Gemstar slide could lead up to Yuen-Murdoch showdown. (Media & Technology).

The more Gemstar-TV Guide International Inc. Chairman Henry Yuen reveals, the less investors find to admire. The stock of the technology and media company has tumbled 50 percent during a two-week wave of disclosures that has stripped away Yuen's aura of invincibility.

Most distressing was the revelation that since 1999 Gemstar has recognized $107.6 million in revenue that it didn't receive, due to a legal dispute with Scientific-Atlanta Inc. The disclosure, in the company's 10-K filing at the Securities and Exchange Commission, wasn't mentioned a week earlier when Yuen discussed the company's fourth-quarter earnings with analysts on a conference call.

With 18 minutes' notice, Yuen held a second conference call to try to allay Wall Street concerns, noting that Gemstar's independent auditor, KPMG LLP, had blessed the recognition of revenue. But Yuen's assurances weren't enough to head off several shareholder lawsuits filed later in the week.

If Gemstar shareholders are unhappy, so are some investors in Rupert Murdoch's News Corp., which holds a 42 percent stake in the Pasadena-based company. JB Were analyst David Roberts slashed his valuation on News Corp. stock by 9 percent, saying he has less confidence in Gemstar's reported numbers.

Tiger by the tail

Now inquiring minds want to know how Murdoch -- who controls half of Gemstar's 12 board seats -- will deal with Yuen, the co-founder who has ruled with an iron grip until now.

On the surface, Murdoch's hands appear tied. Although Yuen's stake is smaller (8 percent at the time of the most recent proxy), Gemstar's bylaws call for Yuen to remain chairman and chief executive until July 2005 "unless he dies, resigns or is terminated for disability or for cause in accordance with his employment agreement," according to the company's 10-K filing.

The bylaw can be changed only with the approval of nine board members. Yuen, like Murdoch, controls six seats. Indeed, News Corp. has a voting agreement to support the election of Yuen and his designees to the board. But if Gemstar's financial statements are being questioned, Murdoch is bound to be uncomfortable, as he personally sits on the Gemstar board, along with his elder son, Lachlan, and News Corp.'s chief financial officer, David DeVoe.

Yuen, a California Institute of Technology-trained mathematician who became a lawyer, has long dazzled investors and the news media with his keen mind and patents issued in his name. Yuen invented the company's VCR Plus system, which permits consumers to record a television program by entering a number, via a remote control, into a VCR or television set. Since its introduction in 1990, PlusCode numbers have become ubiquitous in television listings.

A comparison of Gemstar's latest 10-K to the year-ago document points up the problems of the company's mature businesses, starting with VCR Plus. Gemstar acknowledged this year that worldwide shipments of VCRs are in decline and there's no assurance that the VCR Plus system will gain the same widespread acceptance in the digital video recorders that are taking the place of VCRs in many TV households.

TV Guide

For the first time, Gemstar's 10-K included a warning that the revenue of "emerging businesses may not be significant enough to offset the revenue decreases of our businesses operating in declining markets."

Towering above all other aging assets is TV Guide Magazine, with falling circulation and cash flow, or earnings before interest, depreciation, amortization and interest. The magazine has lost 24 percent of its paid weekly circulation since 1998.

A year ago, Gemstar only acknowledged that the declines "may continue." In the most recent 10-K, however, the company sharpened its warning to say the declines "are expected to continue?' The company reported a 9 percent decline in circulation and a 15 percent drop in total ad pages in 2001.

Gemstar and TV Guide were fierce competitors in the business of providing on-screen program guides until Gemstar acquired TV Guide for $7.9 billion of stock in July 2000. After the merger, Gemstar stirred excitement with its strengthened portfolio of patents and determination to dominate the business of interactive program guides.

Gemstar vowed to build a new business selling ads on its on-screen guides. But Gemstar's latest revelations have shaken Wall Street's confidence in the growth of that business. In its 10K, Gemstar disclosed that $20 million of the $101.4 million in interactive advertising revenue in 2001 came from barter advertising instead of cash.

Gemstar also said it had advertising revenue of $19.3 million last year from its largest share-holder, News Corp., although it didn't disclose how much was allocated to advertising on the interactive program guide.

One more revelation: Gemstar said it chose to capitalize, rather than expense, patent prosecution and litigation costs of $47.6 million in 2001. The company is in legal battles with EchoStar Communications Corp. and Pioneer Corp. in addition to Scientific-Atlanta.

During the conference call, Yuen vigorously defended the company's capitalization of legal costs because he said the patent litigation is designed to strengthen the company's assets. Yuen called the treatment "typical."

New litigation

But Scientific-Atlanta, one of Gemstar's legal opponents, said that it expenses lawsuit costs. Gemstar also disclosed a rash of new litigation since November with its once-close partner, Thomson Inc., over a joint venture to share advertising revenue on electronic programming guides. In the 10-K, Gemstar disclosed Thomson recently added a claim for antitrust violations under federal and state laws.

Gemstar disclosed that it received $76.2 million in revenue last year from Thomson, with receivables of $53.2 million due from Thomson as of Dec. 31.

Gemstar's flurry of news shows no sign of abating. It announced that its board extended an authorization granted in September 2001 to repurchase as much as $300 million of its outstanding shares. According to SEC filings, Gemstar spent only $6.4 million in 2001 on the stock repurchase program; the duration of the program wasn't specified. Try as it might, Gemstar still hasn't gotten the hang of full disclosure.