above its peers. Many results did reflect Atari’s intrinsic value. Possible explanations for this noted by Lazard were: (i) speculation on a possible buy-out of minority shareholders; (ii) lack of liquidity of Atari common stock; (iii) an implicit valuation of Atari net operating losses (NOLs) by the market; and (iv) a misunderstanding of Atari’s activity and assets (distribution vs. publishing) by the market.

 

Net Asset Value

 

Lazard performed a net asset value analysis, based on Atari’s December 31, 2007 balance sheet. Two scenarios were presented to Infogrames’ board of directors:

 

a.  “Going concern” scenario: All tangible assets were taken into account at their book value of US$41 million. The value of Atari’s intangible assets (Intellectual Property portfolio, Atari brand license and Infogrames distribution agreement) was estimated by Infogrames management to be US$17 million. Tax deferred assets were estimated, based on Infogrames’ assumptions and on Infogrames’ tax advisors’ analyses, to be US$12 million, assuming no change of control under applicable U.S. tax regulations. Atari’s total assets value was thus estimated at US$70 million, or US$5.20 per share of Atari common stock. All liabilities on Atari’s balance sheet were taken into account at their book value of US$65.2 million, or US$4.80 per share of Atari common stock. The implied equity value of Atari obtained by deducting total liabilities from total assets was therefore US$4.8 million or US$0.40 per share of Atari common stock. Various sensitivity analyses led to a valuation range of US$0.25 to US$0.62 per share of Atari common stock.

 

b.  “Significant loss of NOLs” scenario: This scenario was assumed as the most likely as, according to Infogrames’ tax advisors, a buy-out of Atari’s minority shareholders by Infogrames would be considered as a change of control under applicable U.S. tax regulations, leading to the loss of the largest part of the existing tax assets (NOLs) of Atari. Based on the same assumptions as in the “ Going concern ” scenario, except that the value of Atari’s tax assets was estimated to be between US$0 and US$5 million, Atari’s equity value was negative and estimated to be US$-0.50 to US$-0.12 per share of Atari common stock.

 

Comparable Minority Buy-Outs

 

Lazard reviewed publicly available information relating to certain selected comparable all-cash minority buy-out transactions in the United States from June 2004 to March 2008. For each of the precedent transactions, Lazard calculated the premium paid over the last trading price before the transaction announcement. Premium over average prices over various periods were also provided in the April Presentation.

 

By applying the observed average premium to Atari spot share price, Lazard derived a possible range of prices for Atari’s equity value per share of US$1.67 to US$2.15.

 

Comparable Companies’ Trading Multiples

 

Lazard identified a small peers group, with only two distribution-oriented U.S. comparable companies identified. Lazard analyzed historical financial information and market forecasts for these peers, which were considered to some extent to be similar to Atari.

 

Using this sample and based on revenues multiples, Lazard calculated that a representative range of Atari’s equity value would be US$0.45 to US$0.59 per share of common stock. The EBITDA and EBIT multiples were not

applicable as Atari, Inc. had negative/nil EBITDA and EBIT in 2007A, and is expected to have negative/nil EBITDA and EBIT in 2008E and 2009E (based on Infogrames management estimates).

 

With regard to the comparable companies and minority buy-outs analyses summarized above, Lazard selected comparable public companies and minority buy-outs on the basis of various factors, including size and similarity of the line of business of the relevant entities and similarity of the transactions; however, no company utilized in this analysis is identical to Atari and no previous minority buy-out is identical to the current merger. As a result, these analyses are not purely mathematical, but also take into account differences in financial and operating characteristics of the subject companies and other factors that could affect the transaction or the public trading value of the subject companies to which Atari is being compared.

 

Lazard

 

Lazard is an internationally recognized investment banking firm engaged in, among other things, the valuation of businesses and their securities in connection with mergers and acquisitions, restructurings, leveraged buyouts, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Infogrames selected Lazard to act as its financial advisor in connection with the merger on the basis of Lazard’s international reputation.

 

Pursuant to its engagement letter with Infogrames, dated May 25, 2007 and amended on December 24, 2007, April 2008 and June 2008, Lazard is acting as financial advisor to Infogrames in connection with the merger. Lazard receives a retainer for its ongoing role as financial advisor to Infogrames on several matters, including the merger. Infogrames has agreed to pay Lazard a customary fee for its services in connection with the merger, €1.1 million (approximately US$1.7 million based on the exchange rate of US$1.5363 to €1 at market close on June 13, 2008), which is payable upon the consummation of the merger.

 

Infogrames decided to structure the transaction as a one-step cash merger in order to provide a prompt and orderly transfer of complete ownership of Atari to Infogrames with reduced transaction costs and minimal risk that the contemplated transaction will not be finalized. The transaction has been structured as a merger of Merger Sub with and into Atari in order to permit the acquisition of Atari by Infogrames in a single step and to preserve Atari’s identity. In choosing this structure, Infogrames also considered the factors described under “Special Factors — Position of Infogrames as to the Fairness of the Merger to Atari’s Unaffiliated Stockholders; Intent of Infogrames to Vote in Favor of the Merger Transaction”. For those reasons, Infogrames also determined not to commence any acquisition with a cash tender offer.

 

Conversion of Outstanding Atari Common Stock

 

Upon the merger agreement being approved by Atari’s stockholders and the other conditions to the closing of the merger being satisfied or waived, Merger Sub will be merged with and into Atari, with Atari continuing as the surviving corporation in the merger. After the merger, Infogrames will beneficially own all of the outstanding shares of capital stock of Atari.

 

When the merger is completed, each share of Atari common stock issued and outstanding immediately prior to the effective time of the merger (other than excluded shares) will be converted into the right to receive US$1.68 in cash, without interest. Shares beneficially owned by Infogrames will be cancelled with no consideration paid therefor.

 

Stock Options

 

To the extent permitted under the applicable option plans, each outstanding and unexercised option to purchase shares of Atari common stock granted under Atari’s stock incentive plans (whether or not vested or exercisable) at the effective time of the merger will be cancelled, and each option holder will be entitled to receive an amount in cash equal to the product of (x) the number of shares subject to such stock option, multiplied by (y) the excess of the

per share merger consideration of US$1.68 over the per share exercise price of such stock option, less applicable taxes required to be withheld with respect to such payment.

 

Furthermore, under the merger agreement, prior to the effective time, Atari has agreed to use its reasonable best efforts to commence a tender offer to purchase all outstanding options to purchase shares of Atari common stock granted under Atari’s employee stock incentive plans (whether or not vested or exercisable) that Atari does not have the right to cancel and that have exercise prices that exceed the merger consideration. Stock options that Atari accepts pursuant to the tender offer will be cancelled and will no longer be outstanding and the tendering option holder will thereafter only have the right to receive at the effective time the consideration payable pursuant to the tender offer.

