Gemstar May Face U.S. Antitrust Suit

The Justice Department has threatened to file a lawsuit against Gemstar-TV Guide International Inc. for alleged antitrust violations before the July 2000 merger that created the Pasadena-based company, sources said Thursday.

The department is investigating whether Gemstar International Group Limited and TV Guide Inc. violated federal regulations forbidding publicly traded merger partners from certain cooperative activities before they combine, a source close to Gemstar said.

The case could result in the biggest fine ever against a company for “jumping the gun” before the completion of a merger, the source said, adding that the Justice Department is looking to fine the company between $4 million and $8 million. The current record in such a case is less than $3 million, the source said.

The disclosure is the latest embarrassment for Gemstar founder Henry Yuen and News Corp., which recently ousted Yuen to gain control of the Gemstar board. At the time of the merger, News Corp. was a major shareholder of TV Guide Inc.

Gemstar, which publishes TV Guide and sells on-screen television program guides, is already under federal investigation for its accounting practices and has lost 85% of its stock value this year, forcing News Corp. to write down about $6 billion of its investment in the company.

Gemstar would not comment Thursday on the allegations. But in a quarterly report filed Thursday with the Securities and Exchange Commission, Gemstar contended that its conduct before the merger was lawful.

In the filing, Gemstar said it received a letter from the Justice Department on Nov. 7 alleging that its two predecessor companies had engaged in “unlawful coordination of activities” before their merger in July 2000.

Government officials have laid out the framework for a settlement, sources said. The company noted in the filing that it would consider settling if terms were reasonable.

The development comes after News Corp. prevailed in a power struggle that has helped buoy investor confidence.

Effective last week, Yuen gave up control of the board and stepped down, leaving Rupert Murdoch’s News Corp. in power. News Corp. executive Jeff Shell took over as chief executive.

The disclosure was part of a quarterly filing made public Thursday that restated financial results for the first two quarters of 2002. The company Thursday also restated results for 2001 and reported a third-quarter loss.

Changes in accounting rules helped it narrow its loss in the third quarter to $17.3 million, from a restated $140.3 million a year ago.

Gemstar’s loss in the third quarter narrowed to 4 cents a share, compared with a loss of 34 cents a share in the year-ago period. Revenue for the quarter fell 16%, to $253.4 million, from $299.9 million, partly because of a significant decline in licensing of its on-screen software to the cable and satellite industries.

In August, Gemstar said it would restate 2001 results after losing a patent ruling on its program guide software that made it uncertain of collecting revenue from rival Scientific-Atlanta Inc. that it already had booked.

Gemstar warned investors that the quarterly results are unaudited and could be subject to further revisions. Filing the third-quarter results, however, satisfied one requirement for continued listing by Nasdaq.

Another requirement is that Gemstar file all amended financial results for 2000, 2001 and 2002 by March. The company, which fired KPMG and appointed Ernst & Young as its auditor, said it expects to be in full compliance by next spring.

Gemstar shares rose 21 cents to close at $4.26 on Nasdaq.