PLAYING FOR KEEPS; CALABASAS GAMER READY FOR NEXT LEVEL.

Byline: Ben Sullivan Daily News Staff Writer

It was anything but fun and games at video game maker THQ Inc. when Brian Farrell took over as chief executive in 1995.

The Calabasas-based developer of entertainment software for the likes of Nintendo Gameboy and Sega Genesis had hemorrhaged money in the industry's transition from 8-bit to 16-bit game consoles, and a floundering THQ toy division was pushing the firm's bottom line even further into the red.

``The company needed some pretty tight fiscal management,'' Farrell said. ``We'd lost $35 million over two years and there were people needing to be paid.''

To get THQ's financial house in order, the board of directors had named then-chief financial officer Farrell to replace company founder Jack Friedman in the top spot.

And that, analysts say, made all the difference.

THQ just completed its ninth consecutive profitable quarter. Shares in the company are trading near their 52-week high, and with $50 million in revenues last year, the company was among the fastest growing in the state.

Now, as it enters its first fall season in years with state-of-the-art titles - including its first offering for the PC market - analysts are watching to see if THQ can maintain its success and vault into the upper echelon of entertainment software developers.

``Their current business model works,'' said James Lin, head of research at Wedbush Morgan Securities of Los Angeles. ``The question is, can they make the transition up?''

THQ was founded in 1990 to manufacture toys and video games. Toys spun off of 20th Century Fox's ``Home Alone'' film and ``Home Alone,'' ``Where's Waldo?'' and ``James Bond Jr.'' video games helped THQ turn a profit in 1991 and 1992.

But when the gaming industry in the early 1990s shifted from 8-bit to 16-bit consoles, THQ was caught off guard. By the time it caught up, around 1993, the rest of the industry was again moving on to newer technology. While firms like Electronic Arts were churning out sophisticated titles for 32-bit machines, THQ was stuck holding millions of dollars worth of 16-bit inventory.

It was a mistake that cost the company millions and led to Friedman's departure. But it was one Farrell was able to turn to his benefit.

Farrell recognized that while THQ was behind the curve on technology, it had by default become one of the largest producers of games for an installed user base of 50 million 16-bit machines.

As CEO, Farrell discontinued THQ's toy business and limited new game development exclusively to projects for 16-bit platforms. What little remaining cash the company had went to licensing successful 32-bit games from other firms and converting them to the 16-bit platform.

``I'd been arguing from the start that we needed this sort of base revenue underpinning our operations,'' Farrell said.

From a loss of $17 million in 1994, Farrell managed a profit of $600,000 in 1995 and about $2 million last year. Analysts expect THQ to earn about $4.5 million in 1997.

Farrell's 16-bit-based strategy has ensured THQ's solvency so far, analysts say, but limits its potential: Eventually all the 16-bit machines in the world will break or be replaced with more advanced machines.

To keep growing, they say, THQ must evolve into a developer of games for newer platforms, including computers, 32-bit and 64-bit game consoles.

To that end, the company over the last year has accumulated through licensing agreements and third-party developers a line-up of advanced-technology titles for the crucial fourth quarter, which traditionally sees the bulk of gaming sales. The titles include National League Football-, National Hockey League- and National Basketball Association-licensed games, plus a shoot-'em-up game based on the Japanese ``anime'' film ``Ghost in the Shell.''

The offering is strong, said Adam Douglas, an editor at Imagine Publishing in San Francisco, which rates electronic games. And Ghost in the Shell has generated particularly strong interest among game testers.

But being watched closest of all is Pax Imperia: Eminent Domain, a space-strategy game that will be THQ's first foray into the PC market. THQ inherited an earlier version of the game last year when it purchased Connecticut-based game developer Heliotrope Inc., and together the companies have spent several months updating it for the PC market.

``It's a wait-and-see situation,'' said Brent Suen, head of research for L.H. Alton & Co., a San Francisco-based investment company. If Pax Imperia or one of the company's 32-bit or 64-bit games is a hit with Christmas buyers, Suen said, THQ could become a major player in the gaming market. Moderate sales of several titles would likewise give the firm a boost in prestige.

``But if they don't sell well,'' said Wedbush Morgan's Lin, ``you could have a lot of finger pointing about what went wrong.''

Farrell says he is undaunted.

``I didn't found the company, but I understand how to take it to tens of millions and hundreds of millions in revenue level,'' he said. ``This is not a turnaround story anymore.''

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2 Photos

Photo: (1--Color) Brian Farrell, CEO of THQ Inc., has led the Calabasas company out of its losses in the early 1990s in the video game market.

(2--Color) Brian Farrell of THQ Inc. has pioneered a move into sports-oriented titles.

Michael Owen Baker/Daily News