 

Effect on Ownership Structure of Atari

 

At the effective time of the merger, Atari’s current stockholders (other than Infogrames and its affiliates) will cease to have ownership interests in Atari or rights as Atari stockholders. Therefore, Atari’s current stockholders (other than Infogrames and its affiliates) will not participate in any earnings or growth of Atari following the merger and will not benefit from any increase in the value of Atari following the merger.

 

Effect on Listing, Registration and Status of Atari Common Stock

 

Atari’s common stock is currently registered under the Exchange Act and is traded on the “Pink Sheets”, an electronic quotation service maintained by Pink Sheets LLC, under the symbol “ATAR.PK”. As a result of the merger, Atari will be a privately held company, and there will be no public market for its common stock. After the merger, Atari’s common stock will cease to be listed on any exchange or quotation service, and price quotations with respect to sales of shares of Atari’s common stock in the public market will no longer be available. In addition, registration of the common stock under the Exchange Act will be terminated. This termination will make certain provisions of the Exchange Act, such as the requirement of furnishing a proxy or information statement in connection with stockholders’ meetings, no longer applicable to Atari. After the effective time of the merger, Atari will also no longer be required to file periodic reports or other information with the SEC.

 

Effect on Organization and Management of Atari

 

At the effective time of the merger, the directors of Merger Sub will become the directors of the surviving corporation in the merger. It is expected that, immediately following the effective time of the merger, the officers of Atari immediately prior to the effective time of the merger will remain officers of the surviving corporation. The certificate of incorporation and the bylaws of Merger Sub as in effect immediately prior to the effective time of the merger shall, from and after the effective time of the merger, be the certificate of incorporation and the bylaws of the surviving corporation, until each is duly amended.

 

It is expected that, upon consummation of the merger, and subject to the discussion above, Atari will continue implementing its restructuring plans and make further changes, as Atari’s management and Infogrames deem appropriate, to Atari’s operations. Atari will not, however, be subject to the obligations and constraints, and the related direct and indirect costs and personnel requirements, associated with being a public company.

 

Beneficial and Detrimental Effects

 

Benefits of the merger to Infogrames include that, after the merger, Infogrames will be entitled to 100% of the future earnings and growth of Atari, if any, and Infogrames’ interests in the net book value and net earnings of Atari will be 100% based on its holdings of Atari’s outstanding capital stock. See “Special Factors — Purposes for the Merger — Infogrames’ Purpose for the Merger”. Detriments of the merger to Infogrames include the lack of liquidity for Atari common stock following the merger, the risk that Atari will decrease in value following the merger, and the payment by Atari of approximately US$700,000 to US$1.1 million in transaction costs and estimated fees and expenses related to the merger. See “Special Factors — Position of Infogrames as to the Fairness of the Merger to Atari’s Unaffiliated Stockholders; Intent of Infogrames to Vote in Favor of the Merger Transaction” and “Special Factors — Estimated Fees and Expenses of the Merger”.

The benefits of the merger to Atari’s unaffiliated stockholders are the right to receive US$1.68 per share in cash for their shares of Atari common stock and not bearing the risk of continuing their investment in Atari. The detriments of the merger to such stockholders are that they will cease to participate in Atari’s future earnings and growth, if any, will no longer own any interest in Atari’s net book value or net earnings, and that the receipt of the payment for their shares in the merger will be a taxable event for federal income tax purposes. See “Special Factors — Federal Income Tax Consequences”.

 

It is expected that, following the completion of the merger, Atari’s operations and business will be conducted substantially as they are being conducted currently. Except as otherwise described in this Proxy Statement, or as may be effected in connection with the integration of the operations of Infogrames and Atari, Infogrames has informed Atari that it has no current plans or proposals or negotiations that relate to or would result in:

 

 

It is expected that, following the completion of the merger, Atari’s board of directors will consist of Frederic Armitano-Grivel, Mathias Hautefort and Pierre Lansonneur, James Wilson will continue as Atari’s Chief Executive Officer, and the other officers of Atari will remain as executive officers.

 

Notwithstanding the foregoing, Infogrames has informed Atari that, following the completion of the merger, it expects to review Atari’s assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes may be necessary to best organize and integrate the activities of Atari and Infogrames.

 

In considering the recommendation of the board of directors, you should be aware that certain of Atari’s executive officers and directors, Infogrames and Merger Sub may have interests in the transaction that are different from, or are in addition to, the interests of Atari’s unaffiliated stockholders generally. The Special Committee and the board of directors were aware of these actual and potential conflicts of interests and considered them along with other matters when they determined to recommend the merger. See “Special Factors — Background of the Merger”.

 

Infogrames Stock Ownership; BlueBay Beneficial Ownership of Infogrames Stock

 

Infogrames currently directly or indirectly controls 51.6% of the outstanding voting securities of Atari, which is sufficient to adopt and approve the merger and the merger agreement. The BlueBay Funds, as disclosed in the Schedule 13D/A dated May 8, 2008 filed with the SEC, collectively hold approximately 31.5% of shares of common stock of Infogrames. The BlueBay Funds are also eligible to redeem certain warrants and convert convertible bonds into shares of Infogrames, whereby, upon redemption and exercise of such stock warrants, the BlueBay Funds would collectively hold approximately 54.9% of the outstanding stock of Infogrames (on a fully diluted basis). The BlueBay Funds may be deemed by Rule 13d-3(d)(1) of the Exchange Act to be beneficial owners of Atari stock held by Infogrames. See “Security Ownership of Certain Beneficial Owners and Management”.

Infogrames and BlueBay Secured Credit Facilities

 

Infogrames has provided Atari a credit facility for the aggregate principal amount of US$20 million. Such loan is secured by substantially all the assets of Atari. For additional information regarding such credit facility, see “Certain Transactions with Directors, Executive Officers and Affiliates”.

 

BlueBay High Yield has provided Atari a credit facility for the aggregate principal loan amount of US$14 million, plus accrued and unpaid and accruing interest and fees. Such loan is secured by substantially all the assets of Atari. BlueBay High Yield and Atari entered into a Waiver, Consent and Fourth Amendment, dated as of April 30, 2008 (the “Fourth Credit Facility Amendment”) pursuant to which BlueBay High Yield agreed to, among other things, waiver of Atari’s non-compliance with certain representations and covenants under the credit facility. If any party elects to terminate the merger agreement, it would constitute an event of default under the credit facility. For additional information regarding such credit facility, see “Certain Transactions with Directors, Executive Officers and Affiliates”.

 

Atari Directors

 

Evence-Charles Coppee was until recently a director and executive officer of Infogrames and may potentially have a conflict of interest in evaluating the merger. Mr. Coppee did not participate in the board meeting at which the merger was approved. For additional information on Mr. Coppee, see “Directors and Executive Officers of Atari, Infogrames and Merger Sub”.

