Acclaim Entertainment Inc.

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Acclaim Entertainment Inc.

1 Acclaim Plaza
Glen Cove, New York 11542
U.S.A.
(516) 656-5000
Fax: (516) 656-2040
Web site: http://www.acclaimnation.com

Public Company
Incorporated: 1986
Stock Exchanges: NASDAQ
Ticker Symbol: AKLM
Employees: 680
Sales: $165.4 million (1997)
SICs: 7372 Prepackaged Software

Acclaim Entertainment Inc. is a worldwide independent manufacturer of entertainment software for PCs, and video game cartridges for Nintendo, SEGA, and Sony systems, targeted mostly at teens. Its Acclaim Distribution Company (ADI) subsidiary sells and distributes various entertainment software publishers’ products. Acclaim Comics publishes comic books under numerous imprints. Acclaim also operates motion capture studios, creating movie special effects and, until 1998, developed coin-operated arcade video games.

As part of its development and marketing strategy, Acclaim maintains relationships with Fox, The Major League Baseball Players Association, The National Basketball Association, The National Football League, Warner Bros., and The World Wrestling Federation, among others.

Acclaim went from a shoestring budget and one-room office in Oyster Bay, to a two-story brick structure, millions in net income, and offices in France, Germany, Japan, Spain, and the United Kingdom. Some of Acclaim’s top gaming competitors include The 3DO Company, Activision Inc., Broderbund Software Company, Electronic Arts Inc., The Learning Company, Macromedia Inc., MicroProse Inc., Sierra On-Line, Software Toolworks, and Toy Headquarters; allies include Nintendo Company Ltd. and Sega Enterprises Ltd. Some of Acclaim’s competitors in comics include DC, Marvel, Dark Horse, and Image.

Getting Started, 1986-92

Founded in 1986 by three former Activision executives, CEO/Co-chairman Gregory Fischbach, Executive Vice-President/Co-Chairman James Scoroposki, and President/COO Robert Holmes, Acclaim Entertainment Inc. was the first independent company in the United States to publish software for the Nintendo Entertainment System (NES), launching several of the best-selling products in the entertainment software industry’s history, debuting with Star Voyager in August 1987. Acclaim went public via a reverse merger with Gamma Capital Corp. that year.

Acclaim was incorporated in Colorado in June 1988 and, the following month, the videogame market was booming again. Acclaim made its mark selling games like Rambo, Wizards & Warriors, and WrestleMania for Nintendo.

Acclaim was reincorporated in Delaware in May 1989. In October, Acclaim established a Tokyo-based subsidiary—Acclaim Japan Ltd.—to distribute products in Asia and Europe. Revenue for 1989 reached $109.3 million, with net income of $12.3 million.

In the late 1980s, a barrier faced dedicated home video systems because of the proliferation of home computers like Amiga, Apple, Atari, and Commodore, which had greater market penetration and could play games from floppy disks. Early software titles for the NES and Sega 8-bit “Master System” were not sufficiently advanced over PC games for consumers to buy new hardware. From 1990 to 1992, that changed. Cost reductions in ROM chips for cartridges led to vast improvements in game graphics for NES and Master System, Sega’s Genesis/Megadrive system was successful, Nintendo’s Super NES (SNES) grew faster than 8-bit systems, and GameBoy—Nintendo’s portable video game player, debuting in 1989—had high market penetration.

From 1987 to 1991, most of Acclaim’s revenue came from video game cartridge sales, like Double Dragon II: The Revenge —licensed for use with the 8-bit NES—and Kwirk, Acclaim’s first GameBoy product.

