The following is a series of articles set in a world where Kurt Cobain doesn't commit suicide (he also never even tried heroin), and finds himself in a series of surprising developments in both his personal life and his career. For example, just to make things a bit clearer; Nirvana continues as a recording and touring act well into the 21st century, Kurt divorces Courtney and remarries, to actress Charlize Theron, and they also create a bold new venture together. This certainly also leads to a number of divergences in politics, sports, and popular culture, though of course, "the more things change, the more they stay the same." Some of these articles reflect things that also occurred IOTL, other articles have more divergences. For more information and context about what is being talked about here, see the thread "Cobain Continues Redone: A Kurt Cobain Survives Timeline" on AlternateHistory .com before you read this particular story here on this site (we are currently working on making a version with further edits, feel to join us!) and the so called Springbok Wiki on Fandom. All websites are represented by separating the dot from website type because of writing guidelines for URLs on this site.

This was all based on meticulous research on my own time, reading dozens of books and hundreds of newspaper/magazine articles spanning decades, as well as watching many hundreds of hours of news footage and documentaries, all spanning decades of time and a variety of subjects, notably looking into politics, economics, cinema, television, music, Broadway, video games, comic books, anime, technology and sports; as well as constant discussions with my teammates on the original TL thread. This is why articles are used; a great number of them appear as they are IOTL, others have some degree of minor tweaks to reflect divergences, and other articles are just invented out of thin air and completely only for this TL. It also shows and represents dozens of different threads in history that span decades, with multiple twists and turns and continuous intersecting with each. Everything and everyone that is brought up once has a payoff and resolution. Something always comes up again, even if it takes the space of years to do so.

I would also like to apologize in advance for the massive word length in each chapter. While nowhere close to the actual limits of the website's character counts, which is several million words, the amounts, with a cap at 1 million words for each chapter, can certainly be daunting. Maybe at some point, I will do another version and break things up into smaller pieces, but I don't know.

This entire timeline is dedicated to the memory of Jim Steinman; and to the loving memory of my beloved uncle, Dr. John M. Ortiz, who influenced and understood me in ways too numerous to describe.

Ch. 1: 1985-2000 (with one pre-1985 article simply to provide context)

"Coke Expected To Acquire Columbia Pictures," by Thomas C. Hayes, The New York Times, January 19, 1982

The Coca-Cola Company, seeking greater diversification, is expected to announce Tuesday that it has reached an agreement to acquire Columbia Pictures Industries in a $750 million transaction, industry sources said today.

The acquisition of the profitable film company would be Coca-Cola's first major purchase under Roberto O. Goizueta, who became chairman and chief executive officer last March and indicated that he would diversify Coke into new fields.

''Coke is very enthusiastic about being in the movie business,'' a source close to the negotiations said. In previous years, as the American market for soft drinks has leveled off, Coke has diversified into such fields as ocean farming and orange groves, but this would be its first big venture into entertainment.

The offer, which has reportedly been received favorably by Columbia officials, calls for a payment of $74 a share in cash and stock - nearly twice the current value of the stock - for Columbia's 10.7 million shares outstanding, one source said. The cash portion would be less than 50 percent of the total payment, sources said.

Industry specialists said they expect Coke's $74 a share offer to be too attractive for Columbia's half-dozen or so principal shareholders to reject, despite the company's recent profitability.

Trading in Columbia shares was halted today on the New York Stock Exchange, with the stock at 41 3/4, its closing level Friday. Asked for an explanation, Francis T. Vincent, Columbia's president, said an announcement was planned for tomorrow that would be ''of substantial benefit'' to Columbia stockholders.

Mr. Goizueta, in an interview last year, made clear that he hoped to put his personal stamp on Coca-Cola by expanding into other fields, such as entertainment, leisure time and flavors and fragrances. He spoke of spending an amount equal to 10 percent of the company's annual revenue for a major acquisition - about $600 million, based on last year's sales of $6 billion. Purchase of Columbia would meet that criterion. Columbia, which came close to liquidation in 1973 when its stock sold for as little as $1.62 a share, has been among the more successful motion picture companies in recent years, especially since the release in the late 1970s of Close Encounters of the Third Kind, a hugely successful movie. The company's more prominent recent feature films have included Kramer vs. Kramer, Stir Crazy, Only When I Laugh, Stripes and The Blue Lagoon.

Later this year, it is scheduled to release a $40 million Hollywood production of the long-running Broadway play Annie. One analyst speculated that Coca-Cola, anticipating great success for the film, timed the offer for Columbia to capitalize on the anticipated popular appeal of the film.

Coca-Cola stock closed Monday at 34 1/4, down 1/8. Columbia also has what some analysts regard as a sleeper with considerable profit potential in its Gottlieb division, a maker of pinball machines and video arcade games. The division, no longer losing money, could grow more rapidly with heavy investments that have been beyond the reach of Columbia but that Coca-Cola, with its ''financial muscle,'' could provide, one executive at Columbia said.

David Londoner, an entertainment analyst with Wertheim & Company, a Manhattan-based brokerage firm, said: ''Columbia is a well-run film company that has had impressive successes in the last few years. Frank Vincent has done a very good job.''

Mr. Vincent, a former Washington lawyer and member of the Securities and Exchange Commission, was brought to Columbia in 1978 to replace Alan Hirschfield, who had been under criticism for his handling of the dismissal of David Begelman from the presidency of Columbia's picture division for forging studio checks. Mr. Begelman is now chief executive of United Artists, acquired in 1981 by the Metro-Goldwyn-Mayer Film Company, while Mr. Hirschfield is president of the 20th Century-Fox Film Company, bought last year by Marvin Davis, a Denver oil millionaire.

In addition to films, the expanding field of home entertainment, including pay television and videocassettes, has markedly enhanced the value of Columbia's library of more than 3000 movies and 10,000 television programs.

Columbia had more than $155 million in licensing contracts with pay-TV, networks and local television stations (for syndication of such television programs as Fantasy Island) at the end of its 1981 fiscal year.

Agreement With HBO

Home Box Office, a subsidiary of Time Inc., agreed late last year to acquire exclusive rights to Columbia films produced between January 1, 1981, and April 1984.

The agreement means that HBO effectively pays an estimated 30 percent of Columbia's feature film production costs during the period, which could range between $100 million and $180 million, according to estimates by industry analysts.

Columbia had a good year with new feature films in 1981, but its performance was not remarkable. Warner Bros., owned by Warner Communications, ranked first among major studios in 1981, capturing an 18 percent share of theater revenues, according to a study published Friday by Daily Variety, a motion picture trade paper. Gulf and Western's Paramount was second, with 15 percent. In third place was MCA's Universal, with 14 percent. Columbia and 20th Century-Fox Film were tied in fourth place with 13 percent.

In its 1981 fiscal year, ended last June, Columbia earned $44.3 million, or $4.43 a shares, on revenues of $686.6 million. For the first quarter, completed last September, net income fell 38.3 percent, to $10.3 million, or $1.20 a share, from $16.7 million, or $1.64 a share, in the same period a year earlier. Revenues fell 8.1 percent, to $171.1 million from $186.2 million.

Principal Shareholders

Columbia's principal shareholders include Allen & Company Inc., a closely held investment concern whose chairman, Herbert A. Allen, is Columbia's chairman, with 6.2 percent of the stock. Mr. Allen acquired his stock at an average cost of $4 a share, or $3 million, a Columbia source said. The Coke offer would mean a profit of $50 million.

Other major stockholders include the American Financial Corporation, the financial holding company that was turned private last year by Carl H. Lindner, its chairman, with slightly less than 5 percent of Columbia; the General Cinema Corporation, which has 5.4 percent, and the Redstone family, which controls General Cinema and recently acquired 9.3 percent of Columbia. General Cinema is the nation's largest owner of movie theaters.

"The Walt Disney Company Changes Name of Distribution Arm," Internal memo, 1985

Effective today, The Walt Disney Company will change the name of its distribution arm from Buena Vista Theatrical Pictures to Walt Disney Studios Motion Pictures, to represent well and truly that Disney distributes and owns its own films. Furthermore, home video releases of all films prior to 1985 will have the message "Distributed by Walt Disney Studios Motion Pictures" added to them, along with keeping distribution notes of "Distributed by RKO Radio Pictures" and "Distributed by Buena Vista" intact, adding the new addendum only at the very end. Disney will keep the Buena Vista name for its home video division, under the Buena Vista Home Video umbrella.

"ABC Is Being Sold for $3.5 Billion; 1st Network Sale," by N.R. Kleinfeld, The New York Times, March 19, 1985

The American Broadcasting Companies agreed yesterday to be sold to Capital Cities Communications Inc. for more than $3.5 billion.

The surprise deal represents the first time that ownership of any of the nation's three major networks has changed hands. It also represents the biggest acquisition outside the oil industry in corporate history.

ABC, with 214 affiliated stations, has been a major cultural force in the nation, broadcasting such popular programs as Dynasty and Hotel and capturing a wide audience with its Olympics programming last summer. Capital Cities, a little-known but ambitious stalker of broadcast and publishing properties, owns television and cable TV systems, the Fairchild Publications business newspaper group and several daily newspapers.

"It Was a Natural Fit"

Thomas S. Murphy, the 59-year-old cost-conscious chairman and chief executive of Capital Cities, and Leonard Goldenson, the strong-willed 79-year-old chairman and chief executive of ABC, said they had been talking on and off since early December, though the deal was essentially patched together over the last two weekends.

''We just thought it was a natural fit between the two companies,'' Mr. Murphy said in an interview yesterday, ''and we thought we'd have an opportunity to handle the new possibilities coming up in the electronics fields better together.''

But the agreement, approved by both companies' boards of directors, means the twilight of the long reign of Mr. Goldenson, the chief builder who put ABC together. Once the merger is completed, he will be reduced to chairman of the consolidated company's executive committee.

"That's Important to Me"

''That is my wish,'' Mr. Goldenson said. ''I feel that the company I built from scratch is in good hands and that it will be carried on, and that's important to me.''

Mr. Murphy will become chairman and chief executive officer of the merged company, to be called Capital Cities/ABC Inc.

To get ABC, a company four times its size, Capital Cities is offering to pay ABC's stockholders a hefty $118 a share in cash plus warrants to buy Capital Cities stock at a set price. ABC's stock rose $31.375 yesterday, closing at $105.375. As a result of this sizable outlay, however, Capital Cities will gain entry to the glamorous and powerful world of network broadcasting.

Mr. Murphy said Capital Cities would gather the money to buy ABC from three sources.

Most of the sum, he said, will come from bank financing.

More than $517 million will come from the proceeds of a separate agreement Capital Cities struck with Berkshire Hathaway Inc., a diversified holding company headed by Warren E. Buffett, who has other interests in communications companies. In return for his company's financing, Mr. Buffett will be named a director of Capital Cities/ABC.

Additional money will be raised by the sale of an unspecified number of television and radio stations. This action is required to stay within the bounds of the Federal Communication Commission's rules on concentration of ownership of broadcast properties.

Under FCC rules that take effect April 1, for instance, a company may own 12 TV stations reaching no more than 25 percent of the nation's households. Capital Cities and ABC together would have 12 stations reaching more than 28 percent of the country.

In Washington, an assistant to Mark S. Fowler, chairman of the FCC, said Mr. Fowler had a brief three-way telephone conversation yesterday afternoon with Mr. Goldenson and Mr. Murphy. Mr. Fowler did not comment on what was said because formal documents have not yet been filed with the commission.

''There are certainly cross-ownership questions,'' said James McKinney, chief of the FCC's mass media bureau, the division with responsibility for broadcasting oversight. ''I would guess they will come in with a plan fairly shortly.''

ABC has been a topic of takeover gossip for some months. Capital Cities' move to acquire such a vast television holding continues a spurt of takeover interest that has recently jolted the broadcast business, one of the most lucrative and profitable industries in America.

Among recent acquisitions in the broadcast industry, the Taft Broadcasting Company bought the Gulf Broadcasting Company, and Multimedia Inc. was acquired by its own top executives.

Elsewhere, Ted Turner, the owner of Turner Broadcasting System Inc., is reported to be considering a bid for the CBS network. Meanwhile, a conservative group, with the backing of Senator Jesse Helms, Republican of North Carolina, was put together to raise cash to buy CBS stock as a way of challenging what the group calls the liberal bias of CBS News.

NBC, the third network, is part of the RCA Corporation, which is occasionally mentioned as a potential target for corporate hunters.

CBS said it had no comment on the ABC-Capital Cities agreement. NBC said only that it wished both companies well.

Last year Capital Cities had revenues of $949.7 million and a profit of $135.2 million. ABC had revenues of $3.71 billion and a profit of $195.3 million. But the combined Capital Cities/ABC Inc. will still rank third among the networks in terms of revenues of the parent companies.

Wall Street's View of Deal

The deal between ABC and Capital Cities drew mixed views from Wall Street. It will fuse together two companies rather disparate in culture. Capital Cities, one of the most profitable companies in the communications industry, with television, radio, newspaper and trade publications operations, is a lean, low-risk company that keeps an unwavering eye on how many coins are in the till.

ABC, on the other hand, is a sprawling enterprise that derives the bulk of its income from the risky and fickle game of television programming. Its heyday as the No. 1 network is a dusty memory, and it has been shaken by dwindling audience ratings that have dropped it back to No. 3.

''There really is no logical reason to put these two companies together,'' said Edward Atorino, a securities analyst at Smith Barney Harris Upham & Company. ''You come down to power, I guess. From ABC's perspective, maybe it's 'Let's get off a sinking ship.' They've got serious ratings problems that could damage their operating results this year and next. So maybe it's turn it over to a new gang of people who think they can do no wrong and give them the challenge of taking a No. 3 network and making it king again.''

''I think it's attractive for the ABC shareholder,'' said Mark Riely, an analyst with F. Eberstadt & Company. ''For Capital Cities, they bit off a lot to chew at a pretty hefty price. They have quite a task in front of them.''

The combination sets the stage for some potential personality clashes, since it establishes a hierarchy involving corporate chieftains unfamiliar with taking orders from others.

In addition to the positions to be occupied by Mr. Murphy and Mr. Goldenson, Daniel Burke, Capital Cities' president and chief operating officer, will continue in the same role for the combined company.

New Executive Alignment

Frederick Pierce, ABC's president, will become vice chairman of Capital Cities/ABC and chairman and chief executive officer of the ABC network. Though he no longer will report to Mr. Goldenson, he will have two new bosses in Mr. Burke, to whom he will directly report, and Mr. Murphy.

''The question is who's really going to run ABC once all the smoke clears,'' said Mr. Atorino. ''Pierce, I would think, is not going to want to take a backseat. He's had a backseat most of his life and was in a position to take the front seat. Murphy is certainly not going to take a backseat. He's never had a backseat in his life. But Murphy has never done any programming, and ABC's ratings are in dreadful shape.''

''I don't think there will be any less autonomy,'' Mr. Pierce said. ''The reporting mechanism is just something on a chart.''

Capital Cities owns seven television stations, including top-ranked TV stations in Philadelphia and Houston. Four of the stations are ABC affiliates. The company also has 12 radio stations, 10 daily newspapers and more than 30 trade publications and other communications-related ventures.

Its publishing division includes Fairchild Publications, which issues such trade journals as Women's Wear Daily. Among its newspaper properties are The Kansas City Star and The Fort Worth Star-Telegram.

ABC owns television stations in New York, Chicago, Los Angeles, San Francisco and Detroit as well as 12 radio stations and an array of magazines, and it is involved in various cable services.

"Murdoch Is Buying 50% Of Fox," by Richard W. Stevenson, The New York Times, March 21, 1985

Rupert Murdoch, the Australian publisher who has bought up numerous American newspapers and magazines, entered the motion picture business yesterday with an agreement to buy 50 percent of the 20th Century-Fox Film Corporation.

Fox, now privately owned by Marvin Davis, a wealthy oilman, is one of Hollywood's best-known movie studios, but one that has suffered financial difficulties from a string of box office disappointments.

''They need the capital to get back on track with production,'' said Harold Vogel, an analyst at Merrill Lynch. ''It's been a rough period for them for the past one and a half or two years.''

The purchase surprised the Hollywood community, and raised questions about what effect it might have on the kind of films the studio produces.

It was not immediately apparent if Mr. Murdoch's stake would give him firm control of Fox. But analysts said Mr. Murdoch would undoubtedly have a major say in studio operations.

Mr. Vogel predicted that ''some people will be delighted and some people will be incensed'' at Mr. Murdoch's move into the film industry.

In a joint statement with Mr. Davis, Mr. Murdoch said he would buy the 50 percent interest for $162 million, and would also advance $88 million to the studio's parent company to help pay debt and provide needed capital.

Mr. Davis and a partner, Marc Rich, bought a controlling interest in 20th Century-Fox in 1981 for $722 million. Mr. Davis bought out Mr. Rich's half of the company last summer for a reported $116 million, after Mr. Rich was indicted for tax evasion and other charges in connection with his worldwide commodities operations.

The purchase is the second announced change in ownership in the media and entertainment industry this week. On Monday, Capital Cities Communications Inc. agreed to acquire the American Broadcasting Companies for $3.5 billion.

Among his holdings, Mr. Murdoch, through his News Corporation Ltd., owns The New York Post, The Village Voice and The Star, a national tabloid. He has often bought the weakest newspaper in a market and tried to strengthen it, sometimes by using screaming headlines and stories that emphasize crime and scandal, and he has been criticized for that. But he also owns highly respected newspapers, including The Times of London and The Chicago Sun-Times.

He also owns television, cable and satellite operations in the United States, Britain and Australia. Analysts said Mr. Murdoch has expressed interest in film and television studios for some time, in part because he hopes to provide programming to his broadcast operations.

''He likes the idea of having a film library and a production arm,'' said Lee S. Isgur, an analyst at PaineWebber Inc. ''If he can have 20th Century-Fox's film library and distribution rights, that's not bad. He's also got an ego, and he wants to get into the business.''

Last year Mr. Murdoch tried to gain control of Warner Communications Inc., the parent of studio Warner Bros. He failed in that bid, but earned an estimated $40 million by selling his stake in Warner back to the company at a premium.

A Series of Disasters

Fox's last major hit was Romancing the Stone, more than a year ago. Since then, it has had a string of disasters, including Rhinestone, starring Sylvester Stallone and Dolly Parton; Blame It on Rio, with Michael Caine, and Unfaithfully Yours, with Dudley Moore.

The studio distributed the three Star Wars movies, but they were produced and owned by George Lucas, the director.

Fox's television production company has also stumbled.

Last September, Mr. Davis lured Barry Diller, who had been chairman and chief executive of the Paramount Pictures Corporation, to Fox, in the same capacity. Mr. Diller reportedly received an equity stake in Fox at that time.

Mr. Murdoch could not be reached for comment yesterday, but, in a prepared statement, he said: ''20th Century-Fox is one of the world's few great film and television companies, and with its new management, under the outstanding leadership of Barry Diller, is positioning itself for significant growth.''

Studio Lost $85 Million

The studio lost $85 million in the fiscal year ended August 25 and another $12.4 million in this fiscal year's first quarter, which ended November 24.

The movie industry has enjoyed record admissions and box office receipts in the past several years, but profit margins have been down lately, as a record number of films has competed for audiences.

Analysts said the investment by Mr. Murdoch should allow the studio to increase its production budget and pay off some of its sizable debt.

At the end of its first quarter, the company's bank debt was $414 million, up from $363 million at the end of the previous quarter.

Two weeks ago Fox had said it was restructuring a revolving credit line of $400 million, and that it had arranged for a capital infusion of $170 million, including $50 million from Mr. Davis.

Of the total of $250 million paid by Mr. Murdoch's News Corporation to TCF Holdings, which is the parent of the Fox studio, $132 million will be invested in the studio and the rest used to pay down the bank debt, according to Mr. Murdoch and Mr. Davis.

The companies said the deal should be completed in about a month.

Since Mr. Davis bought into 20th Century-Fox in 1981, the studio has been plagued by management turnover.

In the last several years, Sherry Lansing, the first woman president of a major studio; Alan J. Hirschfield, who preceded Mr. Diller as chief executive, and Joe Wizan, the head of production, all left the company.

Since he acquired the company, Mr. Davis has spun off Fox's extensive real estate holdings.

"An Open Letter From Trans World Airlines to Carl C. Icahn," The New York Times, May 20, 1985

If you thought we'd just stand by and do nothing while you try and take over our company...THINK AGAIN!

You secretly accumulated our stock for several weeks. Finally, you disclosed that you have bought 1/4th of our shares. You have also been, as usual, vague about what your real intentions are-and characteristic of your past actions, you have threatened to take over our company.

Well, Mr. Icahn, we have no intention of standing by and doing nothing while you play your Wall Street games with us. TWA is a vital part of our nations well-being. And because we view that role seriously, we are going to take whatever steps necessary to protect the constituencies and communities we serve. In case you're unaware who relies on us, let us elaborate:

-The other owners of nearly 24 million shares of TWA common stock, as well as the holders of our preferred and preference stock;

-the more than 27,000 TWA employees worldwide;

-the more than 60 U.S. cities we provide with dependable air service;

-the numerous cities and countries abroad which benefit from our acclaimed international flag service;

-the literally hundreds of vendors-from the aircraft manufacturers to the smallest stationery suppliers-who count on us for providing them with jobs;

-finally-and of paramount importance-the more than 18 million passengers who fly 28 billion miles each year on TWA.

You see, Mr. Icahn, running a major airline is a big job, one that we don't take likely. It's not like speculating with paper on Wall Street. You have to be proven "fit" to operate an airline-"fit" to manage; "fit" to raise the vast sums of money needed to maintain equipment safely and invest in new, modern aircraft; "fit" to comply with the many important rules and regulations that the various federal, state, municipal and international agencies demand of an air carrier. In fact, we think you are so unfit we are asking our government's Department of Transportation to rule on your fitness to control an air carrier and we are suing in you in state and federal courts.

So, Mr. Icahn, if you thought we'd just stand aside and do nothing while you try to take over our company-think again! Running one of the world's most respected airlines is a heavy responsibility. We think it's a commitment you just can't handle.

Ed Meyer-President and CEO, TWA

Dick Pearson-Executive VP and COO, TWA

"R.J. Reynolds Makes $4.9 Billion Offer To Buy Nabisco Brands," Los Angeles Times, June 3, 1985

R.J. Reynolds Industries Inc. announced on Sunday that it will merge with Nabisco Brands Inc., forming the largest U.S.-based consumer products company.

The merger, which is subject to approval by Nabisco shareholders, brings together the second-largest tobacco company in the country and the nation's No. 4 food company. The deal, estimated to be worth $4.9 billion, would be the largest non-oil merger in U.S. history.

The combined firms will have annual sales of more than $19 billion, displacing Cincinnati-based Procter & Gamble Co., with $12.9 billion in annual sales, as the nation's largest consumer products company, according to Peter Allan, a Reynolds spokesman.

Under terms of the agreement, R.J. Reynolds, based in Winston-Salem, said it plans Tuesday to offer to buy up to 51% of Nabisco's common stock at $85 per share in cash.

The company's remaining common stock will be exchanged for $42.50 in new senior debt securities of Reynolds and $42.50 stated value of a new preferred RJR stock, company officials said. The debt securities and preferred stock are designed to have an aggregate value of $85.

The price was in line with recent Wall Street speculation that has sent Nabisco shares rising by over $20 per share in the month of May. On the New York Stock Exchange, Nabisco shares closed Friday at $82.675 a share, up $2.875. Reynolds stock on Friday closed at $74.375 a share, up $1.125.

Likely Takeover Candidate

Wall Street analysts have said for many months that Nabisco was a likely takeover candidate as it sought an infusion of friendly funds for advertising and promotion in the hotly contested food market.

The merger agreement was announced in a joint news release by J. Tylee Wilson, chairman and chief executive Reynolds, and F. Ross Johnson, Nabisco's vice chairman and chief executive. The agreement was worked out late Saturday, Allan said.

As part of the agreement, Nabisco has granted Reynolds an option to purchase about 10.6 million shares of Nabisco stock at $85 per share and an option to buy Nabisco's U.S. biscuit division for $1.65 billion, the officials said.

"We are extremely pleased to make this agreement with Nabisco Brands," Wilson said. "Nabisco's premium quality brands and its strong management team offer the ideal addition to the RJR portfolio."

Johnson added that "we're in businesses we both understand, using much the same distribution channels, with many of our brands enjoying leading shares of their market segments. This is a positive, progressive move and will enhance the future of Nabisco worldwide. The combination of leading brand names and the variety of items gives us a line of consumer products and unequalled around the world."

Wilson, 53, will head the combined company, while Johnson, 53, will become president and chief operating officer of Reynolds Industries. Edward Horrigan, Jr., 55, Reynolds president and chief operating officer, will be named RJR's vice chairman.

The three men will make up the newly formed office of the chairman of Reynolds Industries.

Expanded Board

At Nabisco, which is based in Parsippany, New Jersey, Robert M. Schaeberle, 62, will continue as chairman, while James O. Welch, 53, president and chief operating officer, will be named president and chief executive.

Under the plan, RJR will also increase its board of directors to 21 members. Added to the board will be Johnson, Schaeberle, Welch, Charles E. Hugel, 56, president and chief executive of Combustion Engineering, and Andrew G.C. Sage II, 59, managing director of Shearson Lehman Hutton.

All five men sit on the Nabisco board of directors.

Nabisco Brands, which earned $308 million on sales of $6.25 billion in 1984, is a food processor known for its cookies, crackers, nuts and snacks. Its brands include Premium Saltines, Ritz crackers, Oreo cookies, Planters nuts, Baby Ruth, Life Savers candy and Nabisco Shredded Wheat cereal.

R.J. Reynolds earned $1.2 billion on sales of $11.9 billion last year.

Reynolds is an international consumer goods and services corporation with interests in domestic and international tobacco, canned and frozen foods, beverages and quick service restaurant services. RJR's brand names include Winston, Salem and Camel cigarettes, Del Monte foods, A1 Steak Sauce, Canada Dry mixers and soft drinks, Hawaiian Punch, Kentucky Fried Chicken, Smirnoff vodka and Inglenook and Beaulieu wines.

The announcement said the transaction has been approved by both companies' boards and is subject to approval of the shareholders of Nabisco Brands, certain regulatory clearances and other "customary conditions."

"TWA Unions Hang Tough Against Lorenzo," by Harry Bernstein, Los Angeles Times, June 26, 1985

Francisco (Frank) Lorenzo's success at busting Continental Airlines' unions has brought about a rare spirit of cooperation among unions at Trans World Airlines, which Continental's parent, Texas Air Corp., is planning to buy for $793.5 million.

When Lorenzo abrogated all union contracts at Continental in October 1983, after filing for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, he laid off a substantial portion of Continental workers and cut wages of the remaining workers almost in half.

The fear of equally harsh treatment has brought unity to the TWA unions representing pilots, mechanics, flight attendants, clerks and other employees-unions that have had a long history of non-cooperation.

In the recently concluded monthlong strike by pilots against United Airlines, for example, members of the International Association of Machinists continued to work even though almost all of that company's flight attendants respected the picket lines.

In an effort to block Lorenzo's takeover plans, the unions have hired consultant Brian Freeman and the investment firm of Lazard Freres & Co. to help them plan actions that could range from an employee buyout to a hurried search for another bidder.

The unions say they plan today to picket the Beverly Hills offices of Drexel Burnham Lambert, which is seeking buyers on behalf of Texas Air for about $550 million in what are called "junk bonds," or debt securities with less than investment-grade ratings. The proceeds would be used to help finance the TWA purchase.

"We want to tell investors that labor will do everything in its power to stop Lorenzo from taking over TWA," said Vickie Frankovich, president of the International Federation of Flight Attendants.

David Venz, a TWA spokesman, said the airline is "fully committed to implementing our board of directors' decision to make TWA a subsidiary of Texas Air" and would, therefore, fight a buyout by employees.

The TWA unions, all of which are having serious trouble negotiating contracts with TWA's current management, represent about 20,000 of 28,000 employees.

TWA's flight attendants voted last week to strike if no new agreement is reached, and several sources say privately that Lorenzo has already been involved behind the scenes in discussing deadlocked negotiations. However, spokesman Venz said he knows of no such contacts between Lorenzo and TWA officials.

He added that it was "particularly unfortunate" that the attendants announced the result of their strike vote last week when TWA was so preoccupied with the terrorist hijacking of TWA Flight 847. Frankovich responded that the unions are "deeply concerned" about the hostages but added that the company is pursuing its business, including a merger discussion, and that that should include negotiations with its unions.

As to the prospect of a takeover, she said, "we believe that our differences with TWA now, even though serious, are minor compared to the treatment we must expect at the hands of Lorenzo, based on his actions at Continental."

The attendants have been in negotiations for more than a year and have offered to make some concessions-but not enough as far as management is concerned.

TWA wants a three-year wage freeze, work-rule changes aimed at boosting productivity and a two-tier wage structure under which the wages of employees hired after the contract goes into effect would start out lower than those of employees already on the payroll, merging in the seventh year.

The attendants offered to accept a two-tier wage structure, but one that would start new employees at 30% less instead of as much as 68% less, as the company is demanding. The company also wants to make the two-tier structure retroactive to January 1985, something that the union finds unacceptable.

Meanwhile, the attendants are seeking a job security clause, which they feel would be essential if they fail to stop a takeover by Lorenzo.

"We don't want to make concessions with no job security protection with Lorenzo hovering in the background," Frankovich said.

A strike is not expected for at least six weeks. By that time, the machinists would also be in a position to call their own strike. Furthermore, the pilots have started exchanging contract proposals with TWA management.

Adding to the unions' interest in the proposed Texas Air/TWA deal is the ironic fact that, while Texas Air is pursuing a sizable merger, its Continental subsidiary is continuing to operate while protected from creditors under Chapter 11.

Since Continental filed to reorganize in September 1983, and let go most of its pilots, the pilots union has been trying to get Texas Air to accept responsibility for its members' lost income.

"We are going to arbitration and are in the courts with cases that involve in excess of $2 billion in liabilities against Continental and its parent, Texas Air," said John Mazor, a spokesman for the Airline Pilots Association.

Boosting the pilots' confidence was a ruling by a bankruptcy court in Biloxi, Mississippi, last week. The judge lifted a stay against a creditors' lawsuit, basically clearing the way for the creditors to proceed with efforts to have Texas Air made responsible for Continental's debts. Mazor contends that, once potential investors in the Texas Air takeover of TWA realize that the company might face sizable liabilities, the unions will have better luck stopping the merger.

Officials of Continental and Texas Air would not comment on the lawsuit or the potential effect of the planned takeover of TWA.

"TWA Pilots In Pact With Icahn On Concessions," The New York Times, July 3, 1985

The Airline Pilots Association said yesterday that it had entered into an agreement with the New York investor Carl C. Icahn under which the union would give pay and benefit reductions of up to 20 percent if he acquired control of Trans World Airlines.

Robert J. Joedicke, the airline analyst for Shearson Lehman Brothers Inc., said in an interview that the agreement puts Mr. Icahn in a strong position to make an alternative offer for TWA. To escape an earlier attempt by Mr. Icahn to buy the airline for $18 a share, TWA agreed on June 14 to be acquired by the Texas Air Corporation, parent of Continental Airlines and New York Air, in a cash-and-stock transaction valued at $925 million, or $23 a share.

''This makes it attractive for Icahn to make another bid but it will have to be something better than the Texas Air bid,'' Mr. Joedicke added.

The Texas Air deal has run into opposition from TWA's three major unions, which have banded together to search for alternatives.

Stock Option Cited

It would be difficult, however, for Mr. Icahn to stop the Texas Air bid from proceeding even if he did make a better offer.

As part of the agreement, Texas Air was given an option to acquire 6,425,000 TWA shares at $19.625 each, a provision designed to ward off another bidder.

The statement by the pilots' union said that Mr. Icahn was seeking to complete agreements with the carrier's two other major unions, the flight attendants and the machinists.

Vicki Frankovich, president of the Independent Federation of Flight Attendants, confirmed that her union had been in negotiations with Mr. Icahn but had ''problems'' with his proposal. She said that an agreement could still be reached but that it would not be an easy process and that her union was talking with other investors.

She added, however, that the pilots' agreement had the approval of the two other unions.

In return for the proposed concessions, the pilots would get profit sharing and common stock if Mr. Icahn were successful in gaining control.

Tactics Criticized

The unions have said that they were concerned about the tactics used by Frank A. Lorenzo, president of Texas Air, at Continental.

After being unable to get concessions from the unions there, Mr. Lorenzo had Continental file for protection under Chapter 11 of the Federal Bankruptcy Code in September 1983.

He repudiated existing union contracts, a move that was upheld by the bankruptcy judge, and hired former and new employees at half pay. He also imposed new work rules.

The airline, which lost more than $536.1 million from 1981 to 1984 and remains under the bankruptcy court's protection, has become profitable.

Pilots Still on Strike

The changes in salary scales and work rules caused much bitter feeling among the unions, particularly the Airline Pilots Association, which protested with a strike against Continental that has yet to be resolved.

There is fear that Mr. Lorenzo would push for similar concessions at TWA.

Jerry Cosley, vice president of corporate communications for TWA, read a statement yesterday saying that ''TWA has a definitive agreement with Texas Air Corporation and our board intends to honor that commitment.''

A spokesman for Continental said that the company would have no comment. A spokesman for Mr. Icahn said that he would make an announcement probably by today.

In trading yesterday on the New York Stock Exchange, TWA gained 37.5 cents, to $19.25.

"Turner Acquiring MGM Movie Empire," by Geraldine Fabrikant, The New York Times, August 8, 1985

The MGM/UA Entertainment Company yesterday accepted a $1.5 billion takeover bid from Ted Turner, the Atlanta broadcasting entrepreneur.

The acquisition will put Mr. Turner at the head of one of the most highly diversified empires in the entertainment industry, adding movies to a business that already encompasses sports teams, the satellite station WTBS-TV and cable news services.

The definitive merger agreement, approved by the directors of both MGM/UA and Turner Broadcasting Systems Inc., comes just after Mr. Turner's bruising defeat in his battle to take over CBS Inc.

Because of that, analysts said yesterday, the success of the MGM/UA deal is vitally important to his credibility.

The acquisition will give Mr. Turner, whose main asset now is WTBS-TV, a 2200-film library that includes such standbys as Gone With the Wind, The Wizard of Oz and Singin' in the Rain.

In addition he will gain a film studio, which could provide important new movies and series for WTBS-TV.

The deal will also separate two Hollywood institutions - Metro-Goldwyn-Mayer and United Artists - that had their origins in the heyday of moviemaking and were combined in 1981. Although Mr. Turner will buy the whole company, under the complex terms of the deal he will sell the UA portion back to the financier who now controls it, Kirk Kerkorian, reducing Mr. Turner's own cost to $1 billion. Metro-Goldwyn-Mayer was the dominant company in the early days of the film industry, claiming ''more stars than there are in the heavens.'' Among those who worked for the studio were Clark Gable, Judy Garland and Elizabeth Taylor.

United Artists was started by Mary Pickford, Charlie Chaplin, Douglas Fairbanks and D.W. Griffith as a distribution company owned by artists. In 1951 it was bought by Arthur Krim and Robert Benjamin, who were responsible for the James Bond series, the Rocky series and the Pink Panther series. All are now part of the United Artists film library, which will continue to be controlled by Mr. Kerkorian.

Mr. Turner has built a reputation as an iconoclastic entrepreneur in the media business. He bought WTBS-TV, an Atlanta television station, in 1970 and turned it into a so-called superstation in 1976 by distributing its programming by satellite, which made it available to viewers across the country.

In 1980 he started CNN, his 24-hour-a-day cable news service. Many industry experts doubted that Mr. Turner could make a 24-hour service work. He refused to give up, however, and his cable operations showed a profit for the first time in this year's first quarter.

Not all of his cable programming strategies have paid off. Last year he started a cable music service to compete with MTV, but cable operators failed to respond.

Mr. Turner's acquisition of MGM/UA, which still requires the approval by stockholders of both companies, will not drastically alter the balance of power in Hollywood or in the broadcasting business, as Mr. Turner's bid for CBS Inc. would have done had he succeeded. MGM is one of the weaker studios, and while Turner Broadcasting has been an innovative force in the industry, it owns only one television station.

However, the deal underscores the growing trend among TV station companies to seek a guaranteed supply of programming at a time when the increased number of media outlets has sent the costs of old TV shows and old movies skyrocketing, said Harold Vogel, a vice president and media analyst at Merrill Lynch Capital Markets.

Just two months ago Rupert Murdoch, the Australian entrepreneur who had bought 50 percent of the 20th Century-Fox Film Corporation, also bought Metromedia Inc., a broadcast company that owns seven television stations. Other TV station companies are increasing their own production of original programming.

The MGM/UA deal also reflects the high premium that media properties are now able to command. Mr. Turner is paying $29 a share, or $5 a share more than most analysts say the company is worth. In yesterday's trading, MGM/UA stock closed at $24.25, up 25 cents.

Mr. Turner will be paying cash for the company, in contrast to the high-risk securities he offered for CBS. The money needed for the purchase, he said, will be raised by Drexel Burnham Lambert Inc., the Wall Street firm that specializes in so-called junk bond financing.

In Wall Street jargon, junk bonds are bonds that carry relatively high interest rates because the companies issuing them have received credit ratings that are less than those of blue-chip corporations. Such bonds have become a frequent form of takeover financing because they enable an acquiring company to raise money at a fixed rate of interest for a longer period of time than banks are typically willing to extend.

For Mr. Turner, the acquisition provides a number of synergies. Foremost is the value of the film library for his superstation when both independent stations and pay-TV services are aggressively bidding for programming. But the synergy goes beyond simply putting old films on WTBS-TV. One industry expert pointed out that MGM owns the rights to a number of old movies such as The Fountainhead, which could be used as the basis of made-for-television remakes.

A source close to Mr. Turner added, ''We are buying a distribution operation, and TBS has a number of products it is trying to distribute.'' It has recently been trying to distribute its CNN service abroad. It has also been producing original programming for WTBS-TV. Frequently, companies sell TV series to foreign television as a way of recouping their production costs. The MGM operation would facilitate overseas sales of both CNN and original programming.

Mr. Turner, who is on a fishing trip in Alaska, could not be reached for comment.

MGM/UA's chairman, Frank Rothman, said the negotiations began in earnest last Friday. He said he had met with Mr. Turner the previous week when he made a visit to the MGM/UA lot and expressed some interest in the studio.

Mr. Rothman said he was not surprised by the offer. ''I have been a friend of Turner's for years,'' he said, ''and we have talked on and off. We never got into any specifics. But his people came out from time to time.''

Mr. Rothman said he had not discussed with Mr. Turner how the studio would be run. Whether Mr. Rothman himself would stay on was also not clear. ''I have committed to stay through the transition period to get Turner's people up to speed on what is involved,'' he said. ''Then we would see. I have no commitment beyond it. I could go over to UA with Mr. Kerkorian, I could practice law again.''

Mr. Rothman said Mr. Turner had said he planned to keep current management. Alan Ladd, Jr. is head of production and has a five-year contract, of which about nine months have gone by.

The junk bonds that Drexel Burnham will sell, most likely to private investors, are expected to be backed by the assets of MGM. While their sale will enable Mr. Turner to pay cash, it could will leave MGM with an annual interest expense of $150 million or more.

MGM's cash flow is insufficient to make such payments, but sources close to the negotiations noted that MGM has several hundred million dollars in accounts receivable that could be sold to a group of banks. Additionally, MGM could negotiate a sale and lease back of the film studio lot, the sources said.

"Icahn Acquires Majority Of TWA Stock," by Robert E. Dallos, Los Angeles Times, August 24, 1985

Carl C. Icahn, the New York financier who began moving nearly a year ago to win control of Trans World Airlines, announced late Friday that he had acquired a majority of the airline's stock.

An aide to the businessman said that Icahn and his associates had bought an additional 1.14 million common shares of TWA, giving them 17.5 million shares of the about 34.5 million shares outstanding. That brought his stake to 50.3%, up from the 47% that he reported Thursday.

"It's his airline now," said one person-who asked not to be identified-involved in the takeover struggle that erupted when Icahn made known his intentions last May.

The news came after the close of business Friday. Icahn, reached at his home, refused to discuss his plans but said he hopes to reach an agreement soon with TWA's board to formally support his bid for the remaining stock. Icahn has offered shareholders $24 for the TWA stock that he doesn't control.

No TWA officials were available for comment, and Texas Air spokesman Bruce Hicks said his company had no comment to make.

Intentions Not Clear

Icahn has not made clear his next move or his intentions for TWA. There have been reports that he plans to fire the current TWA board of directors and replace it with his own choices. There have also been reports that he plans to sell the airline quickly or merge it with another company, perhaps even Texas Air.