 

Eugene I. Davis is the chair of the Special Committee that evaluated the merger and the merger agreement and Chairman of the Board of Directors. Mr. Davis is a director of Cherry Luxembourg S.A., a company in which entities affiliated with the BlueBay Funds hold 43% of the common stock, 50.4% of the preferred shares and 55.6% of the debt. The Special Committee, comprised of four members, including Mr. Davis, voted unanimously for the merger and the merger agreement. For additional information on Mr. Davis, see “Directors and Executive Officers of Atari, Infogrames and Merger Sub”.

 

Treatment of Shares Subject to Options Granted under Atari Stock Incentive Plans

 

To the extent permitted under the applicable option plans, each outstanding and unexercised option to purchase shares of Atari common stock granted under Atari’s stock incentive plans (whether or not vested or exercisable) at the effective time of the merger will be cancelled, and each option holder (including directors and executive officers of Atari) will be entitled to receive an amount in cash equal to the product of (x) the number of shares subject to such stock option, multiplied by (y) the excess of the per share merger consideration of US$1.68 over the per share exercise price of such stock option, less applicable taxes required to be withheld with respect to such payment. All vested and unvested options to acquire shares of Atari common stock held by the executive officers of Atari were issued under Atari’s 1997 Stock Incentive Plan (as amended), 2000 Stock Incentive Plan (as amended) and 2005 Stock Incentive Plan. From and after the effective time of the merger, no additional options will be issued under any of Atari’s stock incentive plans. If the merger does not close, the plans will operate as they did prior to the date the merger agreement was signed.

 

All outstanding options (other than those granted to Jim Wilson and Timothy Flynn pursuant to their respective employment agreements, as further discussed below) have exercise prices above US$1.68 per share. Under the merger agreement, prior to the effective time, Atari has agreed to use its reasonable best efforts to commence a tender offer to purchase all outstanding options to purchase shares of Atari common stock granted under Atari’s employee stock incentive plans (whether or not vested or exercisable) that Atari does not have the right to cancel and that have exercise prices that exceed the merger consideration. Directors and officers of Atari will receive, in aggregate, US$[          ] if such directors and officers choose to tender their options pursuant to the tender offer described in “The Merger Agreement — Stock Options”, but will not otherwise receive any merger consideration in respect of such options since the per share exercise price of such options exceeds US$1.68.

The following table sets forth, as of the record date, the number of shares of Atari common stock subject to vested and unvested options held by Atari directors and executive officers:

 

 

For further information regarding the beneficial ownership of Atari common stock by the directors and executive officers of Atari, see “Security Ownership of Certain Beneficial Owners and Management”.

 

Employment with the Surviving Corporation Post-Merger

 

It is expected that, immediately following the effective time of the merger, the executive officers of Atari immediately prior to the effective time of the merger will remain executive officers of the surviving corporation. From and after the effective time of the merger, the executive officers of the surviving corporation will be eligible to participate in the global stock option plan of Infogrames.

 

Jim Wilson and Timothy Flynn Stock Options

 

Under Messrs. Wilson’s and Flynn’s respective employment agreements, Atari has agreed to use its best efforts to cause Infogrames to agree to grant to each of Messrs. Wilson and Flynn a stock option with respect to shares of Infogrames in substitution of their currently outstanding options to acquire Atari stock. Such options to acquire shares of Infogrames shall have a present value approximately equal to the present value of each of Messrs. Wilson’s and Flynn’s options to acquire Atari stock using Black-Scholes or another reasonable option valuation methodology.

 

Directors of the Surviving Corporation Post-Merger

 

The board of directors of Merger Sub at the effective time of the merger shall, from and after the effective time of the merger, be the directors of the surviving corporation, until their successors are duly elected and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and by-laws.

 

Indemnification and Insurance

 

Pursuant to the merger agreement, Infogrames and Atari, as the surviving corporation, shall be jointly and severally responsible for maintaining in full force and effect all existing rights to indemnification in favor of Atari’s directors and officers for at least six years after the effective time. Under Atari’s certificate of incorporation and bylaws, as well as the indemnifications agreements entered into between Atari and each director, Atari will indemnify and hold harmless each present and former director and officer of Atari (in each case, when acting in such capacity) against all costs and expenses incurred in connection with any proceeding arising out of matters existing

or occurring at or prior to the effective time of the merger, to the fullest extent permitted. Infogrames and/or the surviving corporation will also advance expenses as incurred to the fullest extent permitted under and in accordance with the provisions of Atari’s certificate of incorporation, bylaws and outstanding indemnification agreements in effect on the date of the merger agreement.

 

In addition, pursuant to the merger agreement, the surviving corporation after the merger and Infogrames shall maintain in effect the “tail” insurance policy provided with Atari’s current directors’ and officers’ liability insurance and fiduciary liability insurance, which will automatically come into effect upon the consummation of the merger.

 

Compensation of the Special Committee

 

In consideration of the expected time and effort that would be required of Special Committee members in evaluating and approving transactions with Infogrames, including a merger proposal, on November 4, 2007, the board of directors determined that each member of the Special Committee shall receive a retainer of US$10,000 (with the exception of the Chairman of the Special Committee, who receives US$25,000). In addition, each member of the Special Committee receives US$2,000 for each Special Committee meeting attended in person and US$1,000 for each Special Committee meeting attended by telephone. Such fees are payable whether or not the merger is completed, and were approved prior to the receipt of Infogrames’ proposal and were not changed by the board of directors thereafter.

 

It is expected that if the merger is not completed, the current management of Atari, under the direction of the board of directors, would continue to manage Atari as an ongoing business. It is likely, however, that Atari would not be able to obtain adequate financing to fund its operations, which would adversely affect Atari’s business and operations, and the board of directors would be required to seek alternative transactions and consider entering liquidation or bankruptcy proceedings. In addition, if the circumstances described under “The Merger Agreement — Termination Fee” occur, Atari would be required to pay Infogrames US$450,000 if the merger agreement were terminated. Furthermore, Atari would need to seek appropriate arrangements with respect to Atari’s credit facilities with BlueBay High Yield and Infogrames (including, as necessary, amendments, waivers and forbearances of remedies regarding any then-existing defaults, which include the termination of the merger agreement). There can be no assurance that (i) Atari would be able to obtain financing, (ii) any other transaction acceptable to Atari will be offered, and (iii) Atari would be able to obtain the necessary amendments, waivers or forbearances of defaults (including the termination of the merger agreement) under the credit facilities with BlueBay High Yield and Infogrames, which are secured by substantially all of the assets of Atari.

