'UPI's Turnaround Appears in Sight'



This story was filed by UPI's Gregory Gordon on April 17, 1986:


WASHINGTON (UPI) - Obituary writers had a field day.

"Vital Signs Failing at UPI," said a headline in The Washington Post, all but predicting the demise of United Press International, the nation's second largest wire service.

"It looks like the wire service may go under," said a national radio broadcaster.

After 78 years as a major news provider for the nation and the world, UPI last spring appeared doomed.

Crushing debts had forced employees to absorb 25 percent wage cuts and spawned fears of financial collapse that sent a number of reporters, editors and photographers scurrying to the security of other jobs.

Some key UPI assets - including its foreign newspictures service - had been sold. Subscribers were canceling at a record pace.

And the company was split by a bitter clash between president Luis Nogales, who wanted to sell UPI, and its two chief owners, entrepreneurs who bought it for $1 in 1982.

On the first Sunday in March 1985, facing a critical cash shortage and pressure from senior executives to yield operating control, co-owner Douglas Ruhe abruptly fired Nogales - who UPI managers said had the firmest grip on the company's staggering problems.

For four tense days, the news agency was in chaos. Ruhe also fired Ray Wechsler, a key financial consultant. Two senior Nogales aides resigned in sympathy.

Heightening the crisis, UPI's primary cash lender, the Foothill Capital Corp. of Los Angeles, threatened to end credit if the dispute was not promptly resolved - meaning paychecks would bounce in a day or two for employees around the world.

In this, UPI's nadir, few could have predicted the wire service would be alive a year later, that it would survive the stigma of Chapter 11 bankruptcy protection, that it would be on the threshold of a successful turnaround.

Few would have guessed that Nogales would return as UPI chairman, outduel the owners in months of legal battles and earn credit for saving the institution.

Under pressure from Foothill during several tense days after the firing, Ruhe and his partner, William Geissler, agreed to yield operating control and assented to return Nogales as chairman.

Seven weeks later, UPI filed for Chapter 11 protection - a move Ruhe and Geissler had resisted. Nogales since has helped steer UPI through one storm after another, and appears to have found the company a safe harbor.

This month, UPI management filed a formal plan of reorganization proposing a $41 million sale to Mexico's largest newspaper publisher, Mario Vazquez-Rana. Vazquez-Rana and minority partner Joe Russo have pledged to pump at least $15 million in working capital into UPI, and while recovery still is not assured, it appears UPI will successfully emerge from Chapter 11 protection.

Consumer advocate Ralph Nader called UPI employees "heroes" who kept the service alive, working through the turmoil at reduced pay, sometimes uncertain whether they would be paid at all.

Los Angeles Times publisher Tom Johnson, a longtime friend of Nogales and a close follower of the developments, particularly credits the UPI chairman.

"He responded to the pressure extraordinarily well," Johnson said. "He always seemed to be hanging in there, hanging in there. Nogales was very much interested in making sure that UPI survived. A lesser person would have bailed out, I think."

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While UPI had lost money for more than 20 years, things looked brighter in 1982 after the E.W. Scripps Co. sold it to Tennessee entrepreneurs Ruhe and Geissler.

The pair took aggressive steps to try to forge a turnaround. They hired Maxwell McCrohon from the Chicago Tribune Co. to serve as UPI's new editor in chief, named William Small, former president of NBC news, as UPI's new president, plucked Nogales from Golden West Broadcasters as a vice president and opened bureaus to help woo subscribers.

Ruhe and Geissler signed a three-year contract that offered to improve the modest wages paid 900 domestic reporters and photographers represented by the Wire Service Guild. Opening a new world headquarters in Washington, they launched into a stream of projects aimed at diversifying UPI.

These efforts cost money, but sales were picking up and it appeared fortunes were on the rise. With little cash of their own, Ruhe and Geissler managed to operate UPI for two years before its slide into deep debt surfaced in the summer of 1984.