In June, in an effort to thwart an Icahn takeover, TWA directors agreed to a merger with Texas Air. That agreement, which includes Texas Air's offer of $26 per share, is still to be voted upon by TWA's shareholders.

Since Icahn now controls more than half of the shares, however, there is no question about the outcome of such a vote.

Most observers, however, predict that Francisco Lorenzo, the chairman of Texas Air, will now negotiate with TWA and with Icahn to nullify the agreement. Sources say that Icahn and Lorenzo, who had been holding talks toward a negotiated settlement, are close to an agreement.

"TWA Canceling Merger Deal With Texas Air," Los Angeles Times, August 27, 1985

Trans World Airlines, now more than 50% owned by financier Carl C. Icahn, is working on dissolving an earlier merger agreement with Texas Air, a spokeswoman said Monday.

Icahn, who had support from airline unions and is offering $24 a share for the TWA stock that he does not yet own, disclosed Friday that he had raised his stake in the company to a controlling 50.3% and said that he hoped to complete an agreement soon with TWA's directors to support his bid.

But first, TWA and Texas Air must end an earlier pact, under which Texas Air had agreed to buy the airline for $26 a share.

The agreement would have had to pass a stockholder vote.

"The company is working toward dissolving the agreement the company has with Texas Air," said Lori Feinberg, a TWA spokeswoman. She said she did not know what, if any, progress had been made.

Texas Air's Stake

Bruce Hicks, a spokesman at Texas Air's offices in Houston, said he did not know the current status of the talks.

Texas Air will not be a complete loser in its bid for TWA, however.

It owns 2.2 million shares of the company's stock, which was purchased for about $20 a share, and has an option to buy an additional 6.4 million shares for $19.625 a share.

That stock would be sold back to Icahn at $24 a share.

In addition, the merger agreement provided for TWA to pay Texas Air an $18 million fee if the pact was broken.

TWA closed Monday at $22.375 a share, unchanged from Friday, in New York Stock Exchange composite trading.

Texas Air, listed on the American Stock Exchange, closed at $18.25 a share, up 50 cents.

"Carl C. Icahn Reported Buying More TWA Stock," Los Angeles Times, September 4, 1985

Icahn, the New York corporate raider who won control of Trans World Airlines last month, continued to build up his stake in the airline, documents filed with the Securities and Exchange Commission showed. He now holds 18.27 million shares, or 52.52% of TWA, after buying 776,900 shares for between $22 and $22.25 a share late last week. After a long struggle to outbid Texas Air, Icahn gained a 50.3% controlling interest in TWA a week earlier.

"Murdoch Will Buy Out Davis's Holdings In Fox," by Thomas C. Hayes, The New York Times, September 24, 1985

Marvin Davis, the wealthy Denver oilman, officially bid farewell to the entertainment industry today by agreeing to sell his 50 percent stake in the 20th Century-Fox Film Corporation to Rupert Murdoch for $325 million in cash.

The transaction will give Mr. Murdoch, whose News America Corporation publishes The New York Post and other newspapers and magazines, sole control of one of Hollywood's major film and television production studios within months of his acquisition of six independent television stations from Metromedia Inc.

With this latest purchase, Mr. Murdoch's News Corporation Ltd., with assets of more than $2 billion at the end of 1984, will have spent $1.6 billion in the last 12 months to acquire 12 trade publications from Ziff-Davis, total ownership of Fox and the six Metromedia stations.

A Wall Street source close to the Australian-born Mr. Murdoch, who asked not to be named, said News Corporation would finance the purchase of Mr. Davis's share of Fox through bank credit lines and cash generated by existing operations.

Hits Were Rare

The sale marks an end to Mr. Davis's four years as a studio head and one of the entertainment industry's most powerful figures. The hugely successful oilman, however, failed to transfer his winner's touch from the oil fields to the silver screen.

Fox lost money in two of the last three years, continually running close to last among the major studios in the annual race for box office receipts. Its rare successes, such as Romancing the Stone, Cocoon and Porky's, were overshadowed by a string of poor showings.

Mr. Davis gained sole control of Fox a year ago after paying a reported $116 million to buy out a half-interest held by Marc Rich, the fugitive oil trader. Mr. Davis and Mr. Rich acquired Fox, then publicly held, for $725 million in 1981.

Despite Fox's box office failures, Mr. Davis apparently will have made several million dollars from his ownership of the studio after the sale to Mr. Murdoch is completed. His original cash investment was $75 million, plus unspecified millions to acquire Mr. Rich's share.

'Good Business Sense'

''Our Fox investment was an extremely successful one,'' Mr. Davis, who is 60 years old, said in a prepared statement. ''While it was not our intention to sell the balance of our interest at this time, we concluded that it made good business sense to accept Rupert Murdoch's offer.''

Harold Vogel, a motion picture industry analyst with Merrill Lynch, said he believed that Mr. Davis would have preferred a longer tenure at Fox, in part because he appeared to enjoy the glitter of Hollywood.

''This might not have been a good deal for him, as little as six months ago,'' Mr. Vogel said. ''But the integration of media empires has changed the nature of the broadcasting and movie connections,'' making the movie companies more valuable, he added.

An investment banker close to Mr. Murdoch said discussions about his purchase of Mr. Davis's half of Fox began after Mr. Davis decided not to participate with Mr. Murdoch last July in his purchase of the Metromedia stations.

''It's been a continuing discussion, but it intensified during the last two weeks,'' he said.

Valuable Real Estate

An industry source, who asked not to be named, said Mr. Davis may have concluded a year ago, when Fox was in financial trouble, that he could not master the movie business.

Yet, the source continued, Mr. Davis set out to improve Fox's fortunes and improve his investment by recruiting Barry Diller, then chairman of Paramount Pictures, to run Fox. As part of his agreement with Mr. Diller, Mr. Davis yielded his involvement in production decisions, and he eventually decided to sell out, the source said.

Mr. Davis's son, John Davis, will continue his ties with Fox. The younger Mr. Davis, who is 30, will become an independent feature film producer, retaining offices at Fox's headquarters in West Los Angeles.

In addition to the cash from Mr. Murdoch, Marvin Davis will retain valuable real estate in Pebble Beach, California; Aspen, Colorado, and 2.7 acres adjacent to the Fox studios in Century City, west of Los Angeles.

A joint venture between Fox and Mr. Davis's real estate interests that is building a Century City office tower will remain as structured. The studio property, covering about 54 acres, will be acquired by Mr. Murdoch, according to the joint statement.

"'Obsessed' Teenage Entrepreneur Cleans Up With His Carpet Business," by Daniel Akst, Los Angeles Times, October 29, 1985

Nineteen-year-old Barry Minkow's life seems a kind of parody at first, an elaborate spoof of society's obsession with success.

At 10, he carried water at the carpet cleaning business his mother managed. Later he worked Saturdays and summers at the same trade, by then actually cleaning carpets, drapes and upholstery himself.

At 15, against his parents' wishes, he started his own carpet cleaning business. They finally agreed to let him use their Reseda garage, but for $150-a-month rent. Still in high school, Minkow hired a crew to do the work while he sat in algebra class, worrying how he would make the week's payroll. He wasn't even old enough to drive.

But both Reseda-based ZZZZ Best Co. and its founder have grown fast. The company has four offices now, with a fifth to open soon. Minkow said his business grossed $1.3 million last year and should reach $2 million this year.

Drives Ferrari Now

With profit margins that Minkow says are at least 20% after taxes, he tools around in a new Ferrari nowadays, or in his year-old Nissan 300-ZX Turbo. He said he is also about to close on a $750,000 house in a gated development in Woodland Hills. His parents' skepticism has been curtailed.

"They work for me," he said matter-of-factly.

Barry Minkow is basically rich. He is also driven. Once a skinny, hyperactive kid who was bullied at military school, Minkow transformed himself through assiduous bodybuilding into a competitive weightlifter with a shape like a fireplug.

He appears to have built his business with the same determination. He said he ignored advisers who urged against expansion, and surmounted dishonest employees, the unsavory reputation of the carpet cleaning business and the worries of suppliers and customers who thought he was too young.

To get business, he would send crews out in the middle of the night, if that's when a customer found it convenient. To get a driver's license early, he said, he made a special plea to the state Department of Motor Vehicles.

Chairman, Sole Owner

Now, as chairman and sole owner of ZZZZ Best, he presides over 108 employees. And as if to affirm his precocious success, he has acquired a pair of bleeding ulcers along the way. People in his business call him Mr. Minkow.

He also acknowledges a host of resentments against those he feels tried to hold him back, or failed to support him in his climb to success. Bankers come in for particular ire. Minkow still gets turned down for loans, he said, and, for a while, he couldn't even get a bank account.

"The jealousy comes out, because he's 42 years old, he's getting a salary of about $30,000 or $40,000 a year out of the bank," Minkow said. "Do you think he wants to help me earn more than him?"

His parents, he acknowledged, are among those he resents-he feels they didn't back him sufficiently-although they say there is no animosity. Indeed, Carol, his mother, is now a senior vice president and helps run the business. His father, Robert, is a salesman. The company's president is Vera Hojecki, 54, a woman with years of experience in rug cleaning.

'Edge of Competition'

"As a young child Barry always wanted to compete with me," said Robert Minkow. "That edge of competition stayed with him."

ZZZZ Best has offices in Anaheim, Reseda, Thousand Oaks and San Diego. Another, in Santa Barbara, is in the works, and franchises are planned.

What motivates all this? How does a kid with $5000 in savings build such a business, and why does he vow to keep building until it becomes "the General Motors of carpet cleaning?"

Minkow answers frankly: "I'm obsessed."

Addressing a group at California State University, Northridge, Minkow is charismatic, funny and unpretentious. He gives such common sense advice as "plan ahead," and stresses such old-fashioned business values as delivering quality. He knew the business from top to bottom, he points out.

Promoting Book

"I don't give anybody any reason to think of me as a kid," he said later.

But his visit isn't merely informational. The barrel-chested young entrepreneur-Minkow resembles a college rugby player-has traveled to campuses throughout Southern California and the Southwest to drum up interest in his book, which he hasn't taken to a publisher yet because, he said, he figures he'll get a better deal on the manuscript after more publicity as a wunderkind.

The industry in which Minkow made his mark is a fiercely competitive one, with a reputation that has been tarnished by some bad business practices. David Tuck, immediate past president of the Carpet Cleaning Institute, a Los Angeles-based trade association, said there are about 2000 companies in the business in Los Angeles and Orange County, and many more practitioners who do the work part time.

There are no figures on how much carpeting there is in the Southland, but the area is carpet-rich, mainly because so many homes are built on concrete slab surfaces without hardwood floors, according to Murray Hall, director of the West Covina-based Carpet Manufacturers Association of the West. Tuck estimated that 80% of the carpeting has never been professionally cleaned.

'Major Complaint Area'

"Carpet cleaning is a major complaint area," said Timothy Bissell, chief investigator for the Los Angeles County Department of Consumer Affairs.

"It's a morass," said Guy Wirsig, director of operations for the Los Angeles-Orange County Better Business Bureau.

The main problem, they said, are bait-and-switch techniques in which an absurdly low price is advertised, a price that in many cases turns out to exclude much of what needs to be done to clean a carpet. Then the cleaners attempt to sell the consumer costlier services.

Bissell and Wirsig said they have had no complaints against ZZZZ Best, which Minkow said discloses prices up front, provides a written contract and guarantee, and "does good work."

ZZZZ Best gets most of its business by selling itself over the phone through cold calls, although Minkow said his customers tend to come back. The average customer spends about $90 for the service, which entails sending a crew to customer's home to do the work, Minkow said.

Despite his precociousness, Minkow is old-fashioned in some ways. His largely inspirational book Making It in America, for example, reveals little about himself, but stresses the need for hard work and knowledge. It scorns those who hope for easy, overnight success.

Even his company's name has traditional overtones. He said he picked it because "I want four kids. So I have four Zs."

"High-Stakes Drama At Revlon," by Robert J. Cole, The New York Times, November 11, 1985

One of the pivotal corporate battles of modern times opened quietly last March when a little-known businessman riffled through a stack of papers from Wall Street investment bankers looking for ideas about companies to take over.

One page that caught his eye was about Revlon Inc., the cosmetics and health care giant. Ten days ago, in a $2.7 billion takeover, the businessman won control of Revlon.

How Ronald O. Perelman accomplished this feat demonstrates that, in this era of the corporate raider, virtually no company is safe from takeover - regardless of the array of legal and financial roadblocks that it may erect.

Stock Was Cheap

Revlon, like hundreds of other publicly owned companies these days, was a sitting duck because its stock was cheap in comparison with the company's earning power or its worth if broken up and resold. With that kind of vulnerability, all that an enterprising financier or corporate prowler needs is access to a pool of funds that will enable him to make shareholders an offer they will find hard to refuse.

What makes the takeover of this billon-dollar giant even more remarkable and frightening to other major corporations, though, is that Mr. Perelman could raise all the money he needed even though the supermarket chain he headed, Pantry Pride Inc., is much smaller than Revlon.

The 42-year-old executive was able to become a threat because a new breed of bond investors are willing to take on greater risk. They back aggressive corporate executives such as Mr. Perelman by buying high-yield securities, known as ''junk bonds,'' a controversial financing tool that has become increasingly common in hostile takeovers. At the same time, Wall Street investment bankers, encouraged by higher and higher fees, are fueling the takeover game by sleuthing for possible candidates and arranging financing. The take for Pantry Pride's investment bankers on the Revlon deal, more than $70 million, appears to have set a new high-water mark.

Acting as a supporting cast in such high-stakes dramas are Wall Street's professional arbitragers, who have billions of dollars at their disposal to invest in potential takeover situations. Once they catch a whiff of a target company, they amass holdings in its shares and are then itchy to make a profit and move on to the next deal.

But the Revlon deal might never have taken place if not for a judge in the Delaware Chancery Court named Joseph T. Walsh, who cleared the way for Mr. Perelman. The judge, now a justice on the Delaware Supreme Court, ruled that Revlon did not act in the best interests of its shareholders when, as a defensive maneuver, it worked out a deal with another company to sell it two key divisions, no matter what happened. In effect, Revlon was trying to discourage Pantry Pride by locking up certain key assets to prevent them from falling into Pantry Pride's hands.

That decision has sent dozens of executives rushing to lawyers for new ways to defend themselves, because, from now on, in the view of many legal experts, if they go too far in erecting defenses, they must treat all potential acquirers equally. The tide, many lawyers believe, has shifted in favor of the hostile bidders.

One of the great success stories of modern times, Revlon began in a backroom on the West Side in the harsh Depression year of 1932 on a $600 stake. It was the brainchild of the legendary Charles Revson, his older brother Joseph and a chemist named Charles R. Lachman, who is best remembered for the ''l'' in Revlon.

Revlon today sells more than $1 billion worth of cosmetics in 130 countries, along with $1 billion of healthcare products.

Cast of Characters In the Takeover

The cast of characters in this emotionally charged battle included:

*Dennis Levine of Drexel Burnham Lambert Inc., the world's leading seller of junk bonds and adviser to Mr. Perelman.

*Eric Gleacher of Morgan Stanley, another adviser to Mr. Perelman. It was his firm that first suggested Mr. Perelman buy Revlon.

*Felix Rohatyn, senior partner of Lazard Freres, who flew back from a vacation in Austria - and canceled another to Venice - to help defend Revlon.

*Theodore Forstmann; his lawyer, Stephen Fraidin, and his investment banker, Goldman Sachs, who thought Mr. Forstmann's investment firm had bought Revlon, only to find that Justice Walsh had taken it away.

*Donald Drapkin, a partner at Skadden Arps Slate Meagher & Flom, which served as the law firm for Pantry Pride.

*Martin Lipton, the takeover defense lawyer who served as Revlon's strategist. A senior partner at Wachtell Lipton Rosen & Katz, he and 100 other lawyers toiled around the clock for days at a time, many so exhausted they curled up on the floor where they were, and slept.

*And, of course, there was Michel C. Bergerac, the man who got a $1.5 million bonus in 1974 just to join Revlon. At that time, Revlon's sales stood at less than $500 million. They now approach $2.5 billion, largely because Mr. Bergerac moved Revlon into the healthcare field.

As a result of the takeover by Pantry Pride, the 53-year-old executive has resigned from Revlon. Among other things, he has also lost the use of a lavishly outfitted Boeing 727, with kitchen, bedroom, living room, backgammon board and, for big-game hunting, gun rack. By year-end he will lose a chauffeur-driven limousine, his office at Revlon, his private dining room, his butler and two secretaries. But his departure is undoubtedly softened by some $36 million in stock options and severance pay.

Revlon came to Mr. Perelman's attention as one of 25 companies he thought of buying to replace supermarkets he planned on selling. Over the past eight years, Mr. Perelman has built up a successful mini-conglomerate, MacAndrews & Forbes Holdings Inc., by selling off divisions of companies he acquired in order to enable him to buy yet more companies. The Revlon deal, however, was his first hostile takeover.

Mr. Perelman used Pantry Pride, which is part of his interests, as the corporate vehicle for the takeover. He narrowed the list of candidates to 10, including Revlon, and began an intensive study of them. In order to prevent outsiders from finding out who the target was, the Pantry Pride team of lawyers and investment bankers used a code word for the Revlon project. It was ''Nicole,'' the name of the 17-month-old daughter of Mr. Drapkin.

By mid-June, Mr. Perelman called Mr. Bergerac. As the Revlon chief remembered it, Mr. Perelman proposed buying Revlon in a friendly deal for far less than the $58 a share he eventually paid, and said that ''if I supported him, he'd greatly improve my life style.'' Mr. Bergerac's response was chilly.

By mid-August, Wall Street heard that Pantry Pride might take its offer to Revlon shareholders. In a few days, Pantry Pride went public with its bid, offering $47.50 a share. Revlon is ''not for sale,'' Mr. Bergerac said defiantly, accusing Pantry Pride in a lawsuit of raising $700 million in junk bonds without saying the proceeds would be used to buy the cosmetics company.

Revlon built its defenses. It created a poison pill, a device to make a takeover more expensive. Such legal maneuvers often require buyers to purchase additional securities that did not previously exist or that are priced so high as to create enormous additional costs.

To further discourage an unwanted suitor, Revlon bought back 10 million shares in exchange for $575 million of securities, thus saddling a potential acquirer with an added debt burden. In response, Pantry Pride clipped its offer in mid-September to $42, Within two weeks, Pantry Pride reversed its strategy and raised its bid to $50 and then to $53, after it concluding that Revlon was close to a deal with someone else.

Revlon Constructs Some Roadblocks

Until Pantry Pride raised its bid, Revlon had little difficulty justifying its opposition: The company was worth far more. But when the bidding topped $50, Revlon's advisers recognized that the company had became vulnerable.

The company quickly decided to seek a buyer. The problem, however, was that Revlon had six days to do so before Pantry Pride's offer would end. At that point Mr. Perelman would be free to buy the company, and likely to pick up much of Revlon's stock from waiting arbitragers.

Unlike some other recent target companies, such as Richardson-Vicks Inc., which are easily sold to one company, Revlon is a cosmetics company and a healthcare company, and no friendly buyer could be found. The task became to sell the two halves to different parties. It was a job that fell to Mr. Rohatyn of Lazard Freres as Revlon's adviser.

Despite considerable skepticism that there was enough time to find buyers and to complete the paperwork, the following pieces fell into place: A small Manhattan investment house known as Adler & Shaykin agreed to buy the cosmetics business for $900 million; Mr. Forstmann's leading New York management buyout organization, Forstmann Little & Company, agreed to take the rest for about $1.4 billion; and lenders for both agreed to put up the money, all before the deadline.

At that point, Revlon seemed to have won. It had worked out its own deal and appeared to have set up the roadblocks that would make it difficult for anyone else to swoop in.

The Forstmann Little portion involved a management buyout of the healthcare interests, with Mr. Bergerac investing some of his severance benefits in the company and becoming its chief. Shareholders, moreover, would get $56 a share. Before long, however, Mr. Bergerac withdrew from the deal after he was criticized for precipitating his golden parachute, as such severance payments are known, and then wanting to use the money to help buy the company.

A confident Mr. Perelman told Mr. Bergerac that whatever Forstmann Little offered, he would raise by 25 cents a share. Four days after Forstmann Little offered $56, he offered $56.25. Because of the high cost of money, Mr. Perelman argued that his $56.25, paid immediately, was worth much more than Forstmann's $56, paid out in perhaps 60 days.

Revlon's directors, meanwhile, were meeting repeatedly to develop a strategy to fight off Mr. Perelman.

One directors' meeting turned comical as directors in New York met by speakerphone with directors on business elsewhere. Ezra Zilkha, head of his own investment company, listened from Jerusalem, but a telephone operator there kept interrupting, with a strong Brooklyn accent to tell Mr. Zilkha that he had another call waiting.

At another point, all of the phone lines went dead and what had been funny was now frustrating for tired directors.

A few days later, now mid-October, Forstmann Little raised the bidding another $1, to $57.25. In return for sweetening the bid, it got the right to buy two key operations. Court papers showed, however, that the $525 million sale price was at least $75 million less than fair value. Justice Walsh stressed this point in his historic decision that raises questions whether companies can set bargain prices for friendly suitors.

Undeterred, Mr. Perelman bumped the price by another 75 cents, to $58.

For his own protection, the offer was dependent on eliminating the sales contract. The poison pill, which might also have been a stumbling block, had already been eliminated when Revlon knocked it out for all bids over $57.25.

To lighten the tension in the Revlon office, Roger Shelley, the company's spokesman printed up T-shirts reading, ''It ain't over 'til the fat lady sings.'' He soon discovered that lawyers on the other side adopted the same slogan.

Legal Bombshell Lands in Delaware

Then the bombshell struck. It was October 23. Justice Walsh, named less than a month before at the age of 55 to become a Delaware Supreme Court justice but working off a backlog of Chancery Court cases, ruled that Revlon's directors had breached their fiduciary duty by giving Forstmann Little the right to buy the two key operations.

The decision is important because it established that while it may be perfectly legal to set up certain roadblocks, such as poison pills, to give directors more time to bargain, it appears to be illegal for directors to construct too many roadblocks and to chill bidding rather than make bidding possible.

The ruling was a setback for Mr. Lipton, Revlon's chief strategist, and Arthur L. Liman, a partner at Paul Weiss Rifkind Wharton & Garrison, the company's outside counsel.

Justice Walsh stopped the sale to Forstmann Little in a preliminary injunction and Mr. Perelman's friends, smelling victory, broke out the champagne that had been stocked, in anticipation of the decision, by Sue Strachan, Mr. Perelman's executive assistant. The champagne flowed again at the Perelman home on November 1 when the Delaware Supreme Court upheld the lower court.

Forstmann Little, however, still has the right to a trial. It is particularly incensed that the court refused to let it collect a $25 million fee it thought it would get from Revlon if the deal collapsed.

Revlon, however, recognizing defeat, immediately announced that this was ''the end of the battle'' and that it would do nothing to impede Pantry Pride from taking over. One of the Revlon directors was Judge Simon H. Rifkind, still a power in the legal world at the age of 83, who in the final board meeting lamented ''the demise of this enterprise, as we knew it.''

By last Tuesday, November 5, Mr. Bergerac and his slate of directors were out and Mr. Perelman was in as new chairman and chief executive, with a slate he now controlled.

For his part, Mr. Bergerac is bitter about the system that made the takeover possible. In a broad condemnation of the battle that led to his ouster, he said: ''The whole thing was crazy. Here we built a great American corporation. Then through this process the stock ended up in the hands of the arbitragers, who forced the sale of the company. And junk bond financing made it all possible.''

Despite his $36 million settlement, $30 million of which he described as stock and stock options he had accumulated, he remarked, ''You're getting a story of a guy who didn't feather his own nest at the expense of the stockholders.'' The stockholders, he contended, got a very good deal because he persisted, rather than opting for Pantry Pride's friendly offer at a lower price that would have saved his job.

Working in a dark blue cardigan in Mr. Bergerac's old sitting room at Revlon, a big cigar between his teeth, the 140-pound, 5-foot, 8-inch Mr. Perelman denied he had told Mr. Bergerac that he would improve his standing of living.

''I don't think that could ever be improved on,'' Mr. Perelman remarked. Mr. Bergerac's salary and bonus last year amounted to $1.3 million.

''Sure, I went in to sell him,'' the balding Mr. Perelman said. ''I told him he'd get everything he's entitled to.''

Besides turning over control of Revlon, Justice Walsh's decision will change the shape of board rooms and generate vast new business for lawyers.

For one thing, it reduces the latitude that directors have had to find friendly buyers to save them or to fight off takeovers in which bidders pay cash for all the stock. For another, it means that directors act at their peril in searching for unusual ways to fight takeovers. It will mean that companies that create poison pills and then sell their crown jewels almost assuredly will find that they have to negotiate with all bidders, even unwelcome ones.

Besides Mr. Perelman, the winners in the contest undoubtedly are the lawyers and most of the investment bankers who advised both sides. Total advisory fees are expected to exceed $100 million. Drexel Burnham Lambert's share as fundraiser may reach $50 million of the total. Lazard Freres collected $11.5 million as adviser to Revlon. Morgan Stanley will get an estimated $25 million for helping Pantry Pride. Revlon's lawyers and accountants get $13 million. Goldman Sachs, as adviser to Forstmann Little, got $3 million. Adler & Shaykin, for agreeing to buy Revlon's cosmetics, got $2 million for expenses. The only fee still pending is Forstmann Little's. So far the courts have refused to approve its $25 million consolation fee for losing to Mr. Perelman.

"General Electric Co. In Largest Non-Oil Merger In History...," United Press International, December 11, 1985

General Electric Co., in the largest non-oil merger in U.S. corporate history, will takeover RCA Corp. in a cash deal valued at $6.28 billion, or $66.50 a share of RCA common stock.

The merger, which will create a company with combined sales of roughly $35.8 billion, was announced late Wednesday by John F. Welch, Jr., chairman and chief executive of GE; Thornton F. Bradshaw, chairman of RCA; and Robert R. Frederick, RCA president and chief executive.

In a joint statement, the three executives said the merger is "an excellent strategic opportunity for both companies that will help America's competitiveness in world markets.

"We are creating a company that will successfully compete with anyone, anywhere in every market we serve."

The announcement followed a flurry of activity surrounding RCA stock on the New York Stock Exchange. RCA was the second most active issue and the session's biggest winner, jumping $10.75 to $63.50 on rumors that a major announcement was pending. GE was up 25 cents to $67.875.

The boards of directors of both companies have approved the merger agreement that will require approval by stockholders of RCA and a review by various regulatory agencies, including the Federal Communications Commission.

Both companies expect the deal to be closed sometime in 1986.

The marriage of GE and RCA will bring together two of the nation's leading consumer products companies. They both also are major defense contractors and observers said some potential overlap could bring consolidation.

RCA designs and engineers a variety of military and space electronics systems, that includes work for NASA. GE is one of the nation's largest defense contractors and aerospace manufacturers, including jet engines.

GE, with earnings of $2.28 billion, or $5.03 a share in 1984, on sales of $26.8 billion, is ranked ninth in the Fortune 500 largest U.S. industrial companies.

RCA, with revenues of $8.98 billion in 1984, has been divesting itself of various assets since Bradshaw assumed the chairmanship of the then-troubled company in 1981.

NBC, its broadcast subsidiary, which owns five television stations as well as AM and FM radio stations, has been doing well. RCA's electronics division makes color and black-and-white television receivers, videocassette recorders and cameras. Since GE got out of the television business, RCA is the dominant U.S. firm in this area.

GE has been doing some divesting of its own. Among recent actions, it sold its small consumer appliance division to Black & Decker, although it remains in the major appliance field that it dominates.

As part of Bradshaw's divestment program for RCA it sold Hertz Corp., the rental car firm, to UAL Inc., the parent company of United Airlines, for $575 million earlier this year.

Two years ago, Manufacturers Hanover Trust paid RCA $1.5 billion for its CIT Financial Services subsidiary.

"Greed on Wall Street," by Susan Detzner, Newsweek, May 26, 1986

A sardonic joke snaked its way along Wall Street's grapevine last week: investment banker Dennis Levine had lost his job because in 54 deals he had earned only $12.6 million. Like most gallows humor, it was the financial community's way of coping with intense shock. In reality, Dennis Levine, 33, was a well-paid mergers-and-acquisitions specialist near the top of the Wall Street pyramid. But last week the Securities and Exchange Commission charged that he had illegally used advance knowledge of 54 impending mergers and other deals to rack up multimillion-dollar profits from trading stocks and options.

More than any other recent insider trading case, the revelations about Levine sent a shiver through Wall Street. Outwardly, he had seemed a kind of Horatio Alger of high finance; a middle-class boy from Queens, New York, he had gone to work for some of the nation's premier investment banking firms, eventually rising to managing director at Drexel Burnham Lambert. Along the way he had acquired the trappings of a modern merchant prince: a million-dollar-a-year compensation package, an expensive apartment on upper Park Avenue, a rented house in fashionable Southampton and even a new red Ferrari. Now the SEC was charging that many of Levine's profits had come by breaking the rules of the game. He stood accused of concocting an elaborate scheme to carry out his trades from offshore, making day trips to the Bahamas and using pay phones to relay his instructions. And an attempt to cover up his trades as the SEC closed in on him led to criminal charges of obstructing justice. Arraigned on those charges last week, he was handcuffed and spent the night in jail.

Levine's case, at least in part, was a cautionary tale for Wall Street. With the wave of huge corporate mergers and the continuing bull market in stocks, the financial community is practically minting money these days — and it is attracting a new breed of gunslingers anxious to get rich quick. The Street is hardly awash in illicit activity. But in the overheated atmosphere, where personal fortunes can be made with one deal, the temptation to cheat has apparently become irresistible to a few of the players. Mounting a merger or acquisition campaign demands careful, secret plans of battle, but the rules of engagement are clear: the securities markets are supposed to operate openly, with all investors having equal access to important information about companies. At an investment banking house, which both arranges mergers and trades stock, using "material nonpublic information" as Levine is alleged to have done is a double violation of trust.

Perhaps most troubling, about 30 of Levine's alleged 54 trades — including the first one — involved stocks of companies that became enmeshed in takeovers or other deals, but in which neither Levine nor the firms he worked for were involved. That suggests Levine may have plugged into a network of financial community tipsters, possibly stock arbitrageurs — traders who seek to make legal profits on the shares of companies involved in mergers or other deals — or other sources with such access to material nonpublic information.

New developments?

Charles Carberry, the Assistant U.S. Attorney handling the criminal charges against Levine, hints that there may be important new developments in the case this week. In the meantime, Levine, who has been relieved of his duties at least until the case is resolved, has denied the charges against him through a high-powered battery of attorneys hired to mount his defense. If he is ultimately found guilty of civil and criminal charges, Levine would be forced to give back the $12.6 million in profits, pay up to $22.8 million in penalties and face a jail term of up to five years. Given that prospect, he may well opt to plea bargain with prosecutors, swapping information about possible accomplices — perhaps arbitrageurs or others in the investment business — for a lesser sentence.

According to the SEC, which has carried out the bulk of the investigation under enforcement chief Gary Lynch, Levine's illicit trading began six years ago when he entered the investment banking business. Among the hotshot Ivy Leaguers and MBAs who populate the top investment banking firms, Levine was no particular standout. But his MBA thesis from New York's Baruch College may have suggested an early preoccupation. Its title: "Determination of Underwriting Compensation" — an analysis of what investment bankers earn from floating new stock or bond issues. Following graduation, Levine did a stint in commercial banking at Citibank, then moved into an entry level job in the mergers and acquisitions (M&A) department of Smith Barney Harris Upham & Co.

Early on he demonstrated traits that were to become his trademark. He showed little interest in — or talent for — the nuts-and-bolts financial analysis at the core of dealmaking. But he had a great flair for marketing, rubbing shoulders with clients — and gathering information. One former associate recalls that Levine spent a lot of time "sniffing for rumors," hanging around the offices of arbitrageurs. In one instance, the snooping Levine so annoyed an "arb" that the trader "threw him out," the associate says.

After a slow start, Levine buckled down and began climbing the ladder at Smith Barney. But when he failed to get a sought-for promotion, he jumped to Lehman Brothers and then to a senior position in the M&A department at Drexel Burnham. All the while the genial Levine amazed former colleagues with his apparent success. He wasn't the most ostentatious of investment bankers — but in everything from expensive style of dress to the new Ferrari, "the more money he made, the flashier he got," a former associate says.

Hitting the jackpot

According to the SEC, Levine's illegal trading began long before he hit legitimate financial success on Wall Street. In June 1980 he allegedly made a profit of about $4000 by buying — and then selling after the price climbed — 1500 shares of Dart Industries, Inc., one day before the public announcement of a merger offer by Kraft Inc. (a deal that wasn't handled by Levine or Smith Barney). He then raised the stakes and hit the jackpot over and over again.

Levine may have outdone the typical insider in cloaking his trades. The SEC alleges that he set up two dummy Panamanian corporations to place trades through an offshore Bahamian bank, Bank Leu International Ltd., a unit of Switzerland-based Bank Leu. Somewhere along the way, an alleged coconspirator, Bernhard Meier, who was then a Bank Leu portfolio manager, entered the scheme; he is charged with making about $152,000 from illegal trades (he declined to comment last week). By making only day trips to the Bahamas, Levine managed to keep his activities a secret from his employers, his wife and young child. His orders were then placed by the bank through brokerage firms headquartered in New York.

Levine's alleged dealings came to the attention of investigators through a confidential tip, says U.S. Attorney Rudolph Giuliani. After that the SEC pieced together the case with the help of Wall Street's high-tech gumshoes. In recent years the nation's stock exchanges have beefed up their surveillance capability: the New York Stock Exchange, the American Stock Exchange and the over-the-counter NASDAQ system now have comprehensive computer systems to monitor unusual stock trading, and last year the NYSE instituted an audit trail allowing it to track the buyers and sellers involved in each trade. These systems apparently helped lead the SEC to the Bank Leu. The commission alleges that Levine then concocted phony cover stories for Meier in an effort to allow him to explain away the trades.

SEC investigators kept on the trial, however, and two weeks ago learned that Levine was trying to transfer about $10 million from the Bank Leu through one offshore bank to another in the Cayman Islands. To halt the transfer, they quickly filed charges against Levine and Meier. Now the commission will rely on statutes, including the Insider Trading Sanctions Act of 1984, as well as a growing body of insider trading case law, to press for judgments against Levine and Meier. In instances where Levine allegedly used information from deals he or his employers were working on, he could be found guilty of "misappropriating" material nonpublic information for his own financial gain. And in instances where he got wind of other deals, the commission may argue that Levine had reason to know the information he traded on came from someone with a "fiduciary" responsibility to keep it quiet.

Offshore crackdown

The biggest triumph of the Levine case may be clamping down on insider trading transacted through offshore shell companies and banks. In contrast to the United States, investors who trade through offshore banks in places like the Bahamas and Cayman Islands needn't reveal their social security numbers for tax purposes — making it tough to track them down if they make suspicious trades. But following a recent trend toward international cooperation in such investigations, the Swiss-based Bank Leu actually identified Levine. The SEC now hopes that the case will demonstrate to prospective insider traders that "you can wade in the waters off Miami, but it's not necessarily going to protect you to be offshore anymore," an SEC official says.

It may be weeks before the Levine case recedes on Wall Street, especially if investigators can turn up evidence of an insider trading ring. If the allegations against Levine are true, says Fred Joseph, chief executive officer of Drexel Burnham, "it's horrible . . . It's a total violation of our rules and is destructive to the business." Still, Drexel's clients appeared to be taking the news calmly, viewing it as an isolated instance of crime and greed. The case of Dennis Levine, it seemed, would go down as the pathetic tale of a man who made big bucks on Wall Street but somehow found that it wasn't quite enough.

"Levine Guilty of Fraud, Perjury and Tax Evasion: Investment Banker Agrees to Give Up $11.5 Million of Illicit Insider Profits," by Michael A. Hiltzik, Los Angeles Times, June 6, 1986

Investment banker Dennis B. Levine settled the largest insider trading case in history Thursday by agreeing to give up more than $11.5 million of his illicit profits and by pleading guilty in federal court here to tax evasion, perjury and securities fraud.

The 33-year-old former managing director of the investment firm Drexel Burnham Lambert faces a maximum of 20 years in jail and fines of $610,000 on his felony convictions.

He also owes more than $2 million in back taxes from 1983 and 1984. The tax assessment will be paid out of the $11.5 million sum, according to Levine's lawyer, Martin Flumenbaum.

That figure is the largest amount given up, or "disgorged," by a single insider trading defendant in Securities and Exchange Commission history.

Levine's plea came on the same day that four young professionals indicted last month in an unrelated insider trading scheme pleaded guilty to having used secret takeover information allegedly stolen by a fifth, Michael David, from the law firm where he worked. David himself pleaded innocent to similar charges at his arraignment Thursday.

Say They Told Bosses

Two of the defendants said they had passed on the tips to superiors at their brokerages who knew they were receiving illegal inside information. Spokesmen for the firms denied that, however, and no one else has been charged.

The SEC charged Levine on May 12 with having made $12.6 million over six years by trading on confidential information that he gleaned as an investment banker at three firms in succession: Smith Barney Harris Upham & Co.; Shearson Lehman Brothers, and Drexel.

The SEC's original complaint listed 54 takeover deals in which Levine traded, but later court proceedings focused on nine in which Levine played a direct role by advising a company involved in the deal.

He was arrested the night of May 12 and charged with criminal obstruction of justice for having ordered executives of a Swiss bank through whose Bahamian office he traded to destroy documents linking him to the secret accounts. He was later released on $5 million bail.

The case shook Wall Street not only because of Levine's prominence in the mergers and acquisitions community but because of the prospect that he might give testimony incriminating other brokers or traders.

Levine said in a written statement that he has agreed to cooperate with the SEC and with federal prosecutors in further investigations. Although in his civil settlement with the SEC he consented to an injunction against fraud without admitting or denying the charges, in his written statement he said: "To contest the charges against me on technical grounds would serve only to prolong the suffering of my family. It would also convey the wrong message. I have violated the law, and I have remorse for my conduct, not excuses."

In its original complaint against Levine, the SEC sought penalties of more than $20 million. Although Levine will end up disgorging just over half that amount, U.S. Attorney Rudolph Giuliani of Manhattan said Levine's plea is not "anything you could remotely describe as a bargain."

The jail term of up to 20 years faced by the defendant, who is to be sentenced July 9, well exceeds the longest jail term so far imposed by any judge in an insider trading case-the four-year sentence last year of former LTV Corp. Chairman W. Paul Thayer, who passed on tips about several companies to a circle of friends and who committed perjury.

$1.2 Million Profit

In his guilty pleas before U.S. District Judge Gerhard Goettel, Levine admitted to trading illegally in the stock of Jewel Cos. in March and April 1984, when it was the takeover target of American Stores, a client of Shearson Lehman Brothers, Levine's employer at the time. Levine made a $1.2 million profit.

Asked why the plea focused on the Jewel transaction, which was not one of the nine that the SEC focused on, Assistant U.S. Attorney Charles Carberry noted that it had produced one of Levine's biggest scores. "It was a matter of prosecutorial discretion," he said.

Levine's guilty plea to evading $2 million in federal income taxes involved profits parked in his Bahamian accounts. Levine understated his personal income by $1.9 million in 1983 and by more than $2.1 million in 1984, the government charged.

Finally, he pleaded guilty to lying to the SEC in November 1984, when he testified in an agency proceeding that he had bought stock in Textron, the Rhode Island conglomerate, after overhearing a casual conversation between "two gentlemen" in the reception area of Drexel's offices. (He worked for Shearson at the time.)

Levine's civil settlement with the SEC requires Levine to transfer to the United States $10.6 million in illicit profits held by the Bahamian branch of Bank Leu, his Swiss bank, and to give up about $1 million more in assets, including his partnership shares in the Drexel firm, a Ferrari automobile and his pension benefits.

The funds will be placed in the care of a receiver and used-after the tax bill is paid-to settle claims from those who may have sold stock to Levine, unaware that he was using superior information.

Levine will be permitted to keep the Park Avenue cooperative apartment where he and his wife and son live, as well its furnishings and a personal bank account that held about $500,000 two weeks ago.

Guilty Pleas

In the unrelated criminal case heard Thursday, federal prosecutors extracted guilty pleas from four men who confessed to receiving illicit trading tips from David when he was a junior associate at the prominent law firm of Paul Weiss Rifkind Wharton & Garrison.

The four are Andrew Solomon, 27, a former research analyst at the brokerage of Marcus Schloss & Co.; Robert Salsbury, 27, a former analyst at the Drexel firm; Morton Shapiro, 27, a former brokerage trainee at Moseley Hallgarten Estabrook & Weeden, and Daniel Silverman, 23, a friend and customer of Shapiro's.