In April 1990, Acclaim acquired LJN Toys Ltd. from MCA Inc. for $13.75 million in cash and stock. The acquisition of the toy manufacturing company increased the number of Acclaim’s Nintendo “slots.” (Nintendo’s restricting the number of titles its licensees could introduce annually made acquiring slots from other companies the only way licensees could accelerate their game-release rate.) In September, Acclaim sold the Entertech Division of LJN for $1.7 million. Acclaim also entered GameBoy’s compact video system software market with three titles under the Acclaim/LJN labels, and introduced new games for the NES, a line of Super-Play hand-held electronic games, and a dual wireless-remote controller system.

In June, Acclaim created the Acclaim Entertainment Canada Ltd. subsidiary to distribute products in Mexico, and a subsidiary in Europe to support its increased growth overseas.

In October, Acclaim, inspired by its own Masters of the Game newsletter, entered an exclusive marketing agreement with Sears to promote products through Sears’ Wish Book catalog, reaching over 12 million consumers nationwide, with a Video Game Magic insert featuring information, playing hints, and tips on Acclaim/LJN products, marking Acclaim’s largest direct-mail venture, and a first for Sears with a Nintendo licensee.

From 1986 to 1990, NES hardware sales grew, triggering concurrent demand for game cartridges. By Christmas 1990, retailers were swamped with hundreds of NES titles, and Acclaim posted revenues of $140.7 million, with net income of $6.9 million.

During 1991, 8-bit NES sales fell, along with demand for cartridges. In February, Acclaim released Bart Versus the Space Mutants —based on the popular animated TV show “The Simpsons”—and WWF Wrestlemania Challenge. Nintendo introduced its 16-bit SNES in late August, including a Super MarioWorld cartridge and two controllers, and Sega’s Genesis, introduced in 1989, with a huge library of titles, was gaining market share rapidly.

In December, Acclaim agreed to distribute software for Sega’s 16-bit Genesis and GameGear units. Retail sales reached $142.2 million. But, as obsolete inventory built up, Acclaim’s first SNES title—Populous —sold poorly, costs rose, and product returns cut into gross profits, Acclaim posted a six-figure loss. The company to catch was Electronic Arts, considered the best developer/marketer of interactive entertainment software.

In January 1992, Acclaim acquired Mirrorsoft Ltd., including U.S. subsidiary Arena Entertainment Inc., from Robert Maxwell’s empire, for $231,250 and a waiver of $1 million in debt. At The Consumer Electronics Show (CES) that month, and again in June, Nintendo and Sega slashed prices on hardware, making the machines more accessible to recession battered consumers. By the end of 1992, video hardware sales were strong, demand for games increased, and Acclaim had hot arcade titles like Double Dragon, NARC, and Smash TV.

In March, Acclaim became the first American company to publish 16-bit Nintendo Super Famicom software in Japan when it introduced WWF Super Wrestlemania. Acclaim also created a subsidiary called Flying Edge, debuting at CES with Genesis’ 16-bit titles Krusty’s Fun House (based on The Simpsons), Ferrari Grand Prix, and arcade-successful Arch Rivals.

In November, Acclaim reached agreements with Nintendo of America, Sony Corporation, and Sega of Japan to publish CD-ROM software for CD-ROM hardware systems, and signed an exclusive agreement with Ardent Studios and Biomechanics Corporation of America, experts in motion study and biomechanical, medical, and sports analysis for motion capture techniques leading to development of synthetic actors as models for videogame characters.

Company Perspectives

Acclaim Entertainment Inc. is a developer, publisher and mass marketer of interactive entertainment software for use with dedicated interactive entertainment hardware platforms and multimedia personal computer (PC) systems. The company operates its own software design studios and a motion capture studio, and markets and distributes its software in the major territories throughout the world. The company’s operating strategy is to develop software for the entertainment platforms and multimedia PCs that dominate the interactive entertainment market at a given time or which the company perceives as having the potential for achieving mass market acceptance. The company’s strategy is to emphasize sports simulation and arcade-style titles for entertainment platforms, and fantasy role-playing, adventure, and sports simulation titles for multimedia PCs. The company intends to continue to support its existing key brands with the introduction of new titles supporting those brands and to develop one or more additional key brands each year based on its original and licensed properties, which may then be featured on an annual basis in successive titles.

