Ex-Officials Blamed for Federated Woes : In Court, Atari Chairman Blasts Ousted Executives’ Decisions

Atari Corp. Chairman Jack Tramiel, embroiled in a bitter dispute over his firm’s 1987 buyout of the Federated Group retail chain, defended in court Tuesday his refusal to pay nearly $600,000 in severance and benefits to two executives ousted from Federated.

Testifying in a civil trial in Orange County Superior Court in Santa Ana, Tramiel and another top Atari official criticized some key business decisions by former Federated President Keith Powell of Laguna Hills and Senior Vice President Merrill Lyons of Los Angeles.

The Atari officials alleged that Powell and Lyons’ actions, including the transfer of an $800,000 condominium to Federated commercial spokesman Shadoe Stevens at favorable terms, contributed to the electronic chain’s continuing financial woes and justified the cutoff of severance pacts with the two executives.

Cash Infusion

But Powell and Lyons, suing Atari to win their benefits, counter that their decisions were legitimate and that Atari, hurt by continued losses at Federated, is grasping for “excuses” to get out of its financial commitments.

The severance dispute is part of a broader legal battle over Atari’s $67.3-million buyout of the Federated in 1987, a deal that turned sour.

Sunnyvale-based Atari, stymied in recent years in attempts to get retailers to sell its home computers and video games, viewed Federated and its dozens of home entertainment electronics stores in California, Texas, Arizona and elsewhere as a solid outlet for its products.

For City of Commerce-based Federated, the Atari acquisition offered a badly needed infusion of capital after the electronics chain saw its market share slip under stiff competition from rivals such as Circuit City. But Federated has continued to lose money, $124 million in 1988 alone.

In response, Atari has cut the number of Federated stores to 40 from more than 65 a few years ago, put the firm up for sale, and sued the company’s former management and advisers in federal court in Northern California in a still-pending action.

Atari maintains that Federated’s former management intentionally inflated the firm’s value by more than $43 million to push through the sale. Had Atari known the “true financial condition” of Federated, company officials assert they would never have offered as much as they did for the retail chain.

In court Tuesday, Atari officials sought to show that they were not aware at the time of the Federated buyout of several of the firm’s outstanding financial commitments.

Chief among these was the transfer of a company-held condominium in West Los Angeles, valued at more than $800,000, to Shadoe Stevens, a radio celebrity who has represented Federated in its advertisements for $15,000 a month.

Former Federated officials Powell and Lyons say that, in lieu of a raise sought by Stevens, they worked out a deal prior to the Atari acquisition to allow Stevens to live in the condominium and buy it from Federated at cost. No contract was ever signed, but the option was exercised following the Atari buyout.

Atari Vice President Steven M. Kawalik said in court Tuesday that Powell, through his approval of this arrangement, effectively “misappropriated” money that rightfully belonged to Atari.

“I believe what Mr. Powell did was wrong, and I believe it had the effect of taking $300,000 (in potential profits from the condominium sale) from the assets of the company,” Kawalik said in explaining his decision to cut off severance pay to Powell.

But he also said he has no evidence that Powell benefited personally from the deal.

Made Payment

Also at issue is a $1-million check to the investment firm of Goldman, Sachs & Co. that Lyons co-signed for its role in the Atari sale. Lyons said that in delivering the check to the investment firm the day after the Atari deal was closed, he was honoring a pre-existing business agreement.

But Tramiel testified that officials at Atari, which had had poor relations with Goldman Sachs, were debating whether to pay the $1-million remuneration and were later surprised to learn that Lyons had already delivered the check.

“We had given Mr. Lyons specific instructions not to pay any checks without advising the Atari people,” Tramiel said.

It was Lyons’ decision to go ahead with that payment that contributed to his termination from Federated in January, 1988, and the cutoff of his severance pay, Tramiel said.

Powell is seeking a total of about $294,000 in severance pay and interest from Atari, and Lyons, $193,000. They also are seeking terminated life insurance benefits that total about $100,000, plus punitive damages against Atari, their attorney said.

The trial, being heard without a jury before Superior Court Judge Jack K. Mandel, is expected to continue through the week.