According to their testimony, David stole confidential information from his firm and used it to trade in a joint brokerage account with Shapiro and Silverman, his childhood friends from Cranston, Rhode Island. He also passed tips to Salsbury and Solomon, who were neighbors.

Solomon said in court that when he passed David's tips on to "principals" at Marcus Schloss, they knew they were getting inside information. Irwin Schloss, the president of Marcus Schloss, said later that "I have talked to all of our people, and no one here ever knew of any insider information and never traded on any inside information."

Challenged by Firm

Salsbury similarly contended that his Drexel superiors knew he was providing them with illegal tips. Drexel issued a statement saying that "we are not aware of and have no reason to believe that Mr. Salsbury's conduct was known or condoned by any official of this firm."

Solomon, Salsbury, Shapiro and Silverman pleaded guilty to felony fraud counts and face up to five years in prison and $250,000 fines on those charges. Salsbury, who coached Solomon to lie about his trading to SEC investigators, also pleaded guilty to a count of obstructing justice, and Solomon to perjury. They will be sentenced July 18.

"Turner Sells Fabled MGM But Keeps A Lion's Share," by Al Delugach, Los Angeles Times, June 7, 1986

The familiar Metro-Goldwyn-Mayer signs will come down from the historic Culver City studio that was an integral part of the MGM image and Hollywood itself.

And broadcast entrepreneur-sportsman Ted Turner, who acquired MGM less than three months ago, will not become a major movie mogul after all-but he will end up with its movie library of 2200 pictures.

Those are the results of a $490 million pair of "agreements in principle" announced Friday that mean another major change in the face of Hollywood.

Details of Breakup

The breakup of the studio, where The Wizard of Oz and a host of other cherished pictures were filmed, involves the following:

-The 44-acre MGM studio property, along with its film processing laboratory, will be bought for $190 million by Lorimar-Telepictures Corp., a major television firm that presently occupies rented quarters on the lot.

-The famous MGM name and Leo the Lion logo will go with its motion picture and television production and distribution and home video businesses for $300 million to United Artists Corp. UA, which until March was the other half of MGM/UA Entertainment Co., said MGM will continue as a separate "production group." A spokesman for UA controlling shareholder Kirk Kerkorian said it has "not been decided" whether to incorporate MGM again into the corporation's name.

-Turner Broadcasting Co., controlled by Turner, will keep the fabled MGM film library, primarily as a source of programming for its Atlanta superstation WTBS. Turner would end up spending $1.2 billion for the library, apparently a record outlay for that type of "product," as it is called in the entertainment business.

Although the cachet of MGM's movies in recent decades has not been able to live up to its pre-1960s image, some movie buffs were already mourning the prospective dispersal of a major chunk of glamour in the industry.

The old MGM has lived on chiefly in its movie library. One of its best-known classics, Gone With the Wind, actually was produced by Selznick International with one of the film's top stars, Clark Gable, borrowed from MGM. MGM distributed the film and later bought it.

Along with the array of MGM musicals and other hits, the library includes many old Warner Bros. and RKO pictures.

MGM Bought March 25

Turner, who has owned MGM only since March 25, had said many times that his primary objective in buying MGM was to acquire its library.

He also said repeatedly that his firm was negotiating to sell any and all of the remaining assets to cope with the mountainous debt it took on to acquire MGM.

Even so, Turner confessed to having been smitten at least somewhat by the moviemaker syndrome and insisted on a condition that the buyers would distribute three movies that he might produce in the future.

Lorimar-Telepictures Chairman Merv Adelson confirmed Friday that his firm did agree to do so "as long as he pays the costs involved." Turner indicated in a speech here earlier this week that he is interested in a strong anti-nuclear picture and other "pro-social" subjects. UA spokesman Andy Fogelson said he did not know if UA made a similar commitment.

"The theatrical motion picture business is not really a sound financial business," Turner told a gathering of television critics shortly before making the MGM sale. "It's like baseball or basketball. They're hobby businesses. We can't play that game anymore."

But Turner added, somewhat wistfully, "How can you not like the movie business?

"We would have attempted some hopefully outstanding, pro-social films along the lines of Gandhi, Chariots of Fire and E.T., " had he retained MGM, he said.

Within hours of meeting with the critics, Turner signed tentative agreements to sell MGM, which officially became his less than three months ago.

But he'll retain the coveted library of MGM films, which will be used to further his grand goals.

"We've got enough programming right now to do a 24-hour global network," he said, adding that he has no immediate plans for such a network.

Library Cost $1.2 Billion

A source at Drexel Burnham Lambert, Turner's investment banker, said Turner's total cost before selling the assets was about $1.7 billion, which included the MGM debt acquired with the company in March. Friday's announcement means that the library cost Turner $1.2 billion. The source said Turner is getting a good return on that outlay since the MGM library brings in about $100 million every year.

The Culver City lot in the future will bear the name of Lorimar-Telepictures only, and MGM is expected only to rent soundstages for future productions, according to Adelson.

Acquisition of the property will give Lorimar-Telepictures a good return on its investment while allowing the company to consolidate its scattered facilities under one roof, he said.

New UA Chairman Lee Rich said both UA and MGM production groups will "remain separate and active" and will "supply product to one central marketing and distribution facility."

Stephen Silbert, a spokesman for UA controlling shareholder Kerkorian, noted that the company is acquiring a picture production company with movies in the pipeline, including the current hit Poltergeist II, as well as Fame and other television properties and two "incredible" assets: the MGM logo and its prosperous home video business.

Entertainment analyst Harold Vogel of Merrill Lynch said he sees no reason for surprise at the deal, observing that, to a large extent, Kerkorian "is buying back what he owned before."

Turner Broadcasting has "more breathing room" on its debt, Vogel said, while Kerkorian "made a healthy profit, I'm sure."

Friday's long-awaited announcement on just what Turner would sell came after interest was expressed by many potential buyers, the Drexel Burnham source said. Among the first formal bids was that of financier Charles Knapp's Trafalgar Holdings. Trafalgar spokesman Don Reynolds said Friday that it bid slightly less than $400 million for all the MGM assets except the library.

"Once-Burned Entrepreneur Shifts to Stock Market," by Daniel Akst, Los Angeles Times, November 18, 1986

Barry Minkow, a whiz kid entrepreneur who built a small carpet cleaning business into a multimillion-dollar enterprise, needed money desperately last year.

So he turned for help to 56-year-old Jack M. Catain, Jr. Their relationship, however, turned into extortion, in the words of a federal prosecutor. In fact, law enforcement authorities have long speculated that Catain is a major organized crime figure, and on November 7, he was convicted in a counterfeiting scheme.

Now Minkow, 20, wants to raise money in the stock market. His Reseda-based ZZZZ Best Co. hopes to gross $11 million to $13 million in a securities offering next month that is supposed to remedy the fast-growing firm's chronic cash shortage-and allow for more expansion.

Raising money in the stock market is likely to be a lot cheaper than working with Catain, if Minkow's assertions in court papers are true. Minkow contends that Catain arranged loans for him at interest rates of 2% to 5% a week and also was to get a share of the profits for jobs he helped finance.

"My company was in desperate need of financial assistance," Minkow says in court papers by way of explanation.

Suits Disclose Deals

Minkow's dealings with Catain were disclosed in lawsuits filed by Catain, who claimed that Minkow owed him money for arranging financing for ZZZZ Best. Catain denies being a mobster or an extortionist, and also denies collecting any interest from Minkow.

Minkow is the much-publicized chairman, president and founder of ZZZZ Best, which he started five years ago. He has since gained national exposure for turning his carpet-cleaning business into a public company with millions in sales.

He gives lectures on business, has written a book about his life, and in March 1985, even received a commendation from Mayor Tom Bradley, who said Minkow "has set a fine entrepreneurial example of obtaining the status of a millionaire at the age of 18. . . ." His publicity agent churns out press releases about Minkow's gifts to charity, his decision to impose drug testing on his employees and other activities.

Prospectus Portrait

ZZZZ Best's preliminary prospectus, along with mentioning the dealings between Minkow and Catain, portrays a company that has grown fast and is extremely profitable. For its first quarter ended July 31, it earned $896,000 on sales of $5.4 million. A year earlier, it made $131,000 on sales of $638,000.

For the year ended April 30, earnings were $946,000 as sales rose fourfold, to $4.8 million.

Minkow was paid $300,000, plus $20,000 worth of company-owned car use, for the fiscal year ended April 30. The prospectus also says that in May, ZZZZ Best signed a three-year agreement worth $520,000 with a financial consultant, whose duties were not disclosed. Minkow's securities lawyer, Mark Moskowitz, said the consultant is Richard Charbit of Beverly Hills, and that he will get $220,000 in cash and the rest in stock.

Meanwhile, ZZZZ Best has taken on a lot of debt. The October 23 offering document said the company had $6.2 million in short-term debt and $933,000 in long-term debt, compared to $3.1 million in shareholders' equity.

And the preliminary prospectus notes that Minkow's company got 86% of its business from a single source during the first quarter ended July 31, contrasted with 45% during the preceding year. The company says that this big customer, a Van Nuys-based independent insurance appraiser called Interstate Appraisal Services, is not obligated in any way to keep the work coming.

ZZZZ Best, however, apparently would rather take that risk than turn away Interstate Appraisal.

"You got to get into business somehow," said Robert Grossman, director of West Coast research for Rooney Pace Inc. of New York, which is underwriting ZZZZ Best's securities offering. Grossman added that, after the offering, ZZZZ Best "will be in a very attractive situation."

The offering will not be affected by sanctions imposed on Rooney Pace last week by the Securities and Exchange Commission in connection with charges that the investment banking firm defrauded customers in a 1981 underwriting. The sanctions were stayed pending appeal, and the ZZZZ Best offering would not be blocked in any case, an SEC lawyer said.

ZZZZ Best went public in January by merging with a Utah shell corporation, and now has 7.8 million shares outstanding. Minkow owns 77%, according to the prospectus, and will own 55% after the offering of one million units. Each unit consists of 3 common shares and one warrant. The stock is traded over the counter.

In response to allegations in Catain's suits, Minkow says in court records that he met Catain around June 1985, and that he agreed to pay Catain a percentage of the profits for jobs that Catain helped finance as well as make interest payments on the loans. Minkow's statement does not say what percentage of the profits Catain was to receive, but Catain says in court papers that it was half.

Mob Reputation

Minkow's lawyers said he did not know about Catain's mob reputation when he agreed to work with him. In court papers, however, Minkow says he continued dealing with Catain even after he learned Catain was under indictment. Minkow also accuses Catain of usury, and says Catain kept most of the interest payments.

One Minkow lawyer, Arthur Barens, said his client severed all ties to Catain in late June, after paying him several hundred thousand dollars. Minkow contends in court papers that Catain got all he was due.

"He is essentially a loan shark," charged Barens. "He tried to intimidate and threaten this young man and extort money out of him."

But Catain's lawyers say otherwise. One of them, Lawrence Brown, said his client knew nothing about the interest payments and never got any. Brown said Catain received only a share of the profits for arranging loans.

Catain, according to Brown, never got all he was owed. So last December he sued Minkow and ZZZZ Best for breach of contract and fraud, contending that Minkow reneged on their agreement.

He dropped the suit in January when Minkow agreed to pay $670,000 plus interest over the course of the year. Catain sued again in July, when Minkow stopped paying, but the case was voided after Catain's lawyer's $99 check for the filing fees bounced.

Catain said in court papers that last year, from roughly June 24 to November 15, he arranged loans, credit lines and investments of more than $400,000 for ZZZZ Best. His July suit asked for actual damages of $540,000, interest, court costs and punitive damages of $1 million.

Barens said Minkow testified before a federal grand jury probing Catain's activities. Justice Department lawyer Edwin Gale, who heads the Organized Crime Strike Force in Los Angeles, would not comment on that. But, in court, Gale characterized the relationship between Minkow and Catain as "extortion."

Conspiracy Conviction

Catain was convicted on federal charges of conspiring to sell part of a $3.3 million cache of counterfeit bills, and of actually selling $50,000 worth. His attorney, James A. Twitty, said an appeal is planned. Catain is free on bail.

Never before convicted, Catain has been the subject of much law enforcement and regulatory attention. Law enforcement authorities have said they suspect he has been involved in money laundering, extortion and trading in stolen securities.

In 1971, when he was head of Rusco Industries, the SEC forced him to pay an $800,000 judgment because of questionable loan transactions. In 1975, federal authorities said they suspected-but never proved-that he and an associate tried to set up a gambling operation in London for Angelo Bruno, then head of the Philadelphia Mafia.

The New York Times reported that, in 1976, a court-authorized wiretap intercepted conversations between Catain and Frank Sindone, identified by authorities as the No. 3 man in the Bruno crime family, on the subject of money laundering.

Sindone, described by The Wall Street Journal as Philadelphia's leading loan shark, and Bruno were both killed in a mob war.

Federal investigators also compiled allegations that Catain associated with Mafiosi from Detroit and New York.

Catain resigned from Rusco in 1980 to settle civil fraud charges brought by the SEC after a court-authorized probe found that he ran the publicly held firm like a private company, and that he owed it $2.7 million for insider transactions.

"Cadence Selling Comic Book, Animation Unit; New World Pictures To Acquire Marvel," by Bruce Keppel, Los Angeles Times, November 21, 1986

New World Pictures-a maker and distributor of low-budget but high-profit films ranging from Godzilla 1985 to the current Soul Man-agreed Thursday to buy Marvel Entertainment Group in a move that will extend the Los Angeles-based firm into comics publishing and TV animation.

Terms of the acquisition from Cadence Industries Corp., a holding company rapidly liquidating its assets, were undisclosed, but the price was understood to be between $40 million and $50 million. The deal is expected to be completed before year-end.

Marvel Entertainment includes New York-based Marvel Comics Group, Marvel Comics Ltd. in Britain and Marvel Productions, which makes animated features at studios in Van Nuys.

Though it is the third-largest producer of TV animation, Marvel is probably best known for its comic book characters, who include Spider Man, the Incredible Hulk and the X Men-described as do-gooder teenage mutants.

"What Marvel really is to us is an idea factory," said Harry Evans Sloan, who is co-chairman with Lawrence L. Kuppin of New World. "The opportunity to exploit those ideas with New World's existing motion picture and theatrical operations is very exciting.

"These characters are well known among the youth of the world," he said.

In addition, Sloan said, Marvel's Van Nuys operation will complete New World's "television profile," which includes offerings on both primetime and weekday TV, by putting its animated programs on Saturday morning schedules. New World's current TV productions include the continuing daytime soap opera Santa Barbara as well as the primetime series Sledge Hammer and Monte Carlo, a miniseries featuring actress Joan Collins.

Sloan and Kuppin, law partners specializing in the entertainment industry, bought New World Pictures in February 1983, from Roger Corman, who founded the company in the 1970s. New World went public in October 1985.

After a $4.8 million loss in 1983, the company reported successive profits of $366,000 in 1984, $5.1 million in 1985 and nearly $6 million for the first nine months of 1986.

Marvel reported revenue of $73 million last year.

"Behind 'Whiz Kid' Is a Trail of False Credit Card Billings," by Daniel Akst, Los Angeles Times, May 22, 1987

James D. Richman said he charged $100 worth of carpet cleaning while living in Santa Monica, but he got billed for $1790 on his Visa card statement. Barbara Lee of Westminster paid by check but wrote her Visa number on top. Sure enough, she said, her Visa card was billed for more than $1600.

Then there was Lucille Frost of Santa Ana. She was slapped with $1389.50 in Visa charges and $1710.57 in MasterCard charges-all for $75 worth of carpet cleaning.

What do these people have in common? Their credit card numbers fell into the hands of Reseda-based ZZZZ Best Co., the fast-growing carpet cleaning business started and run by whiz kid entrepreneur Barry Minkow. Now just 21, Minkow is becoming a household name in Southern California, thanks to his remarkable success and his frequent television commercials.

Through ZZZZ Best's lawyer, Mark R. Moskowitz, Minkow acknowledged to The Times this week that ZZZZ Best rang up $72,000 in false charges from November 1984, to March 1985. In an earlier interview, Minkow himself had said there were $150,000 to $200,000 in false charges. Moskowitz later called this account mistaken.

In any case, Minkow said ZZZZ Best made good on all the bogus charges by April 1986, and he blamed 12 unscrupulous carpet cleaning subcontractors whom the company had been paying an immediate 50% commission on every ZZZZ Best sale. Minkow said the subcontractors were caught and fired, but he refused to identify any of them.

But the same thing happened again in early 1986, according to a credit card security official, at Floral Fantasies, a Canoga Park flower shop that was owned by Charles B. Arrington III. Arrington, 26, is chief operating officer of ZZZZ Best.

Floral Fantasies submitted $91,000 in false charges in early 1986, said Gil Lopez, branch investigations manager at First Data Resources in Santa Ana, a unit of American Express that does credit card processing for banks. Lopez said he had talked to Minkow 10 or 15 times to resolve the problem, because Minkow told him he was the owner. Minkow denies ever speaking to Lopez but admits that he reimbursed the money.

"I was getting ready to submit the case . . . and go for prosecution on the entire $91,000 of fraud," said Lopez, an ex-Army intelligence officer. "Out of the blue, Mr. Barry Minkow calls up the bank and calls me up and says, 'I will pay the entire amount back.' "

Minkow said through his attorney that he was just bailing out Arrington, who inherited the situation from a previous owner. But city tax records say Arrington acquired the store on October 1, 1985, before the false charges occurred. Arrington said he sold Floral Fantasies last June, but he couldn't be reached for comment on the charge problems. The store is still in business.

Lopez added that while Floral Fantasies' account at California Overseas Bank was opened by Arrington, Lopez never spoke to him.

Lopez said it took Minkow until June or July last year to repay all the money, and that meanwhile the store had use of it interest-free.

"Again, he (Minkow) claimed it was an employee (who made the charges)," Lopez said. But because the money from the charges was paid into a Floral Fantasies corporate account, Lopez said, it seems unlikely that an employee could have benefited.

The phony charges were racked up by using Visa or MasterCard numbers to generate credit card slips for nonexistent or inflated sales. The slips were filled out as telephone orders, which don't require a card imprint, and then presented for payment to the company's bank, which routinely paid cash for them.

Cardholders who noticed the phony charges didn't have to pay them. But not all of them notified their banks of the phony charges in time.

Robin H. Swanson of La Canada said she charged $23.95 worth of Floral Fantasies flowers on her Visa card January 15, 1986, but was billed for $625.06 because she didn't report it to her bank within 60 days.

Won Judgment

She said that when she demanded a refund, store employees told her that Minkow was the owner, and she got a judgment in small claims court against him last October 21, a judgment that she said Minkow eventually paid. Through another lawyer, Minkow denied any knowledge of the Swanson case.

Minkow's meteoric rise began at an early age. Raised in Southern California, he began working at age 10 for the carpet cleaning business his mother managed.

At 15, against his parents' wishes, he started ZZZZ Best, his own carpet cleaning business, in their Reseda garage, which they rented to him at $150 a month. Now, he says, both parents work for him.

Minkow took ZZZZ Best public in January 1986, and after a December 1986, public stock offering now retains about 52%, or 5.9 million shares. That would give him a fortune worth $90 million at the current market price.

He's been featured in major newspapers, appeared on The Oprah Winfrey Show and received a special commendation from Mayor Tom Bradley, which said Minkow had "set a fine entrepreneurial example."

ZZZZ Best stockholders have also fared well. Since its public offering on December 9, ZZZZ Best shares have soared from $4 each to a closing over-the-counter price of $15.375 Thursday.

For the nine months ended January 31, ZZZZ Best earned $3.4 million on revenue of $33.4 million. Last month, the company agreed to pay $25 million for Flagship Services of Newtown Square, Pennsylvania, whose KeyServ Group subsidiary does carpet cleaning under contract to Sears Roebuck.

Dogged by Controversy

But for all ZZZZ Best's growth, both the company and its young entrepreneur have been dogged by controversy and lawsuits.

In 1985, Minkow was so desperate for cash that he turned to the late Jack M. Catain, Jr., a Los Angeles-area reputed mobster, according to court papers. In the same papers, Minkow also said Catain arranged loans for him at 2-5% interest per week.

ZZZZ Best has been rejected for membership by the Better Business Bureau of Los Angeles and Orange counties. The reason? A credit card complaint filed in March 1985, by James D. Richman. Bureau President William Fritz said ZZZZ Best never responded to the bureau's inquiries about that complaint.

Richman, now a Tarzana resident, says he never paid the questionable charge, and his bank took care of it.

Lopez said he first became aware of credit card problems at ZZZZ Best in late 1984 or early 1985, when disputed ZZZZ Best credit card charges started pouring in.

"I contacted Barry Minkow at that time, and his story was that he had an employee working in one of his shops that was generating credit card sales," Lopez said.

But since ZZZZ Best's bank at the time was not a customer of First Data Resources, Lopez merely returned the drafts unpaid for the company's bank to deal with. In early 1986, according to Lopez, phony charges began turning up from Floral Fantasies. Lopez said that when he confronted the store manager, she referred him to Minkow.

Lopez said that even though most cardholders who suffered phony ZZZZ Best or Floral Fantasies charges lost no money, those who failed to examine their monthly credit card statements carefully might never have noticed and simply paid the bill.

"Fallen Star: How Whiz Kid Chief of ZZZZ Best Had, and Lost, It All," by Daniel Akst, The Wall Street Journal, July 9, 1987

Wealthy entrepreneurs can point to all kinds of secrets for success. Young Barry J. Minkow's secret allegedly was fraud.

By the time Mr. Minkow turned 21 years old last March, the tiny carpet cleaning business he started at 15 had grown into a public company with a peak market valuation exceeding $211 million, giving the flamboyant young entrepreneur a paper fortune of around $109 million.

The subject of adoring publicity in a society as obsessed with success as he was, Mr. Minkow (rhymes with ginkgo) talked of building his ZZZZ Best Co. into the General Motors of carpet cleaning - and then running for president of the U.S. He was the subject of countless flattering articles and appeared on The Oprah Winfrey Show. He bought a Ferrari, acquired an expensive home in nearby Woodland Hills, California, and generally spent money as if there was no tomorrow.

There wasn't. Mr. Minkow's company was an elaborate construction of lies and deceit, kept afloat by sheer audacity. While much of the press was busy with his apotheosis, Mr. Minkow was taking advice from a former convict and obtaining financing from a reputed mobster. His company was submitting phony credit card charges, and his second in command owned a flower shop that did likewise. And ZZZZ Best stock was soaring on press releases touting millions of dollars in contracts, now allegedly bogus.

The company and its whiz kid former chairman are now at the center of wide-ranging investigations by the Securities and Exchange Commission and other law enforcement agencies; those agencies include the Los Angeles Police Department, which said yesterday it suspects ZZZZ Best may have been used for laundering organized crime narcotics money.

The police department investigation is ironic in light of Mr. Minkow's almost fanatical crusading against drug abuse. He has made small contributions to drug treatment programs, required drug tests of his workers and adopted the motto, "My act's clean, how's yours?"

In a civil suit filed in state court in Los Angeles, the company accuses Mr. Minkow of fraudulently removing more than $3 million from ZZZZ Best bank accounts last month alone. The suit also says the company, under Mr. Minkow's stewardship, paid out more than $18 million to perform nonexistent "insurance restoration" work (restoring building interiors damaged by water or fire).

Attempts to reach Mr. Minkow for comment have been unsuccessful; but his lawyer, Arthur Barens, says, "I categorically deny that Mr. Minkow was involved in or aware of any wrongdoing or fraud."

Mr. Minkow, citing health reasons, resigned his posts at the company last Thursday, and ZZZZ Best filed yesterday for protection under Chapter 11 of the federal Bankruptcy Code.

(Bruce Andersen, the company's interim president, says ZZZZ Best still has most of its offices open; he says there were 21 before last week.)

Despite the Chapter 11 filing, ZZZZ Best seems to have little remaining for the bankruptcy system to protect. The company says it suffered "misappropriation of significant assets" that are needed to run the business.

"The company is going to evaporate shortly," says one investigator. "It's going to vaporize."

ZZZZ Best stock has already plummeted from a high of $18.375 a share three months ago to close at $1.0625 a share, up 12 1/2 cents, yesterday in over-the-counter trading. Volume in the past two weeks has been enormous. On Monday alone, nearly 5.3 million of the company's 11.5 million outstanding shares changed hands.

While ZZZZ Best started out cleaning carpets, federal authorities now suspect that laundering money may have taken precedence lately. "There are tons and tons of cashier's checks and checks cashed for paper money" that figure in the investigation, says a member of one law enforcement agency.

The SEC is also investigating the possibility of phony receivables, bogus financial results, organized crime connections, and various securities law violations by the company and its present and former executives. The agency reportedly wants an independent trustee put in charge of the company.

Investors are flabbergasted. One lost $7 million on ZZZZ Best. Another, Leonard Weinstein from Miami, complains that he recently bought 500 shares of ZZZZ Best at $8.25 and 500 warrants at $5. He says he is considering joining a class action suit against the company (ZZZZ Best is already faced with at least two). He adds: "I'd probably want to commit suicide if I was a big shareholder."

Yet another shareholder, explaining his gullibility, says the irregularities at ZZZZ Best are so far beyond run-of-the-mill finagling that he couldn't have dreamed they were possible.

However extraordinary, the rise and fall of Barry Minkow had its roots in the ordinary - in Main Street rather than on Wall Street. In a 1985 interview, Mr. Minkow said his career began at the age of 10, when he carried water at a carpet cleaning business managed by his mother. Later, he worked Saturdays and summers cleaning carpets, drapes and upholstery.

At 15, he started his own business in the Minkow family garage in this working-class section of Los Angeles's sun-baked San Fernando Valley. Mr. Minkow said his family made him pay $150 a month rent for the building, but his father, Robert Minkow, insists rent was charged only after the business started to thrive. Barry Minkow subsequently maintained, bitterly, that his parents initially discouraged his venture. His father denies that. Mr. Minkow's mother, Carol, couldn't be reached for comment.

Still in high school and too young to drive, Barry Minkow hired a crew to clean carpets while he sat in class fretting over each week's payroll. He boasted that despite the carpet cleaning industry's bait-and-switch reputation, he insisted on high business ethics.

Mr. Minkow, who hasn't much formal education beyond high school, was particularly proud that his parents became his employees. He made his mother senior vice president. He made his father a salesman.

He made himself over. Formerly a skinny, hyperactive youth who was bullied in military school, he built himself up with weights. On the job, he worked punishing hours with singleminded dedication. "I'm obsessed," he acknowledged in the earlier interview.

The hard work paid off. In the 1985 interview, Mr. Minkow said the business took in $1.3 million in 1984. By contrast, for the first quarter ended July 31, 1986, ZZZZ Best reported earnings of $896,000 on sales of $5.4 million. The number of ZZZZ Best outlets was expanding as well.

"The bullies couldn't kick sand in his face anymore," says one former ZZZZ Best executive. "Now he could kick sand in theirs."

Scott Dear, ZZZZ Best's controller for five months last year, says Mr. Minkow could be a tyrant in the workplace. "My way or the highway" was a favorite Minkow expression, and around the office he insisted that he be called Mr. Minkow.

According to Mr. Dear, Mr. Minkow was so intense that he regularly chewed pens into crushed and twisted twigs. "Barry's incredibly aggressive, real hardnosed," Mr. Dear says. But he adds: "He really knew his business. He really knew carpet cleaning."

Outsiders were also impressed. In February of this year, the Association of Collegiate Entrepreneurs and the Young Entrepreneurs' Organization placed Mr. Minkow on their list of the 100 top young entrepreneurs in America. Mr. Minkow even won a commendation from Los Angeles Mayor Tom Bradley, who said the young executive had "set a fine entrepreneurial example of obtaining the status of a millionaire at the age of 18."

But the company's impressive growth wasn't nearly fast enough for the impatient Mr. Minkow, and that's where Jack M. Catain, Jr. came in. Mr. Catain, who died this past February, was a mobster and loan shark whose attorney says had offices in the same building as ZZZZ Best.

Around June 1985, "in desperate need of financial assistance" for ZZZZ Best, Mr. Minkow borrowed money from Mr. Catain at interest rates of 2% to 5% a week, Mr. Minkow said in a sworn court declaration; the declaration was in response to a civil suit brought by Mr. Catain in state court in Los Angeles, claiming Mr. Catain wasn't paid all he was due. Mr. Minkow's lawyer later said his client paid Mr. Catain several hundred thousand dollars, and that all debts to Mr. Catain were paid.

Mr. Minkow's declaration also said he agreed to share with Mr. Catain any profits from jobs the latter helped finance. Mr. Catain said his share was to be 50%.

But Mr. Catain's role went further, according to his former lawyer, James A. Twitty, who says Mr. Catain also helped "organize" the company.

In the past, Mr. Catain had frequently run afoul of law enforcement authorities, who suspected him of extortion and trading stolen goods. The Federal Bureau of Investigation also looked into charges that a company Mr. Catain headed, Rusco Industries Inc., an American Stock Exchange-listed maker of aluminum building products, was a front for laundering organized crime money. Mr. Catain resigned as Rusco's chairman and chief executive in 1980 as part of the settlement of an SEC suit charging him with undisclosed insider transactions. Mr. Catain was convicted last November 7 on counterfeiting charges but died prior to sentencing.

Mr. Minkow's lawyers have said he didn't know of Mr. Catain's mob ties; but in court papers, Mr. Minkow says he continued dealing with Mr. Catain even after he learned that Mr. Catain was under indictment.

ZZZZ Best went public in January 1986 by acquiring Morningstar Investments Inc., a Utah shell corporation, in exchange for stock. Last December, ZZZZ Best had a public offering of one million units consisting of three shares of common stock and one warrant each.

But the company disclosed in its offering statement that the nature of its business had changed. Rather than carpet cleaning, 86% of revenue was coming from insurance restoration activities.

The offering statement also showed enormous debt, some $6.2 million short-term and $933,000 long-term, compared with $3.1 million in shareholders' equity. Because Mr. Catain had sued the company and its chairman, Mr. Catain's dealings with ZZZZ Best were also disclosed.

Nevertheless, the offering sold out, bringing in about $13 million, and ZZZZ Best was off and running. In a telephone interview in May, Mr. Minkow said the company had about 1300 employees at locations throughout California as well as in Arizona and Nevada.

Somewhere along the line - it isn't clear where - Mr. Minkow also hooked up with a former convict and securities specialist named Maurice Rind.

"Rind was more or less touted as a finance expert," says Mr. Dear, the former controller. "He was around the office once or twice a week."

A knowledgeable member of a law enforcement agency says Mr. Rind was also a large ZZZZ Best shareholder through one of his companies, B&M Investments Inc.

Mr. Rind, who couldn't be reached for comment, was sentenced in 1976 to 18 months in prison and fined $10,000 for conspiracy to violate federal securities laws, mail fraud, interstate transportation of forged securities and other violations.

Records filed with the California secretary of state's office indicate that Mr. Minkow is also the agent for a similarly named company, B&M Insurance Services Inc., whose owner and president is Robert Victor, according to ZZZZ Best SEC filings.

Police say Mr. Victor is also known as Robert Viggiano, 51, from Brooklyn.

Joseph Valiquette, a spokesman for the Federal Bureau of Investigation in New York, says that Mr. Viggiano was indicted in December 1968 by a federal grand jury in Brooklyn on a charge of extortionate credit transactions in an alleged loan sharking scheme, but the charges were dismissed in January 1972.

In 1973, Robert Viggiano got five years' probation after pleading guilty to attempted grand larceny in connection with the 1968 theft of $750,000 in jewels from the Long Island Diamond & Jewelry Exchange in Garden City, New York.

Also arrested in that robbery was the late Joseph Colombo, Sr., described by law enforcement authorities as the head of one of New York's Mafia families. Charges of conspiracy and grand larceny against Mr. Colombo, Sr. in connection with the jewelry robbery were dismissed in February 1975.

In 1985, according to a registration statement filed with the SEC, Messrs. Minkow and Victor signed joint venture agreements for B&M Insurance to finance two separate restoration jobs, including one for $2.3 million in an eight-story building in Arroyo Grande, California.

But local officials say Arroyo Grande is a town of 13,000 souls, five traffic lights - and no buildings over three stories. Mr. Victor couldn't be reached for comment.

ZZZZ Best also claimed in an SEC filing that it had a $7 million refurbishing contract in Sacramento, California. But city and county officials there haven't issued permits for any such job and find the whole idea inconceivable.

"Sacramento was false-first, last and always," says ZZZZ Best Vice President Mark Morze. Mr. Morze has also been sued by the company, which claims that missing corporate funds went to Marbil Management Co.; Marbil, the suit says, was the "alter ego" of Mr. Morze.

Mr. Morze insists he doesn't own Marbil but won't comment further, pending consultation with his attorney.

ZZZZ Best also claimed a $2.8 million restoration job in San Diego awarded by a unit of Travelers Corp., based in Hartford, Connecticut. But David L. Tengberg, the claims manager for the area, says that "Travelers has nothing to do" with any such job.

As recently as May 18, ZZZZ Best claimed it won a $13.8 million restoration job in Dallas. But "there hasn't been any kind of job like that in Dallas," says Kurt Blackmon, president of Blackmon-Mooring Steamatic Catastrophe Inc., a 40-year-old restoration concern in Fort Worth, Texas. "We monitor that day and night. That's our business."

Most of the apparently phony ZZZZ Best insurance jobs came through Interstate Appraisal Services, based in Van Nuys, California. Interstate is owned and run by Thomas Padgett, who used to work for Travelers as an auto damage appraiser, according to Mr. Tengberg.

The California Department of Insurance says neither Mr. Padgett nor his company is a licensed insurance adjuster, although it isn't clear whether either did work requiring a license. Both Interstate and Mr. Padgett are also defendants in the fraud lawsuit filed in state court in Los Angeles by ZZZZ Best against Mr. Minkow.

The suit charges Interstate, Marbil, and Messrs. Padgett, Minkow and Morze with breach of fiduciary duty, fraud and conversion, contending that the company suffered damages exceeding $25 million, including $18 million that the company claims it paid Marbil.

Last week, a man identifying himself on the phone as Mr. Padgett vowed to prove to a reporter that the refurbishing contracts were legitimate but never showed up for an appointment and hasn't been reachable since. Yesterday, Los Angeles Police Chief Daryl F. Gates alleged that the refurbishing contracts were fake, and were instead a vehicle for laundering illegal narcotics profits.

ZZZZ Best's hard assets also are apparently questionable. The SEC is reportedly looking into whether a group of secondhand generators the company said it bought last year for $1.1 million and 435,000 shares is worth anywhere near that.

According to the company's SEC filings, the generators were purchased from Generator Corp., a Cayman Islands entity that couldn't be located for comment.

Mr. Minkow's empire began collapsing May 22, when the Los Angeles Times reported that ZZZZ Best used customers' credit card numbers to run up at least $72,000 in inflated charges.

Mr. Minkow said the scam, which occurred in 1984 and 1985, was the fault of unscrupulous former subcontractors who were caught and fired. Yet the company said in its public offering statement that "the company hires no subcontractors for any of its residential or commercial carpet cleaning jobs."

In early 1986, the same thing happened again, this time for at least $91,000, at Floral Fantasies, a Canoga Park, California, flower shop then owned by Charles B. Arrington III. Mr. Arrington, 27, is ZZZZ Best's chief operating officer.

Mr. Minkow, who made restitution in both cases, blamed the flower shop charges on a prior owner, but city tax records show that Mr. Arrington bought the shop before the bogus bills were processed. Neither Mr. Arrington nor the store's current owners, listed in city tax records as Robert Victor and Rosalie Victor, could be reached for comment.

ZZZZ Best's public offering last December had been handled by Rooney Pace Inc., a unit of New York-based Rooney Pace Group Inc., at the equivalent of $4 a share; the price later more than quadrupled on a positive earnings report. The Rooney Pace unit went out of business in January after a series of problems unrelated to ZZZZ Best.

The stock had been touted by another brokerage house, Ladenburg Thalmann & Co., based in New York. Just last week, Robert Grossmann, a securities analyst in the firm's Los Angeles office, was quoted in BusinessWeek magazine as saying, "Barry Minkow is a great manager."

Mr. Grossmann now says that "a lot of us wish we hadn't said a lot of things." Still, he recalls Mr. Minkow's charisma. Recently, he says, "At the Century Plaza Hotel, Barry had a big show . . . and he was magical, he was mesmerizing. He won everybody over."

Ladenburg Chairman Ronald B. Koenig was among those who suffered losses on ZZZZ Best Stock. The company's shares, which had closed at $15.375 May 21, fell $3.50 on the first trading day after the Los Angeles Times article.

ZZZZ Best was soon beset by hordes of short sellers, who sell borrowed shares with the hope of rebuying them at a lower price if the stock falls as they expect. On June 15, the stock was short more than 1.5 million shares, out of about 5.5 million shares in public hands. The rest of ZZZZ Best's roughly 11.5 million shares are controlled by Mr. Minkow and are for the most part restricted.

Six days after the credit card fraud was disclosed, Mr. Minkow buoyed ZZZZ Best stock by announcing that the company would report that earnings for the year ended April 30 had exceeded $5 million, or 50 cents a share, on revenue of more than $50 million. That would be a huge increase from the prior year, when ZZZZ Best reported earnings of $900,000, or 12 cents a share, on revenue of $4.8 million. But law enforcement and company sources say the higher figures probably are inflated.

On June 2, Ernst & Whinney quit as the company's independent auditors. ZZZZ Best says the resignation wasn't over accounting differences, but Ernst & Whinney won't comment. The company hired Price Waterhouse & Co., which also declines comment.

Those who know Mr. Minkow call him dynamic, smart and utterly singleminded. He is also extremely persuasive, having gained the trust of many savvy investors and institutions.

These include the two major accounting firms; the investment banker, Drexel Burnham Lambert Inc.; and the prestigious law firm of Hughes Hubbard & Reed, based in New York.

ZZZZ Best's offering statements and SEC filings were handled by Mark R. Moskowitz in Hughes Hubbard's Los Angeles office. Mr. Moskowitz couldn't be reached, and the firm says it isn't appropriate to comment since it remains ZZZZ Best's counsel.

Drexel executives also declined comment. Earlier this year, Drexel agreed to raise $25 million in debt financing for ZZZZ Best to complete a pivotal acquisition, that of Flagship Cleaning Services Inc., a unit of London-based Northern Foods PLC, which holds a home cleaning license from Sears Roebuck & Co. But Drexel backed out late last month, and the acquisition appears doomed.

The ZZZZ Best corporate headquarters in Reseda, a two-story cement block structure, has been locked for days and has a uniformed guard posted outside. The blinds are drawn, and the phones are constantly ringing. A frustrated receptionist says at one point, "I'm just going to leave this on hold."

On Monday a few employees pounded at the door demanding to be paid.

ZZZZ Best directors, meanwhile, are trying frantically to sort out the mess left by Mr. Minkow's departure, and they are discovering that major contracts aren't the only things that appear to be ghostly at the company. One company director says nervously that nobody can find the insurance policy that is supposed to protect directors and officers from personal liability.

"Coke Unit, TriStar To Join Operations," by Geraldine Fabrikant, The New York Times, September 2, 1987

In a deal that would strengthen its presence in the entertainment industry and benefit its shareholders, the Coca-Cola Company said yesterday that it would merge its movie and television operations with TriStar Pictures Inc.

Through the complex transaction, TriStar would become a substantially larger entertainment company, with all the attributes of a major film studio. TriStar, an independent motion picture company that produces theatrical films and owns movie theaters, was originally financed by Coke, CBS Inc. and Home Box Office.

Coke to Hold 49%

Under the deal, Coca-Cola would end up with a 49 percent stake in TriStar. At the same time, the results and financial flexibility of its core soft drink business would be shielded from the uncertainties and high debt of the entertainment operations.

Recently, for example, its Columbia Pictures unit has dragged down Coke's entertainment sector, which also includes two television operations, Merv Griffin Enterprises and Embassy Communications. For the second quarter, the group reported a loss, after setting aside a $25 million reserve to cover losses on Ishtar. The film, which starred Warren Beatty and Dustin Hoffman, was rumored to have cost more than $40 million, and it did poorly at the box office.

After the transaction, Donald R. Keough, president of the Coca-Cola Company, will become chairman of TriStar Pictures, and Victor A. Kaufman, currently chairman and chief executive of TriStar, will become president and chief executive of the combined entity, which will eventually be named Columbia Pictures Entertainment Inc.

Francis T. Vincent, Jr., an executive vice president of Coca-Cola who had headed the company's entertainment operations, will assume the responsibility of monitoring Coke's equity investments in its bottling properties in the United States and around the world.