In Los Angeles, officers of Foothill, which had extended UPI a $4 million line of credit for working cash, began questioning reports the company was losing money and that its books were in a shambles. Foothill forced a quick shakeup in the financial department. Jack Kenney, who took over with Peggy Self, recalls that UPI's financial records were in "deplorable" condition, in part because the company had been left without an automated accounting system when Ruhe and Geissler took charge.

Kenney said financial controls were "almost nonexistent" and the owners "were not spending money in a prudent manner."

An intense review of the books determined that UPI's 1983 loss was projected to be $14 million - not $6 million, as thought earlier, he said.

Ruhe and Geissler, whose two minority parnters (Chicago lawyer Cordell Overgaard and Small Newspapers president Len Small of Kankakee, Ill.) quit about a year after the purchase from Scripps, had been cash-short from the start.

When money was tight, they sold assets or dummed up new "joint venture" deals that brought new funds, fanfares of publicity about UPI's future and optimism among UPI staffers worldwide.

Ruhe, who held the title of UPI's managing director, sold away in succession the wire service's share of UNICOM, a worldwide commodities news service; its right to one-fourth interest in UPITN, a television news film service; the rights to its electronic data base; the right to market UPI's stock price reporting service; and its valuable picture library.

Those transactions generated $5.7 million, plus royalties, but critics argued they cost UPI substantial revenues and never led to promised stock dividends or other returns. As a result of the picture library sale, UPI now must pay the Bettmann Archives to use its own negatives.

In June 1984, Ruhe sold UPI's foreign newspictures service to the rival Reuters news agency for $3.3 million cash and $2.5 million over five years. UPI officials assert the plan not only stripped the company of a key asset, but Reuters paid only about one-third of the actual value.

"UPI was bought by two guys who had no capital," Nogales said later. "They started to liquidate the company by selling important assets and businesses to fund it. They were unable to turn it around."

Ruhe argued, "Those deals were put together because those entities were losing money, and it made sense to both generate cash and cut losses." He called Nogales criticism of the transactions a public relations ploy aimed at shifting blame for his own "incompetent" management.

Nogales said that after hearing the 1983 loss was at least $14 million, not $6 million, he feared imminent disaster. He said that, with Ruhe's permission, he phoned union president William Morrissey in New York.

"He said the company was in deep financial difficulty . . . that they did not know how the company was going to make it in the future," Morrissey recalled.

Morrissey hardly spoke during the 45-minute conversation. "I had an ache in my gut," he said. "I was shocked, speechless."

Morrissey and union officials huddled with Nogales and other UPI lawyers and officers. UPI opened its books to a Guild accountant.

"The company had very little time to go," Morrissey said. "It was our estimate that (UPI's collapse) was certaintly not more than two months away."

Morrissey and union secretary-treasurer Dan Carmichael determined they would at least try to buy time for employees to seek other jobs.

During weeks of secret negotiations, the company and union agreed on a tough concessions package. Campaigning side-by-side, Morrissey and Nogales urged employees to accept 25 percent pay cuts, reductions in pension fund contributions and other concessions. There also would be layoffs. In return for the sacrifices, Ruhe and Geissler promised employees 7.5 percent of the stock in UPI - stock that later proved worthless.

For selling the concessions package, Nogales was rewarded with the UPI presidency.

To open the position, Ruhe and Geissler triggered a new maelstrom by terminating a long-term contract with Small, who officials say had been kept isolated from the financial crisis until it exploded.

Small stubbornly reported to work until he finally was locked out of his New York office. Then he filed a $10.8 million breach of contract suit.

The union concessions allowed UPI, for the first time in two decades, to record a steady, positive cash flow. But profits quickly were swallowed by the crush of interest payments on UPI's massive debts. Nogales said that with business continuing to decline, he pressed the owners for badly needed capital.

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In October 1985, Nogales assured employees at world headquarters that Ruhe and Geissler would be selling their Chicago UHF television station. "They have promised to invest up to $10 million in UPI - whatever it takes," he said.

The pair put one pledge in writing. An independent accountant from the Arthur Young and Co. refused to certify that UPI was solvent as of Dec. 31, 1983, until the owners certified they would invest $2 million.