That year, Acclaim took a $3.1 million write-off for its remaining investment in Video Power, a 30-minute syndicated television show featuring characters from Acclaim games, but managed to post revenue of nearly $250 million, with net income of $17.1 million. By year’s end, Acclaim was developing software titles like The Simpsons: Bart’s Nightmare, George Foreman’s Knockout Boxing, and Trog. LJN released Roger Clemens’s MVP Baseball, NBA Super All-Star Challenge, The Amazing Spiderman & Uncanny X-Men: Arcade’s Revenge, Terminator 2: Judgment Day, Aliens 3, Bill and Ted’s Excellent Adventure, Wolverine, Thrilla’s Surfari, The Amazing SpiderMan, The Amazing Spider-Man 2, Crash Dummies, WWF Superstars, NBA All-Star Challenge 2, and Beetlejuice, for nearly a dozen hardware platforms, compared to three in 1991.

Controversy Brings Revenue, 1993-94

Until May 1992 virtually all Acclaim’s revenue was derived from Nintendo’s platform. Beginning in 1993, Acclaim intensified efforts to develop entertainment software for Sega’s platform. In June, concurrent with Nintendo’s purchasing major European distributor Bandai, Acclaim established ADI to service retailers, including Toys-R-Us, Wal-Mart, Kmart, Sears, Target, Electronic Boutique, Kay-Bee Toys, and Babbage’s/Software Etc. Additionally, Acclaim became one of the first entertainment software companies to establish direct distribution in Europe, creating sales offices in the United Kingdom, France, Germany, the Benelux countries, plus Canada and Japan, and initiated distribution relationships with Phillips Electronics and Sony’s Columbia TriStar Home Video Distribution.

In July, Acclaim received the rights to develop video game software titles to the first 15 films produced by director James Cameron’s film company Lightstorm Entertainment, beginning with Arnold Schwarzenegger’s True Lies. Acclaim also signed an agreement with video game software developer Hi Tech Expressions allowing the latter to distribute PC-based versions of Mortal Kombat, Smash TV, WWF Super WrestleMania, and others throughout North America.

By August, Acclaim had two of the top-selling arcade titles: Mortal Kombat —which competed with Capcom’s Street Fighter II —and NBA Jam (hitting number one and number two, respectively). Mortal Kombat was launched on “Mortal Monday” (September 13) following a $10 million advertising blitz—more than any independent producer had spent marketing a game—selling two million units across the four major software formats for Sega and Nintendo (something no other game maker had done) in the first few weeks, and finishing the year as the top-selling video game. Additional titles released in 1993 included WWF Royal Rumble and Championship Soccer.

Also that month, Acclaim signed with London-based Probe Entertainment Ltd.—a manufacturer of games, including Lemmings, SimCity, and Dracula —to jointly develop several hardware and software platforms.

In September, Mortal Kombat created controversy for its violence and explicit graphics (including ripping out opponents’ hearts or spines, with gushing blood). Although some stores refused to carry it, the game did not slump in the retail market, selling over six million copies. The controversy reached the U.S. Congress, which exerted pressure on the video and computer game industries, warning that a mandatory federal ratings system was forthcoming unless they created an acceptable system. The video game industry, dominated by Nintendo and Sega, responded by forming The Interactive Digital Software Association (IDSA) which, in June 1994, reluctantly organized a ratings system before the holidays, so parents would have a superficial guide to game content, like the familiar G/PG-13/R/ NC-17/X ratings for movies. But the effort divided video game and computer game developers. The Software Publishers Association (SPA)—primary representative of computer software developers—resisted Congressional pressure to join IDSA because of the $500 required by developers for each game rated (by a panel of parents and educators), wanting a self-administered system where developers would review predetermined ratings criteria and make its own decisions on ratings, something The Senate Government Affairs Subcommittee on Regulation and Government Information, led by Senators Herb Kohl and Joseph Lieberman, found unacceptable.

