Ailing Unit Blamed for $85-Million Loss : Atari Puts Federated on the Block

Atari Corp., the video game and computer maker, said Thursday that it hopes to sell its faltering Federated Group consumer electronics retailing unit, possibly through a leveraged buyout arranged by a group of Atari employees.

The announcement came as the Sunnyvale, Calif., company disclosed that it lost nearly $85 million last year because of the continuing poor performance of the ailing Federated unit, a 91-store retailer in California, Texas and Arizona that Atari purchased less than two years ago for $67 million.

Despite the losses, news of a possible Federated sale buoyed investors, who bid Atari stock up 75 cents a share to close at $6.50 in active trading on the American Stock Exchange.

Atari insiders said a leveraged buyout might be led by Atari’s chief financial officer, Gregory Pratt, a 40-year-old accountant and close confidant of Atari Chairman Jack Tramiel. Pratt, who has been with Atari since 1984, declined to comment on the matter, saying only that “it would be inappropriate at this time.”

However, Pratt, who has been overseeing Federated operations since last November, said Federated “can be a viable business with the proper businessmen” at the helm.

Needs Hot Products

Analysts say Federated is the victim of several problems: its own poor marketing efforts and limited product selection; aggressive price-cutting competition from retailers such as Circuit City and Adray’s, and a continuing absence of hot new electronic gadgets to lure consumers into the stores.

“Retailers live and die on (hot electronic) products. Right now . . . there’s nothing,” said Art B. Levis, editor at large of Consumer Electronics Monthly, a trade publication based in New York.

According to Pratt, Atari’s problems with Federated even go beyond the currently dismal market. “Just because you sell to retailers doesn’t mean you understand retail,” he said. “And there’s no question that Atari didn’t understand retail.”

At the time his company purchased Federated in August, 1987, Tramiel said the deal was part of his overall strategy of building an international electronics company that would handle everything from computer chips to the finished goods themselves. But even as the deal was signed, the City of Commerce-based retailer was losing money because of the stiff competition offered by the Circuit City chain.

Beyond its retail woes, analysts said Thursday that Atari’s personal computer operations suffered from the serious shortage of computer memory chips throughout 1988 that caused prices for the product to skyrocket. Rather than increasing its computer prices to offset the escalating chip costs, analysts said Atari chose to accept lower profit margins.

However, Atari said Thursday that the worst appears to be over. “Looking ahead, there are indications of an improving environment,” the company said in a prepared statement. “We expect profit margin improvements . . . (and) if anticipated demand for our products grows and our new products meet with success in the marketplace, 1989 should be a good year.”

Loss in Quarter

Clearly, 1988 was not. In the final quarter, usually the hottest selling period for all retailers, Federated stores generated sales of just $65 million, half the level of the previous year and just 25% of the unit’s full-year sales of $253 million. The unit lost $106 million in the final three months of 1988, and it lost $124 million for the full year.

For the entire company, which includes Atari’s computer and video game manufacturing operations as well as Federated, the fourth-quarter loss was $97 million, contrasted with a profit of nearly $18 million the year before. Revenue for the period was $152.6 million, up just 4% from the $146.4 million recorded in the prior year.

For the full year, the entire corporation lost nearly $85 million, contrasted with a profit of $57 million in 1987. Annual revenue was $452 million, up 25% from the $362.6 million recorded the year before. Included in the full-year loss, the company said, was $100 million in writeoffs of Federated merchandise and operations, as well as reserves against future losses by the retailing unit.

Atari said Thursday that for accounting purposes it began treating the Federated Group as a “discontinued operation” on Jan. 1.

Last August, Atari sued Wilfred Schwartz, the founder and former chief executive of Federated, and several of the retailer’s financial advisers for overstating the company’s assets by $43 million in the appraisals conducted just before the sale. The suit, which is pending in U.S. District Court in San Jose, alleged that Atari would not have agreed to the deal had it known the retailer’s true financial condition.