Nogales said he and other company executives relied on that promise, and plans for the Chicago TV sale, in agreeing to take a desperate gamble: that UPI would generate extra cash by retaining employee withholding taxes for the last three months of 1984 rather than passing the money to the government.

Nogales said it gradually dawned on him "we were being misled" about the commitment to invest in UPI, and that the company was headed for disaster.

"Nobody wanted to invest in a company where Ruhe and Geissler were in control," Nogales said. "They had made no out-of-pocket investment, they had a terrible reputation for management and were unreasonable in . . . asking for a large amount of monies for a small piece of the company."

Ruhe and Geissler were unable to close a sale on their Chicago television station. Their reported promise of cash never was fulfilled. In fact, they transferred at least $2.3 million in UPI funds to their own management company, Focus Communications, Inc. - to pay for "consulting" services, Ruhe said. Meanwhile, UPI executives struggled to hold off creditors, including vital stringers who assist in photo and news coverage worldwide.

Foothill periodically allowed UPI to exceed its $4 million line of credit to stay alive. SInce UPI was holding its own, Foothill president John Nickoll said he was reluctant "to just pull the plug."

By late February, Nickoll said he and other Foothill officials agreed that, at minimum, operating control must be removed from Ruhe and Geissler. But Nogales said they refused to surrender control.

On Sunday, March 3, Nogales and several top company officials and lawyers met at Nickoll;s home in Beverly Hills to discuss the deepening problems.

Before the meeting could begin, Ruhe phoned from Nashville, Tenn., and fired Nogales and Wechsler. Kenney and a key communications vice president, Bob Brown, resigned in protest. UPI had no one left with authority to borrow from Foothill, and paychecks began bouncing the next day.

The company was mired in its deepest crisis without a leader, without key management officials, with massive debts. UPI employees, uncertain they would ever be paid, continued to turn out the news and hope for a solution.

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Nogales refused to walk away, saying that after campaigning for wage cuts in August of 1984 he felt "morally committed to the employees of this company."

Meanwhile, Foothills was pressing Ruhe for a solution. "We said we would continue (to extend credit) on one condition: that all the parties worked out an agreement that was satisfactory and signed it," Nickoll said.

Morrissey turned the heat a notch higher, telling Ruhe the union no longer supported the owners.

Within 48 hours, Nogales found himself in resumed negotiations with Ruhe and Geissler, finally winning a written agreement to surrender control and name him chairman.

Ruhe now says he fired Nogales because company managers had "schemed to force us out" and were seeking a block of UPI stock for themselves. Bitterly dismissing general praise for Nogales, Ruhe called UPI's management team "incompetent."

Nogales said he hoped that, with UPI for sale, the company could settle its short-term debts with creditors while finding a buyer with adequate capital.

But on April 19, 1985, came the seeming coup de grace. The IRS imposed a $1.7 million lien on UPI for failure to pay withholding taxes. Learning the news, Foothill officials froze all credit because their loan no longer would receive top priority.

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Although the bankruptcy filing frightened subscribers, UPI officials stressed to the industry that the April 28 action listing $42 million in liabilities offered protection that might provide the only chance for recovery.

First, Foothill agreed to continue as UPI's primary lender. With interest payments on debts frozen, UPI's monthly income could be freed for working capital.

UPI employees began to regularly receive expense reimbursements. Stringers were paid again. The flow of office supplies resumed.

Nogales and Wechsler, UPI's new president, knew ther were no more reprieves. UPI most operate profitably or break even, or face liquidation. They set to work to slash costs, beef up revenues and streamline the operation.

- UPI salesmen were sent to ask subscribers to accept a voluntary 9.9 percent rate surcharge, winning enough support to net an extra $3 million.

- They canceled corporate credit cards and imposed strict controls on travel and entertainment, saving more than $2 million.

- Nogales saved up to $1 million a year by shutting numerous projects begun by the owners, including UPI ASK, a polling company that had cost the wire service $300,000 to $400,000; a separate firm set up to oversee UPI's real estate dealings; and a corporate research department. Contracts with high-priced consultants were terminated.