The debate raged into 1994, with SPA forming another group, The Recreational Software Advisory Council (RSAC), which pledged to create an independent board providing ratings. Then, confusing matters more, Sega adopted a self-administered rating system in late 1993, with three symbols: “GA” (general audiences), “MA-13” (mature audiences), and “MA-17” (adults only) before switching to IDSA ratings in 1994. 3DO also released a self-administered system early in 1994, with four ratings: “E” (everyone), “12” (suggesting guidance for players under 12), “17” (suggesting guidance for those under 17), and “AO” (adults only).

Also in 1993, Acclaim signed through 1995 with WMS Industries under which it had first right of refusal to convert any of WMS’s arcade games to the Sega or Nintendo game formats for three years after their release. Acclaim also released Terminator 2: The Arcade Game with an infrared game controller under its Arena label, and signed development agreements with content provider Park Place Entertainment, as well as distribution agreements with Virgin Games. By year’s end, in an industry estimated at nearly $4 billion, sales for Acclaim jumped to $327.1 million, with net income of $28.2 million.

By early 1994, 16-bit software sales slowed, and 8-bit software sales continued to slide as consumers lost interest in low-graphics capability, turning their eyes toward the new technology of CD-ROM. Acclaim entered that technology with CD-ROM editions of Mortal Kombat II (arcade game of the year), Corpse Killer, Slam City with Scottie Pippen, Kids on Site, What’s My Story?, Supreme Warrior, World Federation Raw (Acclaim’s first 24-Meg video game), and two games based on Itchy and Scratchy, cartoon characters from “The Simpsons.”

In April, Sega joined with Acclaim to develop games using Acclaim’s motion capture technology and Sega’s proprietary Titan architecture video game system technology, based on Hitachi RISC chips similar to those at the heart of the Saturn and Super 32X advanced systems, which allowed easy transfer of arcade versions to home formats. Acclaim was the first U.S. publisher to take advantage of the Titan system. In May, Acclaim entered the coin-operated game business with Batman Forever, based on the hit movie.

In June, consolidations in the computer software and service industries continued, with Computer Associates International Inc. buying ASK Group Inc. and Novell Inc. acquiring WordPerfect Corp. and part of Borland International Inc. Acclaim followed suit in July, buying Voyager Communications Inc. (renamed Acclaim Comics Inc.) for $65 million in cash and stock. Voyager, founded in 1990, possibly the third largest comic book publisher in the United States with 16 monthly series under its “Valiant” imprint; plus proprietary comics for KFC, Kraft Foods, MCA, Metropolitan Life, Nintendo, and others; also licensed properties for trading cards and other merchandise. In September, Acclaim acquired a minority interest in Digital Pictures Inc.—a publisher and developer of CD-based software—for $4 million, and Digital became the first independent label distributed worldwide by ADI.

In July, Acclaim extended its agreement with Marvel Comics, giving Acclaim exclusive worldwide rights to sell and distribute products under the Marvel Software brand. In September, Red City, a short “film” directed by Chelsea Pictures/ Redwing Film Company’s David Anderson, showed in movie theaters and on television to spot Acclaim’s game Maximum Carnage, based on the villainous Marvel character. In October, Tele-Communications Inc. (TCI) invested $80 million for 10 percent of Acclaim, and formed a joint-venture company to develop and acquire entertainment and gaming software. TCI’s acquisition gave the telecommunications giant the ability to send interactive video games via its cable TV infrastructure.