The move was generally greeted positively on Wall Street. TriStar's shares climbed $2.50, to $13.50, in heavy over-the-counter trading, while Coca-Cola's shares slipped 12.5 cents, to $50.50, on the Big Board in a session in which stocks were broadly lower.

Harold Vogel, an entertainment analyst at Merrill Lynch Capital Markets, said he believed TriStar would benefit by becoming a leading studio presence in both theatrical films and television.

By producing more feature films, TriStar will increase its chances of coming up with box office hits and bolster its leverage with theater owners, while reducing administrative and distribution costs. Nevertheless, Mr. Kaufman pointed out that TriStar and Columbia Pictures would continue to maintain separate production and marketing operations.

And like the rest of the leading studios, TriStar will become a major producer of shows for network television. Steady revenues from the sale of rerun rights to successful hit television shows help to counteract the volatility of film operations.

After the addition of the Coke units, the company will have a net worth of $1 billion and total debt of about $600 million, thereby giving it ample room for additional borrowing.

The restructuring plan is reminiscent of Coca-Cola's acquisition of several bottlers last year and the subsequent spinoff of its bottling unit as Coca-Cola Enterprises. Coke now holds a 49 percent stake in that company, while the balance is owned by the public.

74 Million New Shares

Under Coca-Cola's proposal, its entertainment assets would be exchanged for 74 million newly issued shares in TriStar, which now has about 34 million shares outstanding. Thus, Coca-Cola's total stake in TriStar would increase to 80 percent, from around 37 percent currently.

Coca-Cola would then reduce its interest in TriStar to 49 percent by distributing about 33 million shares to Coke's shareholders as a special one-time dividend.

Roy Burry, a beverage analyst at Kidder Peabody, pointed out that the deal should be very attractive for Coke's shareholders and that Coke would own 49 percent of an entertainment entity whose opportunity for growth will have improved. Because of TriStar's expanded size, it will have greater access to financial resources, he noted.

In turn, Coke's borrowing capacity will increase because it will be able to remove $403 million in interest-bearing debt from its own balance sheet. As of July 31, Coca-Cola Entertainment had total assets of about $2.3 billion and liabilities of $1.6 billion. Under the deal, those assets and liabilities will be transferred to TriStar's balance sheet.

The Coke entertainment unit's first-run network television programs include Who's the Boss? and Designing Women. Its syndicated programming includes the game shows Wheel of Fortune and Jeopardy. Columbia Pictures' recent successes include The Karate Kid Part II and La Bamba.

Accounting for Coke's Stake

Because Coke's ownership of TriStar will ultimately be below 50 percent, it will report its share of TriStar's earnings on an equity basis. Thus, Coke will take 49 percent of TriStar's net earnings or losses on its own income statement.

TriStar, which was created in 1982, earned $13.7 million on sales of $254 million last year. The entertainment subsidiaries of Coke reported revenue of about $1.3 billion last year and operating profit of about $230 million.

While Coke has increased its holdings in TriStar since the company's creation, CBS has sold its whole stake and HBO owns only 10 percent. TriStar's successful films have included Rambo and The Natural.

"Minkow Empire; ZZZZ Best: the House of Cards Falls," by Barry Stavro and Alan C. Miller, Los Angeles Times, September 6, 1987

On a crisp Sunday last November, an official of the ZZZZ Best carpet cleaning company took the firm's lawyer and accountant on a tour of an office building in Sacramento, a final inspection before they gave their go-ahead for a public stock sale that would bring the company into the Wall Street limelight.

The lawyer and accountant were there to see how ZZZZ Best's most profitable line of business worked. Although the Reseda company founded by Barry Minkow was best known for its service to homeowners-it would clean two rooms of carpeting for $39.95-its ledger books showed that 86% of its revenue was from insurance jobs, repairing buildings damaged by fire or water.

The books listed a series of multimillion-dollar insurance contracts. But the crown jewel was a $7 million job in Sacramento, supposedly sprucing up a building damaged when a water main burst and its sprinkler system went off.

Looking Good

And so Mark Morze, 36, a former UCLA linebacker in charge of ZZZZ Best's insurance projects, showed off the office tower to Larry D. Gray, a partner with the Big Eight accounting firm of Ernst & Whinney, and Mark R. Moskowitz, an attorney from Hughes Hubbard & Reed, a New York-based firm with an office in Los Angeles.

Gray and Moskowitz toured several floors of the 18-story building, Morze recalled. Although there were no workers around on a Sunday, anyone could see what a good job ZZZZ Best had done: new carpeting had been laid, wiring and ceiling tiles were ready to be installed and trash and paint cans were ready to be carted away. It was almost like there had never been any water damage.

In fact, there hadn't been any damage, Morze said recently. ZZZZ Best had nothing to do with the office building. It was simply a new high-rise with space for lease that ZZZZ Best used as a prop in an expensive ruse.

Called a Charade

ZZZZ Best did not have a multimillion-dollar insurance job in Sacramento-or anywhere else, for that matter, Morze said. The insurance business was, in effect, a charade and the Sacramento trip was the grand performance.

"I couldn't believe it would work. I was expecting catastrophe," Morze said. He said he was thinking, "These are smart guys, they'll catch on."

But they didn't. After the tour, the attorneys and accountants gave their blessing and two weeks later ZZZZ Best sold $13 million worth of stock. Within months, the company was a hot pick on Wall Street. Its stock quadrupled, creating paper fortunes for many, including the 21-year-old Minkow, whose holdings grew to $100 million.

Since then, ZZZZ Best has collapsed like the house of cards it was. Minkow resigned, the company entered Chapter 11 bankruptcy proceedings and the firm's board of directors is suing Minkow, Morze and others for $25 million, alleging fraud and theft.

Los Angeles Police Chief Daryl F. Gates has announced that Minkow and ZZZZ Best are under investigation for allegedly being part of a money laundering conspiracy linked to organized crime.

While police are investigating what crimes may have been committed, ZZZZ Best investors are asking another question: How were the professionals fooled?

Asking Why

The accountants, attorneys, stock brokerage firms and ZZZZ Best's board of directors were all supposed to provide checks and balances before the public financing.

"I screamed at my broker and cried hysterically, 'How could you allow this to happen?' " said Jenny Raphael, who owns a fabric firm in New York. She bought ZZZZ Best stock at the urging of her broker when it was $16 a share, then sold at $1 a share, losing $50,000.

She is among a group of investors eager to join class action lawsuits-some already filed in U.S. District Court in Los Angeles-against the company. Lawyers in those cases said they expect to sue ZZZZ Best's accountants, attorneys and its board of directors as well.

Asked Raphael: "What kind of checking did they do?"

SEC Requirements

Before a company sells stock to the public, the Securities and Exchange Commission requires "full disclosure." It is a lengthy process and a team effort, led by the stock brokerage firm that will actually sell the stock. In ZZZZ Best's case that was Rooney Pace, a New York firm with a history of run-ins with the SEC. Rooney Pace went out of business in January due to financial problems unrelated to ZZZZ Best.

Over several months, three accounting firms, including Ernst & Whinney, checked ZZZZ Best's numbers. Hughes Hubbard & Reed, ZZZZ Best's law firm, made sure the necessary documents were filed with the SEC. The brokers, accountants and lawyers all helped write the 48-page stock prospectus that went to potential investors.

James C. Van Horne, professor of finance at Stanford Business School, said the investing public has a right to expect "that the numbers are accurate, and the underwriters and accountants have dug a little more deeply."

Now that ZZZZ Best has collapsed, Van Horne said, "The question is how deeply did they probe in this case, and could reasonable people have detected a problem in advance?"

Based on what he has heard about ZZZZ Best, he said, "I think the answer there is yes."

Most Aren't Talking

Most of the professionals who worked for ZZZZ Best are not talking. Ernst & Whinney and Gray-who works out of the accounting firm's Woodland Hills office-would not comment. Nor would Moskowitz, although a spokeswoman for his firm confirmed that the lawyer and accountant were escorted to Sacramento, where they toured an office building "represented to be in the final stages" of restoration.

Two former officials of Rooney Pace, the defunct underwriting firm, agreed to talk about ZZZZ Best on condition that their names not be used. They said their fact-checking in this case was, if anything, more thorough than usual. Only after ZZZZ Best collapsed did their oversights became apparent, they said.

Said one of the former Rooney Pace officials: "When I go back over the files and think of the level of deception and the extent of the fraud and cover up, it makes my skin crawl."

There were plenty of potential red flags, including Minkow's receipt of loans through a reputed Los Angeles mobster, a faked letter from a major insurance company, grossly exaggerated sales, and the staged Sacramento tour.

To this day, Morze is surprised that no one caught on. "This couldn't take close scrutiny," he said. "All they had to do was scratch below the surface."

Almost Made It

And yet ZZZZ Best almost became a national force in carpet cleaning. Even as things neared collapse, the company was negotiating to land a contract with the country's biggest retailer, Sears Roebuck. Under the deal, ZZZZ Best would have cleaned carpets and upholstery for Sears customers in 34 states.

How could ZZZZ Best have gotten so far? Part of the answer is that Barry Minkow's story was a compelling one. He was almost a caricature of the American entrepreneur. Chosen as both "most likely to succeed" and "class clown" in high school, he started ZZZZ Best in 1981 at age 15 in his parents' Reseda garage and, by the time he left his teens, was parking his Ferrari in a gated compound of mansions.

Minkow was a young workaholic who spoke in a torrent of words. A tireless self-promoter, he built up his accomplishments much as he built up his body through hours of weightlifting. By 18, he had hired a ghostwriter to produce his self-published autobiography, Making It in America. He donated $20,000 to the YMCA in Reseda and $60,000 to drug treatment and education programs; he had a public relations firm alert the media to his generosity.

Heavy Hitters

Minkow ingratiated himself with older men, including Harold Lipman, the 59-year-old father of his girlfriend. Lipman joined the company's board of directors last year, lending it credibility because he was the respected associate superintendent of the Simi Valley Unified School District. Neal Dem, 34, owner of a prosperous Chatsworth stationery business, agreed to be a director as well.

Minkow also invited the San Fernando Valley's most prominent whiz kid businessman to join the board. But real estate dealer Mike Glickman, 27, whose company dominates the Valley market, quit ZZZZ Best's board after one meeting last year. "I didn't like the idea of young people calling him, 'Mr. Minkow,' " Glickman recalled. "Everybody was just agreeing with everything he had to say."

Despite Minkow's prosperous image, ZZZZ Best had a history of money troubles.

In late 1984 and early 1985, ZZZZ Best overbilled customers by $72,000 by inflating their credit card charges. Minkow later admitted the problem, but blamed it on rug cleaning subcontractors.

Money Order Case

Minkow was sued in November 1984, for allegedly stealing and then forging about $13,000 worth of money orders from a Reseda liquor store to pay company bills. The case was settled out of court, without any admission of wrongdoing. In 1985, the IRS sued ZZZZ Best for $5000 in back taxes.

In the spring of 1985, Minkow met Jack M. Catain, Jr., whom Los Angeles law enforcement officials had long described as one of the area's major organized crime figures. Catain was convicted in a counterfeiting case the next year, but died before he could serve time in prison.

Catain offered to help arrange loans for ZZZZ Best. Minkow later said that he was charged 2% to 5% interest a week.

The relationship became public record when the two men had a falling out and Catain sued Minkow in December 1985, alleging that he was owed $1.3 million. The suit dragged on until Catain's death.

In an interview earlier this year, Minkow said he was unaware of Catain's reputation, explaining: "I was clearly fooled . . . that he was a legitimate guy and a nice guy and wanted to help."

Minkow's attorney, Arthur H. Barens, suggested that Minkow had been naive and fell prey to a crook.

"He is essentially a loan shark," Barens said of Catain. "He tried to intimidate and threaten this young man and extort money out of him."

'Sharks' Move In

Police believe that once Catain hooked the young entrepreneur, other mob figures were attracted to Minkow "like sharks circling a bloody fish," one investigator said.

In legal papers, both Minkow and Catain said the loans were to be used to help a growing part of ZZZZ Best's business, insurance restoration work.

Soon after Catain and Minkow got together, according to documents later filed with the SEC, ZZZZ Best signed a joint venture agreement with a firm called B&M Insurance Services to work on two projects worth $5 million, including a job in San Diego from Travelers Insurance.

Listed as the sole owner of B&M was Robert Victor, 51, of Woodland Hills. Minkow told friends that he had met Victor when he was a teenager and the older man helped him buy a car.

Gates' Allegations

At a press conference in July, Police Chief Gates listed Victor, also known as Robert Viggiano, as among the "organized crime subjects or associates of organized crime subjects" involved in the money laundering scheme. In 1971, Victor was indicted with the late Joseph A. Colombo, Sr., reputed head of one of the New York Mafia families, in a $750,000 jewelry robbery.

Victor, who pleaded guilty to attempted grand larceny in the New York case, will not comment on Gates' allegations.

Even if the lawyers, accountants and stock underwriters had no reason to question Victor's background, they could have been tipped off that something was wrong by a letter filed in the Catain lawsuit. Dated August 19, 1985, on Travelers Insurance stationery and addressed, "To Whom It May Concern," it confirmed that the insurance company had awarded ZZZZ Best a $1.5 million repair job in San Diego. The letter was signed by Travelers employee Thomas Padgett on the letterhead of his boss, David L. Tengberg, manager of the claims department.

His Own Company

Padgett, who said he met Minkow years before while working out at a San Fernando Valley gym, later left Travelers to work full-time for his own company, Interstate Appraisal Services of Van Nuys and Culver City. It was Padgett's company, according to SEC filings, that awarded ZZZZ Best millions of dollars worth of restoration contracts.

One of the Rooney Pace officials said that a member of the underwriting team did call the insurance company to check Padgett's background, but that Tengberg was on vacation. No one called him back.

Tengberg could have told the stock underwriters that the letter was a fabrication, and that Padgett was hardly in a position at Travelers to award multimillion-dollar contracts. Tengberg said in a recent interview that Padgett worked as a Travelers automobile appraiser. He inspected dented cars.

Padgett has refused comment.

In January 1986, ZZZZ Best became a public company, making its stock available for purchase, by merging with an inactive but publicly held Utah mineral exploration firm called Morningstar Investments.

'Confidant' Identified

Scott Dear, who worked as ZZZZ Best's controller for part of last year, said he was told that the move was directed by Maurice Rind of Encino, who served as Minkow's "confidant." Rind often came by in the late afternoon, Dear recalled, to talk with Minkow in his office.

Rind, twice convicted of stock fraud in the 1970s, was described by Chief Gates at his press conference as having organized crime associations.

"It was part of the mystery of Barry's world how he ever met these guys," Dear said.

Rind also helped the company qualify for a listing on the computerized over-the-counter stock market. One requirement is that a company have $2 million in assets. Dear said Rind helped line up a deal to pay stock and cash for $2 million worth of power generators from a Cayman Islands firm.

Rind denied any wrongdoing, saying he and a partner "don't do anything illegal."

By spring, ZZZZ Best wanted to raise some money and contacted Rooney Pace. The underwriters took one peek at the growth and profits of the small carpet cleaning company and suggested a stock sale.

Terrific Numbers

ZZZZ Best's numbers for the fiscal year that ended April 30, 1986, were terrific. Fueled by the insurance restoration projects, which supposedly brought in about half the business, ZZZZ Best's sales nearly quadrupled from the year before to $4.8 million, and its profits nearly tripled to $946,000.

Now that ZZZZ Best was a public company, somebody had to do a full audit on its numbers. George Greenspan, a New Jersey accountant, came out to Los Angeles to inspect the books and gave his OK, ZZZZ Best officials said. Greenspan declined to be interviewed.

Even better figures were coming. For the three months that ended July 1986, ZZZZ Best reported $5.4 million in sales, more than it had in the entire previous year. Profits were nearly $900,000 for the quarter.

Minkow was fond of saying that he would build ZZZZ Best into "the General Motors of carpet cleaning." Indeed, according to the ledger books, his company was earning about 17 cents for every $1 in sales. The real General Motors does well to earn 5 cents on the dollar.

'Interim Review'

But Rooney Pace said that to make the stock sale work, it wanted a larger accounting firm's name on the books, so ZZZZ Best hired Ernst & Whinney. The Big Eight firm was not asked to do a complete audit on the fabulous July 1986 results. Instead, it did "an interim financial review," which does not involve independent verification of the company's numbers.

On the surface, everything seemed fine.

Beneath the surface, however, things were frantic at ZZZZ Best, according to Morze. The company was juggling debts to several local banks and private investors, and the stock offering-which would bring an infusion of cash-was taking longer than expected.

The idea behind the insurance charade, Morze said, was to keep up appearances at least until the stock sale, then pump the money into the small, but legitimate, carpet cleaning business to help it grow.

To build the illusion of a thriving business, when ZZZZ Best got its hands on funds from a bank or private investor, "the money would go in a loop," Morze said. "It would go into the company or take a circuitous route so it would look like income."

Financial Loop

He said the loop began with Padgett's Interstate Appraisal Services-named by Gates as one of the "front" companies under investigation-which supposedly handed the insurance jobs to ZZZZ Best.

ZZZZ Best then supposedly hired a subcontractor-often Morze's own Agoura bookkeeping firm, Marbil Management-to supply labor and materials for the repair work.

In the 18 months before ZZZZ Best collapsed it paid Marbil $18 million but never received any services, according to the lawsuit filed by ZZZZ Best's directors against Minkow, Morze and Padgett.

In fact, Morze said, the money stayed in Marbil's bank account "for 20 seconds" before beginning the loop again.

Minkow refused to comment on Morze's portrayal, but his attorney branded the allegations of fraud "incredible" and suggested that Morze may have been acting on his own.

In any case, the professionals missed the ruse, although they did make a series of inquiries about ZZZZ Best and Minkow. The stock underwriters discovered the Catain lawsuit and insisted-against Minkow's wishes, they said-that it be mentioned in the stock prospectus. The prospectus even reported that Catain was under investigation by a grand jury.

Legitimate Job

Rooney Pace also checked out ZZZZ Best contracts for $200,000 in repair work for Crawford & Co., an Atlanta insurance adjusting firm with nationwide offices. It was legitimate work.

In late fall, however, Rooney Pace said there would be no stock offering unless somebody outside ZZZZ Best went to Sacramento to examine the biggest insurance project. Actually eyeballing a project-as opposed to making some phone calls to check-was unusual for them, the underwriters said. But then, 86% of ZZZZ Best's business now was coming from the one type of work.

Another ZZZZ Best associate found a new office building that could be used for the inspection tour, Morze said. "It was in the process of being leased out," he recalled. "There were a few floors not finished."

The associate told the building's rental agent "we might want to lease some space," Morze said, and asked if a group could inspect the building on their own over the weekend.

On November 23, Morze escorted the accountant and attorney to Sacramento. The law firm's spokeswoman said they saw photographs and blueprints of the project, then the building.

There Were Clues

Even if they were tricked into thinking the Sacramento building was part of a ZZZZ Best project, members of the underwriting team might have been tipped off by the elephantine $7 million price tag.

By contrast, Blackmon Mooring Steamatic, a Fort Worth firm that has been in the insurance restoration business for 40 years, was paid $2.1 million for its work after the Las Vegas Hilton fire a few years ago, company President Kurt Blackmon said.

Commenting on a later ZZZZ Best claim that it had won a $13.8 million contract to repair two buildings in Dallas, Blackmon said, "A $14 million contract in fire restoration would be the biggest contract ever to be let."

After the stock sale, the public began to hear more about this remarkable young salesman named Minkow. He appeared on TV shows, pumping iron for the camera and showing off his $698,000 Woodland Hills home and his Ferrari. The television show Eye on L.A. called him "the Rocky of rug cleaning."

Minkow joined other successful young entrepreneurs on The Oprah Winfrey Show. When another executive mentioned the difficulty of selling seasonal products like frozen yogurt or soft drinks, Minkow boasted, "I could sell frozen yogurt in a blizzard."

Glowing Report

Last March, Bob Grossmann, an analyst with the New York stock brokerage firm of Ladenburg Thalmann, wrote a glowing report likening ZZZZ Best to McDonald's and 7-Eleven. He predicted fast growth "under . . . its 20-year-old master entrepreneur, Barry Minkow."

In fact, ZZZZ Best's carpet cleaning business was growing-the company expanded from 374 employees and 13 offices around California at the time of the stock sale to 1030 employees and 21 offices in three states by spring.

A $2 million television ad campaign that aired from February through June brought in new business. Actors portrayed rival carpet cleaning salesmen as buffoons who tried to trick homeowners into paying too much for poor service. Then Minkow came on to confidently promise that ZZZZ Best was one carpet cleaning firm that people could trust.

In April, Minkow announced the deal that would take his firm big time: ZZZZ Best planned to buy KeyServ Group, a company that did $80 million a year in carpet cleaning for Sears customers. Drexel Burnham Lambert, a noted investment banking firm, was set to raise $25 million to finance the deal.

'Make It Look Real'

With the Sears business in the works, Morze recalled, Minkow told him, "Just somehow hold the insurance restoration together. Make it look real."

In May, as Ernst & Whinney was about to do its year-end audit, Morze took the accountant and ZZZZ Best's new controller-who also did not know of the ruse-on another building tour, this one to San Diego. Unlike the situation in Sacramento, Morze said, there actually was a little work being done by a ZZZZ Best subcontractor, putting in some acoustical tiles and wallboard, although the job wasn't worth anything like the $7 million the company claimed it was getting.

It all began to fall apart on May 22 when The Times reported on ZZZZ Best's past credit card problems. To calm investors, Minkow issued a press release the next week saying the company would report record sales and profits.

The professionals, however, apparently began to take a closer look.

Firms Bail Out

Four days later, Drexel Burnham Lambert quit the ZZZZ Best account without public comment. On June 2, so did Ernst & Whinney, which later attributed its move to information that some of the insurance work was phony.

By now, ZZZZ Best's board of directors had hired another Los Angeles law firm, Kadison Pfaelzer Woodard, to check out the newspaper reports. It tracked down Tengberg at Travelers and asked him about the Padgett letter.

Minkow was busy during this period. On June 24, according to real estate records, he got a $1 million loan from Michael L. Malamut, a ZZZZ Best board member, who took as collateral a third trust deed on Minkow's home. Late in June, he got a $2 million loan from his personal line of credit at Prudential-Bache, using some of his ZZZZ Best stock as collateral.

On the following Monday, June 29, Minkow was in Chicago to meet with Sears executives to try to keep the KeyServ deal alive.

Minkow Resigns

But three days later, Minkow suddenly resigned as ZZZZ Best's chairman and the succession of lawsuits and bankruptcy actions began.

Investigators are still trying to trace where all the money went. ZZZZ Best got about $12 million from its stock sale, another $7 million from a Union Bank loan and nearly $2 million from First Interstate. There was also a $10 million loan from European investors that a local businessman helped arrange.

The suit filed by ZZZZ Best after Minkow's departure alleges that he "drained" $3 million from the company during June by signing company checks made out to cash or cashier's checks that, among other things, supposedly paid for supplies for insurance jobs.

Law enforcement officials say they are investigating the apparent "laundering" of 30 checks from ZZZZ Best, each for $9500, over a two-day period shortly before the firm filed for bankruptcy protection. The checks allegedly were taken to Las Vegas-investigators won't say by whom-and used to buy chips at two casinos. Then the chips were cashed in and the money hauled back to California in brown paper bags, they said.

Hunting the Money

By the time ZZZZ Best's bankruptcy trustee started poking through the company's bank accounts, only about $30,000 was left.

Minkow's attorneys say that he doesn't have the money, that it went back into the business. He filed for personal bankruptcy on August 7.

Although Minkow declined to be interviewed, Barens, one of a quartet of lawyers now representing him, said that Minkow never visited any of the major insurance job sites. Minkow relied on Morze to run that end of the business, Barens said, adding: "Mr. Morze may be aware of things based on his own activities that Mr. Minkow is not aware of."

A private investigator working with the legal team also suggested that Minkow was victimized by others.

'He's Still 21'

"He's still 21 years old," said the San Francisco investigator, Jack Palladino. "He was out there at the point (representing) the company and having a good time selling this company. Meanwhile, more experienced people like Mark Morze are taking care of the business and keeping the accounts on the (insurance) reconstruction work."

Palladino said Morze is now cooperating with police, hoping "to do very little time and do it in a little prison camp. And he doesn't expect to lose his assets."

Morze confirmed that has helped lead investigators through the paper trail. He said he is talking because too many people know what happened and "the damage has been done."

Morze insists that Minkow knew what was going on. "Barry was the field general, the chief of state," he said. "I worked for Barry. He's the guy who called the shots."

Although Morze readily admits he was a central figure in wrongdoing, he said he had hoped that ZZZZ Best would become a legitimate, profitable carpet cleaning company.

The Sears deal could have been "the cure," Morze said, allowing ZZZZ Best to "get rid of this bogus restoration business. . . .

"It could've worked where there would have been no victims. We came unbelievably close."

"Sony Buys CBS Record Division for $2 Billion After Months Of Talks," by Paul Richter and William K. Knoedelseder, Jr., Los Angeles Times, November 19, 1987

Ending months of on-again, off-again negotiations and widespread Wall Street speculation, CBS Inc. announced late Wednesday afternoon that it has reached an agreement to sell its record division to Sony Corp.

"The Sony board in Tokyo and CBS board in New York approved the sale of the record division for $2 billion in cash. It was unanimous," said CBS President and Chief Executive Laurence A. Tisch as he left CBS' New York headquarters Wednesday evening following a special board meeting called to vote on the sale.

In a statement released minutes after the board meeting ended, CBS said that while it has signed a "definitive agreement to sell our worldwide record operations," the company doesn't expect the deal to be finalized until early 1988, "after receipt of required government approval."

"After long discussion and very careful review, our board concluded that this is a very attractive offer in terms of value to the shareholders, while it also provides an important source of capital and allows us to focus all of our energies and resources on our core business of broadcasting," Tisch said in the CBS statement.

CBS Chairman William S. Paley-who reportedly had previously resisted the idea of selling the record division-was quoted in the CBS statement as saying the deal was "clearly in the best interest of the corporation and its shareholders."

Before the announcement, CBS stock closed at $176 a share on the New York Stock Exchange on Wednesday, up $8.625 from Tuesday's close. Sony also rose, gaining $2.75 a share to $35.625.

CBS Records Group spokesman Bob Altshuler said Wednesday that the name of the company will be changed to CBS Records Inc., that it will continue to operate from CBS' headquarters in New York and that "senior management will remain in place."

For its $2 billion, Sony Corp. gets the world's largest and most successful record company. With about 6000 employees worldwide, CBS Records deploys the most powerful-and the most widely emulated-armada of manufacturing, distribution, marketing and artist acquisition operations in the industry.

The company's three labels-Columbia Records, Portrait Records and Epic Records-boast an artist roster that is the envy of competitors, both for its size and the wealth of talent. Bruce Springsteen, Michael Jackson, Billy Joel, Bob Dylan, Barbra Streisand, Willie Nelson, James Taylor and Placido Domingo are just a few of the more than 200 performers under contract.

Last year, CBS Records reported operating profits of $162.1 million-an all-time record industry high-on revenue of $1.49 billion, accounting for 37% of CBS' total operating profit and 31% of its revenue. This year, the company is expected to report profits of about $200 million.

"DIC, Computer Memories Plan Merger: Cartoon Maker Seeks Easy Way To Go Public," by James Bates, Los Angeles Times, December 29, 1987

DIC, a Burbank company that in six years rose from a two-man operation to become the nation's largest television cartoon maker, disclosed Monday that it plans to go public by merging with a largely liquidated computer parts company in Chatsworth.

Under the agreement, DIC would in effect absorb Computer Memories, which was one of the nation's largest makers of disk drive data storage devices for personal computers until it was dumped in 1985 by its primary customer, IBM.

The deal follows the recent collapse of a similar agreement Computer Memories had with Hemdale Film, a Hollywood company that financed the Academy Award-winning movie Platoon. Computer Memories' directors scrapped that merger because of Hemdale's ongoing legal problems with Vestron Inc. over the videocassette rights to Platoon.

Shareholders of Computer Memories, which sold most of its assets and became a shell company last year, are expected to receive about one-third of the stock of the merged firm. The new company's overall value was placed at $75 million.

"It looks like they are a very nice moneymaking, cash-generating company," Computer Memories Chairman Irwin Rubin said of DIC. "It also is in a business that goes on and on and on because children go on and on and on."

Animating Alf, Heathcliff

After the deal is completed, DIC will be the surviving entity and gain access to the $25 million in cash that Computer Memories holds. The merger also gives DIC a cheap, easy way to go public because it will take on Computer Memories' status as a publicly held company. Merging with a public shell company generally requires fewer government filings and lower investment banking fees than selling stock through an initial public offering.

DIC President Andy Heyward and other company executives were on vacation Monday and could not be reached for comment.

DIC (pronounced DEEK ) has produced or co-produced six weekly half-hours of programming now airing on Saturday mornings on the three major networks. It has 50 more half-hours of programming distributed through syndication.

The company's programs feature such characters as Alf, Dennis the Menace and Heathcliff. DIC also has produced such shows as Inspector Gadget and The Real Ghostbusters. The company has said it expects revenue of about $90 million this year.

In an interview earlier this month, Heyward, 38, who said he controls DIC with a 52% stake, said that he wanted to take the company public in part to help him raise money to finance an ambitious list of plans. Those plans, he said, include developing primetime family shows, an indoor theme park somewhere in Southern California and a line of boutiques featuring characters from DIC-produced cartoons and toys.

He also acknowledged that the company has considerable debt resulting from the $65 million leveraged buyout he led in December 1986, with financial help from the Bear Stearns & Co. brokerage firm and Prudential Insurance.

Former Story Writer

At that time, Heyward and his partners bought the stakes of company founder Jean Chalopin, a French businessman, and Radio-Television Luxembourg, a European firm that backed Chalopin when he started the firm in 1976. Heyward, a former story writer for the Hanna-Barbera cartoon factory, started DIC's U.S. operations in April 1982, and built it into an animation powerhouse virtually from scratch, largely by forming alliances with toymakers and greeting card companies.

Beginning at his mother's kitchen and working with Chalopin, Heyward soon was producing shows based on characters that toy makers could turn into toys. This often made it easier for Heyward to sell his programs to the networks because sponsors were already lined up. And toymakers or greeting card companies often financed DIC shows in exchange for ad time or a share of the profits.

The merger must be approved by Computer Memories shareholders and DIC's owners.

Computer Memories' troubles began in August 1985, when IBM, which accounted for about 80% of the company's sales at the time, disclosed it was dropping the company as a supplier of hard disk drives for its IBM-PC AT computer. Within a year, its directors voted to liquidate.

"Businesspeople; For Maker of Cartoons, A Chance to Go Public," by Andrea Adelson, The New York Times, December 30, 1987

Sitting at his mother's kitchen table near Los Angeles in 1982, Andy Heyward and a French businessman, Jean Chalopin, developed the idea for a television cartoon series on a crime-solving handyman. After drawing a few sketches, Inspector Gadget was born. The men have since built a powerhouse in television animation.

Their company, DIC Animation City Inc., expects revenues of about $100 million in 1987 and this week made plans to go public by merging with a defunct computer equipment maker.

If the stock deal, worth about $75 million, is approved by shareholders, Computer Memories Inc. will no longer exist and DIC, based in Burbank, California, will absorb the company's $25 million in cash. The computer company's stockholders will receive a one-third interest in DIC (pronounced DEEK), which is now more than 50 percent owned by Mr. Heyward, its president.

''It was a very small operation, and it has grown overnight,'' said Mr. Heyward, 38, who worked as a story writer on such programs by Hanna-Barbara Productions Inc. as The Flintstones and Yogi Bear.

DIC began as television's craving for animated shows was growing. In the early 1980s, four hours of animated shows aired weekly, compared with nearly 12 hours of cartoons on television today. Six of the 30-minute programs on Saturday mornings are DIC projects, including Alf, The Real Ghostbusters and Dennis the Menace.

The company also licenses its characters and has recently begun developing toys. Mr. Heyward said his 3-year-old son, Robert, was the inspiration for a talking toy line based on the song ''Old MacDonald.'' A licensing deal is under way, he said.

Mr. Heyward's plans to diversify led to a $70 million leveraged buyout of DIC last December. He and his financial advisers have bought Mr. Chalopin's interest and that of the company's European parent, RadioTelevision Luxembourg.

DIC is the industry's only non-union company, and a 1984 organizing attempt failed. Like most animation houses, DIC's concepts, sketches and designs are homegrown. But the inking, painting and photographing of animation cels are done overseas.

"Barry Minkow-His Dream Born in a Garage Turns Sour," by Alan C. Miller, Los Angeles Times, January 19, 1988

"I am expanding to the hilt, and I have no shame." -From Barry Minkow's Making It in America.

Even as his financial empire was collapsing last summer, Barry Minkow planned to host a television show designed to counter the negative image of America's younger generation. A brochure for Class of Tomorrow, which was being marketed by two producers to various networks, hailed the 21-year-old Wunderkind as nothing less than "what tomorrow's youth is all about."

After all, Minkow's exploits had been widely chronicled: He had founded the ZZZZ Best carpet cleaning company in his parents' Reseda garage at 15, built it into one of Wall Street's hottest firms and donated more than $110,000 to anti-drug and other civic ventures. He seemed too good to be true.

And he was.

The glowing descriptions of Minkow as the embodiment of the American dream-"the Rocky of rug cleaning"-have taken on darkly ironic overtones in the wake of the company's demise, accusations by Los Angeles police and last week's federal indictment of the former carpet cleaning king and 10 associates on 54 counts of racketeering, fraud and money laundering.

Minkow remains in custody with his bail set at $2 million, facing a maximum sentence of 350 years in prison and a $13.5 million fine if he is convicted on all counts.

His rapid rise from rugs to riches is a saga of personal and corporate deception of stunning proportions, according to prosecutors and former associates. The indictment alleges that Minkow masterminded an intricate scheme that used phony businesses, sham invoices and other ruses to secure millions of dollars from stock sales and bank loans by convincing lawyers, accountants and investors that vastly inflated revenues claimed for ZZZZ Best were bona fide.

One thing no one seems to dispute at this point: ZZZZ Best's major source of income, a business that purportedly restored office buildings damaged by flood or fire for insurance companies, was almost entirely fabricated. The legal finger-pointing concerns fixing responsibility.

"Minkow was, in substance, charged not only with participating in (the scheme) but with orchestrating it," U.S. Attorney Robert C. Bonner said. He estimated that losses to banks and investors exceed $50 million.

In his defense, attorney Arthur H. Barens argued that Minkow relied on older, more sophisticated business partners and was unaware of any illegal activities. Barens said these same businessmen are cooperating with the government "to exercise some damage control in their future by pointing the finger at some 19-year-old."

A jury likely will have to decide the question: Was Minkow, in essence, taken in by unscrupulous associates who called the shots, or is his defense yet another attempt at deception?

The characterization of Minkow as someone who was not in control would surprise many people who worked closely with the young tycoon. When ZZZZ Best launched a $2 million television advertising campaign in early 1987, for instance, Minkow insisted that he be featured on camera in the commercials depicting his company as the Mr. Clean of an often dishonest industry.

"He wanted to be the star," said David Marchese, a partner at the advertising firm that produced the ZZZZ Best spots. "That's his modus operandi. He felt he knew more about it than anybody else and it was his commercial and his company."

Minkow displayed that same confident demeanor Friday during his first appearance in court as a defendant. His muscular frame clad in baggy sweats and athletic shoes, he proffered advice to his attorneys, joked with other defendants awaiting arraignment and winked at a spectator.

At one point, he browsed through drawings of himself by television artists. "Don't like that one," he said. "The nose is too small."

In a television interview shortly before the sealed indictment was made public, Minkow averred that he was a victim of his own immaturity and arrogance.

"I'm not mature enough to handle a company with 1400 people," he said. "I wasn't then, and at least I have the ability without the ego and the pride to admit it now."

Barry Jay Minkow's story reads like a 1980s version of F. Scott Fitzgerald's Jay Gatsby-a working-class youth driven to amass great wealth; a vain man who surrounded himself with fancy cars, glitzy parties and attractive women; a high-profile multimillionaire who is said to have quietly consorted with mobsters.

At a press conference in July, Police Chief Daryl F. Gates alleged that Minkow and ZZZZ Best were part of a conspiracy to launder narcotics profits for East Coast organized crime families. No arrests have been made in connection with the allegation, but police said last week that the investigation is continuing.

Born March 22, 1966, in Inglewood, Barry Minkow was the youngest of three children of Robert I. and Carole Minkow. The family moved to a small stucco home in Reseda when Barry was 4.

Called a Nuisance

"He was a nuisance, a Dennis-the-Menace type," said neighbor Donald Miller. "I'd hear them yelling at him."

The hyperactive Minkow spent two years at the Ridgewood Military Academy where, he recalled, he gained the drive to acquire wealth. He also said classmates broke his nose eight times.

Minkow's image of his parents was taking a beating, too. He later recalled in an interview that he was ashamed when the family's telephone was cut off because they couldn't pay the bill.

Robert Minkow, a cheerful man always ready with a joke, at one point worked as a real estate broker and night foreman, his son said. Carole Minkow, a serious-minded person, worked for a carpet cleaning company.

Minkow says he was 9 when his mother got him a summer job as a telephone solicitor in the rug cleaning company because she couldn't afford a babysitter. Later, he grew so confident of his salesmanship, he boasted on national television: "I could sell frozen yogurt in a blizzard."

At 15, Minkow recalled, having familiarized himself with the business, he started ZZZZ Best in his garage with three employees, four phones and $6200, saved from his carpet cleaning work evenings and summers.

Minkow joined a fragmented field of carpet cleaning operators without any dominant firms. In the San Fernando Valley area alone, there are about 150 different companies, most of them mom-and-pop operations.

The industry is marred by widespread consumer complaints, state and local officials report. The major problem is the bait-and-switch game-firms advertise a ridiculously low price to get in the door, then announce that the price doesn't include much of what needs to be done.

Company Guarantee

Minkow sought to counter this practice by guaranteeing that his firm would clean two rooms of carpets for $39.95-without extra charges. Ironically, there were few, if any, complaints about the work of Minkow's small firm.

Videotapes of the company's early days show Minkow, his dark hair extending over his collar, seated at a card table earnestly calling prospective customers. Too young to drive, he hired an older friend to chauffeur him. After moving the operation to a Reseda office, he recalled, "I was a kid who had a ticket into the adult world."

He said he picked the name ZZZZ Best (pronounced "Zee Best") so there was one "Z" for each of the four children he planned to sire.

Minkow hired his mother, and later put his father to work, too, as a salesman in ZZZZ Best's commercial division. In a rap music videotape that employees made for Barry's 21st birthday, Robert Minkow rapped: "I'm your pop, better known as Bob RM/Now I know I raised me a gem/Happy Birthday, son, you're 21/And all the fun has just begun."

Though he had to worry about cash flow as well as calculus, Minkow graduated from Grover Cleveland High School in June 1984. He received the unlikely twin plaudits of Most Likely to Succeed and Class Clown.

By the time he graduated, ZZZZ Best had 80 employees in three offices.

A savvy self-promoter, Minkow hired a ghostwriter to do his 136-page Making It in America-18 Years Old and a Million Dollars, and published it himself.

Eye for Publicity

He also hired a public relations firm to tout his accomplishments. Entrepreneur magazine headlined an article on him: "18-Year-Old Cleaning Mogul Makes the Rules and Plays by Them," and he won a 1985 commendation from Los Angeles Mayor Tom Bradley.

Despite the growth of his businesses, Minkow expressed bitterness about being sold short by bankers who denied him credit and other adults who refused to take him seriously. What law enforcement authorities now describe as his preference for cash transactions thus may have begun as necessity.

"People told us, 'You couldn't do it,' and we did it," Minkow said during an appearance on The Oprah Winfrey Show last April. "Success is the best revenge."

Minkow, meanwhile, was also growing physically. Angered by the bullying he had absorbed at the military academy, he began rigorous weight training.

"Weightlifting gave me the confidence to look in your eye and say, 'You're fired,' " Minkow told a television interviewer. " 'Cause not everyone was bigger than I was."

But it appears that Minkow may have inflated his weightlifting accomplishments.

In recent years, when he worked out in the early mornings, he was able to bench press 275 pounds or more, impressive for a 5-foot, 10-inch, 175 pounder, fellow weightlifters said.

Minkow, however, said in promotional materials that he bench pressed 400 pounds daily, which experts say would make him one of the top 100 weightlifters nationwide. Further, he wrote in his book that he won several events "competing against the best lifters in the state of California."

But Mike Lambert, editor and publisher of the Camarillo-based Powerlifting USA, the nation's most authoritative source on powerlifting competitions, said Minkow's name never appeared in the magazine's list of winners. "We didn't find anything," Lambert said.

