Expanding Potential for Chaos : Multimedia: The Costa Mesa firm, recently sold to a software maker, will be able to publish its own video games and tap into a larger distribution network.

TIMES STAFF WRITER

As Orange County millionaires go, Allen Adham and Michael Morhaime are mere youngsters. In another circle, the two entrepreneurs are elder statesmen.

Adham, 27, and Morhaime, 26, sold their video game development company, Chaos Studios Inc., for $6.75 million two weeks ago. Chaos--now a subsidiary of Davidson & Associates, a Torrance-based educational software maker--has a crew of 19 "cool nerds" whose average age is 24 1/2 years.

The mind-set at Chaos is just as young. The company is attuned to Generation X, the game-obsessed descendants of the baby boomers. That is how little-known Chaos caught the attention of the bigger company.

"Everyone in our company is really passionate about video games," said Adham, who did not begin taking a salary--or a vacation--until last year. "We are all fanatic game players. We are the target market, and that gives us an advantage in knowing what is going to sell. I watch cartoons Saturday morning . . . because I like them, not just for a job."

It took only three years for college buddies Adham and Morhaime to turn their fanaticism into a multimillion-dollar windfall. Fearful of outgrowing their creativity, they went for the deal because they were promised independence.

The agreement also gives both companies more clout in the fast-changing multimedia industry, where alliances are announced almost every day as movie studios, game publishers and others jockey to build the next creative juggernaut.

"It's a real smart move for Davidson to move from education into entertainment software," said Michael Wallace, an analyst at investment bank UBS Securities in New York. "They bought talent, and the price they paid is a sign of the potential. From the Chaos view, they can do their own projects now and get a much larger company to distribute them."

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Chaos' roots are in Orange County's video game development network, which is much like the network of subcontractors in Southern California that grew up around large defense companies.

Scores of video game publishers known as licensees--among them are Sunsoft Inc. in Cypress, Virgin Interactive Entertainment in Irvine and Interplay Productions Inc., also in Irvine--have emerged in the past five years as leading independent game producers.

Those companies, which produce and sell games for the Sega of America and Nintendo systems, in turn subcontract much of their development work to another tier of players, the cottage industry known as software developers.

Adham broke into the industry a decade ago by starting at the bottom as a programmer working as an independent contractor. He made good money from those summer jobs during his high school and college years.

"Those were the good old days when one or two people could design a game themselves," he said. "Back then it was easy. You just had to have the desire. It was like taking an idea and writing a book. Now it's more like making a movie, requiring seven to eight people with different skills."

On graduating from UCLA in December, 1990, with a computer science degree, Adham received $10,000 from his parents to go to Europe. He used the money instead to start a video game company, Silicon & Synapse--the predecessor of Chaos. Morhaime, who also got seed money from his parents, joined Adham. Another friend, Frank Pearce, completed the founding trio.

"Allen is a great sales guy," Morhaime said of Adham. "I was working at Western Digital designing a little part of a chip, and he did this sales job on me for a year to recruit me."

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In early 1991, they started with contract work for Interplay Productions. Adham and his colleagues did technical work, converting Nintendo games to other formats such as the Commodore Amiga. They made about $250,000 in their first year.

"They're good guys," said Brian Fargo, president of Interplay, which has 150 employees. "I've known Allen for 12 years, even before I started Interplay, and he has always had the right attitude."

The game conversions paid bills and taught Chaos the inner workings of good games. The company began to do art, programming, sound and design. It then began creating games, including "Lost Vikings," sales of which topped 300,000 units for Interplay.

Now Chaos has a staff of 19, most of them artists and programmers, working on 11 projects. Adham himself is president as well as human resources manager, accountant, programmer and executive game producer.

"The biggest challenge for me is relinquishing control," Adham said. "I'm a perfectionist and a workaholic. I get that from my father, who has a doctorate in engineering. I get my street smarts from my mother," a trained entomologist who is now a preschool administrator.

Chaos shows its colors in its Costa Mesa offices. Comic super-heroes and fantasy monsters seem to spring from posters plastering the walls. Beards, blue jeans, T-shirts and long hair are so common that the place looks more like a college campus than a corporation. At lunchtime, the staff plays cards or games.

The company game room features a large-screen, Nintendo-equipped television across from a candy vending machine. There is at least one computer or video game system on every desk. Morhaime has three computers in his office. Spending on toys isn't out of control, however: Adham, upon becoming a millionaire, went out and bought a Nissan Pathfinder instead of a sports car.

Like Adham and Morhaime, every employee does several jobs, so they are constantly challenged to learn new things. The artists, for example, take turns answering the phones.

"We get the whole company to sit down once a week and brainstorm ideas," Adham said, "from a particular game project to the next great platform for the industry."

From such sessions emerge games like "BlackThorne," a brooding action game that combines anachronisms like monsters from medieval fantasy with science fiction weaponry.

Last year, Chaos generated $750,000 in revenue from royalties on games that generated at least $20 million in sales for the publishing companies. As a publisher, Chaos hopes to generate 10 times the revenue it had before.

To get more recognition and access to better game properties, and to generate the much higher revenue associated with game publishing, Chaos sought out a big brother that would make it into a publisher itself. Davidson stood out among half a dozen suitors because it promised to let Chaos be.

"We want to be a publisher with multiple development studios that do the creative work, sort of like a movie studio," said Robert Davidson, chief executive of Davidson & Associates.

Under Davidson, Chaos will add perhaps a dozen employees this year as part of an effort to launch more complicated, visually stunning games for the systems that will be coming out in the next year or so.

"We are very meticulous about whom we hire," Adham said. "You don't have to be young. It's the state of mind. We discriminate only on the basis of video game habits."

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