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Beleaguered video game publisher

THQ

(THQI)

saw profits tank in the critical fourth quarter on poor sales of key titles and a $20 million charge related to a lawsuit and canceled product lines.

Including charges, the Calabasas Hills, Calif., company earned $3.1 million, or a 8 cents a share, in the fourth quarter, compared with earnings of $28.5 million, or 75 cents a share, a year earlier.

Ahead of the earnings report, THQ stock closed the day up 2 cents, or 0.15% to $13.35. THQ shares plunged $1.19, or 8.91% to $12.16 in after-hours activity.

Profits were whacked by a bigger-than-expected charge. The company canceled more product lines that it expected in late December and needed a $12 million charge to cover them, not the $3.2 million item it originally expected.

Moreover, THQ took an additional $5 million charge related to out-of-court settlements of class-action suits. The company said in a prepared statement that the $5 million charge was recognized because of a dispute with its insurer "regarding the amount of directors and officers liability coverage for this settlement." The company is currently in arbitration and said it believes it will prevail, in which case the charge would be reversed in future quarters.

Separately, it also took a $1.6 million charge from a writeoff of a canceled wrestling game line based on the World Wide Wrestling Federation, which goes by WWF. The WWF is currently being sued by the other WWF, the World Wide Fund for Nature.

Excluding charges, the company earned $16.4 million, or 41 cents a diluted share, in the fourth quarter.

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Sales for the fourth quarter improved 10.9% to $217.8 million, from $196.4 million in the year ago quarter.

Wall Street expected the company to earn 40 cents, on sales of $218.88 million for the fourth quarter, according to a Thomson Financial/First Call poll of analysts. Those expectations were severely ratcheted down after the company slashed its own guidance near Christmas.

THQ sliced its financial targets after discovering that some of its games weren't selling as quickly as it believed. In specific, the company blamed a key title,

Red Faction 2

, and titles for Nintendo's GameCube platform.

"The recent holiday season revealed new challenges for our company and our industry and we have adjusted our business plan to reflect the changing competitive environment," said THQ CEO Brian Farrell in a prepared statement.

THQ was one of the first companies to spark a selloff in the game sector last October when it took down guidance, telling investors that 2003 would not be nearly as profitable as it once believed. Those statements, combined with other affirmations of a similar trend at competing publishers, took the luster off an erstwhile attractive game stock sector.

The company plans to adjust its earnings reporting schedule. Its fiscal year will now end on March 31, instead of the end of December.

Looking ahead, for the current quarter ending March 31, the company reiterated its earlier guidance and expects to lose 15 cents a share, on sales of $50 million. For the quarter ending on June 30, the company expects losses to be within a range of 8 cents to 10 cents a share, on sales of $75 million to $85 million.

For the full fiscal year ending in March 31, 2004, the company expects to earn 80 cents to 85 cents, on sales of $520 million to $530 million.