 

Infogrames and Atari would also continue to perform their respective obligations under outstanding intercompany agreements. Infogrames and Atari would continue to reevaluate its current operational arrangements and, as appropriate, renegotiate the terms of any underlying agreements.

Estimated Fees and Expenses of the Merger

 

Atari expects to incur approximately US$700,000 to US$1.1 million in fees and expenses in connection with the consummation of the merger and the related transactions, and In addition, Infogrames will incur filing fees related to compliance with state and federal law and financial, legal and other advisory fees, in each case, as set forth below:

 

 

 

 

 

In general, all costs and expenses incurred in connection with the merger agreement and the merger and the other transactions contemplated by the merger agreement will be paid by the party incurring such expense.

 

Infogrames estimates that the total amount of funds required (i) to purchase all of the outstanding Atari common stock not currently beneficially owned by it, (ii) to pay amounts to the holders of options that Atari does not have the right to cancel and that have exercise prices that exceed the merger consideration, and (iii) to pay the estimated fees and expenses of the merger, will be in aggregate approximately €2.7 million (approximately US$4.1 million based on the exchange rate of US$1.5363 to €1 at market close on June 13, 2008). Infogrames has sufficient funds available to pay these expenses. The merger is not conditioned on any financing arrangements.

 

The size of the merger transaction does not require federal antitrust filings. In connection with the merger and its financing, Atari and Infogrames are only required to:

 

 

On April 18, 2008, attorneys representing Christian M. Stanley, a purported stockholder of Atari (“Plaintiff”), filed a Verified Class Action Complaint against Atari, certain of its directors and former directors, and Infogrames, in the Delaware Court of Chancery. In summary, the complaint alleges that the director defendants breached their fiduciary duties to Atari’s unaffiliated stockholders by entering into an agreement that allows Infogrames to acquire the outstanding shares of Atari’s common stock at an unfairly low price. An Amended Complaint was filed on May 20, 2008, updating the allegations of the initial complaint to challenge certain provision of the definitive merger agreement. On the same day, Plaintiff filed motions to expedite the suit and to preliminarily enjoin the merger.

 

Plaintiff alleges that the US$1.68 per share offering price represents no premium over the closing price of Atari stock on March 5, 2008, the last day of trading before Atari announced the proposed merger transaction. Plaintiff alleges that in light of Infogrames’ approximately 51.6% ownership of Atari, Atari’s unaffiliated stockholders have no voice in deciding whether to accept the proposed merger transaction, and Plaintiff challenges certain of the “no shop” and termination fee provisions of the merger agreement. Plaintiff claims that the named directors are engaging in self-dealing and acting in furtherance of their own interests at the expense of those of Atari’s unaffiliated stockholders. Specifically, Plaintiff asserts that the directors’ fiduciary duties require the directors: (i) to undertake an extensive evaluation of Atari’s net worth as a merger candidate, (ii) to attempt to auction Atari to third parties to obtain the best value for Atari’s stockholders, (iii) to structure the proposed merger transaction in a manner that is fair and noncoercive to unaffiliated stockholders, (iv) to refrain from favoring the directors’ interests over those of Atari’s unaffiliated stockholders, and (v) to disclose all material facts necessary for

Atari’s unaffiliated stockholders to make an informed decision as to whether they should vote for or against the proposed merger transaction. Plaintiff asks the court to enjoin the proposed merger transaction, or alternatively, to rescind it in the event that it is consummated. In addition, Plaintiff seeks damages suffered as a result of the directors’ violation of their fiduciary duties. The parties have agreed to expedited proceedings contemplating a hearing in mid-August on Plaintiff’s motion for a preliminary injunction.

 

Atari believes the suit to be entirely without merit and intends to oppose the action vigorously.

 

The following is a summary of the material United States federal income tax consequences of the merger to “U.S. holders” and “non-U.S. holders” (each, as defined below) of Atari common stock. The discussion does not purport to consider all aspects of United States federal income taxation that might be relevant to holders of Atari common stock. The discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), applicable current and proposed United States Treasury regulations, judicial authority and administrative rulings and practice, all of which are subject to change, possibly with retroactive effect. Any change could alter the tax consequences of the merger to the holders of common stock.

 

This discussion applies only to holders who hold shares of Atari common stock as capital assets within the meaning of Section 1221 of the Code. This discussion does not address all aspects of United States federal income taxation that may be relevant to holders of Atari common stock in light of their particular circumstances, or that may apply to holders that are subject to special treatment under United States federal income tax laws (including, for example, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, cooperatives, traders in securities who elect to mark their securities to market, mutual funds, real estate investment trusts, S corporations, holders subject to the alternative minimum tax, partnerships or other pass-through entities and persons holding shares of Atari common stock through a partnership or other pass-through entity, persons who acquired shares of Atari common stock in connection with the exercise of employee stock options or otherwise as compensation, United States expatriates, and persons who hold shares of Atari common stock as part of a hedge, straddle, constructive sale or conversion transaction). This discussion does not address any aspect of state, local or foreign tax laws or United States federal tax laws other than United States federal income tax laws.

 

This summary is not intended to constitute a complete description of all tax consequences relating to the merger. No rulings have been sought or will be sought from the United States Internal Revenue Service (“IRS”), with respect to any of the United States federal income tax considerations discussed below. As a result, Atari cannot assure you that the IRS will agree with the tax characterizations and the tax consequences described below. Because individual circumstances may differ, each holder should consult its tax advisor regarding the applicability of the rules discussed below to the holder and the particular tax effects of the merger to the holder, including the application of state, local and foreign tax laws.

 

For purposes of this summary, a “U.S. holder” is a holder of shares of Atari common stock, who or that is, for United States federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States, any state of the United States or the District of Columbia, (iii) an estate, the income of which is subject to United States federal income tax regardless of its source, or (iv) a trust if (1) a United States court is able to exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust; or (2) it has a valid election in place to be treated as a domestic trust for United States federal income tax purposes.

 

A “non-U.S. holder” is a person (other than a partnership) that is not a U.S. holder.

 

Tax Consequences to U.S. Holders.   The receipt of the cash merger consideration pursuant to the merger will be a taxable transaction for United States federal income tax purposes. In general, a U.S. holder whose shares of Atari common stock are converted to cash in the merger will recognize capital gain or loss for United States federal income tax purposes equal to the excess, if any, of the cash received in the merger over the U.S. holder’s adjusted tax basis in the shares converted into the merger consideration. Such gain or loss will be long-term capital gain or loss provided that the U.S. holder’s holding period for such shares is more than one year at the time the merger is

completed. Under current law, long-term capital gains recognized by U.S. holders that are individuals generally should be subject to a maximum United States federal income tax rate of 15%. There are limitations on the deductibility of capital losses. If a U.S. holder acquired different blocks of Atari common stock at different times or different prices, such holder must determine its tax basis and holding period separately with respect to each block of Atari common stock.

