New Gemstar chief aims to turn page at ailing TV operation.

With Gemstar-TV Guide International Inc. still facing a federal investigation into its financial reporting and ongoing legal challenges, the Pasadena-based company's new chief executive is making plans for a fresh start.

While the immediate priority is restating three years worth of financial results, a corporate overhaul is in the works that includes everything from management changes to a likely relocation of its headquarters to Hollywood. Also under consideration is changing the company's name.

"We need to return to normalcy as quickly as possible," said former Fox executive Jeff Shell, who last week replaced the company's controversial CEO, Henry Yuen.

Asked during an hour-long interview about the pending changes, Shell said, "I won't rule anything out. We may have to restructure the company to see that it's managed more efficiently. Whether that just involves rearranging the businesses or it involves certain shutdowns it's too early to tell."

One sign of the company's health will come on Thursday when third quarter financial results are released -- as well as restated earnings going back to July 1999. The restatements will cover adjustments for $113.5 million in patent-licensing revenues that had been booked but never received from ScientificAtlanta Inc., according to a Gemstar filing last week with the Securities and Exchange Commission. Also part of the restatement will be a $20 million deal to purchase the intellectual property of online game company Fantasy Sports.

Because Gemstar fired its auditor, KPMG, late last month in a dispute over what should or should not be restated, the results this week will be unaudited. Gemstar's new auditor, Ernst & Young, has begun an examination of the company's books, a process, Shell said, that will take 90-120 days to complete and likely will result in a revision to this week's restatement.

"We wanted to start fresh and have someone come in and do an intensive audit," said Shell. Acknowledging that this week's numbers will be "subject to change and unreliable," he added that, "It's in my best interest to make sure, to the extent that there is any other bad news, that we get it out." He said he doesn't know of any.

SEC probe

After a free-fall in the stock following months of negative news, Wall Street is showing some renewed interest in Gemstar. Shares were trading late last week at around $4 a share, up from the $2.50 range in early October.

Still, there is a lot to get past. Last month, Gemstar announced that the SEC had launched a formal investigation to determine whether there have been violations of federal securities laws -- presumably as it relates past accounting practices involving revenue recognition. It also faces delisting by the Nasdaq for being late in filing its quarterly reports.

Having Rupert Murdoch's News Corp. as a major shareholder, with 43 percent of the outstanding shares, compounds the scenario. Murdoch, who gained his stake by selling TV Guide to Gemstar, has seen the stock plummet from a peak of $101 in early 2000. This year, News Corp. has taken writedowns totaling almost $7 billion, most of that related to the Gemstar investment.

It was concern over the company's direction -- and especially Yuen's management performance -- that led Murdoch and News Corp. President and Chief Operating Office Peter Chernin last March to push for Shell as Gemstar's co-president and chief operating officer. As Shell put it, someone was needed "to parachute behind enemy lines, so to speak, and I volunteered for it."

Yuen, who Shell described as "a brilliant inventor and scientist," founded Gemstar in 1989 and developed a system to simplify VCR programming. But along the way he had engaged in a lengthy series of legal battles to protect the company's patents, earning the moniker "patent terrorist." Yuen was so confident of victory in the courts that he had the company book as revenue the patent fees from Scientific-Atlanta. But in June, a judge ruled that Scientific-Atlanta and other companies had not infringed upon Gemstar patents, further deflating the company.

Relations with Yuen

Despite the circumstances behind his arrival, Shell said the two have gotten along reasonably well. "People won't believe this but throughout the entire process it has been, under very trying circumstances, cordial between him and me," he said. "It's not as unpleasant on the inside as people on the outside might expect."

Highly visible during his days as head of Fox Cable Networks, Shell has played a low-key role as a Gemstar senior executive. But with Yuen and Chief Financial Officer Elsie Leung agreeing to step down in exchange for large severance packages, and Shell taking over as chief executive, change is in the air -- clearly under the watch of Murdoch and Chernin.

"At News Corp., you're always under the gun," he said, summarizing the executive culture there as "you know what you have to do, you go do it and if you do it well, you'll probably get rewarded, and if you do it poorly, you'll probably be looking for another job."

So far, signs of a shakeup are most evident at Gemstar's TV Guide unit, one of the company's core businesses that include the familiar magazine as well as several electronic versions. Last September, former Primedia executive John Loughlin was named president of its TV Guide Publishing Group, a new position. Last week, long-time TV Guide Editor Steven Reddicliffe resigned.

"It was time for a change -- for him and for us," said Shell, who called Reddicliffe a "fantastic editor." "We need to do a reinvigoration of the product and I think it would have been tough for Steve to do that."

A search has begun for both an editor and a publisher, a post that has been unfilled for some time.

Still a mainstay among consumer publications with a circulation of 9.4 million, TV Guide magazine has seen a 21.5 percent drop in newsstand circulation for the first six months of the year. As of September, ad pages are down 16 percent, though the company reports a recent upturn.

As Shell sees it, the company got caught up in the new media bubble and neglected core assets that remain cash generators, such as the magazine. He stressed that TV Guide magazine -- both print and electronic -- would play a major role in the newly configured Gemstar. In fact, he said the Gemstar name might be dropped in order to focus on the iconic TV Guide brand. "It's something we'll certainly look at," he said.

Company never merged

Interviewed at his Brentwood home, with his wife and 3-week-old daughter in the next room, Shell acknowledged that "the company has not been operating well. We have a number of great assets and need to get back to operating them efficiently. We've started the process but it's going to take some time and that will continue to be reflected in the numbers."

Shell outlined a multi-step process for reviving the company, starting with improving the basics of financial reporting and communications and beefing up the senior management ranks.

The company will keep its operations in New York, Radnor, Penn. (home of TV Guide) and Tulsa, he said. But the corporate headquarters, now in Pasadena, is likely to move in the next few months to Hollywood, where the company already has an office with about 100 employees. "Hollywood feels right for TV Guide. I'd like to bring the company back to Los Angeles," said Shell.

He also hinted at wanting to resolve the ongoing patent litigation. "If we're forced to take those suits to finality, we believe we'll prevail," he said. "However, that's not the business we're in. My hope would be that as we take a new approach ... that we'll find a way to work through most of these things."

Amid all the proposed changes remains the inevitable speculation about Murdoch's investment strategy. During News Corp.'s annual meeting last month, he said there were no current plans to increase the company's Gemstar stake. "You have to have a few months with our people there in control of it before we close our minds on that subject," Murdoch said.