In December, Acclaim introduced its new product development facilities—including blue screen studio, motion capture studio, and post-production facilities—for developing and publishing technologically advanced interactive software for 16-(Genesis/SNES), 32-, and 64-bit entertainment systems (32X/ Saturn/Ultra 64/PlayStation) and PCs. The blue screen studio was created to film character close-ups for transport into video games in the same process used in movie and television production. The motion capture studio—the first dedicated solely to digital motion capture—was created for Acclaim’s software development and for leasing to special effects companies and movie studios (i.e., Warner, who used it for Batman Forever and Forsaken). The motion capture process involves filming the motion of an individual wearing a special suit containing motion sensors; digitizing the video data into computer-legible format; processing the data using Acclaim’s proprietary software, which performs algorithmic computations needed to transpose the data into a skeletal structure; rendering the skeletal structure with such third-party software as Wavefront, Alias, or Softimage; and placing fully rendered 3D characters into digital background sets.

Also that year, Acclaim purchased a 70,000-square-foot corporate headquarters building in Glen Cove, New York. Total revenue and net income both soared to a record $480.8 million and $45.1 million, respectively.

Regrouping, 1995-Date

Acclaim continued acquiring in January 1995, purchasing Iguana Entertainment Inc. for $7.4 million; receiving most all of struggling Lazer-Tron Corporation in a stock swap in August, changing the name to Acclaim Redemption Games; and, in October, acquiring both Probe and Sculptured Software Inc.—leading independent entertainment software developers—bringing 250 programmers, musicians, graphic artists, and engineers to Acclaim.

In February, Acclaim was the first company known to use the closed-captioning feature required in all 13 +“ TV sets for promotional purposes, embedding special player codes for NBA Jam: Tournament Edition in commercials.

By July, Acclaim had distribution deals with Sunsoft and Interplay, and joined WB, DC Comics, and America Online (AOL) in an interactive promotion offering gamers a free sneak preview of Batman Forever (featuring full-motion video of the making of the game, movie trailers, art and sound bites, and AOL’s startup kit). Major promotional tie-ins included specially produced holographic trading cards featuring game tips in packages of Fleer’s Ultra ’95 Batman Forever trading cards, and a special video game version featured in the final round of Blockbuster Video’s World Championship.

In August, attempting to boost its affiliated label program, ADI agreed with Sound Source Interactive (SSI), a leading developer of PC-based edutainment and entertainment products, to resell SSI’s titles. In September, Acclaim’s first PlayStation titles, NBA Jam: Tournament Edition (successor to the original game that sold more than three million cartridges) and Street Fighter: The Movie, sold out in retail stores in about a month. In October, Acclaim began jointly publishing, with WB Interactive Entertainment, software based on several WB films; and agreed with Taito Ltd. that Acclaim would received first option on Taito products for all leading home interactive entertainment systems for the Western hemisphere. The first Ac claim-Taito titles—Jupiter Strike and Galactic Attack —debuted in December.

By the end of 1995, sales on Acclaim’s top titles began sagging, but revenues reached an all-time record high of $566.7 million, and netted $44.8 million, a mark from which it would fall precipitously.

In 1996, the dedicated platform industry underwent a hardware transition from 16-bit cartridge to 32- and 64-bit CD-ROM, and Acclaim was hit hard, with revenues dropping nearly 75 percent to $161.9 million, leading to a massive loss of $221.4 million. Nonetheless, the company persevered with a flurry of new introductions and joint ventures and began regaining lost ground.

In February, ADI entered distribution agreements with Take 2 Interactive—releasing Ripper (starring Christopher Walken), Star Crusader, and Hell: A Cyberpunk Thriller —and Domark. In March, Acclaim joined Tiger Electronics and Sega as licensees for live-action/animated film Space Jam, starring Michael Jordan and WB’s Looney Tunes characters. In July, Acclaim released D, a very graphic 3-D blood-and-guts mystery/action-adventure game. Other 1996 releases included Rise II: Resurrection (soundtrack by Queen guitarist Brian May), College Slam, Cutthroat Island (from the Geena Davis film), WWF Wrestlemania, NFL Quarterback Club ’96, Venom/Spiderman: Separation Anxiety, and Frank Thomas Big Hurt Baseball.

