Game Over for Acclaim?

Shares of video game maker Acclaim Entertainment (Nasdaq: AKLM) are down 25% to $0.25 each this afternoon after the company reported earnings for the fourth quarter and fiscal year ended March 31. The real item of interest, however, wasn't yet another shoddy earnings report, but the sticky situation surrounding the company's finances.

The series of actions is a little complicated. But basically, after a waiver and amendment agreement, and a subsequent extension, Acclaim must pay down its debt owed to GMAC Commercial Finance by Aug. 4. Unable to do so with the paltry $1.15 million in cash it had as of March 31, Acclaim entered a letter of intent on May 4 with a different lender for a new $30 million credit facility, with which it would be able to repay GMAC.

However, that deal has not yet been completed. And without such a deal, Acclaim would be forced into bankruptcy, or worse, giving up the game altogether.

Moreover, Acclaim revealed that it is already in default on the $11.9 million in 16% convertible notes it sold just last fall. Sometime after March 31, $5.5 million of those had been converted into shares, but get this: Due to a delay in registering those shares, Acclaim owes interest on those notes, which of course it cannot pay without the new credit facility.

In its release, the company sounded confident that it would obtain a waiver on those defaults on its convertible notes. But then the question becomes this: If Acclaim is saved from bankruptcy in this round, will it even matter in the long run?

On the plus side, costs are down. For the full year, Acclaim's management managed to drop cost of revenue by 40% and operating expenses by 30%. Of course, that doesn't mean much when revenues for the year similarly declined 32% to $142.7 million.

And it's hard to see things getting much better unless Acclaim hits something really soon.

Back in April, we discussed how some onlookers viewed Alias -- a spy game based on the hit TV show on Disney's (NYSE: DIS) ABC -- as the big hit that would save Acclaim. But that game hasn't blown anybody away. And earlier, we had also taken a look at upcoming street racer Juiced as a potential blockbuster. However, upon further review, the odds seem slimmer with bigger, proven competition from Electronic Arts' (Nasdaq: ERTS) Need For Speed Underground 2 and Take-Two's (Nasdaq: TTWO) next Midnight Club coming into play.

And unlike last year, this year's holiday season is full of star-studded must-have sequels -- including Sony's (NYSE: SNE) Gran Turismo 4, Konami's (NYSE: KNM) Metal Gear Solid, EA's Madden, and Take-Two's next Grand Theft Auto, not to mention another Tony Hawk game from Activision (Nasdaq: ATVI) -- that make the outlook that much bleaker for Acclaim.

So even if Acclaim does make it past Aug. 4, it desperately needs to make a hit out of Juiced this fall, or surprise with underdogs like The Bard's Tale or The Red Star. Because if it doesn't, the spring 2005 lineup the company has projected in its earnings release will be of no consequence.

Two of Acclaim's competitors, Electronic Arts and Activision, are Motley Fool Stock Advisor recommendations. To learn more, sign up and get a six-month, money-back guarantee.

Fool contributor Jeff Hwang owns shares of Electronic Arts.