Money Problems

Despite his bravura, Minkow was dogged by money problems.

"We had to watch every penny," said Elenora Madrinan, a high school friend of Minkow's who was ZZZZ Best's advertising coordinator. "Six months after I started with the company, we started having problems with the payroll."

During this period, Minkow was accused in a Superior Court lawsuit of stealing and forging about $13,000 in money orders from a neighborhood liquor store to invest in ZZZZ Best. He denied the accusation and the case was settled out of court without an admission of wrongdoing.

In late 1984 and early 1985, ZZZZ Best used customers' credit card numbers to ring up $72,000 in false charges. Minkow said unscrupulous former subcontractors were at fault and had been fired. He repaid the money.

Minkow wrote in his book: "There are no magic formulas" to business success. "It doesn't take rich uncles lurking in the background. Just hard work."

But he apparently had his own version of a "rich uncle."

Minkow said he got involved in 1985 with the late Jack M. Catain, Jr.-long described by police as a major Los Angeles organized crime figure with links to Mafia families in Chicago and Philadelphia-when ZZZZ Best "was in desperate need of financial assistance."

In a civil suit that followed a falling out between the two men, the ailing Catain said he obtained loans for Minkow in return for about 50% interest in the business, but that Minkow refused to pay him his share of the profits. Minkow's lawyer said Catain was paid what he was owed and the loans were usurious, with interest rates of 2% to 5% a week.

Minkow's lawyer said his client didn't know of Catain's alleged mob ties. In court papers, however, Minkow acknowledged that he continued the relationship after learning of Catain's indictment on counterfeiting charges. Catain was convicted November 7, 1986, but died in February 1987, before sentencing and resolution of the Minkow lawsuit.

Called Source of Problems

Madrinan, Minkow's friend and employee, now says, "I'm sure that's where Barry went wrong. "He got involved with this person and didn't realize who he was until it was too late," Madrinan said. "Jack helped him out with the money. Once you're in, you're never out."

Los Angeles police also believe that after Catain hooked the young entrepreneur, other mob figures were attracted to Minkow "like sharks circling a bloody fish," one investigator said.

At his July news conference, Gates announced that his officers had searched the homes and offices of more than a dozen businesses and individuals suspected of "laundering" narcotics proceeds, including five people who were "organized crime subjects or associates of organized crime subjects." None of those were among the group indicted last week.

One of those that Gates named was Maurice Rind of Encino, who was twice convicted of stock fraud in the 1970s and who served as Minkow's "confidant," according to Scott Dear, who worked as ZZZZ Best controller for part of 1986. Rind helped Minkow acquire the $2 million in assets needed for ZZZZ Best to qualify for a listing on the computerized over-the-counter stock market, Dear said.

"It was part of the mystery of Barry's world how he ever met these guys," Dear said.

Rind says he didn't "do anything illegal" and has challenged police to find any evidence against him. "They can investigate us now until the world comes to an end and they wouldn't come up with nothing," he said after Gates' public accusations.

A confidential source who told of being in the company of Minkow and some of the alleged organized crime figures said: "They didn't treat Barry very well. . . . They would always talk about the (ZZZZ Best) stock. They would say, 'Do better, Barry.' Barry backed down to them a lot."

Minkow began to reap the benefits of his growing wealth in late 1985. That November, he paid $698,000 for a large Mediterranean-style home with a red stucco roof in a gated community in Woodland Hills. A huge black Z was emblazoned on the bottom of the pool. He wasn't ready for a Gatsby-type mansion, but he was on his way.

Minkow drove a white BMW and a bright red 1985 Ferrari with "ZZZZ BST" license plates. He sported a gold ring and gold chains.

For the 19th birthday of his girlfriend, Joyce Lipman, an attractive, 5'8", hazel-eyed blonde, Minkow bought her a black Porsche.

It was through Lipman that Minkow met her father, Harold Lipman, 59, the associate superintendent of the Simi Valley Unified School District. Lipman, a silver-haired man with a doctorate in education and a sterling reputation among colleagues, added credibility to ZZZZ Best when he joined its board in February 1986.

"I was asked to give Mr. Minkow a hand by my daughter," said Lipman, who has since retired from the school district and says he was shocked to learn of ZZZZ Best's alleged fraudulent activities.

On January 20, 1986, ZZZZ Best went public, making its stock available for purchase, by merging with Morningstar Investments, an inactive Utah shell corporation. ZZZZ Best had four offices at that point and reported sales of $2 million in 1985.

As a corporate executive, Minkow was "a constant contradiction," in the words of an ex-associate. A whirl of nervous energy, he was a quick study and a consummate salesman, but he was also a rough-hewn kid in a grown-up world-showing off by taking sensitive long distance calls on his speaker phone during business meetings, for instance. He preferred sweats to suits and ties, but also demanded that employees, including his mother, call him "Mr. Minkow."

Sudden Appearances

Minkow could be a tough boss: "My way or the highway" was a favorite expression. Anxious to know what was happening in every department, he would poke his head into various offices without warning, former employees say.

But by all accounts there was an esprit de corps among the largely youthful staff. Minkow himself, often at his desk before 7 AM and still there in the evening, was an inspiration.

"We all believed in Barry," said Madrinan, a three-year ZZZZ Best veteran.

Minkow showed his appreciation. In June 1986, he threw a luxurious company party for 350 at the Beverly Hilton Hotel. Forgoing his exercise uniform for a white tuxedo and black bow tie, Minkow presented awards to key aides, including his mother.

Minkow also threw a Christmas black tie bash that year at the Westin Bonaventure Hotel. ZZZZ Best had gone public in a big way on December 9, selling $13.2 million worth of stock and warrants to the public, an offering that prosecutors now allege was based on fraudulent claims about the company's revenues.

Minkow's parties were noted for their sobriety. He never drank liquor and insisted that no one else under 21 imbibe. He also required ZZZZ Best employees to submit to a drug test.

His anti-drug crusade included posters of him plastered throughout ZZZZ Best offices stating, "My Act is Clean. How's Yours?"

With his public relations firm trumpeting his generosity, Minkow contributed $20,000 each to Narcanon, a national drug treatment program, and Narcanon International for school drug education. He helped pay for a public service announcement for the Los Angeles Mothers Against Drunk Driving, gave $20,000 to the West Valley YMCA and spent $30,000 to landscape a girls softball league field.

One place that Minkow rubbed elbows with his business associates and met others was at the gym. Among those with whom he pumped iron were Mark L. Morze, Thomas G. Padgett and Daniel B. Krowpman, all of whom were named with him in the federal indictment unsealed Friday.

In the house of cards that ZZZZ Best became, according to the indictment, Padgett played the role of the insurance executive who handed out jobs to the cleaning company. To an outside investor or auditor, it looked like his firm, Interstate Appraisal Services of Culver City, was awarding million-dollar contracts to ZZZZ Best to repair fire or water damage to large buildings.

Krowpman's firm, Cornwell Tools, created paper work "that gave the false impression" that it provided millions of dollars in equipment for ZZZZ Best's jobs, the indictment said. And Morze, an accountant and former UCLA football linebacker, was in charge of the insurance projects. Morze has since said he was cooperating with authorities.

For Barry Minkow, 1987 proved the best of times, and the worst of times.

Early in the year, he vowed, "I'll be President in the next 20 years." By year's end, he faced the prospect of serving a term in the penitentiary rather than the White House.

By March, Minkow's face was becoming familiar to Los Angeles television viewers. ZZZZ Best's $2 million advertising campaign ridiculed competitors-showing their salesmen as buffoons who ruined customers' carpets while upping the price-and closed with Minkow making a pitch for ZZZZ Best. Chest out, he looked into the camera and declared: "I'll guarantee the work and price in writing."

To the surprise of the advertising professionals, Minkow shot the commercials in a single take, advertising executive Marchese said, an impressive display of poise.

University Rejection

With his business booming, Minkow sought to bolster his academic credentials. Marchese, who teaches part time at Pepperdine University, said Minkow asked for his help to get him into the graduate school of business. But the university turned down Minkow's proposal that he be awarded undergraduate credit for his business experience.

Although the small, legitimate rug cleaning business was prospering, the largely bogus restoration jobs accounted for the vast majority of the revenues claimed on ZZZZ Best's ledgers. ZZZZ Best announced one $13.8 million Dallas job that insurance restoration experts say would have been the largest ever let.

The stock took off. It opened 1987 at $4 a share and reached a high of over $18. Shortly after Minkow's 21st birthday, his 51% of the company's stock was valued at $103 million.

On April 16, ZZZZ Best announced that it was going to spend $25 million to buy the KeyServ Group, a nationwide firm that had taken in $80 million the previous year by cleaning carpets for Sears customers. ZZZZ Best, which had 21 offices and 1030 employees in California, Nevada and Arizona, was acquiring a firm with 50 locations and 2300 employees in 34 states.

According to Morze, the purchase was to be the "cure" that would allow ZZZZ Best to stick with legitimate carpet cleaning and "get rid of this bogus restoration business."

Minkow talked boldly of plans "to expand into England" and build a billion-dollar company.

On April 27, Minkow joined several other highly successful young entrepreneurs on The Oprah Winfrey Show where he fidgeted, interrupted others and demeaned his fellow guests.

Offers Cliches

"Tough times pass. And tough people last," he counseled. "Face the fear. The fear will disappear."

When another guest said viewers might want some non-cliche advice, Minkow retorted: "Your sales were $17 million. Mine were $50 million. End of story."

The end of ZZZZ Best's story was fast approaching. But first there was a last hurrah.

In early May, at a cost of hundreds of thousands of dollars, Minkow flew in 600 KeyServ employees and their wives from around the country for a high-spirited three-day conference with several hundred ZZZZ Best employees at the Century Plaza Hotel. The event was called "The Sky's the Limit," and employees of both companies gave Minkow a standing ovation when it ended.

The rug began to slip out from under ZZZZ Best on May 22, when The Times published an article describing the credit card problems of 1984 and 1985. The company's stock plunged $4.25 that day.

"It really humbled him," Minkow's friend Elenora Madrinan said. "He really changed. He got to be a lot more quiet. He made more of a point to go and talk to people in the corporate office. He was trying to reassure them that everything would be OK."

It was too late. On June 1, ZZZZ Best's investment banker, Drexel Burnham Lambert, resigned, jeopardizing the KeyServ deal. The next day Ernst & Whinney, ZZZZ Best's auditor, followed suit.

Minkow soon was busily accumulating cash. He got a $1 million loan from a ZZZZ Best board member, through a third trust deed on his home. On June 26, according to court papers, he got a $2 million loan from Prudential-Bache Finance Ltd., using his ZZZZ Best stock as collateral.

Assistant U.S. Attorney James R. Asperger said there is evidence that Minkow had developed "a close personal relationship" with a woman who worked at Prudential-Bache, who subsequently processed a postdated check for him-giving him traveler's checks, which were then cashed in Las Vegas. "He told her he loved her, that he would give her a postdated check . . . and that ZZZZ Best would cover it," the prosecutor said.

Missing Money Alleged

At Minkow's bond hearing Friday, prosecutors also alleged that he removed as much as $816,000 from ZZZZ Best's treasury in the company's waning days and may have millions stashed away in overseas bank accounts. Herb Wolas, the bankruptcy trustee assigned to help process creditors' claims, said there is "between $23 million and $30 million not accounted for."

Even with his empire crumbling, Minkow made a last-ditch bid to save the KeyServ deal, jetting to Chicago in late June with Hal Lipman to meet with Sears executives. Lipman said Minkow explained the credit card problems, apparently to the satisfaction of the Sears brass. The Sears executives planned to fly to Los Angeles within two weeks to finalize the deal.

They never made it. Minkow unexpectedly resigned July 2, citing a pair of bleeding ulcers. ZZZZ Best filed for bankruptcy six days later, and shortly thereafter the company's board sued Minkow and others for $25 million, alleging fraud and theft. On August 7, Minkow declared personal bankruptcy.

Fitzgerald's Gatsby ended up face down in his swimming pool, shot after a mysterious automobile accident that subjected him to the rage of two jealous husbands.

Minkow also had his shooting incident. Five weeks after Gates alleged that he was involved with organized crime families, Minkow reported to police that four shots were fired at him from a white Lincoln Continental as he drove a friend's pickup truck along an isolated San Fernando Valley road. No arrests have been made.

In the six months after ZZZZ Best's demise, Minkow kept a low profile as he waited for the indictment that seemed inevitable. He was seen by neighbors working out with weights in his garage and by friends hanging around a San Fernando Valley pest control business owned by a friend. His attorney said he also was "out on a daily basis on his hands and knees, cleaning carpets."

Disputing the suggestions that Minkow has a fortune stashed away, attorney Barens commented: "If there were hoards of millions of dollars offshore, I doubt very much that Mr. Minkow would be sitting around Reseda preparing his defense."

In a rare interview, Minkow told a television reporter last week, "The Lord is my defense and my deliverance and I'll take it as it goes, one day at a time."

One thing Barry Minkow can certainly say in his own defense: From his meteoric rise as a multimillionaire Wall Street whiz kid to his equally breathtaking descent, he has been true to one part of his personal credo.

"I'm motivated," he once wrote, "by the idea of astounding other people."

"Huge Debt Keeps Pressure On DIC To Keep Turning Out Animated TV Hits: Cartoon Firm Deals Way To Top," by James Bates, Los Angeles Times, March 8, 1988

Dennis the Menace, the all-American brat, is part Canadian.

Last year, DIC Enterprises in Burbank produced 13 half-hour cartoon episodes starring the mischievous 5-year-old that are now airing Saturday mornings on CBS.

Canada gives tax breaks to investors in television shows and movies if the programs are at least partly made there. So DIC got about $3 million in U.S. dollars from Canadians to finance the shows and qualified them for the write-offs by having an Ottawa animation company do drawing, voices and editing, according to Canadian executives and former DIC officials.

Exotic deals are nothing new to DIC (pronounced "deek") and its president, Andy Heyward. A former writer for rival cartoon factories Hanna-Barbera and Filmation, Heyward, 39, has used his dealmaking prowess to take DIC from a business he operated six years ago on his mother's kitchen table to television's biggest cartoon supplier with about 60 half-hours of children's programming on the air a week. The privately held company has nearly $90 million in annual revenue.

Each Saturday morning, Heyward and DIC have six half-hours of shows on all three major networks, including CBS' Dennis the Menace, NBC's ALF, and ABC's The Real Ghostbusters. On local stations, more than 50 half-hours of DIC shows air each week, including a block of episodes of The Real Ghostbusters to premiere in first-run syndication, and original series Beverly Hills Teens and The Adventures of Teddy Ruxpin.

Yet for all of DIC's growth, competitors and business associates predict that DIC will be under increasing pressure to churn out hits, while the television market is softening, because DIC must service its debt growing out of a two-step, $70 million buyout Heyward led in late 1986 and 1987.

Last fall, with Prudential Insurance and the Bear Stearns investment company as partners, Heyward finished buying out DIC's previous owners, French businessman Jean Chalopin and Radio-Television Luxembourg. That left Heyward with about 52% of the company and a debt that probably costs the company from $5 million to $8 million a year to service, executives familiar with DIC say.

"Andy has no choice but to succeed," Chalopin said. "He has a heavy burden on his back."

If Heyward is worried, he doesn't show it. "We are a growing company in an industry that is in a downcycle right now," he said.

DIC maintains that it is profitable, but doesn't release figures. People familiar with the firm estimate pretax profit before debt payments at $12 million to $15 million.

Some suggest that if the hits don't keep coming, Heyward may have to sell a chunk of the company. Indeed, Heyward and his partners nearly sold one-third of DIC when they unsuccessfully tried to take it public by merging with Computer Memories, a publicly held shell company in Chatsworth that has $25 million in cash. The deal was scuttled last month when a dissident Computer Memories shareholder opposed it.

Michael Garstin, a managing director with Bear Stearns, dismisses any idea that DIC must go public soon, or that it may need a cash infusion. "We recognize that there is some softness in the animation business, but we don't see that at DIC," he said.

Still, television industry executives note that all animation companies, including DIC, face problems on several fronts.

Children are watching tapes on VCRs more. And new television ratings based on handheld "people meters" reveal that fewer children watch TV programs than was previously thought, which could hurt advertising revenue. Toy makers that buy ad time on children's shows also are suffering from an industry slump.

But the more serious problem is the glut of children's shows, splintering ratings and advertising revenue. In some cities, 25 or more separate cartoon shows air on local stations, most of them daily. Add to that the 20 or so kid shows that the networks air Saturday mornings and children's programs on cable channels like The Disney Channel and Nickelodeon.

"There is a tremendous shakeout going on. The market melted down because of an oversupply of cartoons," said Melvyn Smith, vice president of programming for Tribune Broadcasting in Chicago.

Characteristically, Heyward sees the current shakeout as an opportunity for DIC to emerge as an even stronger player. "Things are moving rapidly. There is a changing of the guard," he said.

Another problem is the sharp rise in production costs. Industry executives say a half-hour cartoon can cost from $150,000 to nearly $400,000 an episode. Although DIC, the industry's only major non-union company, and most others subcontract much of the animation work to the Far East, where production is cheaper, Japanese animation executives say work there costs as much as 40% more than it was two years ago because of the stronger yen.

So Heyward and other animators are moving more work to Korea and Taiwan, a trend that worries some executives because it may mean problems meeting deadlines, as well as inconsistency in the quality in the drawings.

"DIC has had a big problem with quality control and consistency because they have been so spread out all over the Far East. They bend over backwards to fix it, but usually the problem is time," said Phyllis Tucker Vinson, NBC's vice president of children's and family programs.

Heyward grew up in the television business. His father, Louis M. (Deke) Heyward, is a former Hanna-Barbera executive. In the early 1980s, Andy Heyward met Chalopin, who had founded DIC ("Diffusion Information Communication" in French) in the early 1970s. The two set up the company's modest American operation in Los Angeles in 1982, where they first worked on Heyward's mother's kitchen table.

They immediately sold Inspector Gadget to local stations and The Littles to ABC, making their operation profitable by contracting the work out to animators in the Far East.

Heyward would rather talk about his cartoons than his deals and how they will be affected by industry problems. Heyward, who calls his methods "trade secrets," frequently swears people he does business with to secrecy, associates say.

His family and friends say he is obsessed by work and success to the point that he often calls associates at midnight to talk about work. "He's the kind who wants the name on top of the building. Prestige is very important to him and success is very important to him," Chalopin said.

One reason for Heyward's success has been his skill in convincing toymakers to participate in new shows either by committing to buy national advertising spots in advance, especially when they plan to develop products based on the show's characters, or directly funding a show. This method, however, has become more difficult recently because of the toy industry's financial woes.

Heyward also takes risks to get a show on the air. He now is selling a show to local stations called Camp Malibu, about California beach kids, that requires stations to commit to taking the show for only one year. Usually, producers require a two-year commitment to lock in a profit.

To cut its risk, DIC is producing only 40 shows instead of the usual 65 in syndication, with a promise to make more shows if it does well. But animators and distributors note that DIC is taking a risk because fewer shows produced mean more reruns, which could hurt ratings.

Heyward has also been extremely flexible when it comes to production services. For example, DIC co-produced a live action show called Zoobilee Zoo, starring entertainer Ben Vereen. DIC's role, however, was basically putting the deal together, for 25% of any profits. Hallmark financed the program while Binder Entertainment of Los Angeles produced it.

"Andy Heyward brought me in as co-executive producer. He made the deal and that's the last I saw of him or DIC," producer Steve Binder said.

DIC also sometimes does work for hire, as it did with the hit cartoon shows The Real Ghostbusters and ALF. Heyward argues that there is money to be made by simply producing. But industry executives note that even if such shows are hits, DIC loses out on future profits because it doesn't own the characters.

Three months ago, Heyward moved to Burbank, where, from his sixth-floor office, he can look a mile to the east and see the studios of The Walt Disney Company, founded by and named for American's greatest animator.

Heyward often talks of Disney-like projects in the future, such as a DIC theme park, DIC boutiques and DIC primetime family shows. And, he yearns for DIC to have the same kind of name recognition with its cartoon stars as Disney has with Mickey Mouse and Donald Duck.

"Walt Disney has been his idol, and he subconsciously has emulated him," said Heyward's father, Deke. "I think it's the direction he wants to go toward, whether he wants to admit it or not."

Heyward scoffs at suggestions that his goals are Disney-like, calling such talk pretentious. Still, Heyward's plans are ambitious. And, industry executives say, it will take deft maneuvering by Heyward the next two years to bring those plans to reality.

"Icahn Renews Bid To Take TWA Private," by John C. Given, The Washington Post, April 23, 1988

Financier Carl C. Icahn offered today to buy the 23 percent of Trans World Airlines Inc. stock he does not control, resurrecting his proposal to take the company private.

Icahn, who is TWA's chairman, dropped a similar proposal after the stock market crashed October 19.

Under the new plan, stockholders would receive for each of their shares a combination of $20 in cash and $29 in face amount of notes paying 12 percent interest due in 2008. The company has 30 million common shares outstanding, of which Icahn controls 77 percent.

The announcement sent TWA's stock up sharply. It rose $7 a share to close at $35.12 1/2 on the New York Stock Exchange.

Louis A. Marckesano, airline analyst for the securities firm Janney Montgomery Scott Inc. in Philadelphia, called the offer "a good deal for shareholders ... generous in price."

"The difficulty is putting a discounted value on the paper," he said. "We'd put it at a {combined} value in the low 40s," he said.

That would make the offer worth at least $276 million, at $40 per share for the 6.9 million shares Icahn does not control.

Icahn's previous offer was $20 in cash and $25 in face amount of the bonds per share.

A statement released by TWA said the new offer was conditioned on approval by a majority of the TWA shareholders not affiliated with Icahn, and the satisfaction of appropriate regulatory requirements. In addition, it said Icahn reserved the right to change the terms, if TWA's stake in Texaco - about 20.6 million shares, or 8.5 percent of the oil giant's stock - should change substantially in value.

Once consummated, employee stock ownership plans would be established to give the airline's employees about 10 percent ownership in the newly merged company, a statement issued by TWA said.

Separately, TWA announced it lost $55.5 million in the first quarter, slightly less than the $54.8 million it lost in the same period last year.

"These results reflect substantially greater interest charges during the first quarter of 1988 than existed in the first quarter of 1987 and do not include unrealized gains of approximately $340 million ... ," a statement said.

"Buyout Kings," by Carol J. Loomis, Fortune, July 4, 1988

Rulers of a vast empire, victors in an internal struggle, KKR's George Roberts and Henry Kravis are set to buy $40 billion of corporate America.

The name is still Kohlberg Kravis Roberts & Co. and the game still leveraged buyouts. The evidence of success remains visible as well. The firm's managing partners are fabulously rich, having for years fed on a feast of fat LBO fees and profits. They are sweepingly influential, controlling a string of companies, including Safeway, Beatrice, and Owens-Illinois, that taken together make KKR the second-largest U.S. conglomerate, just a touch behind General Electric in annual revenues. In Wall Street's mergers and acquisitions departments the partners are kings, their firm known as the biggest customer bar none. But stop there, because Kohlberg Kravis Roberts is otherwise radically changed. The cast of characters is different and the plot as well. The firm's founder, 62-year-old Jerome Kohlberg, Jr. - the spiritual father of the entire LBO industry - has been gone a year, a casualty of a tense management struggle over the firm's future. Now in total command of KKR are the two younger men who left Bear Stearns with him 12 years ago to start this firm, his longtime friends, followers, and partners, Henry R. Kravis, 44, and George R. Roberts, 45. The battle among the three was mostly about force: whether or not KKR should use it in trying to make buyouts.

Traditionally, though not with complete consistency, KKR had sought to be friendly, playing no role more aggressive than white knight to a company in play. Kohlberg yearned to keep things that way, avoiding hostile deals at all costs. Kravis and Roberts, ambitious, driven, and young enough to have long careers ahead, contended that KKR and the deal market had outgrown such niceties. In the end they won. This is not just one of those intramural Wall Street scraps, mildly interesting to read about, but of little relevance to the real world. This is KKR, powerful beyond most people's understanding even before this quarrel, now prepared to haul out the artillery when necessary. At the firm's disposal is a bankroll of unprecedented size: a $5.6 billion LBO fund that it lined up last summer from institutional investors - pension funds, banks, insurance companies. This money is slated to be equity, the base onto which at least $35 billion of bank and subordinated debt can be piled. It all adds up to a blockbuster total of $40 billion - enough to buy, say, all ten FORTUNE 500 companies headquartered in Minneapolis, including General Mills, Pillsbury, and Honeywell. Or the $40 billion war chest could buy two Texacos, a notion less fanciful.

In March, KKR announced that it had amassed a 4.9% position in Texaco and might move up to 15%. The stake is the first hard evidence of what the partners were fighting about. It is what KKR calls a ''toehold'' position, a raiderlike grip that Kravis and Roberts wished to take selectively and Kohlberg did not. In the sales literature that KKR used last year to raise its new fund, the firm said toeholds would be secured to speed the progress and lower the cost of ''potential management buyouts.'' In other words, KKR has designs on all, or at least part, of Texaco. This quest may fail. Carl Icahn, holder of a 14.8% Texaco stake, wants the company for himself, and Texaco wants devoutly to stay free of both. But if it isn't Texaco that KKR buys, it will ultimately be one or more somebodies of size, and when that happens statistical fireworks could light up the sky. KKR is an empire cloaked in disguise, one commonly identified only in terms of its pieces - all those companies it has taken private through leveraged buyouts and that it controls. Ask people to guess the combined revenues of all the companies in KKR's grip, and even the sophisticated will almost surely underestimate. The total in 1987: about $38 billion. A billion above is GE, sixth-biggest company on the 500 list.

As it goes about its everyday affairs, KKR acts and is treated like a huge company. The accounting firm of Deloitte Haskins & Sells, for example, handles this conglomerate-in-disguise like any large corporation, assigning a lead partner to oversee an array of KKR companies. Just as any giant might, KKR has time after time used a favorite executive recruiter to rustle up managers for its businesses. And in the executive suites, Kravis and Roberts have all the power of, say, Jack Welch, CEO of GE. Like Welch, Kravis and Roberts can hire and fire the operating executives below them, change the strategic direction of any unit they control, and buy and sell the businesses that constitute their holdings. It is the buying and selling, in fact, that makes KKR so extraordinary. GE unloads a division now and then (Utah International, for example) and picks up others (RCA). But it does not preside over its operations with the intention of getting rid of them in time. KKR does. Nothing that KKR controls is regarded as a permanent holding; everything is an investment, in due course to be sold, privately or publicly.

It is the firm's modus operandi to hold on to a company for only a few years, long enough to shape up its operations and, in all probability, shed some assets. In the U.S., there are about 15 companies - Amstar and Wometco, for instance - that used to be KKR properties and are not anymore. This is a conglomerate always in flux. A conglomerate ever growing as well. KKR's dynamics call to mind a troop of hoofers like the Rockettes, in circular march. On one side of the circle, imagine, a Rockette peels off and disappears into the wings, followed seriatim by others. On the other side, new Rockettes join, one by one, preserving the circle and in fact gradually enlarging it, until the stage seems almost to fill. The character of the dancers changes too. The Rockettes coming on are each taller, leggier, more statuesque, and more glamorous than those peeling off. My God, will the next be an Amazon? So it might be - that big, strapping rangerette named Texaco.

Add Texaco to all that KKR controls now, and its revenues would exceed $70 billion, whip it past IBM in size, virtually tie it with Ford, and leave it trailing only General Motors and Exxon. The men now in charge of this powerhouse, Henry Kravis and George Roberts, permitted FORTUNE to take the photograph on the cover, but declined to be interviewed. Jerry Kohlberg likewise declined. There is no shortage, however, of people who have known the three men as clients, dealmakers, and friends, and who are willing to discuss them, sometimes for quotation, sometimes not. Among these people are a few who know the reasons why the three are no longer working together, a story never before told publicly. Kravis and Roberts are cousins, the sons of a sister and brother. To a degree, they have led remarkably parallel lives. They both grew up in the Oil Patch - Kravis in Tulsa, Roberts in Houston - and both went on to Claremont Men's College in California, where they majored in economics. Kravis captained the Claremont golf team as a junior; Roberts was a soccer star. Some summers they worked at Bear Stearns, whose senior partner then, Salim ''Cy'' Lewis, was a friend of Kravis's father, the owner of a well-known geologic survey firm. After graduation, the lives of the cousins diverged a bit: Roberts got a law degree from the University of California at San Francisco, Kravis a Columbia MBA. But by 1969 they were both working at Bear Stearns, though in a bicoastal way that has remained their wont: Kravis in New York, Roberts in San Francisco.

Physically, the two men are almost identical: short, slight, athletically trim. Some people see a facial resemblance. But Roberts is definitely quieter and less outgoing; he has a softer, steadier look about him. Married soon after college and the father of three children, Roberts is a suburban family man who keeps a low profile in San Francisco and essentially no profile in New York, which he dislikes. Business friends call Roberts creative, conceptual, and a whiz at assessing the values in a deal. Richard Arnold, executive vice president of Charles Schwab & Co., got to see these skills when Roberts helped his friend Chuck Schwab buy Schwab's brokerage company back from BankAmerica. Says Arnold: ''George doesn't talk a lot. But when he does say something, it cuts right to the core of the issue. He's sensible, practical, knowledgeable, deliberate.'' Plus, says John Canning of First Chicago Venture Capital, a longtime KKR investor, ''outstandingly smart.'' No one thinks Kravis got slighted in intelligence either. He is more kinetic than Roberts and harder edged, showing some steel in his eyes. He can charm as well. A New Yorker who once waited in KKR's elegant New York offices to see Jerry Kohlberg remembers getting his first glimpse of Kravis: ''Suddenly this man swept into the reception room, perfectly attired in a Savile Row suit, and said to this gangly Texan who'd been waiting there too, 'Hello, I'm Henry Kravis.' He was urbane, he was brisk, he was just right.''

Kravis is divorced from his first wife, but is close to their three teenage children. He is married now to Carolyne Roehm, the dress designer. They are flashily prominent in New York society: Her publicist appears to work overtime keeping them in the columns, which is believed to suit Kravis just fine. A recent tidbit from Vogue: Guests at their Connecticut pre-Revolutionary house wake up to the smell of brewing coffee and baking croissants that has been piped into their rooms. Later in the day, the vents advertise brownies. The Kravises are conspicuous spenders - a matter that seems to have bugged Jerry Kohlberg no end - and conspicuous givers also. With his art collection, composed of Monets, Renoirs, Sargents, and much more, Kravis seems to have a display space problem. Some of his paintings have gone to decorate KKR's antique-filled, mahogany-paneled offices, which overlook Central Park and may be, says one New York businesswoman, ''the nicest spread in the city.'' According to still another Vogue item, Kravis is eyeing space on the floor above his $5.5 million Park Avenue apartment for a private museum to house the rest of the overflow. At the real museum nearby, the Metropolitan, work is under way on a new Henry R. Kravis wing, partially underwritten by HRK's $10 million gift. New York's Mount Sinai Medical Center received $10 million from him recently as well. In politics, Kravis's favorite cause is George Bush, whom he has backed enthusiastically. It could be, a business friend speculated recently, that Kravis is interested in a Washington job. But nothing about what Kravis says, nor Roberts, nor their friends, suggests that this pair is anything but fascinated by what they do. Says a close friend: ''These are Type A people. The fact that they've made a lot of money doesn't matter. Each deal is a new challenge. Each time they go to meet with the management of a company, it's a challenge to convince them KKR should do the transaction. This kind of thing is what drives all Type As. These are just very active, driven people.''

One thing is sure: They are not working for the love of restructuring corporate America. Chuck Schwab once spoke admiringly to Roberts of all KKR had done, as Schwab saw it, to improve U.S. business, taking companies out of the hands of uncaring boards and putting them in the hands of entrepreneurial owner-managers. Roberts looked at Schwab sideways and said, ''That's not why we do it, Chuck.'' In confidence and ability, Kravis and Roberts are obviously eons away from the days when they first began working with Jerry Kohlberg at Bear Stearns. Kohlberg, then co-head of corporate finance there, was athletically trim himself (he is a tennis nut), more reserved than Roberts ever thought of being, but well known and respected on Wall Street. He was also successfully, if in a limited way, using Bear Stearns's capital to do what were then called bootstrap, or management, acquisitions. The deals, however, always had the look, and later got the name, of leveraged buyouts: Acquire a company or a division with a package of money containing a sliver of equity - say 10% or less of the price - and a slab of debt; shape up the company with the help of managers whose hearts and minds you've captured by giving them a share of the ownership; sell it off later. Most important, coin money. The potential for doing that - or not doing it - was in the leverage. The debt had to be repaid and serviced out of the company's cash flow and there was always the possibility it couldn't be, which might mean a wipeout of the equity. But if things went well, any profits and any value added belonged to the gang putting up the sliver, turning it into silver - or gold. Kohlberg played this game expertly for years at Bear Stearns, but grew restless because its appetite for such deals was less than his. So in 1976, pulling Kravis and Roberts from the ranks and collecting some seed capital from a few friendly investors, he set up KKR in what was clearly a gutsy move. KKR went on to a series of triumphs: the first LBO of a major New York Stock Exchange firm (Houdaille, in 1979); the first $1 billion buyout (Wometco, in 1984); the first large buyout done by a public tender offer instead of through a drawn-out merger process (Malone & Hyde, in 1984); the largest buyout in history (Beatrice, for $8.2 billion, in 1986).

In its frontier days, KKR often had to struggle to raise the debt financing it needed. At first the firm was dependent on insurance companies, which wanted a share of the equity for putting their money on the line. Later the banks signed on, forgoing the equity; today KKR is particularly close to Bankers Trust. Still later junk bond financing, often scads of it, became essential to KKR's deals. Though it spreads its merger and acquisition fees around the Street with finesse, KKR has leaned on the junk bond juggernaut of Drexel Burnham Lambert's Michael Milken repeatedly. Recalling KKR's history of foraging for money, a man who in the 1970s made investment decisions for a large Eastern insurance company remembers seeing Kravis often, Kohlberg only now and then. Once, he says, Kravis came to him and practically begged for funds. ''I always thought,'' says that man, ''that Henry got the doggiest jobs and got powerful doing them.'' Perhaps, but for years the locus of power in the firm was totally clear: ''We'll have to check this with Jerry,'' Kravis and Roberts would say as they did the legwork. ''He was an absolute father figure to those two guys,'' says one man who dealt with KKR then. He was also the man who applied the brakes to some of the younger partners' more ambitious plans for adding staff and stepping up the pace of acquisitions. The KKR partnership structure called for unanimous agreement to do a deal, and around the firm, Kohlberg got the nickname ''Dr. No.''

Then, in early 1984, Kohlberg became ill. He was found to have a brain tumor. While it turned out not to be malignant, the surgery he underwent was severe, leaving him with intense headaches for several months and reducing his working hours for a time. During this period, naturally, Kravis and Roberts ran the firm. ''And they liked it,'' says a man then a friend of all three. Kravis and Roberts, he says, began to have thoughts of holding on to more authority after Kohlberg returned. The friend believes that under most circumstances Kohlberg would have readily acceded to that change, accepting the chance to free up some time for his outside interests, among them his alma mater, Swarthmore; Columbia University, where he got a law degree; and tennis. But Kohlberg, the friend says, did not want to reduce his role when there were disagreements about policy, which there certainly were beginning to be. The LBO business had changed dramatically. Kohlberg's original negotiating style, says still another friend, had been ''to sit down and get to know management, to schmooze with them, to spend six months or longer talking in what was a very friendly sort of joint process.'' But by the mid-1980s the competition for deals was feverish and the time for schmoozing had disappeared. A whole industry of LBO firms was crawling around the woodwork of corporate America, looking for deals and trying to replicate KKR's success. Bidding wars began to erupt, typically because a raider had initiated hostilities and paved the way for firms like KKR to step in as white knights. KKR played that role again and again, but the problems of staying gentlemanly - as Kravis and Roberts were forever reminding Kohlberg and as he did not want to hear - were intensifying. The pressures got more insistent in late 1985, when KKR loaded up its acquisition guns by raising its fifth LBO fund, a $1.8 billion giant.

It was at this point that the friendliness of KKR's deals first dropped a notch. In the Beatrice acquisition, negotiated in the fall of that year and completed the next spring, there was no raider on whose heels KKR, as white knight, moved in. KKR moved in, period. It was accompanied by Donald P. Kelly, a man with an iconoclastic image, who took over as chairman of Beatrice and has been busy ever since busting it up. Beatrice had grown vulnerable because of management troubles: The board had forced out one chief executive, James L. Dutt, and replaced him with a retired executive, William W. Granger, Jr., who didn't look like a permanent solution. You can argue that the management upheaval put Beatrice in play and guaranteed that somebody was going to take the company over - so why not KKR? Among those making this case at the time were Kravis and Roberts, who, as Beatrice's board stalled over what to do, went so far as to propose to Kohlberg that KKR launch a hostile tender offer. But Kohlberg was camped at the opposite pole, wanting to call off the pursuit entirely. In the end, by way of a compromise, KKR just kept pressuring Beatrice's board, urging offers upon it, until it capitulated and accepted a deal. In the takeover community, the episode was called a ''bear hug,'' meaning on the border of hostile. The internal debate at KKR went on from there, through endless discussions.

Late in 1986, KKR did a large white knight deal, rescuing Safeway from the Hafts, Herbert and Robert. Then the KKR bear went rambling again, this time in the Owens-Illinois acquisition, signed in early 1987. Here, there were rumors of a raider, but one never emerged. KKR meanwhile came around to talk and found O-I's management ready to do a buyout. In opposition, though, were some of O-I's outside directors, who wanted to see the company remain independent and who fought KKR bitterly. In the end KKR raised its bid by about 10%, made it all cash, and prevailed. Six weeks after this deal was completed, Jerry Kohlberg gave up his role as a general partner of KKR and left. Says an insider in the situation: ''It sort of evolved to the point where Jerry was saying, 'Well, look, maybe it's better if I leave. Maybe this isn't the right place for me.' And George and Henry were saying, 'Yeah, maybe it's better that you do.' '' But it wasn't as simple as that makes it sound. Continues the insider: ''It was an incredibly emotional experience. Very difficult for everybody. It was painful.'' To the public, the partners revealed little. Kohlberg announced that he would start his own LBO firm, Kohlberg & Co., and spoke vaguely of ''philosophical differences'' within KKR, providing no details. Said Kohlberg, as reported in the New York Times: ''I guess you could say I'm too old to not do things my way.'' Roberts indicated that Kohlberg may have felt KKR's deals were getting too big. Kohlberg's comment about his new firm: ''I won't restrict myself to small transactions, but I'll stick with deals where reason prevails.''

A big question remaining in this tale is whether Kohlberg also disputed with his younger partners the fees KKR was commanding. In Kohlberg's eyes, were they so much as to be unfair to other participants in the deals? Answering the question requires an understanding of the various ways in which an LBO firm makes money. Sometimes it seems as if these add up to 57 varieties of compensation, but the three that count most are the management fee, transaction fees, and ''the carry.'' Basically, the management fee rewards an LBO sponsor - a KKR, say - for figuring out how to invest its fund; the transaction fees for actually doing the buying; and the carry for doing it well. Call these the triple-dip. FOR KKR, the management fee is essentially 1.5% annually on the fund most recently raised, which right now is that $5.6 billion lined up last summer. These billions are not in KKR's hands; the firm's investors have simply promised to deliver the money as it is needed for deals. The management fee, however, becomes payable immediately. Seasoned investors with KKR get a partial break on this fee for a couple of years. But as of next summer the grace period will end, and the firm will start earning the fee on the full amount. The take will be a glorious $84 million a year, a charge continuing through 1992 or until the fund is fully invested, whichever comes first.

Next come the transaction fees, paid not only to KKR but also to commercial bankers, investment bankers, and lawyers for their work in making a deal happen. Technically, these fees are borne by the company being taken over. But since KKR's investors end up being the principal owners of that company, it is they who pay the freight. We are talking big money here: In the three megadeals that were sewn up in the year before Kohlberg pulled out of the partnership - Beatrice, Safeway, and Owens-Illinois - KKR's fees were $45 million, $60 million, and $60 million again. In retrospect the Beatrice fee looks almost small, since it was only 0.73% of the $6.2 billion purchase price (not including the $2 billion of debt assumed). On the Owens-Illinois acquisition, the fee was up to 1.36%. Finally, consider the carry, which is 20% of all profits from an LBO deal. Take, as an example, KKR's acquisition of sugar refiner Amstar in 1984, done with funds that KKR had lined up from investors in 1982. In this case, as always, KKR formed a special limited partnership to make the acquisition. The money needed was $52 million of equity to finance a $465 million purchase. KKR, as general partner, put up about 1.6%, or $830,000. Its institutional investors put up the remainder: $51.2 million. Things moved fast and well after that. KKR sold Amstar off in less than three years (to a Merrill Lynch LBO partnership), at a profit of $232 million, producing a compounded annual rate of return on the equity of 81.5%. Of the profit, the institutional investors who were limited partners (including, for example, the state retirement funds of Oregon, Washington, and Michigan) got 80%. The remaining 20%, or more than $46 million, went to KKR. That is to say it mainly went to the four men then general partners of that firm, Jerry Kohlberg, Henry Kravis, George Roberts, and Robert MacDonnell, Roberts's brother-in-law.