 

Under the Code, a U.S. holder of Atari common stock (other than a corporation or other exempt recipient) may be subject, under certain circumstances, to information reporting on the cash received in the merger. A U.S. holder, who is not otherwise exempt, who fails to supply a correct taxpayer identification number, under-reports tax liability, or otherwise fails to comply with United States information reporting or certification requirements, may be subject to backup withholding of tax at a rate of 28% with respect to the amount of cash received in the merger.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s United States federal income tax liability provided the required information is timely furnished to the IRS.

 

Tax Consequences to Non-U.S. Holders.   A non-U.S. holder’s receipt of the cash merger consideration pursuant to the merger generally will not be subject to United States federal income tax unless:

 

 

A non-U.S. holder whose gain is associated with a U.S. trade or business will be subject to United States federal income tax on its net gain in the same manner as if it were a U.S. holder. In addition, such a non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits (including such gain) or at such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in the second bullet point above will be subject to tax at a 30% flat rate on the gain recognized with respect to their shares of Atari common stock, which gain will equal to the excess, if any, of the cash received in the merger over the non-U.S. holder’s adjusted tax basis in such shares, which may be offset by United States source capital losses even though the individual is not considered a resident of the United States.

 

Non-U.S. holders that have shares of Atari common stock converted into the merger consideration pursuant to the merger generally will not be subject to information reporting and backup withholding, provided that Atari does not have actual knowledge or reason to know that the non-U.S. holder is a United States person, as defined under the Code, and the non-U.S. holder provides Atari a certification, under penalty of perjury, that it is not a United States person (such certification may be made on an IRS Form W-8BEN, or successor form, or by satisfying other certification requirements of applicable United States Treasury regulations). Backup withholding of tax may apply (at a rate of 28%) for any non-U.S. holder who does not provide adequate certification.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s United States federal income tax liability provided that the required information is timely furnished to the IRS.

 

THE UNITED STATES FEDERAL INCOME TAX SUMMARY ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER’S PARTICULAR SITUATION. THE SUMMARY DOES NOT ADDRESS EVERY U.S. FEDERAL INCOME TAX CONCERN WHICH MAY BE APPLICABLE TO A PARTICULAR HOLDER OF ATARI’S COMMON STOCK. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES, OF THE

DISPOSITION OF SHARES OF ATARI COMMON STOCK PURSUANT TO THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.

 

Infogrames intends to account for this transaction as a step acquisition using the purchase method of accounting. The excess of the purchase price over the net identifiable assets acquired will be allocated to goodwill. Subsequent to completion of the transaction, 100% of the results of operations of Merger Sub will be included in Infogrames consolidated results of operations.

 

Holders of Atari common stock who dissent and do not vote in favor of the merger are entitled to certain appraisal rights under Delaware law in connection with the merger, as described below and in Annex C hereto. Such holders who perfect their appraisal rights and strictly follow certain procedures in the manner prescribed by Section 262 of the DGCL will be entitled to receive payment of the fair value of their shares, as determined by appraisal proceedings, in cash from Atari, as the surviving corporation in the merger.

 

ANY ATARI STOCKHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW ANNEX C CAREFULLY AND SHOULD CONSULT HIS OR HER LEGAL ADVISOR, SINCE FAILURE TO COMPLY STRICTLY AND TIMELY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS.

 

The record holders of the shares of Atari common stock that elect to exercise their appraisal rights with respect to the merger are referred to herein as “Dissenting Stockholders”, and the shares of Atari common stock with respect to which they exercise appraisal rights are referred to herein as “Dissenting Shares”. If an Atari stockholder has a beneficial interest in shares of Atari common stock that are held of record in the name of another person, such as a broker or nominee, and such Atari stockholder desires to perfect whatever appraisal rights such beneficial Atari stockholder may have, such beneficial Atari stockholder must act promptly to cause the holder of record timely and properly to follow the steps summarized below.

 

A VOTE IN FAVOR OF THE MERGER BY AN ATARI STOCKHOLDER WILL RESULT IN A WAIVER OF SUCH HOLDER’S RIGHT TO APPRAISAL RIGHTS.

 

When the merger becomes effective, Atari stockholders who strictly comply with the procedures prescribed in Section 262 of the DGCL will be entitled to a judicial appraisal of the fair value of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, and to receive payment of the fair value of their shares in cash from Atari, as the surviving corporation in the merger. The following is a summary of the statutory procedures that must be followed by a common stockholder of Atari in order to perfect appraisal rights under the DGCL. This summary is not intended to be complete and is qualified in its entirety by reference to Section 262 of the DGCL, the text of which is included as Annex C to this proxy statement. Atari advises any Atari stockholder considering demanding appraisal to consult legal counsel.

 

In order to exercise appraisal rights under Delaware law, a stockholder must be the stockholder of record of the shares of Atari common stock as to which appraisal rights are to be exercised on the date that the written demand for appraisal described below is made, and the stockholder must continuously hold such shares through the effective date of the merger.

 

While Atari stockholders electing to exercise their appraisal rights under Section 262 of the DGCL are not required to vote against the approval of the merger, a vote in favor of approval of the merger will result in a waiver of the holder’s right to appraisal rights. Atari stockholders electing to demand the appraisal of such stockholder’s shares shall deliver to Atari, before the taking of the vote on the merger, a written demand for appraisal of such stockholder’s shares. Such demand will be sufficient if it reasonably informs Atari of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder’s shares. A proxy or vote against the merger shall not constitute such a demand. Please see the discussion below under the heading “Written Demand” for additional information regarding written demand requirements.

Within ten days after the effective time of the merger, Atari, as the surviving corporation, must provide notice of the date of effectiveness of the merger to all Atari stockholders who have not voted for approval of the merger agreement and who have otherwise complied with the requirements of Section 262 of the DGCL.

 

An Atari stockholder who elects to exercise appraisal rights must mail or deliver the written demand for appraisal to:

 

Atari, Inc.
417 Fifth Avenue
New York, New York 10016

Attn: Kristina K. Pappa, Secretary

 

Within 120 days after the effective date of the merger, any Dissenting Stockholder, and any beneficial owner of shares of Atari stock held either in a voting trust or by a nominee on behalf of such beneficial owner, that has strictly complied, or has caused the applicable Dissenting Stockholder to strictly comply, with the procedures prescribed in Section 262 of the DGCL will be entitled, upon written request, to receive from Atari, as the surviving corporation, a statement of the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received by Atari, and the aggregate number of holders of those shares. This statement must be mailed to the requesting stockholder within ten days after the stockholder’s written request has been received by Atari, as the surviving corporation, or within ten days after the date of the effective date of the merger, whichever is later.

