Atari Nears Game Over

The company's cash reserves dwindle to $2.5 million.
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Updated from 5:00 p.m. EST

Atari's

(ATAR)

continued existence in its current form may be further in doubt after the company's second-quarter report on Thursday.

The video-game software producer, which is majority owned by France-based

Infogrames

, reported a swelling loss on a 77% drop in sales. But perhaps more importantly, the company said its cash reserves had fallen to just $2.5 million, representing a fraction of the loss just reported, its accounts payable and total current liabilities.

The drop in cash -- Atari had $5.8 million at the end of the last quarter -- was related to a buildup in inventory for the current, holiday quarter, said CFO Diane Baker on a conference call. Baker noted that the company has dipped into a short-term credit line by about $11 million as a crutch to get through the holiday season. But Atari expects to repay that amount by early January and to not have to dip into it again until midsummer, she said.

On the call, CEO Bruno Bonnell argued that they had already brought down the company's cost structure through a restructuring earlier this year in which the it closed some studios and sold other assets. Atari should see the benefit of those changes as sales pick up, he said.

Meanwhile, Infogrames plans to continue to back Atari's turnaround efforts, said Bonnell, who also serves as the chairman and CEO of the French parent company.

"Infogrames is dedicated to supporting its main asset," Bonnell said on the call. "It feels strongly that it is working in full cooperation with Atari. Everything is being done in total harmony for the benefit of the entire shareholder

base."

Atari's optimism about its prospects is related to its hopes for the second half of its fiscal year, company officials said. The company expects to post substantially better results in the second half as it releases a number of new games including those based on its

Dragonball Z

,

Driver

and

The Matrix

franchises.

Noting the company's projected lineup of game releases, Bonnell said that "Atari is poised for a stronger second half of fiscal 2006."

But it remains to be seen how those titles will fare in an environment that Bonell acknowledged was "challenging." The last iteration of

Driver

, for instance, received poor reviews and posted disappointing sales.

"We are looking at a current retail environment as challenging, and crowded with a lot of releases," he said, predicting that the company's rivals will increase their marketing and advertising to boost sales. And with Atari already low on cash, it may find it difficult to compete for consumers' attention.

But shareholders had better hope the company finds a way. In its most recent quarter, Atari lost $25.2 million, or 20 cents a share, on $38.4 million in sales. That was far off the year-ago performance, when the company lost $16.9 million, or 14 cents a share, on $68 million in sales.

Excluding restructuring charges and losses from discontinued operations, Atari would have lost $22.3 million, or 18 cents a share.

Despite the poor results, the company's loss was in line with, and its revenue above, analysts' expectations. On average, the three analysts polled by Thomson First Call were expecting the company to lose 18 cents a share in the quarter on sales of $30.5 million.

Atari blamed its performance in part on a drop in the number of titles it released in the first half of its fiscal year compared with the same period last year.

The company did not immediately give an outlook for coming periods. The three Wall Street analysts had predicted the company would earn 19 cents a share in the third quarter on $158.4 million in sales, but post a 6-cent-a-share loss in the fourth quarter on $61.6 million in sales -- and a full-year loss of 29-cents a share on $274.7 million in sales.

But to get that far out, the company could need a new line of cash -- or at least some continued understanding from HSBC, who has provided a line of credit to the company, not to mention from Infogrames. At the end of the quarter, it had $34.7 million in accounts payable and nearly $70 million in current liabilities. Although the company had $74.5 million in current assets, some $34.1 million of that was tied up in inventory and another $16 million was in the form of accounts receivable.

Last quarter, Atari

acknowledged that it had failed to meet financial targets required of it by HSBC to continue to tap into its credit line. However, the company was able to get a waiver from the bank and to negotiate lower targets for the rest of this fiscal year. The company has not specified what those targets are, but as long as it continues to meet them, it should be able to tap into a $50 million line of credit with the bank.

On the call, Baker pointedly noted that Atari met the new targets in the second quarter and did not have to ask for another waiver of the terms of the agreement.

In recent after-hours trading, Atari's stock was unchanged at $1.28. The company's shares closed regular trading up a penny.