As KKR transactions go, Amstar was a standout, producing much better returns, faster, than has been generally the case for the firm's deals. Even so, the KKR record has so far been good enough to keep the customers coming. Most of the firm's completed deals have their roots in the period from 1976 to 1982, when KKR raised three different funds and, by its figuring, put $543 million of equity into 20 different deals. In the selling literature that KKR used last summer, the firm stated that compounded annual returns on these three funds over their life - after the carry - were 31%, 32%, and 44%. These returns translate into realized profits of just over $1.5 billion, of which KKR's share would have been $300 million. The 1976-82 period also included a deal that was backed by only some of KKR's investors, was not part of a fund, and therefore is not mentioned in KKR's literature: the $425 million acquisition, in 1981, of American Forest Products, a division of Bendix. This transaction was a bummer. KKR's equity investors apparently not only lost the entire $93 million they put up, but also were required to contribute some additional funds to pay the subordinated lenders. The firm tends to speak of this deal as ''tax-oriented,'' implying it is different from others. ''That's a bunch of horse manure,'' says one man who was lending KKR money when this transaction was done. ''They're just trying to make their record look better. It's only in hindsight that they have treated this deal as different.'' KKR's performance on transactions done with its fourth fund, raised in 1984, and its fifth, raised as 1985 was ending and 1986 beginning, has not yet been determined: Many of the Rockettes financed with those funds are still doing their stuff on KKR's stage. Last summer, though, KKR was estimating - conservatively, it said - that the rate of return on the 1984 fund, which led to $1 billion in equity investments and includes such uncompleted deals as Union Texas Petroleum and Motel 6, would be 36%.

The 1986 fund financed four biggies: Beatrice, Safeway, Owens-Illinois, and Jim Walter Corp. These deals were negotiated before the crash, when the market was all but throwing money at LBOs. Consequently, they required very little equity: only about $900 million for transactions in which the prices paid and the debt assumed totaled $22 billion. Of these deals, Beatrice, which accounted for $8.2 billion of that total, is a sure winner, though how much of one remains uncertain. KKR's investors got most of their $402 million in equity back when the company spun off E-II Holdings last year and took it public. Having sold off much of the rest of Beatrice, Chairman Don Kelly is now sitting with about $3 billion in debt, most of it junk bond variety; $2 billion in cash; a big food business, including Hunt-Wesson, Swift-Eckrich, and a cheese processor; and a major question as to how to make this investment liquid. Once, says KKR investor Canning, of First Chicago, Beatrice looked like ''a triple grand slam.'' But the food business has proved harder to sell than Kelly and KKR expected. Now, Canning is forecasting a single grand slam, which he defines as perhaps four times your money. Canning, who talks to Henry Kravis a lot and considers him a close friend, has some thoughts about KKR's other big deals as well. Safeway: ''Working out very well. They've done a super job.'' Owens-Illinois: ''Too early to tell, but the signs are positive.'' Jim Walter: ''Too early'' also, ''but I think it's going okay.''

The outcomes on these deals will matter not only to KKR and its investors, but also to Jerry Kohlberg, who as part of his financial settlement with Kravis and Roberts stayed a limited partner in the firm. But how, in the meantime, did he feel about the richness of KKR's diet, the triple-dip? His friends say he worried that the rewards were out of proportion: too much for KKR, too little for the investors. Kohlberg argued within the firm, so the friends say, for a structure that would allow the investors, since they had put up the money, to share in the transaction fees and any other special fees. Ridiculous, responds a close friend of Kravis and Roberts, arguing that the dispute just didn't happen. Says he: ''Jerry never had any complaints about the fees. Not when they were going to him.'' The evidence on this conflict is conflicting itself. Jerry Kohlberg went along with the fees set while he was at KKR and took his share of them home. On the other hand, when Kohlberg & Co. went out to raise a fund from investors, it proffered a whole new arrangement: This fund, said Kohlberg's selling literature, ''will share all transaction fees with its investors.'' The split is to be 50-50, vs. 100-0 at KKR. To that, the Kravis-Roberts camp also has an answer: It claims that the new fee structure was forced on Kohlberg, and on other recently formed funds as well, by a market grown angry about fees and determined to break the KKR pattern.

Certainly Kohlberg's fund cannot be said even then to have been a hot seller - to have whistled out the window, as they say on the Street. Planning originally to raise $500 million, Kohlberg ran into a difficulty called October 19, and settled instead for a smaller amount. Reports say he got $280 million; a friend of his says ''more than that.'' In any case, Kohlberg definitely stirred up the air as he went about selling his fund. When he was pressed for explanations of the ''philosophical differences'' that had caused him to leave KKR, he apparently said little. But his selling literature spoke volumes, promising investors not only a share of the fees but also the friendliest of styles: no toeholds, no hostiles. By implication, the spiritual leader of the industry was saying, ''This is the right way to behave. KKR's is the wrong way.'' When this news reached KKR, says a friend of Kohlberg's, Henry and George were not pleased. Kohlberg's fund is now up and running out of twin offices in Manhattan and suburban Mt. Kisco, near his home. His organization of seven other professionals includes his older son, James, 30, who formerly worked for KKR, and George Peck, 56, long a principal in a small LBO fund and also a former Canny Bowen executive recruiter who for many years helped KKR with the people and issues that arose in its businesses. In June, Kohlberg & Co. announced its first deal: a $330 million buyout of Alco Health Services of Valley Forge, Pennsylvania. The deal, said a Kohlberg spokesman pointedly, is ''totally friendly.'' Among Kohlberg's investors are a couple who reportedly refused to sign up for KKR's 1987 fund because they regarded the idea of toehold investments as getting unpalatably close to hostile deals. It is also possible to find institutions that once invested with KKR and have stopped doing so because they grew to hate the fact that fees were not shared. ''I had bitter discussions about this with them a couple of years ago,'' says one investor who jumped ship.

But no case could possibly be made that KKR's investors are broadly dissatisfied. You can't get $5.6 billion from a bunch of malcontents. In truth, many KKR backers leap to give testimonials. First Chicago's Canning, for example, committed $300 million to KKR's 1987 fund and exudes enthusiasm for the firm. Never mind, he says, that some other LBO funds produce better returns than KKR: As he sees it, KKR's strength is that it is performing admirably with extremely large amounts of money. ''They're in a league by themselves,'' he says. The Texaco toehold reinforces the point; smaller LBO funds couldn't even consider going after the oil giant. The biggest KKR fan club is located in Oregon, whose state retirement fund hooked on to KKR in 1981. James George, the state's investment manager, says he can't really quantify the profits made since, but knows it's been ''a tremendous success.'' George committed $600 million to KKR's 1987 pool, a walloping amount considering that the retirement fund has assets at market value of only $8.3 billion. George calls KKR's toehold investments ''an evolution'' to be watched: ''We'll see how it works out.'' Some Wall Streeters wonder what would happen if KKR opened up fire on a company located in Oregon or some other state whose pension money it handles. That could also be something to watch.

One of KKR's more pressing concerns right now would seem to be the possibility of a recession, which could cause some of the firm's debt-laden lovelies to languish. At the least, a recession might impede KKR's plans to take a number of its companies public, among these Safeway. At the most, one or more KKR operations might go really sour. But there would be no domino effect here. Because each deal is set up solo, it lives or dies on its own. Long range, the problem for KKR and every other buyout firm is returns. Recent changes in the tax law have hurt the economics of bust-up deals and put LBO funds - ''financial buyers,'' as the term goes - at something of a disadvantage in competing with corporate buyers who simply want to run what they buy. Nonetheless, the financial buyers are everywhere, carting money that they are burning to use. KKR's $5 billion is matched in the market by at least $10 billion that has been entrusted to other LBO funds. When a possible acquisition surfaces, everybody jumps. For example, all manner of buyers scrambled for Kraft's battery division, Duracell, when it went on the block recently. The winner: KKR, which probably hopes to take Duracell public one day. Some dealmakers were stunned by the price KKR agreed to: $1.8 billion for a company that last year had pretax profits of only $135 million. ''Crazy,'' said one bidder who dropped out more than a half-billion below. An alternative thought: So far only a pittance of the $5.6 billion raised in the 1987 fund has been committed to deals, leaving a full $5 billion still to be spent. Another loser in the bidding contest regards the $1.8 billion price as irrefutable evidence that KKR is feeling tremendous pressure to get that $5 billion to work. More evidence of that may lie in the fact that KKR has been looking recently at buyout prospects overseas, certainly in Britain and maybe elsewhere. It's a whole different, more difficult world beyond the big water. The market isn't used to the leverage that Americans employ, nor well set up to provide the quantities of subordinated debt that a KKR would require. Still, the firm is not leaving this stone unturned.

In the end, KKR's investment of its $5.6 billion, or whatever chunk of that it can actually find a place for, should produce an eye-popping realignment of giant companies, and perhaps a reworking of corporate power. If hostilities occur, they will heighten the drama; if KKR manages a peaceful occupation instead, broad stretches of business countryside will still be overridden. Generals Kravis and Roberts, in any case, should do nicely: Over the next few years, KKR seems likely to take in close to $1 billion in fees as it works the money it has now into place. The term for that might be conspicuous consumption.


They number at least 23 today, in which KKR, through its partnerships, controls 13% to 98%. KKR shares control of Union Texas with Allied Corp. The Duracell buy is pending, as are the sales of Storer and Malone & Hyde, neither one listed.

Beatrice 88%; DAW Forest Products 98%; Dillingham 75%; Duracell 88%; L.B. Foster 13% IDEX 56%; M&T 98%; Marley 26%; Fred Meyer 67%; Fred Meyer Real Estate 90%; Motel 6 88%; Owens-Illinois 90%; PacTrust 88%; Printing Finance 80%; Red Lion Inns 75%; Safeway 85%; SCI Television 45%; Seaman Furniture 80%; Stop & Shop 92%; Union Texas Petroleum 39%; U.S. Natural Resources 49%; Jim Walter 83%; W-I Forest Products 44%


Every KKR acquisition is made through one or more limited partnerships formed just for that deal. In 1984 these investors put up $189 million of equity to buy $1.6 billion of properties subsequently christened Pace Industries. While lists for later partnerships aren't publicly available, many of these investors are known to have re-upped.

GENERAL PARTNER: KKR Associates 1.1% LIMITED PARTNERS: 10% each State of Oregon retirement fund, State of Washington investment board 6.8% First Chicago Investment 5% each Equitable Life, GTE Service pension fund, Metropolitan Life, New York State retirement fund, Security Pacific Capital 3.5% each Aeneas Venture (Harvard), State of Michigan pension funds 2.5% each BankAmerica Capital, Bank of New York, Bankers Trust New York, Continental Illinois Equity, First Interstate Equities, Hillman/Wilmington, Hughes Aircraft retirement plan, Minnesota board of investment, U.S. Bancorp 2% Government of Singapore Investment 1.5% First Bank System 1% each Alcoa master trust, British Gas pension scheme, Henry Crown & Co., First Bank System pension fund, H.J. Heinz retirement fund, Rowney Inc., Tektronix retirement trust, United System master trust, Water Authorities superannuation fund (London), Yale 0.8% Madison Dearborn Partners 0.7% Salvation Army 0.5% each Carnegie Mellon, Electra Investment Trust (London), John Hancock Mutual Life, London Mortgage Trust (Samuel Montagu), Sun Life Assurance Society (London) 0.3% Massachusetts Institute of Technology

"The Tough Cookie At RJR Nabisco," by Bill Saporito and Charles A. Riley II, Fortune, July 18, 1988

In two mergers, Ross Johnson went through the revolving door last and came out first. An enemy of the quiet life, he introduces chaos to turn managers into winners.

Gee whiz, you say to yourself: Just how hard is it to run one of those big FORTUNE 500 companies? Let's ask F. Ross Johnson, 58, the boss at RJR Nabisco Inc., the multibillion-dollar food and cigarette behemoth that ranks 19th among the 500. Given the strength of the company's brands - Oreo cookies, Ritz crackers, and Winston cigarettes - says Ross, ''you could put your crazy old aunt in and run it for a while.'' To some the company may look as if Auntie is already in charge. Johnson reorganizes RJR Nabisco so often that businesses ricochet around the company like billiard balls. He specializes in taking break shots at neatly racked old cultures and replacing them with an organizational mix of turbulence, vigilance, and guts. In three overhauls, he sent 2650 corpocrats back to line jobs or out into the wilderness. The saying among the survivors: Nobody has a job at RJR, only a current assignment. Surprisingly enough, RJR executives seem to love it. Not so much for the money, though they get plenty of that, as for the sting of battle.

So far, at least, they have been following a winner. Johnson, for example, reduced legendary Procter & Gamble to a whining loser in the Great Cookie War of 1983-86, teaching lessons to marketers everywhere. This accountant from Winnipeg also has ideas of his own about the always crucial matter of deploying corporate assets. RJR's fat cash cow is the cigarette business. & Johnson is milking her hard, but he is also giving her a big bucket of oats. He is introducing a new product that may cost him a billion. Risky? Sure, he says: ''It's a lot goddamn harder to launch a new cigarette than to go borrow at the bank and buy what somebody made 20 years ago. But what the hell. That's what we're here for.'' If all his gambles succeed, he may be known not just as America's toughest marketing man, but also as its best.

In eight years of corporate Pac-Man, Johnson's companies were swallowed twice by bigger players, but each time he emerged to run them. Top executives of acquired companies tend to get the boot, or an offer they cannot refuse. Johnson is the striking exception. He merged Standard Brands into Nabisco in 1981 and was in charge of the combined Nabisco Brands when he sold it to R.J. Reynolds in 1985 for $4.9 billion. That was followed by what is now a signature event: his stunning grab of the CEO spot at RJR Nabisco, which he followed by spiriting the shorn corporate staff - he reduced their numbers from 1000 to about 350 - out of tobacco town Winston-Salem, North Carolina, to neutral Atlanta. The move capped Johnson's reputation as an ultimate corporate master blaster. The desired result of Johnson's frenzy is a simplified management process, a worthy goal. He figures that with fewer people and procedures to gum up the works, a company can make the most of its powerful brands. Instead of investing in corporate staff, Johnson prefers to spend money making his products the lowest-cost producers, tuning their distribution systems until they hum, inventing products, advertising their message, and chewing up the competition.

At RJR Nabisco, Johnson, after turmoil only somewhat less memorable than the first battle of Atlanta, has combined two consumer companies' weirdly unmatched businesses and vastly different management philosophies. At the time of the merger, the two companies were running more than 50 businesses and paying nearly 4300 corporate staff people to keep track of things. Since then, RJR Nabisco has sold more than 30 operations that logged $2.5 billion in sales; the treasury deployed the proceeds to reel in the $1.6 billion in preferred stock that financed the merger, plus another 25 million common shares, maneuvers that boosted return on equity to an enviable 20%.

In May, RJR Nabisco reorganized Del Monte Corp. for the fourth time, reuniting two major businesses, fresh fruit and canned goods, that were last separated in 1986. Says Robert J. Carbonell, 61, chief of Del Monte and vice chairman of RJR Nabisco: ''If something isn't working, we're prepared to move 180 degrees in a hurry.'' The company broke Nabisco Brands into four operating divisions in June, and will force 1600 employees with staff positions to pay their way in one of the operations or beat it. Says H. John Greeniaus, 43, head of Nabisco Brands Inc.: ''The idea really stems from Ross's philosophy that businesses should be legitimate freestanding units.''

Change has done RJR Nabisco good. It stands as a stripped-down marketing machine with a phalanx of bulletproof brands such as Oreo, Ritz, Del Monte, Planters, Life Savers, Camel, Winston, and Salem. Analysts forecast 20% to 25% earnings per share growth for RJR Nabisco this year and about 18% to 20% annually for the next three; earnings should reach $1.4 billion in 1988, while sales will increase $1 billion to $16.7 billion. That's about an 8% increase, none too shabby considering that the tobacco market is declining and the biscuit trade is flat as a cracker.

The old cookie monster, now called Nabisco Biscuit, is setting market share records monthly in biscuits and crackers. Nabisco Foods' basket of products is sort of a you-must-remember-this course in American social history. The names include Fleischmann's margarine and Royal gelatin from the Standard Brands days, A1 steak sauce from R.J. Reynolds, and Shredded Wheat and Milk-Bone dog biscuits from Nabisco. Though few products are stars, most are big players in small niches - dog snacks for instance - that pump out gross profit margins above 50%. Overall, RJR Nabisco's food business earns almost 10%, pretax, vs. 6% to 8% for the rest of the industry. For all its profitability, the food company is not nearly the money spinner that tobacco is. RJR's pretax profit margin on its domestic cigarette business is 29%. But the food business gives Johnson a highly profitable place to put the tobacco cash. He goes out of his way to point out that on an after-tax basis, food represents 40% of the company's earnings. In fact, analysts hailed the union of Reynolds and Nabisco as a perfect fit - each sold consumer packaged goods, but had no overlapping products. Their operating strategies were polar opposites, however. Nabisco thought hard about strategy questions such as competitive advantage: its buying clout as the industry's biggest flour customer, for example, or the distribution efficiencies of a full line of cookies, and the plump margins commanded by a proprietary product such as cholesterol-free Egg Beaters. RJR ran like a conglomerate. In addition to the tobacco business, the company controlled operations as disparate as Heublein's liquor, Kentucky Fried Chicken, mail-order fruit sellers Harry & David Inc., and Canada Dry Beverages. Reynolds also owned Del Monte Corp., whose properties included Hawaiian Punch, Grey Poupon Dijon mustard, and the Patio and Morton frozen food lines. The Reynolds businesses had little in common with each other in manufacturing, sales, or distribution. The union of R.J. Reynolds and Nabisco also presented a spectacular clash of corporate cultures: RJR's staff-oriented, conglomerate-style management warring with Nabisco's freewheeling, decentralized model. At RJR, Southern gentility was the style. Meetings invariably started with talk of family or fishing. ''That takes 20 minutes in Winston-Salem,'' says a former executive. ''The Nabisco people didn't have 20 minutes for the whole meeting.'' RJR's small-town, take-care-of-the-people roots fostered a large staff, which made life difficult for line managers. ''The element of control was stifling. You spent more time reporting to a system,'' says Carbonell, now at Del Monte and one of Johnson's old friends from Standard Brands. RJR had elaborate procedures for decision-making that required signoffs for everything on the high-cost side of changing a light bulb. The personnel department had 87 policies, vs. ten guidelines today. The culture that emerged from the combination obviously wasn't Reynolds's, but it isn't Nabisco's either. It comes from Standard Brands.

Johnson joined Standard Brands' Canadian subsidiary as an executive vice president in 1971. A graduate of the University of Manitoba, where he studied accounting, he had learned marketing at Canadian GE and retailer T. Eaton Co. He moved to Standard Brands' New York City headquarters in 1973 as senior vice president responsible for international operations. His keen prairie eye for gopher holes on a balance sheet moved him ahead fast. In 1975 he became president. That year Standard Brands had $2 billion in revenues and $121 million in pretax earnings, half of which came from a high-fructose corn sweetener business.

In the first months after Johnson took over as chief executive in 1976, the price of sugar dropped from 61 cents to 13 cents, wiping out the high-fructose corn syrup market and most of his company's profit. Earnings estimates dropped from more than $4 a share to $2.40, and Johnson, frantic, held a press conference to talk about a turnaround. ''The boy wonder arrives, and we go down to nothing,'' he says. ''If earnings had dropped to $2.35, I would have been gone.'' Profits ended up at $2.42, but he eventually dumped the sweetener business anyway. Johnson has demonstrated an uncanny ability to get the top hand on the bat. First, at Standard Brands, the board kicked CEO Henry Weigl upstairs to pave the way for Johnson. After merging Standard Brands into Nabisco to form Nabisco Brands in 1981, Johnson took over the CEO's job from Robert Schaeberle, who was 61 and had planned to retire at 65.

When Johnson and company descended on Nabisco, it was as if Hell's Angels merged with the Rotary Club. The Standard Brands organization was a risk-driven, no-guts-no-glory outfit that had to scramble for every dime given its ragtag lineup of mediocre liquor brands and fourth-rate grocery items. As one observer described it, all the Standard Branders seemed to be divorced guys who wore loafers, while the Nabisco crew were family types in lace-up shoes and suits. Johnson says the image of an overly ambitious underling is exaggerated. At Nabisco he reported to Schaeberle for three years, and by most accounts the two were a great team and remain good friends. Following the Nabisco Brands-RJR merger in July, Johnson took the No. 2 spot behind CEO J. Tylee Wilson, but says he was in charge by August. Eight months later Wilson was fishing and Johnson was preparing to move the company he was now running to Atlanta. Johnson says he never made a grab for Wilson's job: ''I was ready to move on. I wanted the RJR-Nabisco deal to be the best merger, and it was,'' says Johnson. ''I told Ty the day I became a pain in the ass, goodbye and no hard feelings. I did not nefariously plot to bump Ty out. He and I never had a problem. Frankly, the board said, 'Hey, Ross . . .' '' Old RJR hands say it was more complicated than that. Wilson had few friends on the board. When the opportunity arrived to dump him, the board did. ''Well, they got me,'' Wilson said, after the meeting.

Johnson believed fervently that each Reynolds company needed to get big or get lost. That's why he quickly peddled Kentucky Fried Chicken to PepsiCo, owner of two other food chains, Pizza Hut and Taco Bell. Canada Dry got the gate because it was hopelessly behind Coke and Pepsi. In 1987, Johnson stunned Wall Street by selling Heublein to Grand Metropolitan, the British spirits, food, and hotel conglomerate, just ten days after buying Almaden Vineyards. Both deals fit the Johnson logic. He had acquired the California wine company to enlarge Heublein. But he recognized that a liquor company without a major Scotch brand was like a baseball team without a shortstop. The cost of filling this gap was likely to be huge, so he jumped at the $1.2 billion that Grand Met dangled. According to an observer, he presented the offer to the board on a single sheet of paper. The first thing Johnson peddled at Del Monte was a new lease in San Francisco on quarters for a 1200-person staff. Although Del Monte was profitable overall, earnings were illusory in such businesses as frozen food because the costs of some acquisitions were not reflected in the overhead. When these costs were fully accounted for, the putative earnings turned into a $20 million loss. Johnson launched the frozen entrees ''like a rocket'' to ConAgra, big in that business and ready to buy. Says Johnson, who thinks both buyer and seller were right: ''Every frozen foods business I ever got I sold.''

If Johnson is a predator, he is an amusing one. Outrageously candid, he angered some city fathers in Atlanta by advising them not to mistake RJR Nabisco for a major corporate benefactor. Says he: ''I told them I can't support every organization from the United Way to the Seven Jolly Girls Athletic Club Beanbag competition. If it pisses them off, I can't help that.'' Johnson once directed that the occupants of two of the company's New Jersey buildings switch offices, fully aware that one building was much bigger than the other. Needless to say, neither group got too comfortable in their new digs. Last year he stunned the managers at the Planters-Life Savers division by packing them off from New Jersey to Winston-Salem to become part of the tobacco group. Even some senior managers wish Johnson would stop shuffling his management deck so often. Insiders call the plush 21st floor of RJR Nabisco's headquarters in Atlanta the fraternity house. It's where Johnson and about 25 advisers meet to direct strategy. Many are members of the so-called Standard Brands Mafia, including Carbonell and Edward J. Robinson, the chief financial officer. Only four come from Reynolds. Although the office accommodations are formal, Johnson's style is casual: popping into Carbonell's office to discuss buying back stock, taking quick phone calls from the operating chiefs, or throwing ideas around over the communal lunch table in the executive dining room.

Johnson values managers who can respond as quickly as he does, and pays them accordingly. Last year the average pay of his top 30 executives was about $435,000, which includes bonuses. Says Andrew Barrett, vice president for personnel: ''If he told me tomorrow, 'I want you to do this,' I would not get high brownie marks if I said I'd like a week to think about it.'' Greeniaus and Peter N. Rogers, now head of the biscuit group, have swapped jobs twice. William B. McKnight just switched jobs with Ellen R. Marram, who was running the grocery operation. McKnight will find the territory familiar; he ran the division from 1982 to 1986, before switching with Rogers. At the corporate level Carbonell recently moved for the third time in a year. He explains: ''Ross and I hadn't seen each other for a week. We were on our way to California, and he said, 'I've been thinking. We've done the job in Atlanta, we restructured the corporate staff, we're well established. I don't need you anymore.' '' Startled, Carbonell cut Johnson off. ''Are you firing me or asking me to resign?'' he asked. ''Shut up and listen,'' said Johnson. ''I want you to pull Del Monte together.'' By the time the plane landed, the fruit company, which had undergone three reorganizations since the merger, was about to undergo another. So far, Del Monte has moved headquarters from San Francisco to Miami and cut its 1200-person staff in half. The tobacco business was particularly top heavy. ''People went from the operations to quote corporate, but they took their jobs with them,'' says Edward A. Horrigan, Jr., head of the tobacco subsidiary. In the reorganization, Johnson sent 400 members of the corporate staff down to the operating company to fend for themselves. Then he pulled the company out of Winston-Salem. The operating people were so glad to see him go, Johnson says, ''they would have paid our way to Atlanta.'' The new chief of Reynolds Tobacco USA, Dolph Von Arx, 53, further unbundled the bureaucracy. He shocked his minions by eliminating weekly status reports and staff meetings. Says he: ''Some of them continued to report to me weekly for several months. Now everyone's fallen into line, and we simply have more time for things that are going to benefit the business.''

For all its call-it-as-you-see-it style, RJR Nabisco is run literally by the book when it comes to financial controls. Each of 173 unit managers prepares a monthly report that is forwarded up the chain. Division presidents like Von Arx get a green book with information on his area; the board of directors a blue one with a corporate summary; and Johnson a more detailed red one that outlines the problem areas in each reporting unit. The reports, developed by Johnson at Standard Brands, are used to track such balance sheet items as receivables, inventories, and cash flow - critical indicators on the state of the business. Newcomers welcome the books about as much as a tax audit. ''Initially people didn't like the report,'' says Robinson cheerfully. ''It says nothing nice about anyone.'' Though the after-the-fact reports are grueling, the planning process follows Johnson's dictum: ''flexible and fleet of foot.'' Says Greeniaus, chief of Nabisco: ''If I want to move $10 million around in advertising expenditures today, I don't need approval.'' Nabisco's senior executives do not formally sign off on each unit's business plan. They won't even look at next year's programs until this fall and won't present them to corporate until next January - essentially too late to change them for the first quarter. ''We run the business on a continuum,'' says Rogers, of the biscuit company. ''We don't have an annual, formalized, fill-in-the-forms, put-things-in-boxes session, which is soul-destroying and numbing.''

Nabisco now runs by firehouse management: Not much seems to happen, but when someone smells smoke, all hands come running. The alarm clanged recently when Kellogg invaded the part of the adult cereal market dominated by Nabisco's Shredded Wheat brand. Although Shredded Wheat's market share is only 5% of the total, it is, thanks to aging baby boomers, both lucrative and growing. When Kellogg launched its major assault, replete with coupons worth 75 cents, half the price of its new entry, NutriGrain Biscuits, Nabisco counterattacked with coupons of its own. Nabisco has temporarily shredded Shredded Wheat's profits, but is holding its share. When P&G launched the cookie war - introducing its Duncan Hines brand of ''soft'' cookies that were meant to feel and taste as if they were home-baked - the combination of Standard Brands' aggressiveness and Nabisco's business execution synchronized perfectly. ''We became much more of a marketing company,'' says James O. Welch, vice chairman of RJR Nabisco. Within days of P&G's launch, Nabisco lowered earnings projections by $50 million, unthinkable in the past, and put the extra money into advertising and promoting its Almost Home soft cookie brand. ''We wanted to mass overwhelming firepower from the word one. We weren't out to stop them, we were out to crush them,'' he says. P&G is claiming in court that Nabisco used illegal weapons in the battle, that its agents hornswoggled the cookie recipe from a subcontractor. The case is tied up in pretrial maneuvering. Meanwhile, soft cookie sales are falling, and P&G is the biggest loser. The Cincinnati company wrote off nearly $500 million in assets last year, and its market share is a crummy 1%. Says McKnight: ''I believe to this day that had it not been for that merger, the cookie wars may very well have come out in a much different way.'' Nabisco, with nearly half the market in cookies and crackers and at least twice the profitability of its nearest competitor, has never been in a stronger position. The company's top managers say that the sales force is too good to let them screw up the business. Nabisco's cookies are store door items: delivered directly to supermarkets and other outlets by combination driver-salespersons who make sure that Nabisco gets every inch of shelf space it can. Last summer the company launched 18 new products in a single promotional blitz. For the year, sales of Nabisco's cookies increased nearly 7%, while total cookie sales shrank 1%; crackers increased 11% in a flat market. The horses pulling that wagon have such familiar names as Oreo and Ritz. Nabisco's use of line extensions rather than new products has earned it a reputation for being unimaginative. The company denies the charge, naturally. ''You will not see us do frivolous line extensions,'' says Greeniaus. ''We've had internal debates as to what an Oreo is. We have a very clear idea.'' It is not, it was decided, a chocolate milk.

Greeniaus explains that Nabisco prefers to think of its new creations as franchise extensions rather than line extensions. The typical line extension, he says, gives consumers an either-or choice - Coke or Cherry Coke - but doesn't add much to a company's incremental sales. Nabisco's franchise extensions go after additional sales by trying to match eating patterns. For example, the original Oreo, two fudge wafers held together by a cream center, is an eat-at-home cookie, while Big Stuff, an oversize version, is positioned as a snack, munched on the go. The individually wrapped single-serve product is sold in convenience stores and vending machines, where packaged cookies haven't done as well. The latest version, fudge-covered Oreos, are designed to entice grownups with a sinfully rich treat. The company says adult women (go on, admit it) are the biggest candy consumers. The sales growth of all varieties of Oreos came to nearly $163 million over the past three years, more than P&G's entire soft cookie business.

Nabisco's newest extension is something called Ritz Bits. A mini version of the original, the coin-size wafer is described by executives as a hand-to-mouth snack cracker, as opposed to regular Ritz, whose mission is to act as a platform for pate and other toppers. The semantics sound awfully silly, but the company this year is going to sell nearly $100 million worth of the little buggers without putting off the Ritz. RJR Nabisco plans $4 billion in capital spending over the next several years, mostly to reinforce its position as a low-cost cookie producer. The company already has that honor by virtue of its buying power in commodities. ''We are going to go from art to science,'' says Carbonell, a biochemist. Most huge commercial cookie companies must rely on actual bakers. Quaint as that may sound, old-fashioned techniques make for greater variation in quality and less efficiency in production. In a new $600 million bakery now under construction, computerized process controllers will guarantee that the recipes are followed precisely, while sensors along the production line will make continuous adjustments in oven temperatures and line speeds to ensure nearly 100% consistency and quality. ''We're going to make Xerox copies,'' says Carbonell. Each baking line in the new plant will produce one product. Only Nabisco has so much volume that it can dedicate one line to Premium Crackers, for instance, 24 hours a day, seven days a week. In most process industries, changing from one product line to another is the most time-consuming, least efficient part of production. Nabisco's one-line, one-product setup will knock at least 15% off production costs.

While the food business is stable, the tobacco business is under a cloud. Powerful anti-smoking groups and the U.S. Surgeon General have turned smokers into pariahs, relegated to their own sections of restaurants, forbidden their pleasures on airline flights of two hours or less. After a string of victories in the courts, the tobacco industry lost its first case in June, when a federal jury in New Jersey awarded Antonio Cipollone $400,000 in damages associated with his wife's death from lung cancer. The jury found that the Liggett Group wrongly implied cigarettes were safe in advertising before 1966, the year warning labels were required by law. The landmark case is likely to encourage more suits, but the tobacco companies doubt these claims will interfere with their profitability. The size of the Cipollone award was small, and the court dismissed charges that tobacco companies had conspired to suppress evidence that smoking was dangerous. Even if the decision leads to more federal legislation - a total ban on airline smoking, for example, or the end of cigarette advertising in print media - the tobacco industry is sanguine. Smokers would light up after a flight, and an end to magazine and newspaper advertising would mean lower costs and hence more profit.

Johnson is taking a a super-aggressive, highly innovative stand against the cigarette censors. Later this year RJR will introduce a nearly smokeless cigarette, which goes by the code name Spa. (The company has not announced the official brand name, and rival Lorillard owns the trademark for cigarettes called Spa.) A smoker lights RJR's new cigarette just like any other. But a carbon heat source at the tip of the cigarette, not the tobacco, burns. The heat generates warm air that passes through the tobacco and then through a capsule that contains tobacco extract, glycerin, water, and flavorings. RJR says that the smoke looks and tastes like ordinary cigarette smoke as it is inhaled. But since it is a vapor, it disappears into the air as it is exhaled. Spa produces almost no sidestream smoke to offend - some say endanger - nonsmokers nearby. The new cigarette has about the same levels of tar and nicotine (0.8 milligrams) as a Winston Light. R.J. Reynolds Tobacco Co., as the cigarette unit is now called, burns with intensity over the Spa project. The smokeless wonder promises to be the biggest cigarette launch ever. The company developed a new manufacturing process to roll the weed and invested $125 million for development and equipment. Advertising, promotion, inventory, and distribution costs will easily treble that figure. Johnson sounds optimistic: ''It's a risk, but we look at it as a contained risk. So you've got a billion dollars. And let's say it's an Armageddon, and aside from the article saying Johnson is an asshole, we can say, 'Okay, by '92 if it hits what we think it's going to hit, we really will have semi-revolutionized the business.' '' The target of the revolution is Philip Morris, which controls 38% of the domestic tobacco market, vs. Reynolds's 33%. RJR hopes Spa will keep the Marlboro man, who represents the world's best-selling cigarette, from galloping away with more business. ''If we didn't introduce Spa, Marlboro would keep going up, and we'd be in a more difficult No. 2 position,'' says Johnson. For instance, its dominant position allows Marlboro to outspend Winston, RJR's top gun, $93 million to $38 million on U.S. advertising. Although RJR is cagey about its goals, Johnson has visions of Spa gaining a five-point market share in a business where a new product is considered a success with one point. Each point is worth over $100 million in revenues. The hope is that lots of curious smokers, nonsmokers, and more significantly ex-smokers will try the product. But how many will use it more than once? Says Johnson: ''If I had nine people who hated it and one that loved it, we're dancing, eh?''

Tobacco's many foes contend that RJR's introduction of a ''safe'' or ''safer'' cigarette is a de facto admission that cigarettes are unsafe. The company's general counsel Harold L. Henderson dismisses the idea: ''This product wasn't something that somebody said, 'Gee, there's something we could have done 30 years ago and now we're going to do it.' '' Taking a novel line of attack, the American Medical Association has petitioned the Food and Drug Administration to declare RJR's new product a drug. The FDA will probably not rule for six months or so, but an agency spokesman points out that the FDA by law has no authority over tobacco products unless manufacturers make health claims. In its traditional cigarette businesses, RJR is turning its marketing guns toward young, blue-collar adult smokers. Now six of ten new smokers try Marlboro first, a figure RJR would like to alter, and only half of them switch later to a different brand. RJR wants to rope in the strays with new images. The Winston version is ''real people'': painters and telephone linemen, who are portrayed in dramatic closeups. Camel's 75-year-old symbol, a dromedary known as Old Joe, is being rejuvenated into a hip cartoon character for such magazines as Rolling Stone. To keep smokers loyal to RJR brands, the company - is running a million-dollar sweepstakes that gives buyers a better chance of winning with each pack of Winston, Salem, or Camel they buy. The sweeps have brought in over 150,000 entries a week, twice the predicted number. Even though the U.S. market seems to be in terminal decline, RJR can continue to earn tons of money from cigarettes. The company's $2 billion investment in its newest facility in Tobaccoville, North Carolina, and a renovation of older plants in North Carolina will make it the lowest-cost manufacturer in the world. In Tobaccoville, for instance, productivity has picked up 45% to 50% over the older plants, and rejects have decreased 20%. With cigarette sales in the U.S. cooling, both RJR and Philip Morris have been moving abroad, gaining sales at the expense of such multinationals as BAT Industries. Last year RJR increased unit sales 10% internationally, and it expects to do the same this year. In Asia, the fastest-growing tobacco market, menthol cigarettes are popular, and RJR's Salem brand shot up 40% last year, making it the world's best-selling menthol. With the drop in the dollar, the company is exporting like mad. Last year the international business turned in the highest operating profits in the company. Can any chief executive be in a more difficult position than one whose company sells a product considered to be deadly to persons possessing lungs and hearts? ''I've been through a lot of pressure in my life. That's what you're paid to take,'' says Johnson. He deflected some of the pressure in April when he fired Saatchi & Saatchi DFS, a Nabisco advertising agency, for creating antismoking ads for Northwest Airlines. In handling the smoking issue, Johnson says, ''I think we really have come to the best conclusion that we could come to on Spa.'' Reynolds's chief Horrigan, a battle-weary tobacco warrior, is grateful for the help: ''The biggest cheerleader we have for this new product is Ross Johnson, and I need him as a cheerleader if we're going to invest in this brand the way we are planning.''

So here comes Manitoba's most famous export, Ross Johnson. Along with a few other food industry executives, notably Anthony O'Reilly of H.J. Heinz, who happens to hail from Ireland, he has been shoving the noses of his managers up against the window of the future. In the process these executives are learning to advertise, distribute, manufacture, promote, and extend ancient brands in a way that turns nostalgia into an advanced weapon. This is an industry where growth isn't available for the asking. Maintaining the status quo gets you zilch, but not maintaining it gets you killed. A dedicated food man like Ross Johnson might one day sell the tobacco business. But only after he has used its fantastic profits to build an even mightier food giant. In the short term most financial analysts expect a big acquisition. The company has looked over Tropicana and other Beatrice companies, but passed them up because Johnson refuses to pay the high prices food companies now command. Of course, in this company that could change quickly. ''How quickly?'' a reporter asked an executive at the beginning of an interview. ''You got two hours?'' came the reply.

"Company News; Holders Support Plan Taking TWA Private," by Robert J. Cole, The New York Times, September 8, 1988

Carl C. Icahn, the chairman of Trans World Airlines Inc., won investor support yesterday to convert TWA into a private company.

As part of the deal, Mr. Icahn, who owns 77 percent of the airline, will recover his $440 million investment, will control 90 percent of TWA's stock and will take over a company with $1 billion in cash and $2.3 billion in debt. The airline's employees will own the remaining 10 percent.

At the start of a 45-minute special meeting in New York, a group representing TWA's pilots handed the 53-year-old Mr. Icahn legal documents stemming from a lawsuit filed in New York State Supreme Court seeking ''to prevent him from looting TWA.''

The suit is thought to have been engineered by Capt. Thomas Ashwood, a TWA pilot who is the chairman of the Master Executive Council of the pilots' union. It contends that Mr. Icahn will ''strip TWA of $665 million and put it in his own pocket through the simple tactic of forcing TWA to borrow to the hilt on its assets in order to pay Icahn.''

Captain Ashwood said in a statement accompanying the documents, ''We won't stand idly by while Carl Icahn strips our airline of assets and keeps it from growing financially stronger, from buying airplanes and from improving service to our passengers because of heavy debt.''

During the meeting, Mr. Icahn told the shareholders that nearly three years ago, when TWA was near collapse, its pilots asked him to take the company private to prevent a takeover by the Texas Air Corporation.

''When they needed me,'' Mr. Icahn said, ''I left my $440 million in and turned down a $170 million profit to do it. They broke trust with me, and I'm deeply disturbed.''

He said he had bought stock at around $8 a share when he was approached. Under an agreement allowing him to take TWA private, Mr. Icahn said, ''I could take the airline private whenever I wanted to, and they couldn't tell us what to do.''

Under the terms of the merger vote, each share of TWA's stock other than Mr. Icahn's will be exchanged for $20 in cash and $30 in 12 percent debentures, in a package that analysts valued at $40 a share. Mr. Icahn will receive $20 in cash, or its equivalent, plus an unspecified amount of TWA preferred and common shares.

The deal will give Mr. Icahn $469 million in cash, $196 million in preferred stock and the remaining shares of TWA.