Acclaim entered the book business early in 1997 by reintroducing the “Classics Illustrated” line of comics, including Shakespeare, Dickens, Twain, and Poe. The company also jumped on the football bandwagon with NFL Quarterback Club ’97, joining Sierra’s Front Page Sports Football Pro ’97 and Electronic Arts’ Madden ’97 and, in March, unloaded most of Lazer-Tron for $6,000.

In April, Acclaim entered the 6- to 11-year-old children’s book market by creating Acclaim Young Readers, agreeing with Disney, Fox Kids Network, and Saban Entertainment to develop “visual storybooks” based on their characters, with distribution through Penguin Books, including Hercules, “Disney’s Enchanting Stories” (featuring Beauty and the Beast and 101 Dalmatians), “Disney’s Action Club” (including Toy Story and The Lion King), “Fox Funhouse” (featuring The Tick and Life with Louie), and “Saban Powerhouse” (with Power Rangers and Masked Rider).

In May, Acclaim released Magic: The Gathering —Battlemage, based on Wizards of the Coast’s staggeringly successful card game, and July saw The Crow: City of Angels. Also early that year, Acclaim released Turok: Dinosaur Hunter (the top-selling third-party N64 title), NFL Quarterback Club ’98 (featuring veteran sports announcer Marv Albert, hired prior to his guilty plea in his highly publicized sex case), and Extreme-G. Other 1997 products included Constructor and NHL Breakaway Hockey ’98, and Acclaim Publishing released its first strategy guide, Extreme-G Official Game Secrets.

N64 hardware sales grew to eight to ten million worldwide in 1997, with PlayStation reaching another eight to nine million consumers. Key titles released for Christmas 1997 included Quarterback Club ’99 and NHL Hockey ’99. Revenue rebounded slightly to $165.4 million, but net losses, at $97 million, were still painful.

Early in 1998, Acclaim Coin-Operated Entertainment introduced the Magic: The Gathering video game but, by March, Acclaim had closed the division, reallocating its resources to Acclaim Studios, and focusing on core competencies of developing, publishing, and marketing home entertainment software. Other early 1998 releases included Riven, Batman and Robin, Bust-A-Move, Extreme G2, Iron & Blood, Major League Baseball, NBA Jam ’99, Recking Balls, Shadowman, WWF Warzone, and X-Men COTA.

In March, TCI divested its 4.3 million shares of Acclaim for $19 million, months before AT&T purchased TCI. In June, Acclaim landed two nominations in the Post-E3 Show Awards with Turok 2 (Best Video Game) and All-Star Baseball ’99 (Best Sports Game), and Supercross ’98 was displayed, with Jeremy McGrath making a guest appearance to promote the release. Although profitability had become a cause for concern, Acclaim appeared firmly on the comeback trail, posting revenues of $315 million by third quarter’s end, and heading for renewed success.

Principal Subsidiaries

ACA Holdings Inc.; Acclaim Cable Holdings Inc.; Acclaim Character Animation LP; Acclaim Coin-Operated Entertainment Inc.; Acclaim Comics Inc.; Acclaim Distribution Inc.; Acclaim Entertainment Inc.; Acclaim Corporate Center I Inc.; Acclaim Entertainment Canada Ltd.; Acclaim Entertainment Espana SA (Spain); Acclaim Entertainment GmbH (Germany); Acclaim Entertainment Ltd.; Acclaim Entertainment SA (France); Acclaim Interactive Software Division; Acclaim Japan Ltd.; Acclaim Redemption Games Inc.; ACTC LP; Iguana Entertainment Inc.; Iguana Entertainment Ltd.; Lazer-Tron Limited; LJN Toys Ltd.; Oyster Bay Warehouse Corp.; Probe Entertainment Limited; Sculptured Software Inc.