 

Within 120 days after the effective date of the merger, (i) Atari, as the surviving corporation, (ii) any Dissenting Stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL or (iii) any beneficial owner of shares of Atari stock held either in a voting trust or by a nominee on behalf of such beneficial owner that has caused the applicable Dissenting Stockholder to strictly comply with the procedures prescribed in Section 262 of the DGCL may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of each share of Atari stock of all Dissenting Stockholders. If a petition for an appraisal is timely filed, then after a hearing on the petition, the Delaware Court of Chancery will determine which Atari stockholders are entitled to appraisal rights and then will appraise the shares of Atari common stock owned by those stockholders by determining the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with the interest to be paid, if any, on the amount determined to be the fair value. If no petition for appraisal is filed with the Delaware Court of Chancery by Atari, as the surviving corporation, any Dissenting Stockholder or any beneficial holder described above within 120 days after the effective time of the merger, then the Dissenting Stockholders’ rights to appraisal will cease, and they will be entitled only to receive merger consideration paid in the merger on the same basis as other Atari unaffiliated stockholders. Inasmuch as Atari, as the surviving corporation, has no obligation to file a petition, any Atari stockholder who desires a petition to be filed is advised to file it on a timely basis. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective time of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at the rate that is 5% over the Federal Reserve discount rate (including any surcharges) as established from time to time during the period between the effective time of the merger and the date of payment of the judgment.

 

The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the court deems equitable in the circumstances. Upon application of a Dissenting Stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL, the court may order that all or a portion of the expenses incurred by any Dissenting Stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees, and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of this determination or assessment, each party bears its own expenses. A Dissenting Stockholder who has timely demanded appraisal in compliance with Section 262 of the DGCL will not, after the effective time of the merger, be entitled to vote Atari common stock subject to such demand for any purpose or to receive payment of dividends or other distributions on Atari common stock, except for dividends or other distributions payable to stockholders of record at a date prior to the effective time of the merger.

At any time within sixty days after the effective time of the merger, any Dissenting Stockholder will have the right to withdraw the stockholder’s demand for appraisal and to accept the right to receive merger consideration in the merger on the same basis on which Atari common stock is converted in the merger. After this sixty day period, a Dissenting Stockholder that has strictly complied with the procedures prescribed in Section 262 of the DGCL may withdraw his or her demand for appraisal only with the written consent of Atari or Infogrames. If a petition has been timely filed in the Delaware Court of Chancery demanding appraisal, such petition will not be dismissed as to any Atari stockholder without the approval of the Delaware Court of Chancery, which may be conditioned on any terms the Delaware Court of Chancery deems just. However, such approval is not required for any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder’s demand for appraisal and to accept the merger consideration within sixty days after the effective date of the merger.

 

Written Demand

 

When submitting a written demand for appraisal under Delaware law, the written demand for appraisal must reasonably inform Atari of the identity of the stockholder of record making the demand and indicate that the stockholder intends to demand appraisal of the stockholder’s shares. A demand for appraisal must be executed by or for an Atari common stockholder of record, fully and correctly, as that stockholder’s name appears on the stockholder’s stock certificate. If Atari common stock is owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand must be executed by the fiduciary. If Atari common stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, must execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he, she or it is acting as agent for the record owner.

 

A record owner who holds Atari common stock as a nominee for other beneficial owners of the shares may exercise appraisal rights with respect to Atari common stock held for all or less than all beneficial owners of Atari stock for which the holder is the record owner. In that case, the written demand must state the number of shares of Atari common stock covered by the demand. Where the number of shares of Atari common stock is not expressly stated, the demand will be presumed to cover all shares of Atari common stock outstanding in the name of that record owner. Beneficial owners who are not record owners and who intend to exercise appraisal rights should instruct the record owner to comply strictly with the statutory requirements with respect to the delivery of written demand prior to the taking of the vote on the merger.

 

Atari stockholders considering whether to seek appraisal should bear in mind that the fair value of their Atari common stock determined under Section 262 of the DGCL could be more than, the same as or less than the value of the right to receive merger consideration in the merger. Also, Atari and Infogrames reserve the right to assert in any appraisal proceeding that, for purposes thereof, the “fair value” of Atari common stock is less than the value of the merger consideration to be issued in the merger.

 

The process of dissenting and exercising appraisal rights requires strict compliance with technical prerequisites. Atari stockholders wishing to dissent and to exercise their appraisal rights should consult with their own legal counsel in connection with compliance with Section 262 of the DGCL.

 

Any stockholder who fails to strictly comply with the requirements of Section 262 of the DGCL, attached as Annex C to this proxy statement will forfeit his, her or its rights to dissent from the merger and to exercise appraisal rights and will receive merger consideration on the same basis as all other stockholders.

 

THE PROCESS OF DISSENTING REQUIRES STRICT COMPLIANCE WITH TECHNICAL PREREQUISITES. THOSE INDIVIDUALS OR ENTITIES WISHING TO DISSENT AND TO EXERCISE THEIR APPRAISAL RIGHTS SHOULD CONSULT WITH THEIR OWN LEGAL COUNSEL IN CONNECTION WITH COMPLIANCE UNDER SECTION 262 OF THE DGCL. TO THE EXTENT THERE ARE ANY INCONSISTENCIES BETWEEN THE FOREGOING SUMMARY AND SECTION 262 OF THE DGCL, THE DGCL SHALL CONTROL.

 

Any statement in this proxy statement which is not historical fact, or which might otherwise be considered an opinion, projection, future expectation, plan or prospect, including statements regarding consummation of the proposed merger, constitute forward-looking statements. In some cases, forward-looking statements may be identified by their incorporation of forward-looking terminology such as “anticipate”, “believe”, “continue”, “estimate”, “expect”, “intend”, “should” or “will” and other comparable expressions. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including the matters discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Atari’s most recent quarterly or annual report filed with the SEC, as well as factors relating to the proposed merger, including (i) diversion of management attention from the operations of the business as a result of preparations for the proposed merger and the defense of litigation in connection with the proposed merger and (ii) the cost of litigation and other transaction related expenses that are expected to be incurred regardless of whether the proposed merger is consummated. Stockholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are made only as of the date of this proxy statement, and Atari undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances except to the extent required by law. Notwithstanding the foregoing, in the event of any material change in any of the information previously disclosed, Atari will, where relevant and if required by applicable law, (i) update such information through a supplement to this proxy statement and (ii) amend the Transaction Statement on Schedule 13E-3 filed in connection with the merger, in each case, to the extent necessary.

 

The following is a summary of certain material provisions of the merger agreement, a copy of which is attached to this proxy statement as Annex A , and which is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. Atari encourages you to carefully read the merger agreement in its entirety, as the rights and obligations of the parties are governed by the express terms of the merger agreement and not by this summary or any other information contained in this proxy statement.