The airline said it had paid Drexel Burnham Lambert Inc., its financier, $17.2 million for raising $800 million for the deal early last year and will pay it another $15 million to refinance an estimated $500 million in temporary financing. The new financing, the pilots' group said, will require TWA to ''inherit a $2.8 billion debt load and at least $466 million annually in interest costs.''

TWA said that the stockholders unaffiliated with Mr. Icahn had voted 3.7 million shares to approve the deal. Mr. Icahn's stock raised the total in favor to 27.16 million. Holders owning 146,061 shares disapproved, the airline said.

"Maxwell Lifts Macmillan Takeover Bid to $86.80 A Share," by Geraldine Fabrikant, The New York Times, September 16, 1988

In a surprise move, Robert Maxwell, the British entrepreneur, raised his takeover bid for Macmillan Inc. yesterday to $86.80 a share in cash, or about $2.4 billion.

The new offer for the New York-based publishing and information concern exceeds the $84-a-share offer that Mr. Maxwell made last Friday and an $85-a-share leveraged buyout bid announced on Monday by Macmillan and Kohlberg Kravis Roberts & Company, the investment firm.

The latest Maxwell bid has few contingencies and will be made directly to shareholders as a tender offer beginning today and ending September 29, eliminating the need for the approval of Macmillan's board. Macmillan and KKR declined to comment on the new Maxwell move.

Offer for Information Units

Mr. Maxwell said Macmillan shareholders would be allowed to keep the 20 cent-a-share quarterly dividend that has just been declared, thus bringing the total value of the bid to $87 a share.

Mr. Maxwell also indicated that as an alternative he was still ready to buy Macmillan's information businesses for $1.4 billion, an offer he has consistently made without raising the price.

Mr. Maxwell was not reachable for comment yesterday. But his statement said the bid was contingent only on the removal of the company's ''poison pill'' antitakeover plan.

The latest bid reiterated Mr. Maxwell's appetite for the company and his desire to establish a strong presence in American publishing. Previously, he had said that if Macmillan received a bid better than $84 a share he would drop his takeover efforts. Last year, Mr. Maxwell ended a takeover bid for Harcourt Brace Jovanovich Inc. after the company undertook a costly recapitalization plan.

Indeed, many arbitragers and analysts had speculated that the four-month-old bidding war for Macmillan had ended with the leveraged buyout plan, which includes a tender offer that begins today. Macmillan's stock, which had traded at about $84.50 since the buyout announcement, rose $2 yesterday, to $86.50, on the New York Stock Exchange.

Higher Bid Predicted

With Mr. Maxwell back in the picture, at least one arbitrager predicted a higher bid from Macmillan and KKR, whose current offer is for $80 in cash and $5 in securities.

''Their bid was only $1 higher than Mr. Maxwell's,'' he said, referring to Mr. Maxwell's $84-a-share offer. ''They probably have something left in their pocket.''

But an investment banker familiar with the battle questioned whether a higher buyout bid would be forthcoming. He said that it was the Maxwell bid of $84 that probably pushed KKR to raise the buyout bid to $85 at the last minute.

One arbitrager was quick to note that at current prices the leveraged buyout bid was unusually high as a multiple of cash flow. The arbitrager said that KKR was paying more than 10 times cash flow, or earnings before interest taxes and depreciation.

''In recent deals the peak has been about eight times cash flow,'' he said, ''That means KKR is taking a very large risk in betting on a certain set of projections. It makes the entire deal heavily dependent on asset sales.''

Macmillan has publicly estimated that in 1989 it should earn cash flow, or earnings, of $234.5 million before interest, taxes and depreciation. After interest and taxes, and depreciation it would earn $190.5 million.

As to the leveraged buyout, Bankers Trust and Drexel Burnham Lambert would arrange the financing. KKR agreed to put up $250 million in equity financing and $230 million in a bridge loan.

The banks, led by Bankers Trust, will provide $1.98 billion in a combination of $700 million of bridge financing that would be taken out by subordinated debt and $1.28 billion of tender offer facility that will be replaced with senior term bank debt. If Macmillan is sold to another party, KKR will get $29.3 million.

The bidding was begun by the Robert M. Bass Group of Texas, which has apparently decided against any further move.

"Man In The News: F. Ross Johnson; A Chief Willing To Gamble," by Doron P. Levin, The New York Times, October 21, 1988

In the world of corporate takeovers, many chief executives resist having their company acquired. Not F. Ross Johnson, chief executive of RJR Nabisco.

Twice Mr. Johnson has found himself at the head of a company that became a takeover target. In each case, he actively supported the takeover, willing to take his chances that both he and his shareholders would come out on top. In both takeovers, he lost out in the bid for the top job at the newly created company, but eventually ascended to the top.

Although RJR Nabisco is not currently the target of a takeover, the food and tobacco industry is in the midst of significant takeover activity. Mr. Johnson is displaying the same willingness to take a big gamble, but this time with a twist.

He and some other executives of the tobacco and consumer products giant are proposing to borrow $15 billion and take RJR Nabisco private in a plan they announced yesterday. That act put RJR into play as a prime takeover candidate, raising the possibility that should Mr. Johnson's leveraged buyout attempt fail, he will see his company taken over. And he could be out.

''You won't see him blocking a restructuring to protect his own job like at some other companies I could mention,'' said Emanuel Goldman, an analyst for PaineWebber.

Comeback at Nabisco

As chief executive of Standard Brands, Mr. Johnson might have seemed headed out the door in 1981 when the company merged with Nabisco and he did not get the top spot. But three years later he took over from Nabisco's chief executive, Robert Schaeberle, who retired early.

When R.J. Reynolds took over Nabisco in 1985 for $4.9 billion, Mr. Johnson was again No. 2, this time behind J. Tylee Wilson. But less than a year later the RJR board dumped Mr. Wilson and gave Mr. Johnson the top job.

Such risk taking is typical of his aggressive style, those who know him say. Mr. Johnson is known as a decisive expert in marketing who can quickly shuffle divisions, staffs and product brands as well as buy and sell companies.

Mr. Johnson will need all those skills in the coming weeks as he attempts one of the biggest private borrowings of all time to accomplish the leveraged buyout.

Comment on Rising on Debt

Just four months ago the RJR Nabisco chief executive spoke in a magazine interview of the dangers of loading up on debt to ''do a lot of short-term stuff to hype things.''

In an interview published in Fortune magazine, he said, ''If you get some down times the only thing that is going to hold you, preserve you, is the integrity of the balance sheet.''

But recent moves in the food industry - Grand Metropolitan's bid for Pillsbury and Philip Morris's bid for Kraft - have indicated a willingness by large food and tobacco companies to pay huge premiums to acquire consumer brands.

So Mr. Johnson, ever agile, appears to be readying a strong move himself, which would entail loading up on debt to accomplish. If he remains committed to his belief about maintaining a strong balance sheet, he will almost certainly be forced to sell parts of RJR Nabisco to pay back some of the debt incurred by the buyout.

No Aversion to Change

In his three years at the top of RJR Nabisco, Mr. Johnson has specialized in movement. Workers have moved from one building to another and back again. The Del Monte unit, best known for its canned foods, has been reorganized four times and its headquarters has been moved to Coral Gables, Florida, from San Francisco. (Analysts now think the unit may be sold to pay for the leveraged buyout.) Mr. Johnson shocked oldtimers when he moved RJR's longtime headquarters from Winston-Salem, North Carolina, where it was the corporate pillar of the community, to Atlanta.

All this movement has given rise to grumbling by some RJR Nabisco workers, and admiration from many associates.

Stanley Katz, chairman of FCB/Leber Katz Partners, which handles some of Nabisco's advertising, described him as ''incredibly intuitive,'' a quality he noted when Mr. Johnson decided to move Nabisco's Planters nuts and Life Savers businesses to Winston-Salem from New Jersey to take advantage of R.J. Reynolds's powerful selling and distribution network.

Working 'From the Gut'

''He operates from the gut and makes some large decisions from the gut,'' Mr. Katz said. ''A lot of other executives demand lots and lots of research.''

As head of one of the nation's biggest advertising sponsors, Mr. Johnson enjoys entree to numerous celebrity and sports events, which colleagues say he relishes. Celebrities often show up at charity dinners Mr. Johnson organizes.

A native of Winnipeg, Manitoba, Mr. Johnson, who is 56 years old, was born on December 13, 1931. He is married, with two children. He played basketball at the University of Manitoba and retains his love of the sporting life. Sports has been an important feature of his company's product marketing through sponsorship of events like the annual Nabisco Dinah Shore Invitational golf tournament.

Mr. Johnson started his career with the Canadian General Electric Company as an accountant and became the company's youngest marketing manager. He moved to an appliance company and then to Standard Brands' Canadian subsidiary before coming to the parent company in New York in 1973. Three years later, after a boardroom struggle, he became Standard Brands' youngest chairman and chief executive.

"TWA Goes Private Despite Efforts To Fight Icahn Move," by Robert E. Dallos, Los Angeles Times, October 25, 1988

Financier Carl C. Icahn took Trans World Airlines private Monday despite protests by some shareholders and unions that he was looting the carrier for personal enrichment.

In the transaction, TWA bought the shares of all stockholders, a move that will remove the stock from trading on public exchanges. Icahn will end up owning 90% of the company and the remaining 10% will be held by TWA workers through an employee stock option plan.

Icahn consummated the transaction after a ruling late Friday by the Delaware Chancery Court cleared the way. The court denied a request by a group of stockholders, who have sued the airline, for a preliminary injunction to at least delay the going-private transaction.

The class action suit, which seeks damages, is pending, and at least two other efforts to reverse the privatization are still alive.

Pilots Are Opposed

Icahn, who is TWA's chairman, won approval for the privatization at a special shareholders meeting last month at which more than 97% of the shareholders voting approved the transaction. The rules of the election kept Icahn, who already owns 77% of the airline's 30.5 million outstanding shares of common stock, from voting.

TWA's pilots have also filed suit in New York State Supreme Court in an effort to prevent the privatization. According to Mark Buckstein, TWA's general counsel, a request for a preliminary injunction was withdrawn by the pilots last week, but the case is expected to go to trial in December. At the trial, the pilots will attempt to undo Monday's deal.

Also, the TWA flight attendants' union has petitioned the U.S. Department of Transportation asking that the privatization plan be disallowed. The attendants seek a test of TWA's financial fitness, charging that Icahn has not left enough money in the airline's treasury.

However, TWA announced Monday that an Icahn-affiliated company had bought for cash the 20.6 million shares of Texaco common stock that TWA owned. The announcement said TWA will make a profit of about $222 million on the sale before taxes.

Altogether, Buckstein said, the sale will infuse about $900 million into the TWA treasury. "We have plenty of money now," he added.

Stockholders fighting the privatization maintain that they are not getting enough cash for their shares. Under the deal's terms, each outstanding share of TWA stock will be exchanged for $20 in cash and $30 face value worth of 12% bonds that will mature in 20 years. The stock closed Monday at $36.625, up 25 cents on the New York Stock Exchange. The bonds are currently trading at about $18.

Like other common shareholders, Icahn received $20 cash for each share. As he owned about 23 million shares, that amounts to about $469 million.

"A Corporate Milestone; RJR Nabisco Bid Gives New Respectability To Giant Deals Financed With Huge Debt," by Sarah Bartlett, The New York Times, October 26, 1988

The proposal to turn RJR Nabisco into a privately owned company represents a milestone in the brief history of the financial tool known as the leveraged buyout.

RJR Nabisco is not only the largest but also the most prominent member of the corporate Establishment ever to be the object of such a deal.

And with RJR Nabisco showing the way, other large, well-known companies may find themselves on the same path. That means they will be financing their operations primarily by borrowing money, rather than by selling stock to the public, and thus will be carrying much higher levels of debt than has traditionally been considered prudent.

Two Sources of Money

In a leveraged buyout, a small group of investors uses borrowed money and some of its own to buy a company's stock from its public shareholders.

F. Ross Johnson, chairman of RJR Nabisco, last week proposed taking the company private in a $17 billion leveraged buyout. Kohlberg Kravis Roberts & Company, the firm of leveraged buyout specialists, made a $20.3 billion counteroffer on Monday.

''There's a difference between a National Can or a Wickes doing a leveraged buyout and an RJR Nabisco doing one,'' said Charles M. Nathan, co-head of mergers and acquisitions at Salomon Brothers. ''It's an imprimatur. Money-good names are saying that leveraged deals are OK.'' RJR Nabisco is the nation's 19th largest industrial company.

Many investment bankers report that their blue-chip corporate clients have been calling to say that they want to take a harder look at the idea of going private.

In many cases the executives believe their companies are worth more than the stock market says they are.

'An Offensive Technique'

''Increasingly frustrated by the stock market's undervaluation of their companies, managements of some of the largest U.S. companies are evaluating leveraged buyouts as an offensive technique to generate shareholder value,'' said J. Tomilson Hill, head of the mergers department at Shearson Lehman Hutton, which is teaming up with the RJR Nabisco executives who are proposing the buyout.

The mere existence of a leveraged buyout offer for RJR Nabisco is a sign of how far corporate thinking on this issue has come.

''Some people used to hold their noses and ask, 'Is this un-American?,' '' said Thomas A. Saunders III, a managing director at Morgan Stanley & Company. ''Taking a company private today is an acceptable alternative, and that is a sea change in the mindset of the managements of major U.S. corporations.'' Mr. Saunders manages Morgan Stanley's $2 billion leveraged buyout fund. The bid for RJR Nabisco, along with Philip Morris's $11.5 billion bid for Kraft, has also revised sharply upward the size of companies thought to be vulnerable to a leveraged buyout or hostile takeover.

''There's been a quantum leap in the last few weeks,'' said Martin Lipton, one of Wall Street's leading takeover defense lawyers. ''People figured if they were bigger than $10 billion they were safe. Now they figure they have to be $20 billion.'' At last count there were only nine American companies that large in terms of their stock market valuation.

Mr. Nathan of Salomon said: ''Size will not protect you. We've been telling our corporate clients that for the last year, but companies didn't believe it. They will now.''

Until fairly recently, leveraged buyouts were considered the province of lesser-known companies that were willing to accept the stigma of the unusually high debt that such transactions entail. Some companies threatened by a hostile takeover also turned to buyouts as a last-ditch defense maneuver.

Yet Mr. Johnson was under no known compulsion to take RJR Nabisco private. Instead, he apparently chose that alternative because he believed the stock market was putting too low a value on his company-largely because of the perceived liabilities associated with tobacco. The company's stock was trading around $56 a share before he made his $75-a-share buyout proposal.

A Shift in Equity Holdings

When a high-quality industrial company goes private in a leveraged buyout, it typically reduces the proportion of equity represented by its public stockholders from about 75 percent of its capital structure to less than 10 percent. The rest of its capital structure is then made up of bank debt (50 to 65 percent) and subordinated debt, or high-yield ''junk bonds,'' which are sold to investors.

Critics have asserted that leveraged buyouts saddle companies with heavy debt loads.

''I believe in public corporations, and I think they have been responsible for growth in America,'' said Rand V. Araskog, chief executive of the ITT Corporation. ''I do not believe in pouring debt on corporations' balance sheets.''

But proponents of leveraged buyouts maintain that companies operate better when freed from the pressure to produce improved quarterly earnings. At the same time, debt imposes a healthy discipline on managers, forcing them to trim fat. And because managers end up owning larger stakes in the newly private companies, they are rewarded more handsomely if they make the company more efficient.

Lots of Financing Available

Leveraged buyouts have become increasingly acceptable partly because there is plenty of money available to finance them. Leveraged buyout funds have been blossoming on Wall Street. Today there is close to $25 billion standing ready to finance the equity component of such deals. At a typical ratio of $10 of debt for each dollar of equity, that would enable Wall Street to finance $250 billion of leveraged buyouts.

Equally important is the widespread availability of bank loans.

''People are getting in line to provide senior bank debt for high-quality assets,'' said Mr. Saunders of Morgan Stanley. Often so many banks are angling to sign up for a big chunk of a loan that a transaction could be financed two or three times over.

That reflects, in part, the dearth of other good lending opportunities for banks. But it is also a function of a change in the way banks make corporate loans.

''A year ago we couldn't have done a $10 billion deal,'' said a senior banker who is active in financing leveraged buyouts. Bankers now estimate that they could provide as much as $20 billion in bank debt for a single deal.

How Banks Have Operated

Traditionally a bank made a loan and kept it on its books. But now it is more common for several banks to commit themselves to a multibillion-dollar loan and then turn around and sell most of it in smaller pieces to other financial institutions. By doing so, they get most of the financing fees without the burden of keeping all of the loan-and its incumbent risk-on their balance sheets. The process is akin to the way Wall Street underwrites and distributes corporate securities.

Last year about 9 percent of all United States bank loans to corporate customers were tied to leveraged buyouts. In the past two years banks have made commitments for an estimated $150 billion of all types of acquisition financing.

Banks also have expanded their networks of loan buyers - usually regional and foreign banks. In the last year Japanese banks have become especially active, taking as much as 30 percent of loans, up from about 10 percent in 1987, according to industry experts. And banks are extending their networks even more by beginning to sell their loans to pension funds, insurance companies and even corporations.

''United States loan sellers are becoming more and more sophisticated,'' said Christopher L. Snyder, Jr., president of the Loan Pricing Corporation, a New York company that has built a loan data base. ''They are building a big, deep, powerful distribution force.''

Limits for Junk Bonds Found

Even now, however, investment bankers believe there is still some undefinable limit on the size of deals that can be financed. The remaining constraint, they maintain, is the junk bond market, which still does not have a broad enough array of buyers to absorb the amount of bonds necessary to finance more than two or three mega-deals.

But even in the junk bond market there has been considerable evolution. Not long ago junk bonds were primarily the domain of Drexel Burnham Lambert Inc. But now firms like Morgan Stanley, the First Boston Corporation and Merrill Lynch & Company have pushed into that lucrative market. Drexel's market share has dropped from about 68 percent in 1984 to about 50 percent today, according to IDD Information Services.

''An increasing number of investment banks have expressed an interest in building up their presence in high-yield bonds,'' said Barry S. Friedberg, division director of investment banking at Merrill Lynch. This increased participation has helped the market grow from an estimated $130 billion last year to more than $150 billion this year, measured by total issues outstanding. And if the latest proposed deals are completed, some believe the market could approach $200 billion by the end of the year.

"The Media Business; Marvel Comic Book Unit Being Sold for $82.5 Million," by Jonathan P. Hicks, The New York Times, November 8, 1988

New World Entertainment Ltd., the publisher of Marvel comic books, said yesterday that it expected to sell the comic book, children's books and licensing and merchandising operation of its Marvel Entertainment group to the Andrews Group for $82.5 million.

New World said the Andrews Group, a Los Angeles-based concern operated by Ronald O. Perelman, chairman of Revlon, planned to take control of Marvel Comics in January. New World, which is based in Los Angeles, said it would retain its Marvel Productions unit, which produces television programs for children.

Spokesmen for New World and the Andrews Group said they were not certain when the final agreement would be signed.

According to Maggie Thompson, co-editor of the Comics Buyer's Guide, an Iola, Wisconsin, trade publication, Marvel commands about a 40 percent share of the $300 million comics market.

The company's publications unit, which is based in New York, produces about 50 comic book titles a month under the Marvel name, with a circulation of 7.4 million, according to the Audit Bureau of Circulation. Marvel's interests include a merchandising operation that licenses products based on the characters in its comic books: Spider-Man tennis shoes and Captain America T-shirts, for example.

In 1986, Marvel was sold to New World for $46 million as part of the liquidation of Cadence Industries of West Caldwell, New Jersey. Marvel's publishing operations, including children's books, had sales of $70 million in 1987, and the company has been consistently profitable since 1975.

New World, which had planned for Marvel to be the source of story ideas that could be used in television shows and movies, had turned away previous inquiries for the business. However, New World has been hard-pressed for cash in recent months.

The company is being sold just as New World begins to take some of the hundreds of Marvel comic characters and make them into the stars of cartoon adventures.

The Marvel cartoon operation has been merged with New World's television and movie business and is excluded from the pending sale.

"Is RJR Worth $25 Billion?" by Sarah Bartlett, The New York Times, December 2, 1988

Few Wall Street dramas have generated as much debate as the strenuous bidding for RJR Nabisco Inc., which culminated late Wednesday in a deal to sell the company to Kohlberg Kravis Roberts & Company for $25 billion.

What does it say about the country's financial markets when a company that was worth $55 a share in the stock market one day is valued at $75 by its top management the next day and is sold at auction six weeks later for $109?

It was not, after all, a Picasso painting that was the subject of a breathless bidding war. It was RJR Nabisco, a company made up of assets that are eminently real and quantifiable. What could be so mysterious about placing a value on Fig Newtons?

Answers Easy and Hard

Easy answers to these questions are so plentiful they are almost ricocheting off Wall Street's canyons. Among the most popular: the public markets are incapable of understanding the true value of corporate assets; management was trying to steal the company from underneath the noses of its shareholders; Wall Street, steeped in greed and ego, ran amok and overbid for the company.

Each of these competing theories probably contains some element of truth. But in trying to explain the RJR Nabisco phenomenon, Wall Street deal makers maintain that those reasons, and others, are necessary to understand fully how and why this additional ''value'' was created. Some of the answers are specific to this deal; some are indicative of the state of the markets.

Much of the explanation lies in the starkly different ways companies are measured and run when they are private as opposed to when they are public entities.

The story begins with the public stock market, where many stocks have been depressed in value since the crash of October 1987. Add the fear of lawsuits tied to tobacco, which could result in huge liabilities for RJR Nabisco, and that helps to explain why the company's stock was recently trading in the 40s, down from the high 60s before the crash.

But RJR Nabisco as a public company had two other counts against it. It was considered too big to be taken over. So, unlike many other companies, its price had not risen in anticipation of a takeover bid.

Its stock also suffered because the company was a medley of businesses in an era when investors prefer concentration in a single area.

''The market penalizes conglomerates,'' said Thomas A. Saunders III, a managing director at Morgan Stanley & Company. A portfolio manager ''wants management to stay focused on its core business,'' he said.

Enter F. Ross Johnson, the RJR Nabisco chief executive frustrated by his inability to raise the stock price of his company and in a good position to judge the company's potential value. On October 20 he bid $75 a share to take the company private. His plan was for Shearson Lehman Hutton and a group of RJR Nabisco senior managers to buy out the public shareholders' position in the company, largely with borrowed money - a leveraged buyout.

A Crucial Question on Buyouts

That raises a question: since under Mr. Johnson's plan the same managers who ran RJR Nabisco as a public company would still be in charge, why would they suddenly be able to make the company so much more valuable?

Mr. Johnson could afford to offer $75 in part because the government would help defray the costs of doing business. Running a private company heavily financed with debt, Mr. Johnson could take advantage of the fact that interest is tax deductible, while dividends paid to public stockholders are not.

What is more, with the debt loads under which many buyout companies operate, they have little choice but to become extremely efficient. And senior managers in leveraged buyouts almost always have equity stakes in their newly constituted companies, which has a way of concentrating executives' minds far more than perquisites like corporate jets and country club memberships.

Lest the managers become distracted, their backers are always close at hand to make sure that their will is being carried out. Managers of public companies rarely hear directly from their owners; disgruntled shareholders just sell their stock.

In addition, freed from the pressure to please the stock market with predictable quarterly growth, some managers say they can operate far more efficiently.

Is That Enough?

But can those managers be $12 billion more efficient, that figure representing the difference between the company's valuation before and after the deal?

A critical source of value in leveraged buyouts is generated by the sale of assets. When conglomerates are broken into their diverse pieces, they can often be worth more to other buyers. The sponsor of a leveraged buyout usually knows that, and may even have tentative commitments from some buyers before it takes a company private.

''The value of a company has a lot to do with the particular blueprint a buyer brings to a company,'' said Brian Wruble, president of Equitable Capital Management, which manages $32 billion in assets.

A company entirely devoted to cookies, for instance, might be willing to pay top dollar for Fig Newtons because it could increase cookie sales without necessarily incurring all of RJR Nabisco's distribution costs. The value this represents is likely to be more than that placed on those cookie-producing assets by faceless stockholders who view Fig Newtons as one piece of a corporate morass whose quarterly profit is not doing as nicely as that of, say, Chrysler.

''Certain parts are worth more to some parties than to the general market,'' said Paul K. Kelly, president of Peers & Company, a New York merchant bank.

Analogy to Home Buying

Mr. Kelly offered an analogy: a house on a 10-acre lot is for sale. Someone who wanted to live in the house and keep the land might be willing to pay $500,000 for it. But to someone who wanted to divide the lot and sell it in two-acre parcels, the house and land might be worth $1 million.

But even assuming that RJR Nabisco is worth more to a group of private investors than to public ones, why did the bidding for the company as a private entity still seem so arbitrary, ultimately rising from $75 to $109 a share?

Most experts close to the deal view the initial bid of Mr. Johnson's group as extremely low.

The management bid opened the door to Kohlberg Kravis Roberts, which has long reigned in the world of large leveraged buyouts.

The buyout firm's entrance unleashed a three-week bidding war that had few, if any, constraints on it. The money was available to finance ever-larger bids, and the intermediaries had almost everything to gain and little to lose by stoking the fires.

Shearson, for instance, had recently amassed a $1.5 billion war chest with which to do leveraged buyouts. A late comer to the business, following firms like Merrill Lynch and Morgan Stanley, Shearson could make quite a statement by doing the largest leveraged buyout ever, and would earn substantial fees.

''The pressures to do this deal were staggering,'' one investment banker said. ''This is next year's bonus pool.''

After the RJR Nabisco board announced that a full-fledged auction would be conducted, other parties, including Forstmann Little & Company and the First Boston Corporation, examined the financial records of the company with an eye to making a bid. Although Forstmann Little declined, without giving a reason, the other bids that came in hovered in the low 90s a share.

A Price Seen as Realistic

Looking back on the process, most investment bankers close to the situation view that price range as coming closest to RJR Nabisco's true value as a private company. That is, that is what the buyout sponsors could afford to pay in making realistic assumptions about the prices they could get for selling certain assets, and the cash they could generate by running the company differently, with more motivated management.

The difference between the low 90s and the eventual $109 price is the portion ascribed to ego. By the end of the intense bidding war, both the Shearson-Johnson group and that of Mr. Kravis were determined to be the victor.

By raising their bids, they have lowered the ultimate return to their investors, many investment bankers think. (It is mainly large investors - pension funds, insurance companies and the like - whose money is being used to buy RJR Nabisco.) And they have narrowed their margin for error. If they have trouble selling some of the company's assets at prices they are counting on, it could strain the company and jeopardize the success of the deal.

"KKR Only Using $15 Million Of Its Own In Nabisco Buyout," by Jerry Knight, The Washington Post, December 2, 1988

Kohlberg Kravis Roberts & Co. plans to put only a little more than $15 million of its own money into the $25 billion purchase of RJR Nabisco Inc., according to sources familiar with the way the takeover firm is financing the biggest acquisition ever of a U.S. company.

Based on the financing techniques it has used in the past, the firm, known as KKR, will leverage its tiny down payment by borrowing more than $18 billion, using about $1.5 billion in cash put up by a select group of investors, and giving RJR Nabisco shareholders securities for the rest of the $25 billion.

By outbidding two other potential buyers of the giant RJR Nabisco food and tobacco empire in hectic negotiations that ended late Wednesday night, KKR preserved its reputation as the preeminent firm specializing in what Wall Street calls "leveraged buyouts."

The principle of leveraged buyouts is to borrow money to buy a company. The business itself is used as collateral, and the loans are paid off with the company's future profits or by reselling some of its operations.

The "leverage" means that the buyer puts up as little of its own cash as possible and uses it as a lever to gain control of a much larger amount of assets.

KKR's plans for financing the purchase of RJR Nabisco shows just how much leverage can be obtained.

The company's own cash investment will be just 1/1666 - or .06 percent - of the amount that is to be paid for RJR Nabisco's family of familiar brands, which include Camel, Winston and Salem cigarettes, Life Savers, Baby Ruth and Butterfinger candy, Planters peanuts, Animal Crackers, Ritz, Triscuits, Sugar Honey Grahams, Shredded Wheat, Oreo and Chips Ahoy cookies and Del Monte foods.

KKR has previously used the leveraged buyout technique to purchase Safeway - after an unsuccessful bid by the Haft family of Washington - for $4.2 billion; Beatrice Cos. Inc. for $6.1 billion, Owens-Illinois Inc. for $3.7 billion, Stop & Shop (parent of Bradlees) for $1.2 billion, Duracell for $1.8 billion, and half a dozen other major businesses.

To finance its purchases, KKR last year raised a $5 billion pool of capital from a limited partnership of institutional investors that include several public and private pension funds, college endowments and insurance companies.

KKR itself contributed only $54.2 million to the $5 billion pool, or a little more than one percent, but as the general partner in charge of the investment has complete authority to use the money, according to confidential documents given to potential partnership investors. In the documents, KKR said it had previously earned profits of 59 percent a year on its investments.

From that $5 billion pool, KKR will put $1.5 billion into the purchase of RJR Nabisco, say sources familiar with terms of the purchase. The purchase will be made through RJR Acquisition Corp. and RJR Holdings Corp., two new Delaware corporations formed specifically for the transaction.

Another $5 billion will be borrowed from the Wall Street investment firms of Merrill Lynch & Co. and Drexel Burnham Lambert Inc., officials of the two firms confirmed yesterday. The $5 billion is meant to be a short-term "bridge loan" that will be repaid by issuing high-interest bonds through Merrill Lynch and Drexel, probably next year.

The bulk of the money to pay for RJR Nabisco - more than $13 billion - will be borrowed from a group of banks that have not yet been publicly identified. Because the loans are so big, dozens of banks are expected to participate in the loans, including most of the nation's major banks.

In addition to the more than $18 billion to be borrowed from the banks and investment firms, KKR will have to assume more than $4.5 billion in debts that RJR Nabisco has previously taken on, which will boost the total debt to about $22.8 billion.

In documents filed yesterday with the Securities and Exchange Commission, KKR said it will pay RJR Nabisco stockholders $109 for each share of common stock. Only $81 of that will be cash, provided by the KKR partnership pool, the banks and the bridge loans. Shareholders will also receive a new issue of preferred stock valued at $18 per share and other securities valued at $10 a share, which will be convertible into stock of RJR Holdings.

No cash will be involved in either the preferred stock or other securities, although stockholders will be able to sell them, just as any other securities.

The board of RJR Nabisco accepted the KKR offer late Wednesday night, but the transaction theoretically could still founder if stockholders refuse to accept the $109 a share offer. The stock was selling for only $56 a share six weeks ago, when the possible sale of the company was first raised.

RJR Nabisco went up for bids largely because its president, F. Ross Johnson, believed the stock price was being held down by public concerns about smoking and the future of the cigarette business, the company's most profitable line.

Johnson decided to organize his own leveraged buyout and offered $75 a share for the stock, which had never before gone above $71. As soon as Johnson's bid was made, several other firms started bidding and the offers quickly jumped to $80 and then $100 a share.

KKR founder Henry Kravis was one of the first to bid, saying he wanted to protect his firm's reputation as the leader in the leveraged buyout business. Johnson brought in Shearson Lehman Hutton Inc., the investment firm owned by American Express, to finance his offer, and the investment banking firm First Boston Co. also joined in the bidding.

When the bids were opened, KKR came up several dollars a share ahead of Johnson - how much depends on how the bids are evaluated - and the First Boston offer was rejected because of contingencies. While KKR was negotiating an agreement with the RJR board, Johnson came back with a new offer, and then the board gave KKR another chance to raise its bid.

"Where's The Limit? Ross Johnson and the RJR Nabisco Battle," by John Greenwald, Time, December 5, 1988

The biggest takeover battle in history raises questions about greed, debt and the well-being of American industry.

The date was portentous: on October 19, precisely one year after the stock market crashed, the chief executive of RJR Nabisco was the host of a lavish meal at Atlanta's Waverly Hotel. Ross Johnson's guests had come to expect such treatment. A brash and hard-driving manager with a fondness for fine living, he liked to treat RJR Nabisco's board members to an elegant evening out before the next day's regular meeting.

On this night, however, Johnson's purpose was not just to be convivial. Declaring that he had tried everything he could during the past two years to boost RJR Nabisco's stock price, Johnson said he had found a solution: he and his fellow top managers would take complete control of the company in a leveraged buyout (LBO). Johnson would then sell off some of the company's food brands and run the remaining divisions as a private company. Surprised that a chief executive would initiate a raid on his own company, the directors nonetheless allowed him to mount what would be the largest takeover ever.

But the directors - and much of the public as well - were soon shocked to read news accounts reporting that Johnson's plan would enrich him and seven of his top executives beyond the dreams of Midas. In exchange for $20 million they would put up for an 8.5% stake in the new company, Johnson and the seven other executives would see the value of their investment jump to $200 million when the sale was completed. That was only the beginning. By doing some simple arithmetic, critics of the plan calculated that the eight men's holdings, which were scheduled to grow to 18.5%, could be worth $2.6 billion within five years if they turned RJR Nabisco into a leaner and more profitable enterprise. Johnson's share alone would have been worth $1 billion.

Swamped by a wave of resentment, Johnson rushed last week to reassure the RJR board that he had intended all along to share the newly created wealth with the 15,000 employees who would remain after the breakup. "I wasn't going to take 18% of this company for seven people," Johnson told TIME in his first interview since the buyout offer. "If I'd known it was going to be in the newspapers, I would have said, 'Look, there's going to be 15,000.' "

Even as Johnson backed away from his huge initial stake, rival bidders rushed in to get theirs. The competing offers turned the fight for RJR Nabisco, whose brands range from Animals Crackers to Winston cigarettes, into the brassiest and potentially most damaging brawl in Wall Street history. By last week three groups were locked in a titanic struggle for the company (1987 revenues: $15.8 billion), and the offering price has climbed above $26 billion - more than the gross national product of Peru or Portugal and twice the sum that Chevron paid for Gulf Oil in 1984 in the largest previous merger. The ordeal turned into a feeding frenzy for hangers-on as well: hundreds of lawyers and investment bankers involved in the bidding stand to earn a total of as much as $1 billion for their expertise.

The sums are so vast, and so apparently out of line with any foreseeable benefits that the deal might bring to American industry, that they raise deep and disturbing doubts about the direction of U.S. business at a time when many firms lag badly in foreign competition. Seldom since the age of the 19th century robber barons has corporate behavior been so open to question. The battle for RJR Nabisco seems to have crossed an invisible line that separates reasonable conduct from anarchy.

Except for its scale, the proposed RJR breakup was like many of the fruitless paper-shuffling deals that have proliferated in the past decade. The management group is planning to take apart a merger, between RJR and Nabisco, that they hailed only three years ago as a brilliant strategic move. "What is being done threatens the very basis of our capitalist system," said John Creedon, president of Metropolitan Life Insurance company, which is suing RJR because the potential buyout has undermined the value of all bonds that the food and tobacco company sold before the announcement. Not everyone was alarmed. Said Harry D'Angelo, a finance professor at the University of Michigan: "I don't see any major social dangers. The real challenges have been to the conventional wisdom that large numbers of shareholders provided the best means of financing industry."

The RJR battle has brought several U.S. business trends of the past decade under greater scrutiny in Washington. Among the political concerns:

- The relentless focus on dealmaking rather than on long-term investment.

- The apparent disregard for company employees and the communities in which firms are located.

- The rapid pileup of debt that has alarmed everyone from small investors to Federal Reserve chairman Alan Greenspan, who recently called for measures to curb borrowing.

- The cost to American taxpayers, who wind up underwriting the buyouts to the tune of billions of dollars because interest payments on the giant borrowings are deductible as a business expense.

The RJR buyout aroused anxieties even in the investment community, where some executives feared that the Johnson-initiated scramble would swallow up too much of the available money for deals and, moreover, give mergers and LBOs a bad name. "This is the sort of excess that investment bankers have worried about for years," said economist Robert Reich of Harvard's John F. Kennedy School of Government, "because it so clearly exposes the greed and rapaciousness of so many of these takeovers." Martin Weinstein, managing director of Kubera, a Wall Street arbitrage firm, concurred: "Do I sense fear? Yes. At some point there is going to be a rebellion against greed."

The first sign of revolt, interestingly, came from the outside directors who had come to dinner at the Waverly Hotel. Appalled by the gall shown by Johnson, whom one director called a "raider from the inside," a committee of five directors three weeks ago opened the bidding to all comers. First to accept the invitation were the most aggressive LBO artists of all, the Wall Street firm of Kohlberg Kravis Roberts. Headed by Henry Kravis, 44, and George Roberts, 45, KKR pioneered the leveraged buyout in the 1970s and nurtured it into one of the best-paying financial arrangements of the decade.

Many Wall Street insiders thought the KKR bid was as self-serving and hasty as Johnson's offer had been. "They broke the golden rule by injecting their egos into a business decision," said one financier who knows KKR well. "They went after RJR Nabisco to protect their franchise as the largest dealmaker."

The directors' invitation attracted a third and scrappy new bidder who helped turn the fight into a virtual Who's Who of finance and industry. Assembled by the First Boston investment firm, the group of newcomers included Jay Pritzker, the Chicago-based chairman of Hyatt Corp., his wealthy family and Philip Anschutz, a Denver oil billionaire. First Boston also wooed Harry Gray, the retired chairman of United Technologies, and several other high-rolling investors. The group came into the bidding with a showstopping but tentative offer of cash and securities worth up to $26.8 billion, or $118 a share, for RJR stock that traded for $56 a share in mid-October.

That bid, quickly dubbed a "Chicago submarine" because it would torpedo the competition, easily surpassed both rival offers. The Johnson team had bid $23 billion, or $100 a share, while KKR had proposed a package worth $21.6 billion, or $94 a share. Board members extended the deadline until Tuesday, November 29, to take any counteroffers and allow time to study each proposal. If none is accepted, the directors could supervise an RJR restructuring themselves.

The donnybrook was only the most colossal of the deals that persisted last week in rearranging the U.S. corporate landscape. Hospital Corporation of America, the nation's largest hospital chain, ended more than a month of dickering and agreed to be acquired for $3.6 billion in an LBO put together by the company's management. Triangle Industries, which just two years ago acquired the packaging division of American Can in an LBO, agreed to be bought for $1.3 billion by Pechiney, the state-owned French metals firm.

Leveraged buyouts seemed like a small-time, unglamorous financial gimmick when KKR began hawking them on Wall Street in the mid-1970s. But the arrangements were an immediate hit with managers who saw the wisdom of taking their companies private to escape corporate raiders. LBOs were also a boon to promising firms that wanted to grow outside Wall Street's harsh spotlight.

Perhaps the most attractive feature of LBOs is that they give managers a sizable chunk of equity in newly structured companies. By using borrowed money to buy out the stockholders, executives can cash in their old shares at a profit even as they become owners of their firms. The managers are then free to sell parts of the business at a handsome profit. The ultimate payoff comes when they put their companies back on the market. The sale of well-run corporations can return up to 100 times the amount of a manager's original investment. With investors lured by such prospects, the value of completed LBOs soared from just $13.4 billion in 1984 to $76.8 billion so far this year. Since 1985, four of the ten largest LBO acquisitions have been made by KKR.

Some deals have fallen short of their fanfare. KKR hailed the purchase of Beatrice as the "deal of the century," but wound up getting stuck with businesses that have not yet found buyers. "Beatrice was over-advertised as a spectacular deal when it was really just a good one," said one investor. "Everybody's making money; they're just not making as much money as they thought they would, or as fast as they could."

At RJR Nabisco, the benefits of LBOs were hardly lost on Johnson. Born in Winnipeg, Manitoba, he had parlayed a keen eye for a deal and the nerves of a gunslinger into the top job at three major corporations. He was president of Standard Brands, the producer of Planters nuts and Baby Ruth candy bars, when it merged with Nabisco in 1981. Four years later, as Nabisco's president, Johnson sold out to RJR Reynolds for $4.9 billion and soon became president of the merged company. After adding the title of chief executive officer in 1987, he swiftly moved RJR Nabisco headquarters from Winston-Salem to Atlanta, sold the Heublein liquor business and slashed the corporate staff from 1000 to 400. The dapper Johnson, a friend of such sports figures as hockey star Bobby Orr and broadcaster Frank Gifford, is described as a "charmer" by one associate. Another warned that when the boss was displeased, "swift as a sword, he would chop your head off."

Amid the brawl for his company, Johnson has remained aloof from most outsiders and workers at RJR Nabisco headquarters in the elegant Galleria complex north of Atlanta. "We don't know what is going on," says an employee. "Some of us are going to lose our jobs, but we don't know who, or where." Feelings of helplessness were hardly confined to the South. Said a 15-year employee at an RJR Nabisco cookie plant in Fair Lawn, New Jersey: "When you're at the bottom of the ladder and you got money men at the top, you take it one day at a time."