- A program to cut UPI's multi-million dollar backlog of subscriber debts helped the cash flow by $400,000 a month.

- UPI reached a tentative agreement with the Bonneville Communications Co. for a joint venture to upgrade its communications system and save $4 million a year.

Nogales directed UPI lawyers to take steps under the bankruptcy code to recover some assets sold by Ruhe. UPI soon regained control of its stock price reporting service from Fintext Inc., and began examining the financial records of Comtex, Inc., which now markets its electronic data base.

Attempting to assure continued profitability, on June 10, 1985, Nogales pressed the union for a new round of concessions, including a six-month wage freeze with employees still at 90 percent of 1984 salaries.

In retrospect, Nogales said he may have erred in accepting the advice of Wechsler and a UPI budget officer calling for more union concessions. Guild members who had accepted years of financial sacrifices responded angrily, setting up informational picket lines nationwide.

The dispute grew bitter. A stream of union bulletins lashed out at the high salaries paid to Nogales and some other managers.

Nogales, who had worked for $85,000 before receiving a raise to $190,000 as chairman, said it was "difficult to take on the personal attacks, to have one's motivations challenged."

He persuaded Wechsler and McCrohon to join him in accepting a 25 percent pay cut to $142,500, but union attacks grew more hostile. Finally, in early October, Nogales dropped the push for concessions. Twelve days later, he requested Wechsler's resignation.

Meanwhile, Nogales and company bankruptcy lawyers, including Richard Levine of Boston, had fought off persistent efforts by Ruhe and Geissler to regain control or to dominate the sale process.

Nogales and Wechsler had spent months canvassing communications companies, media firms, venture capitalists and wealthy individuals, searching for a buyer. By September the company had drawn 25 "expressions of interest."

Nogales, recognizing the lack of union concessions would soon send UPI's finances on another downward spiral, pressed for a sale deadline. The Guild, seeking to protect employees' interest, hired aggressive investment adviser Brian Freeman to conduct its own search for a purchaser.

The steadiest suitors included Vazquez-Rana, Mexico's largest newspaper publisher; Houston-based real estate developer Joe Russo, and Telecom Plus, Inc., which was tied to former CIA official Max Hugel. In late October, a fourth bidder, a seven-member business consortium led by Financial News Network Inc., made an offer.

Nogales set a Nov. 11 deadline for a decision, summoning all bidders, a creditor's committee and union officers to Washington. On Nov. 7, the union announced its endorsement of both Vazquez-Rana and Russo. But FNN submitted a higher offer - albeit conditional - to creditors. UPI executives were torn.

To break up the impasse, Vazquez-Rana accepted Russo as a 10 percent partner, and won unanimous endorsement with a $41 million offer.

FNN, asserting it had a verbal promise of a 48-hour extension to lift conditions on its bid, vigorously challenged the deal in bankruptcy court and filed a $975 million damage suit against many of those involved in the decision. Six of the seven counts in the suit were later dismissed.

While the remaining $150 million claim remains unresolved, U.S. Bankruptcy Judge George Bason has given preliminary approval to the sale.

Meanwhile, UPI's upper management went through another round of shakeups, with two executives resigning.

Despite the nonstop turmoil, Nogales and other executives say they are certain UPI's future is safe - at least for the immediate future.

"Luis ought to get a lot of credit," said Freeman, the union's adviser. "He kept this thing together through a very difficult period. He was successful in getting UPI set for a turnaround."

Nogales was showered with congratulatory letters - even a note from Chrysler Chairman Lee Iacocca, who had also saved a faltering company.

But Nogales' future still is uncertain.

Vazquez-Rana said during a recent interview he has asked Nogales on several occasions to stay, but he declined to say whether he would offer to leave the UPI chairman in operational control.

Nogales "has done a good job - a great job," he said.

But, Vazquez-Rana stressed, "Nogales has not saved UPI yet. I hope that he will help me to save it."

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