 

The effective time of the merger will occur at the time that Atari duly files the certificate of merger with the Secretary of State of the State of Delaware immediately following the closing of the merger or at such later time as Infogrames and Atari may agree and specify in the certificate of merger in accordance with the DGCL. The closing will occur no later than the second business day after the day on which the last of the conditions to the merger set forth in the merger agreement are satisfied or waived or such other time or such other date as Infogrames and Atari may agree in writing. The date on which the closing occurs is referred to as the closing date. The time at which the merger is complete is referred to as the effective time.

 

At the effective time, Merger Sub will merge with and into Atari and the separate corporate existence of Merger Sub will cease. Atari will continue its corporate existence under Delaware law as the surviving corporation in the merger and Atari will become a wholly owned indirect subsidiary of Infogrames.

 

Following completion of the merger, each share of Atari common stock outstanding at the effective time of the merger, other than shares held by holders who have perfected and not withdrawn a demand for appraisal rights, and shares beneficially owned by Infogrames, will be cancelled and converted into the right to receive US$1.68 in cash, without interest. Shares beneficially owned by Infogrames will be cancelled with no consideration paid therefor. The holders of certificates which, prior to the effective time, represented Atari shares will no longer have any rights with respect to those shares, other than the right to receive the merger consideration upon the surrender of their certificates.

 

At the effective time of the merger, each outstanding option to purchase shares of Atari’s common stock, whether or not vested or exercisable, will be converted into the right to receive an amount in cash, without interest, equal to the product of the number of shares of Atari’s common stock into which each option was exercisable immediately prior to the effective time, multiplied by the excess, if any, of US$1.68 over the exercise price per share of each such option. The payment to the option holder will be reduced by applicable withholding taxes.

 

Furthermore, prior to the effective time, Atari has agreed to use its reasonable best efforts to commence a tender offer to purchase all outstanding options to purchase shares of Atari’s common stock granted under Atari’s employee stock incentive plans (whether or not vested or exercisable) that Atari does not have the right to cancel and that have exercise prices that exceed the merger consideration. Stock options that Atari accepts pursuant to the tender offer will be cancelled and will no longer be outstanding and the tendering option holder will thereafter only have the right to receive at the effective time the consideration payable pursuant to the tender offer.

 

Infogrames has selected American Stock Transfer and Trust Company to act as the paying agent. Infogrames will provide funds necessary for the payment of the aggregate merger consideration to the paying agent, no later than close of business on the business day immediately preceding the closing date. Promptly after the effective time, the paying agent will mail a letter of transmittal that will contain instructions concerning the procedure for

surrendering stock certificates. Upon surrender of the stock certificates to the paying agent, together with a properly completed letter of transmittal and any other documents the paying agent may require, the holder will receive the appropriate merger consideration, less any applicable withholding taxes. No interest will be paid or will accrue on any amount payable upon surrender of stock certificates.

 

You should not return your certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a properly completed letter of transmittal.

 

If any merger consideration is to be paid to a person other than the person in whose name the surrendered certificate is registered, then the merger consideration may be paid to such a transferee so long as (i) the surrendered certificate is accompanied by all documents required to evidence and effect that transfer and (ii) the person requesting such payment (a) pays any applicable transfer taxes or (b) establishes to the satisfaction of Infogrames and the paying agent that any such taxes have already been paid or are not applicable.

 

Until surrendered, each certificate, from the effective time forward, will only represent the right to receive the applicable merger consideration. At the completion of the merger, Atari’s stock transfer book will be closed and there will be no further registration of transfers of Atari shares. If any certificate is lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and the posting by such person of a bond in the form required by Infogrames as indemnity against any claim that may be made against Infogrames on account of the alleged loss, theft or destruction of such certificate, the paying agent shall pay the merger consideration to such person in exchange for such lost, stolen or destroyed certificate.

 

Shares of Atari common stock that are held by a stockholder who has perfected a demand for appraisal rights pursuant to Section 262 of the DGCL will not be converted into the right to receive the merger consideration, unless and until the dissenting holder effectively withdraws his or her request for, or loses his or her right to, appraisal under the DGCL. Each such dissenting stockholder will be entitled to receive only the payment provided by Section 262 of the DGCL with respect to shares owned by such dissenting stockholder. See “Special Factors — Appraisal Rights” for a description of the procedures that you must follow if you desire to exercise your appraisal rights under Delaware law.

 

The merger agreement contains representations and warranties made only for purposes of the merger agreement. They may have been made for the purposes of allocating contractual risk between the parties to the agreement instead of establishing these matters as facts, and may be subject to standards of materiality agreed upon by the contracting parties that differ from those applicable to investors. The representations and warranties expire at the effective time of the merger. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that Atari delivered to Infogrames in connection with signing the merger agreement. These disclosure schedules contain information that has been included in Atari’s general prior public disclosures, as well as additional nonpublic information. Accordingly, Atari stockholders should not rely on the representations and warranties as characterizations of the actual state of facts, since they were only made as of the date of the merger agreement and are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement, which subsequent information may or may not be fully reflected in Atari’s public disclosures.

 

Atari’s representations and warranties relate to, among other things:

 

 

 

Many of Atari’s representations and warranties are qualified by a “material adverse effect” standard. For purposes of the merger agreement a “material adverse effect” with respect to Atari means any event that individually or together with another event has had or is likely to have a material adverse effect on: (i) the financial condition, assets, liabilities, business or results of operations of Atari and its subsidiaries, taken as a whole; (ii) Atari’s key intellectual property assets; or (iii) the ability of Atari to perform its obligations or to consummate the transactions contemplated by the merger agreement.

 

However, the following will not be taken into account in determining whether there has been or will be a material adverse effect on Atari:

 

 

The representations and warranties made by Infogrames relate to, among other things:

 

 

Under the merger agreement, Atari, Infogrames and Merger Sub have agreed that after April 30, 2008 and prior to the earlier of the termination of the merger agreement or the effective time of the merger:

 

 

Furthermore, Atari may not:

 

 

 

Except as expressly permitted under the merger agreement, Atari has agreed that it will not, and it will not instruct or cause its subsidiaries or representatives to, directly or indirectly:

 

 

Atari must notify Infogrames promptly upon the receipt of (i) a takeover proposal or any written notice stating that a person is considering a takeover proposal or (ii) any request for non-public information relating to Atari or any of its subsidiaries.

 

For the purposes of the merger agreement, a “takeover proposal” means any proposal or offer, other than those contemplated by the merger agreement, relating to:

 

 

Notwithstanding the restrictions described above, the merger agreement provides that, prior to Atari’s stockholder meeting to approve the transaction, Atari and its board may:

 

 

For the purposes of the merger agreement, a “superior proposal” means a takeover proposal involving a merger or consolidation of Atari, the acquisition of all or a majority of Atari common stock or the acquisition of all or

substantially all of Atari’s assets, that the Atari board, after consulting with outside financial and legal advisors, has determined (i) is on terms and conditions more favorable from a financial point of view to Atari’s stockholders than the terms of the merger agreement, (ii) is reasonably capable of being completed on the terms proposed and (iii) for which financing is then committed or reasonably likely to be available; provided that a proposal to provide financing or to refinance Atari’s outstanding indebtedness will not constitute a superior proposal.

 

Prior to the stockholder meeting approving the merger, Atari may withdraw, modify or amend its recommendation in a manner adverse to Infogrames if the board has:

 

 

If the board’s recommendation change is due to a superior proposal, the board must give Infogrames five business days’ written notice of its intention to change its recommendation. At any time Infogrames may propose revisions to the terms of the transaction contemplated by the merger agreement and the board is required to negotiate in good faith with Infogrames regarding any such revisions. In this situation, the board may only make a change of recommendation if the third party’s offer continues to be superior in light of any revisions to the terms of the transaction proposed by Infogrames.

 

The merger agreement requires Atari, as promptly as practicable after the Atari proxy statement and Schedule 13E-3 are cleared by the SEC, to call and hold a special meeting of its stockholders to vote upon the adoption of the merger agreement. Except in certain circumstances described above under “No Solicitation of Takeover Proposals”, Atari is required to use its reasonable best efforts to solicit proxies in favor of the merger agreement from Atari stockholders. Infogrames has agreed that neither it nor any of its subsidiaries will take any action by written consent or otherwise to obtain the requisite company vote other than at the stockholder special meeting called for that purpose. Unless the merger agreement is terminated in accordance with the terms described below under “Termination of the Merger Agreement”, Atari must submit a proposal for the adoption of the merger agreement to its stockholders at a stockholder meeting held for that purpose, whether or not the board withdraws, modifies or amends its recommendation in a manner adverse to Infogrames.

 

Infogrames and Atari will (i) use its reasonable commercial efforts to obtain any consents, approvals or other authorization, and make any filings and notifications required in connection with the transactions contemplated by the merger agreement and (ii) make any other submissions required or deemed appropriate by either party in connection with the transactions contemplated by the merger agreement under:

 

 

Atari and Infogrames will cooperate and consult each other with the making of all such filings and notifications. Atari and Infogrames will promptly inform the other party of its receipt of any communication from any governmental entity regarding any of the transactions contemplated by the merger agreement. If such party receives a request for information from a governmental entity regarding the transactions contemplated by the merger agreement, then such party, after consultation with the other party, will, as soon as reasonably practicable, respond to such governmental entity’s request. Infogrames agrees that it will advise Atari of any agreements it

proposes to enter into with any governmental entity in connection with the transactions contemplated by the merger agreement and will use its reasonable commercial efforts to resolve any objections that may be asserted with respect to the transactions contemplated by the merger agreement under any competition or trade regulation laws.

 

Notwithstanding the foregoing, however, Infogrames is not required to agree to (i) sell, hold, separate, divest, discontinue or limit, any assets, businesses, or interest in any assets or businesses of Infogrames, Atari or their respective affiliates or (ii) any conditions relating to, or changes or restriction in, the operations of any such assets or businesses which, in either case, could reasonably be expected to:

 

 

For purposes of the merger agreement, a “material adverse effect” on Infogrames means any event that individually or together with other events has had a material adverse effect on the business, assets, properties, liabilities, financial condition or results of operations of Infogrames and its subsidiaries, taken on the whole, or on the ability of Infogrames to perform its obligations under the merger agreement or consummate the transactions contemplated by the merger agreement.

 

The parties have agreed that each will use its reasonable commercial efforts to take, or cause to be taken, all actions and to do, or cause to be done, everything necessary, proper or advisable to ensure that the conditions of the merger agreement are satisfied, and to consummate the transactions contemplated by the merger agreement as promptly as practicable. The merger agreement also contains additional agreements among Atari, Infogrames and Merger Sub relating to, among other things:

 

 

 

The respective obligation of each party to complete the merger is subject to the merger agreement being adopted by the requisite Atari stockholder vote.

 

Furthermore, the obligations of each of Infogrames and Merger Sub to complete the merger are subject to the satisfaction or waiver of the following additional conditions:

 

 

Atari’s obligation to complete the merger is subject to the satisfaction or waiver of the following additional conditions:

 

 

 

The merger agreement may be terminated at any time prior to the effective time of the merger by mutual written consent of Infogrames and Atari (through action by, or with approval of, the Special Committee).

 

The merger agreement may be terminated by either Infogrames or Atari (through action by, or with approval of, the Special Committee) at any time prior to the effective time if:

 

 

 

 

The merger agreement may be terminated by Infogrames at any time prior to the effective time if:

 

 

 

The merger agreement may be terminated by Atari (through action by, or approval of, the Special Committee) at any time prior to the effective time if Infogrames breaches any of its representations, warranties, covenants, or agreements contained in the merger agreement, which breach would (i) have a material adverse effect on Infogrames, or (ii) cause Infogrames to fail to materially perform its obligations under the merger agreement, and in either case if such breach is not cured within 20 business days.

 

Termination Fee

 

Atari will pay Infogrames a termination fee of US$450,000 if the agreement is terminated:

 

 

Infogrames has provided Atari a credit facility for the aggregate principal amount of US$20 million. Such loan is secured by substantially all the assets of Atari. For additional information regarding such credit facility, see “Certain Transactions with Directors, Executive Officers and Affiliates”.

 

The following table sets forth selected historical consolidated financial data for Atari and its subsidiaries. The selected historical consolidated financial data as of and for each of the fiscal years ended March 31, 2004 through 2007 have been derived from Atari’s audited consolidated financial statements in Atari’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, which is attached to this proxy statement as Annex D. The selected historical consolidated financial data as of and for the nine months ended December 31, 2007 have been derived from Atari’s unaudited consolidated financial statements in Atari’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2007, which is attached to this proxy statement as Annex E. The historical results of Atari included below are not necessarily indicative of Atari’s future performance. The unaudited selected historical consolidated financial data reflect, in the opinion of management, all adjustments, consisting of normal, recurring accruals, necessary for a fair presentation of Atari’s financial position and results of operations at the end of and for the period presented.

 

The information contained in this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Atari’s consolidated financial statements, including the related notes, appearing in Atari’s Report on Form 10-K for the fiscal year ended March 31, 2007 and Atari’s Report on Form 10-Q for the quarterly period ended December 31, 2007, which are attached to this proxy statement as Annexes D and E , respectively. See “Where You Can Find More Information”.