Whoever wins the grab for RJR, a highly leveraged takeover could add more debt to the U.S. economy than any previous business deal. All told, corporate debt has climbed from some $965 billion in 1982 to $1.8 trillion this year, a rise from 32% to 37% of U.S. gross national product. LBOs can be especially worrisome of borrowing, because they replace virtually all of a company's equity with IOUs that must be repaid. A sudden downturn can thus put a firm heavily in hock out of business. "High leverage is unsafe, not just for a company but for the entire economy," says MIT economist Franco Modigliani, a Nobel laureate. Modigliani adds that while the debt mountain has not yet grown perilously high, "LBOs are reducing the safety. Management loses the power to do many things. It has no margin for error and less margin for additional risk."

A company mired in debt can ill afford to build new plants or develop new products, since most of its earnings go to pay off borrowings. The shortage of investment can then dampen U.S. growth and damage the ability of American firms to compete abroad. In a slump, the impact can be dramatic. A study by the Washington-based Brookings Institution, a liberal think tank, estimated that a new recession could jolt 10% of major U.S. companies into bankruptcy.

Bankers, too, are taking a harder look at the risks, and some junk bond buyers are becoming picky. While cash has poured in from such staid investors as the Harvard and Yale endowment funds and many state pension plans, other money managers are refusing to play. Says New York City comptroller Harrison Goldin, who oversees the investment of some $30 billion in pension funds: "I cannot condone activities that divert so much time and energy from investments that create new jobs and opportunities to those that reshuffle chairs. Pension fund managers are supposed to invest in the American economy."

While that may be true, even the U.S. tax code is a strong ally of LBO artists. Since the interest on junk bonds and bank loans is tax deductible, companies like RJR Nabisco can borrow at Government expense. Some - but not all - of the Treasury's loss can be recouped from capital gains taxes on the profits of shareholders who sell their stock.

The way the tax code treats stock profits is another plus for LBOs. Corporate earnings are taxed twice: they are first paid to stockholders out of a company's after-tax profits, and the shareholder then pays taxes on the dividends. "There is no question that our tax laws have a bias toward debt that must be rectified," says a top congressional aide.

The buyout binge produces some big-time losers as well, particularly investors who owned a company's top-quality bonds when the same firm's junk bonds hit the market. Since the new IOUs would saddle the company with a riskier load of debt, the old bonds get clobbered. No sooner had Johnson disclosed that he wanted to buy RJR Nabisco, for example, than the company's $5 billion of outstanding bonds lost 20% of their value. Furious bondholders, including Metropolitan Life and ITT, immediately sued for damages. Declared Metropolitan Life chairman Creedon: "No one in his right mind wants to invest in corporate bonds anymore." In fact, the LBO binge has created a financial innovation called the "poison put," which guarantees bondholders against the risk of buyouts and other unexpected deals that might depress their holdings.

Shareholders can lose out in LBOs even when they sell their stock for a profit. That is because stockholders usually receive far less than executives make when they break up a company and then put it back on the market. LBO critics argue that managers who fatten their wallets in this way are really profiting at the expense of other stockholders. So far, shareholders have brought eleven class action suits against RJR Nabisco charging executives with acts ranging from "unfair self-dealing" to "not acting in the best interests of the stockholders."

The RJR deal also raises the salary competition among executives to absurd levels. Says John Swearingen, former chairman of Standard Oil of Indiana: "There is a limit to what managers ought to be paid for managing other people's money." Adds a top executive involved in a current takeover: "The yardstick for compensation has just gotten twelve inches longer. The chief executive who's doing a first-class job running a major U.S. corporation for $890,000 a year is going to start thinking he's some kind of a fool."

Washington lawmakers readily recognize the populist sentiments aroused by the spectacle. "What's going on is corporate cannibalism," says Congressman Edward Markey. "We have to ask whether it is in the national interest to allow companies to go so heavily into debt." As chairman of a House subcommittee that covers finance, the Massachusetts Democrat will play a key role in drafting any legislation to curb LBO excesses when Congress reconvenes next year. But lawmakers are uncertain how to limit buyouts, or even if they should.

Washington's reformers concede that the stock market is still edgy after its collapse. Wall Street showed just how nervous it was when stocks dropped nearly 79 points in the week that George Bush was elected President. "Nobody wants to be blamed for setting off another stock market crash," says a brokerage house lobbyist. Legislators are still haunted by charges that proposals to restrain takeovers last year helped cause Black Monday. Many Wall Street insiders are now convinced that buyouts and mergers are among the market's few remaining props.

Yet Congress cannot ignore growing public fears that greed, debt and buyouts are all spiraling out of control. "The dealmakers have gone too far," says Samuel Hayes, professor of finance at Harvard Business School. "They have defied that tolerance that allowed them their freedom." Federal Reserve chairman Greenspan urged the Senate in October to consider tax law changes to curb the debt buildup. Said he: "The laws still provide substantial incentives to borrow."

House Speaker Jim Wright last week urged steps to slow the pace of buyouts, which he said were having a damaging "psychological and economic impact." Meanwhile, members of the Senate Finance Committee have been quietly pondering measures that would reduce the tax loopholes for interest payments and give a break to dividends. To cushion the Wall Street impact of such provisions, they might be included as part of a general tax bill that would seek to narrow the budget deficit.

LBOs do have some strong defenders, and not just among the executives who grow rich from them. Some financiers and economists argue that increased leverage can be a benefit to companies, especially those in mature industries like tobacco. Reason: these businesses produce a lot of cash but call for relatively little research or development. For them, one efficient way to distribute profits to shareholders is simply by buying up stock.

Proponents say many companies have become stronger than ever after being taken over and reorganized. The point is driven home in a study by Abbie Smith, a University of Chicago economist who surveyed 58 acquired companies - among them, R.H. Macy, Mary Kay Cosmetics and Uniroyal - most of which had been bought out since 1984. The findings indicated that the firms were generally more profitable and productive after they were bought.

Even so, the results underscored a common criticism of the motives for buyouts. Richard Thevenet, vice president of Stern Stewart & Co., a Manhattan- based management efficiency consultant, put it bluntly: "Managers have an incentive to underperform before a buyout. Records of dramatic turnarounds after an LBO raise a troubling question. Why were these managers unable to accomplish these feats before the LBO? Shareholders bear all the costs, but not the rewards of the turnaround."

American business is built on a rock of lawfulness and trust between companies and those who hold a stake in them. But when avarice grows out of proportion, cracks start to appear in the foundation. "Greed can be good," says MIT's Modigliani, when it spurs profitable and productive growth. "But it can also be bad," he warns, when it outpaces all other considerations.

In the fight for RJR Nabisco, that seems to have happened in spectacular fashion. No matter how the battle turns out, the unseemly scramble for riches has, for the moment at least, given overreaching a bad name. In the end, the RJR brouhaha may turn out to be a useful testing of the limits: of greed, of debt, of dealmaking. The resulting outcry may prove an effective regulating device. "In its own way, the deal has been typically American, where nothing is in moderation, including the enormous selfishness of management," notes James Bere, chairman of Borg-Warner. "It's touched a nerve. Sometimes we have to do things in extremes before we can put the total in perspective." Without that perspective, the wages of greed may be a less productive and ever more debt-ridden economy.

"A Heap of Woe for the Junkman," by Barbara Rudolph, Time, December 5, 1988

Bond whiz Milken prepares for criminal charges

The battle to control RJR Nabisco has pitted some of Wall Street's most powerful investment houses against one another, but the financial muscle behind the bidding is really the legacy of one man: Michael Milken. It is not just that Milken's firm, Drexel Burnham Lambert, is bankrolling the Kohlberg Kravis Roberts bid to the tune of $5 billion. Milken's role is much grander and far more controversial. The boyish moneyman with the tousled toupee and the obsessive work habits has almost singlehandedly sparked the frenzy of takeovers and buyouts that has given the Roaring Eighties their name. And his tactics along the way may put him behind bars as a result.

It is Milken who created and has dominated the market for junk bonds, the high-octane financial fuel that powers many of today's most daring Wall Street deals. The volume of these bonds has zoomed from less than $1 billion in 1981 to more than $175 billion today. In the process, Milken, 42, has amassed a fortune of at least $500 million and a reputation as the most influential financier since J.P. Morgan.

The RJR Nabisco showdown may prove to be one of Milken's final moments of glory. He and Drexel are expected to be slapped any day now with criminal indictments accusing them of racketeering, mail fraud and other crimes. The charges would stem from two years of federal investigations that prompted the Securities and Exchange Commission to file a civil suit against Milken and Drexel in September, accusing them of 18 transactions including stock manipulation and other securities law violations. Says a close associate of the embattled dealmaker: "Two years ago, Milken was on top of the world. Now it has crashed down upon him."

The expected criminal charges could heavily damage Drexel, the fifth largest U.S. investment firm and the fastest-growing powerhouse on Wall Street. Rudolph Giuliani, the U.S. Attorney for the Southern District of New York, is likely to follow the SEC in accusing Drexel and Milken of collaborating with convicted arbitrager Ivan Boesky to defraud the firm's clients, trade on insider information and conceal the true ownership of stocks - all, presumably, in the pursuit of greater profits and power. Milken's lawyers, for their part, accuse the government of a vindictive campaign based solely on self-serving testimony by Boesky. The potential racketeering charges against Drexel could hit the firm even harder than the civil suit, because federal law - the Racketeering-Influenced and Corrupt Organizations Act, or RICO - would enable prosecutors to freeze a major portion of Drexel's assets.

The charges have triggered a vigorous debate over Milken's role in 1980s finance. Is he a megalomaniac who has built a tottering tower of corporate debt? Or is he a financial genius whose funding of unsung, mid-size industries greatly overshadows his role as a takeover player? He has many defenders among buyers and users of his junk bonds. Says MCI chairman William McGowan, whom Drexel helped raise $2.4 billion for building long-distance telephone lines: "When we first went to Milken, we were not even qualified for junk bonds, but he was able to help us. People went to him because the rest of the financial establishment was turning away companies like ours."

The son of an accountant, Milken grew up in California's San Fernando Valley, only about a dozen or so miles from his current headquarters. In high school, after he was benched as a member of the varsity basketball team, he became head cheerleader instead. Reflecting on those years during a recent interview with TIME, Milken mused, "When things look their worst, you always have the seed of great improvements." At Berkeley during the mid-'60s, Milken concentrated on math and business courses rather than on protest. It was there that he first considered the far-reaching idea upon which he built his empire. Milken came across a study showing that junk bonds, which at the time were often called fallen angels because they were the downgraded debt of ailing companies, actually represented a lucrative investment for those who bought them.

As a graduate business student at Pennsylvania's Wharton School, Milken made junk bonds a focus of his scholarship. Despite their reputation for high risk, he found that the securities showed a history of few defaults. Milken believed the securities' relatively high yields, typically 3% to 5% more than an investment grade corporate bond, were more than enough compensation for that slightly increased risk.

Milken never put his big idea or his ambition aside. As a trader for the old-line Philadelphia firm of Drexel Firestone in the mid-'70s, he scorned colleagues who hewed to tradition and "spent from 11:00 to 2:00 at the racquet club." The dogged Milken soon discovered that junk bonds could provide much needed capital for medium-size companies that were unable, because of their size, to issue investment grade debt. Other firms, notably Shearson Lehman Hutton, had already tried minting bonds that were high yield from the outset. But Milken was the first to build a market for the bonds by finding hungry customers among institutional money managers, who must constantly search for higher returns on their investments.

Milken's junk bonds remained innocuous until the mid-'80s, when he began using the securities to raise mountains of money for hostile takeovers. In fact, the preferred opening salvo of corporate raiders became the dreaded letter from Drexel in which the firm stated it was "highly confident" of coming up with the necessary cash. In some cases, like T. Boone Pickens' failed bid in 1984 for Gulf Oil, Drexel charged a hefty fee for lining up money that it never had to deliver. But in many other raids, including Ronald Perelman's 1985 takeover of Revlon, Milken raised billions through his network of buyers. Before long, Milken's annual junk bond conference became known as the Predator's Ball.

Milken's junk bond department, which he moved from Manhattan to Beverly Hills not long after he formed it a decade ago, quickly became the engine of the Wall Street firm's furious growth. One reason is that junk bonds earn hefty fees: Drexel charges 3% to 4% of an offering's total value, compared with a fee of less than 1% for a higher-grade issue. Milken's web of buyers and sellers for the bonds has given him a virtual lock on the market, though the entry of such competitors as Morgan Stanley and First Boston has whittled Drexel's market share from a monopoly in the late 1970s to about 50% today. For his huge contribution to Drexel's bottom line, Milken has pocketed bonuses of as much as $200 million in a year and accumulated the largest individual stake in Drexel: a 6% share consisting of stocks and warrants worth $90 million.

Though Milken's title is only senior executive vice president, he has set Drexel's tone and direction during the past decade, according to many who deal with the firm. But his yen for control and lack of regard for convention, which served him so well in staking out his new financial realm, may have been what led him to allegedly illegal tactics. Says journalist Connie Bruck, author of the 1988 book on Drexel titled The Predator's Ball: "For years he's been a law unto himself. He has disdain for the way the world works. He figures he's waging a holy war."

Milken now spends nearly a third of his time working on his legal defense but otherwise maintains his characteristic workaholic schedule. After arriving at his office at 9560 Wilshire Boulevard by 4:30 AM each day in a chauffeur-driven Mercedes, Milken holds forth in a trading room the size of a basketball court. He has no private office, preferring to sit at one of three huge, X-shaped desks, where 30 bond traders and other workers shout into telephones and scramble to execute the orders that he barks out or scrawls on yellow legal pads. On the computer terminal next to his, a coworker has posted a sign reading MENTAL ILLNESS IS ESSENTIAL TO SUCCESS.

The barrage of negative publicity during the past two years, starting when the Boesky case broke in 1986, has been tough on Milken's family. "The Michael Milken portrayed in the press is not the man I know and live with," said his wife Lori. Milken and Lori, who was his high school sweetheart, live quietly with their three children (Greg, 15, Lance, 12, Bari, 7) in Encino. Their five-bedroom house, which might sell for $3 million, was once occupied by Clark Gable and Carole Lombard. It is a suburban idyll trimmed by red and white Impatiens, finished inside with dark oak paneling and filled with photographs of the children.

Once extremely private, Milken has sought to improve his public image by appearing at charitable functions on both coasts and bidding reporters to "call me Mike." Last year Milken and his wife donated $198.1 million to the family's three charitable foundations, more than a sixfold increase from the previous year. Less than $15 million of these funds was actually disbursed, going to some 200 organizations. The remainder was invested by the foundations. That is perfectly legal, but the California Attorney General's office began this month to investigate the Milken foundations' activities for possible irregularities.

If Milken is indicted on the racketeering charges, his workdays may become devoted to legal defense. Drexel could ask him to resign or take a leave of absence, while the investment firm would pay a fine to settle its own charges. The company has set aside more than $500 million for legal costs, and could spare $1 billion without dipping into its bare minimum of capital. Under racketeering charges, the government could freeze so much of Drexel's assets that the company would be paralyzed, but prosecutors may want to avoid a punishment that would cost innocent workers their jobs. Drexel is taking no chances: the firm already has 115 lawyers assigned to its case, compared with a total of about 35 at the SEC and the U.S. Attorney's office.

The investment firm may also be contemplating major changes in its executive suites. Drexel officials have approached former Senator and White House chief of staff Howard Baker with the idea that he become Drexel's chairman. According to one rumored scenario, Baker would take over after both Milken and Drexel chief executive Fred Joseph stepped aside.

Milken's legacy will take years to come fully into focus. "Behind every great fortune there is a great crime," Balzac once said. "Great fortunes are made by solving problems" is the way Milken has preferred to see it. The government's view should be known in a few weeks. The true value of junk bonds will take longer to determine.

"Minkow Is Convicted On All Charges: Jury Decides That ZZZZ Best Founder Masterminded Fraud," by Kim Murphy and Ronald L. Soble, Los Angeles Times, December 15, 1988

Barry Minkow, who became a teenage millionaire after he launched a carpet cleaning company in his parents' garage, was convicted Wednesday of 57 fraud counts for masterminding a sophisticated securities swindle that propelled his firm into a hot Wall Street commodity.

A federal court jury found Minkow, 22, guilty of all charges in an indictment that alleged that the ZZZZ Best carpet cleaning company bilked investors-including some of the most prestigious financial institutions in the country-out of more than $26 million in loans and stock offerings by bolstering its books with phantom earnings.

Prosecutors alleged that the charismatic, fast-talking young salesman engineered a classic sting operation-complete with faked documents, staged phone calls and even rented office space hastily outfitted as job sites-to persuade investors that ZZZZ Best was making $43 million a year restoring buildings that had been damaged by fire or flood.

Most Jobs Didn't Exist

In fact, Minkow himself later admitted, 90% of the restoration jobs never existed. But Minkow said he was forced to go along with the scam by organized crime figures who had infiltrated ZZZZ Best.

The verdicts interrupted a last-minute round of plea negotiations, launched Wednesday morning at Minkow's request over the objections of his attorney. Minkow reportedly had been talking from prison over the last several days with a "spiritual counselor" and had become determined to plead guilty, despite his lawyer's belief that he might prevail, perhaps on appeal.

Minkow, who now faces up to 403 years in prison, sat quietly as the 57 guilty verdicts were read over a period of more than 20 minutes Wednesday afternoon, and apologized to reporters when his attorney would not let him speak afterward.

Throughout the nearly four-month trial, Minkow admitted his role in the ZZZZ Best fraud but claimed that he had no choice because various mobsters beat him and threatened him into cooperating in their criminal ventures once he began borrowing money from them.

"I was just a puppet," he testified at one point, describing how several of the men held his head in a sink full of water and beat him until he vomited blood. "I was a frontman for the mob."

Even Minkow's attorney admitted that the defense was a risky attempt to persuade jurors that Minkow had committed numerous crimes in fear of his life or the lives of his family over a period of several years. In order to acquit him, jurors would have had to conclude that he had no opportunity to escape from the men he said were threatening him from the time the fraud began in March 1985, until ZZZZ Best folded more than two years later.

Ultimate Sales Job

For Minkow, the defense was perhaps the ultimate sales job, an attempt during nearly 10 days of testimony to persuade jurors that after three years of lies and double-dealing at the helm of ZZZZ Best, he was at last telling the truth.

"It's easy to convince people of a lie, but to convince people you're telling the truth is difficult," he testified at one point.

Minkow's past shadowed him throughout the trial, as prosecutors presented constant images-via videotapes, photographs and testimony-of the life style financed by the schemes he claimed were forced on him.

One witness testified about an elaborate, poolside doghouse with vaulted ceilings he built on Minkow's instructions. Another told of thousands of dollars Minkow spent hiring spectators to cheer on the women's softball team he sponsored. A former New York financial officer related how she lost her job when she approved a loan for Minkow after he flew her to California and took her out to a romantic, seaside dinner.

Prosecutors played a videotape of Minkow's televised anti-drug campaign-"My Act Is Clean. How's Yours?"-then introduced evidence that Minkow had used cocaine himself and supplied money for employees to buy the drug; they also showed that his bodybuilding physique was clearly enhanced by anabolic steroids.

The defense also was stung by a series of rulings from U.S. District Judge Dickran Tevrizian, who refused to allow evidence that one of the alleged organized crime figures Minkow claimed had engineered the fraud, Encino financier Maurice Rind, had been convicted of stock fraud in the past.

Tevrizian also barred the defense from presenting any evidence about previous racketeering and extortion convictions of many of those involved at ZZZZ Best, as well as evidence that they had threatened other ZZZZ Best employees. The result, defense lawyer David Kenner said, was that jurors never had a fair chance to evaluate whether Minkow's fear of his associates was reasonable.

"I think the court had to wrestle with some very difficult legal principles, and I think these principles will be reviewed (on appeal)," Kenner said, adding that neither he nor Minkow were surprised by the verdicts.

"I think Barry was realistically aware of the fact that the nature of the duress defense made an acquittal unlikely, given the state of the evidence" permitted by the court, he said.

But he said the jurors' verdict against Minkow on all 57 counts "means they listened to the argument. I told the jury that Barry was either guilty of everything, or not guilty of anything."

Prosecutors belittled the duress defense, indicating that they were armed with nearly a dozen former ZZZZ Best employees and associates who were ready to testify that Minkow was calling the shots and enjoyed relatively friendly relations with many of the men he claimed to fear, regularly sitting around in his underwear with one of them, smoking cigars.

During closing arguments, the prosecution characterized Minkow as a "natural predator" and a "pathological liar" whose motivation was not survival but power, prestige and money.

"I think what we can rely on is what the jury said 57 times: no duress," Assistant U.S. Attorney Gordon Greenberg said after the verdicts.

The co-prosecutor in the case, Assistant U.S. Attorney James R. Asperger, said the government was pleased with the verdict and plans to seek a "substantial" jail term for Minkow at his sentencing February 21.

After the verdict, jurors continued deliberating on a second defendant in the case, Marina del Rey accountant Norman Rothberg, 52, accused of accepting a $25,000 bribe for recanting information about the ZZZZ Best fraud that he had given to the company's outside accountants.

Besides Minkow and Rothberg, 10 others were charged by a federal grand jury with assisting in the fraud at ZZZZ Best. All 10 pleaded guilty.

Minkow had appeared to be a classic American success story. He was widely portrayed in print and on television as a working-class youth who built a carpet cleaning empire from scratch through determination and hard work, the "Rocky of Rugs."

At 15, he started ZZZZ Best in his family's Reseda garage with three employees, four phones and $6,200 saved from evening and summer jobs. He said he picked the name "ZZZZ Best" so there was one "Z" for each of the four children he ultimately planned to have.

As his business grew, so did Minkow-literally. Angered by the bullying he had to endure as a young man, Minkow said, he became a serious body builder, working out at the San Fernando Valley gymnasium where he eventually met two of the men who would later go on to participate in the ZZZZ Best fraud.

He was portrayed by associates as a vain, self-conscious young man who surrounded himself with expensive cars and beautiful women, and insisted that all employees-even his mother-call him "Mr. Minkow." He promoted his success story through a self-published autobiography, a public relations firm, large contributions to charity and participation in anti-drug campaigns. He also became something of a public figure by starring in his company's television ads-promoting ZZZZ Best as a "clean" alternative to dishonest carpet cleaners.

In late 1985, Minkow began to display his growing wealth. He paid $698,000 for a large Mediterranean-style home in a gated community in Woodland Hills and drove a red Ferrari.

In January 1986, ZZZZ Best became a public company and in early 1987, with its reported revenue soaring, the firm's stock rose from $4 a share to more than $18. Its rapid rise created paper fortunes for many, including its founder. Minkow's holdings alone were valued at more than $103 million by the time he reached the age of 21.

The company grew to have 21 offices and 1030 employees in California, Nevada and Arizona.

But banks and others who had loaned ZZZZ Best money began scrutinizing the company after The Times disclosed in May 1987, that it had overbilled customers by $772,000 by inflating their credit card charges.

Minkow resigned, ZZZZ Best entered Chapter 11 bankruptcy proceedings in July 1987, and the remaining board of directors sued Minkow and some of his associates, alleging fraud and theft.

That same month, Los Angeles Police Chief Daryl F. Gates told a news conference Minkow's company was under investigation for laundering drug profits for East Coast organized crime families. None of the ZZZZ Best defendants in the federal indictment were charged with this, however.

Federal and local authorities have said that they are continuing what they call the organized crime phase of the ZZZZ Best case.

"Warner Completes Merger With Lorimar-Telepictures," by Al Delugach, Los Angeles Times, January 12, 1989

It was, as they say, the end of an era. Lorimar-Telepictures Corp. at last was merged Wednesday into the entertainment mammoth Warner Communications Inc.

Lorimar, which made its reputation producing Dallas and other television series, will survive as a Culver City subsidiary doing what it has always done best: TV.

What it has done with notable lack of success-making movies, especially-has been wound down during the many months that the merger has been impending.

The final impediment to the merger was eliminated Tuesday with the closing of the sale of Lorimar's last television station, WPGH in Pittsburgh. The sale of Lorimar's stations had been forced by the terms of a previous agreement between Warner and its largest shareholder, Chris-Craft Industries.

Red Ink From Movie Losses

Many Lorimar employees whose functions became redundant under the merger have long since departed or given notice, and the distribution arms of both companies have been merged, Warner spokesman Geoffrey Holmes noted. In coming months, corporate staffs will be consolidated, but he did not estimate how many more layoffs would result.

Merv Adelson, chairman, chief executive and a founder of Lorimar, is expected to be elected a Warner director and vice chairman at the New York company's next board meeting.

Part of Lorimar's legacy will be the copious red ink from movie losses, with a cumulative writedown of about $254 million on the value of film inventories, according to a regulatory filing by the firm.

Although Warner is known for being one of the industry's most conservative companies in movie accounting, the magnitude of the inventory reductions has startled some observers.

Because of the massive writedowns, securities analyst Lisbeth Barron of McKinley Allsopp Securities in New York said, a major financial effect of the merger will be a near-term reduction of the combined company's operating income from filmed entertainment.

Ancillary Markets

However, she said, the writedowns will enable future income from ancillary markets for both movies and TV series to go "directly to the bottom line." As a result, Barron expects Lorimar to stop diluting Warner's earnings after this year and to contribute "substantially" to its 1990 earnings.

Ancillary markets for films include foreign theatrical, home video, basic and pay cable, and local and network TV. Those for TV series include rerun syndication on local stations and basic cable networks.

Under the merger, each Lorimar share is to be swapped for 0.3675 share of Warner-a $13.64 value, based on Warner's closing price Tuesday of $37.125. Lorimar's last trade that day was $13.375.

"Time Inc. and Warner to Merge, Creating Largest Media Company," by Floyd Norris, The New York Times, March 5, 1989

Time Inc. and Warner Communications Inc. announced yesterday that they plan to merge, creating the largest media and entertainment conglomerate in the world.

Time's chairman, J. Richard Munro, said the new company would seek to grow even larger by acquiring other businesses.

Time is a leading book and magazine publisher with extensive cable television holdings, and Warner is a major producer of movies and records and has a large cable television operation. The merger would create a new company, Time Warner Inc., with a stock market value of $15.2 billion and revenue of $10 billion a year.

A Place in 1990s

The merger would insure Time Warner a place in the 1990s as one of a handful of global media giants able to produce and distribute information in virtually any medium. The companies said the deal would help the United States compete against major European and Asian companies.

''Only strong American companies will survive after the formation of a unified European market in 1992,'' said Steven J. Ross, chairman of Warner.

The merger, involving an exchange of stock in which no cash would change hands, was billed as a merger of equals in which Mr. Munro and Mr. Ross would have the same power as co-chairmen and co-chief executive officers, but of which Time's president, N.J. Nicholas, Jr., would eventually take control.

Time Warner would replace Bertelsmann AG, a privately held German publisher known primarily for its book division, as the world's largest communications company in terms of revenue. Bertelsmann's 1987 revenue was more than $6 billion.

The merger was unanimously approved by the Time board, but there was one abstention on the Warner board. A Warner official said Herbert J. Siegel, chairman of Chris-Craft Industries, who is a frequent critic of Mr. Ross, was the holdout. Mr. Siegel could not be reached for comment.

The agreement is subject to approval by shareholders and by government regulatory agencies.

A Difficult Takeover Target

The merger would unify two huge media companies that have felt the pressure of demands for performance and have long been the subjects of takeover rumors on Wall Street. The much larger merged company would be a more difficult takeover target.

''Neither of these companies was forced into doing anything,'' Mr. Munro said. ''We both could have survived alone. But this gives us a very strong balance sheet. We won't have to fire anybody, we don't have to sell anything and we don't have to borrow to accomplish this. It gives us a very large treasury - and we have plans to use it.'' The company would have long-term debt of less than $3 billion, leaving ample borrowing capacity for possible acquisitions.

An analyst for Drexel Burnham Lambert Inc., John Reidy, called the deal ''mind-boggling.''

''What you've got is a company that will be the largest magazine publisher in the country, the world's most profitable record company, a cable television entity with more than 5.5 million cable subscribers, one of the world's largest book publishing operations and the country's largest supplier of pay-cable programming,'' he said.

Time's properties include Time, People, Money and Sports Illustrated, as well as Home Box Office, the pay-television operator; Time-Life Books, and Book-of-the-Month Club.

Warner owns Warner Bros., a major film producer, and a large record company, a major paperback book publisher and cable television systems.

Time Board Members Applaud

One person who attended the Time board meeting said that after a day of reviewing financial data, board members applauded when shown a video of Warner programming, including excerpts from its new Batman movie.

People affiliated with both companies said Time and Warner had been discussing a combination for more than two years, ever since Mr. Ross first raised the possibility of a joint venture in cable television. Last year those talks turned to the idea of a merger, but the discussions were broken off in August for reasons that were not disclosed. Geoffrey Holmes, a senior vice president of Warner, said talks were renewed in January after Warner acquired the Lorimar-Telepictures Corporation.

Broadcasters say the merging of one of the nation's premiere producers of programming with the owner of an important cable television system underscores the networks' vulnerability to competition.

''If this merger goes through,'' said George F. Schweitzer, senior vice president for communications at CBS Inc., ''it's another example of how all our competitors can build very powerful communications complexes, while the networks are held back by 20-year-old regulations, which are now increasingly unfair and outmoded.'' The networks are not allowed to own cable television systems.

The proposed company could create television programming, distribute it over its own cable system and syndicate it around the world.

''This is an example of how software suppliers and cable distributors can do things the networks cannot,'' Mr. Schweitzer said.

Companies With Different Styles

Time has long been known for a staid corporate style, while Warner under Mr. Ross has been known as more freewheeling.

But Mr. Holmes discounted the possibility of conflicts between the two organizations.

''People perceive the corporate cultures to be very different, but they aren't,'' he said. ''Both we and the Time management have always believed very strongly in decentralized management. Both companies have a limited corporate staff.''

In 1983, Warner was a takeover target of the News Corporation, the media giant based in Australia and controlled by Rupert Murdoch. To escape that bid, it reached a deal with Chris-Craft giving that company a large stake in Warner. That stake now amounts to 11 percent of the stock and 17 percent of the vote. But the friendly arrangement has soured, with Mr. Siegel opposing a large pay package for Mr. Ross and going to court in an unsuccessful effort to stop Warner's takeover of Lorimar.

The merger was discussed at a Time board meeting Friday and at a Warner board meeting that began Thursday and continued Friday. The announcement was made yesterday in part because a report of the deal appeared Saturday in The Los Angeles Times.

Under the proposal, each share of Warner Communications would be exchanged for 0.465 share of Time, with an indicated market value of $50.74, based on Time's closing stock price of $109.125 a share on Friday. Warner shares were very active in New York Stock Exchange trading Thursday and Friday, rising $2.875 in the two sessions, to $45.875.

The companies said Mr. Nicholas would become president of Time Warner and replace Mr. Munro as co-chief executive when he retires in about two years. When Mr. Ross retires, which is expected in about five years, Mr. Nicholas would become the chief executive.

"Stoddard Quits ABC To Head Special Unit," Los Angeles Times, March 21, 1989

Brandon Stoddard has resigned as president of ABC Entertainment to form a new in-house production venture for Capital Cities/ABC, it was announced today.

Stoddard will head an as-yet unnamed unit that will supply the network with series, movies and miniseries.

NBC already has a similar unit, NBC Productions, headed by Brandon Tartikoff, who also is president of NBC Entertainment. At CBS, Vice President Norman Powell heads CBS Entertainment Productions and reports to Kim LeMasters, president of CBS Entertainment.

Stoddard has headed the entertainment division since 1985; among the current primetime shows that have gone on the air during his tenure are Roseanne, Perfect Strangers, Head of the Class, Full House, The Wonder Years, China Beach, Hooperman and thirtysomething.

Stoddard said he had taken over as head of entertainment reluctantly and promised ABC's then-President Fred Pierce that he would see the network through War and Remembrance, the final segments of which air in May.

"Brandon Stoddard Resigns As Head Of ABC Entertainment: 'It's Just No Fun Anymore,'" by Nikki Finke, Los Angeles Times, March 22, 1989

In a move that caught the television industry by surprise, Brandon Stoddard resigned Tuesday as president of ABC Entertainment, saying "it's just no fun anymore."

Always the reluctant administrator since taking over the top programming position on November 12, 1985, Stoddard will stay on until his successor is named "in a couple of days."

Then he will become president of an as-yet-untitled and much broadened in-house production division at ABC that will supply the network with series, movies and miniseries-a job nearly identical to the one he had before taking over responsibility for the development, production and scheduling of ABC's entertainment programs.

"I guess what this really is about is returning to fun for myself," Stoddard said in an interview. "Many people know that I haven't been the happiest guy in the world in the (entertainment president's) job. I always perceived before taking it, and I'm very aware now, that it's an awful lot of frustration and not a lot of laughs."

Stoddard's resignation came at an awkward time for ABC.

While Stoddard certainly leaves the network in better shape than it was in when he took over, in terms of quality and ratings, ABC is locked in a desperate battle for second-place status with CBS and seems to have lost some of the ratings momentum with which it began the TV season. Some financial analysts predicted that Stoddard's leaving was the first step in an overall ABC executive "housecleaning" because of the entertainment division's mixed performance.

The timing was also deemed curious by the TV production industry, since the networks are currently engaged in the delicate process of selecting and scheduling shows for the fall season.

Meanwhile, some producers who had been brought into the ABC fold by Stoddard expressed dismay about the secrecy surrounding Stoddard's leaving and concern about the future of their projects under a new programming chief.

Even Steven Bochco, whom Stoddard in 1987 had signed to an exclusive six-year, seven-series deal in hopes of having him duplicate the success of Hill Street Blues and L.A. Law, had not known in advance about Stoddard's resignation. The producer-writer had been working closely with Stoddard on the pilot for a proposed show for the fall season.

"I'm stunned and I'm sad. I had a really good relationship with him," said Bochco, who received a phone call from Stoddard two hours after the official announcement was made. "I'd always heard he wasn't 100% happy in that job. But it's his life, and he doesn't owe me anything compared to the overwhelming responsibility he has to himself to feel good about the person he looks at in the mirror.

"Physical stature notwithstanding, his are going to be very big shoes to fill."

Though Ted Harbert, 33-year-old Wunderkind and senior vice president for programming, had been considered Stoddard's handpicked successor, sources inside and outside the network said that the replacement probably will likely come from the business affairs side of the network.

The top contender for the job, several sources told The Times, is Bob Iger, who has been executive vice president of the ABC Television Network Group since August and who made a name for himself as the chief negotiator for most of the network's major sports acquisitions in the mid-1980s. ABC/Capital Cities management was so high on Iger that he was selected for the television group position "without even being interviewed," one source said.

Though Iger, who is based in New York, is not well-known in the Hollywood creative community, ABC sources maintained that he has had considerable programming experience in sports over the years and in daytime entertainment over the last six months.

Stoddard would not comment on the possibility of Iger being selected. But he seemed to indicate that he would not have a large say in choosing his successor.

"That's their call, and they're going to go with the guy they believe in," he said.

Stuart Bloomberg, vice president of comedy development, also was said to be in the running because, as one ABC executive said, "you just have to look at our track record for comedy of late." But sources said Bloomberg instead will be promoted to take charge of series programming while Harbert will move sideways to run current programming and scheduling.

While Stoddard has ordered all the primetime pilots for the fall season-many of them are already in production-he said he is leaving the actual selection of new shows to his successor.

"I felt that the new guy, whoever he is, should have his chance to make his mark on the schedule," Stoddard said. "If I'm invited, then I'll be involved. But I'm really going off to another area. I've even got to find out where the men's room is."

Broadcast analyst Ed Atorino, vice president of stock research at Salomon Brothers, agreed that Stoddard's announcement was timed to "allow whoever is going to replace him to get in place, talk to Hollywood and look at what's in the pipeline and on the drawing board and take responsibility for what's going on next fall. If Stoddard had stayed on till June, he would have had to put together the fall strategy and then walk away."

Stoddard acknowledged that the challenges his successor will face have never been greater for ABC. And he said they're the main reason he decided to quit.

"The network side of the job has been increasingly more difficult and more frustrating, given the changes in network environment and network economy," Stoddard said. "Frankly, it's like swimming faster and faster in a pond that's getting smaller and smaller.

"Since the networks have less audience than they used to, it's more difficult for new shows to get off the ground. And now that the economics of the networks have changed, the fact that NBC is making a lot of money and the two others aren't making much at all is an added pressure."

John S. Reidy, a broadcast analyst at Drexel Burnham Lambert, estimated Tuesday that the ABC-TV network will earn about $100 million this year, compared to nearly $300 million for NBC and $50 million for CBS.

Despite the handicaps, however, Stoddard managed during his three-year tenure to accomplish the objectives he set out when he took over as entertainment chief.

Once derided as the "Almost Broadcasting Company" because of its demoralizing inability to score in the Nielsen ratings or to create quality programming, ABC became a solid No. 2 in the network pecking order under Stoddard's lead. In last November's ratings sweeps, for instance, the Niesen numbers showed ABC as the only one of the Big Three to gain viewers over the same ratings period the year before.

CBS caught up in the February sweeps with its hit miniseries Lonesome Dove, and the two networks are now running dead even in the season-to-date ratings, well behind NBC. ABC has a decided edge, however, because it has more successful series than CBS.

More important than the raw numbers, however, Stoddard has strengthened ABC's primetime schedule to the point where the network is winning many of its time periods on Tuesday, Wednesday and Friday nights. And he did so with a mixture of comedy-most noticeably Roseanne, the nation's top-rated TV show for the past two weeks-and quality, such as thirtysomething and The Wonder Years, which captured the Emmy Awards last year as best drama series and best comedy series, respectively.

Even Stoddard, a master of understatement, began to exult that "I think we've made a little headway. I think people are talking a little more positively about ABC than they were a year ago and two years ago. So I feel relatively happy about our movement."

Specifically, Stoddard guided his selected series so they would rely more on characterization and realistic storylines than on stereotypes and gimmicks. He widened the circle of producers contributing creatively to ABC and reduced Aaron Spelling's lopsided influence at the network. And he pursued his own shyly seductive style of leadership, which "stressed listening over lecturing and nurturing over nagging," in the words of veteran primetime producer Tom Miller of Perfect Strangers and Full House.

Stoddard himself boasted Tuesday that "There is a very good structure to the schedule now, which makes me very satisfied and confident about leaving. It's what I wanted to do. And I'm very confident that the network is going to have a strong year next year, since there's a foundation of programs from which to build, and the replacements don't have to be wholesale."

Irwin Gottlieb, senior vice president and director of national broadcast and programming for the New York advertising firm of D'Arcy Masius Benton & Bowles, said, "ABC has moved into No. 2 not because they did anything spectacular but because the network has had a consistent strategy since Brandon Stoddard took over."

Analyst Reidy agreed that Stoddard has "done a pretty good job. The notion that Stoddard leaves the network in good shape is a fair one. He inherited a problem, and now ABC has become a solid, decent competitor with NBC. There are a number of new shows that work."

Stoddard also had his detractors. Many in the Hollywood production community were critical of his decision to push producer-writer Glenn Gordon Caron off his creation Moonlighting-with the result that ratings have dipped drastically this season-and to allow Roseanne Barr virtual carte blanche on her show Roseanne.

Meanwhile, some producers complained that Stoddard never would pick up a phone to pat them on the back if their overnight ratings were sensational. Others claimed Stoddard would leave even hit shows hanging without telling them if they were being picked up for a new season.

But, more than anything else, some thought Stoddard's personality simply wasn't cut out for the job. Known for being cerebral in a business that's not, Stoddard was more stuffy than showy, especially when compared to his chief rival at NBC, Brandon Tartikoff.

For instance, the "other Brandon," as Stoddard quickly became known, always made a point of never going to lunch with creative people or studio heads or producers, let alone joining the see-and-be-seen crowd at Spago or Morton's, out of fear he would be "compromised."

Now that he's bid goodbye as programming chief, however, some of that may change. Tuesday was laughing and lighthearted-in his words, "almost giddy now that the daily rating reporting card won't be following me every week."

He might even start to have fun. As Stoddard told one friend Tuesday when describing the advantages of his new job: "Well, I can finally start having lunch with all the guys again."

"ABC Names Iger Program Chief: NY Business Executive Wins Top Hollywood Post," by Nikki Finke, Los Angeles Times, March 24, 1989

Breaking with the networks' standard practice of promoting from within the programming ranks, Capital Cities/ABC Inc. on Thursday named Robert A. Iger from its business affairs side as president of the entertainment division.

The 38-year-old former executive vice president of the ABC Television Network Group immediately declared, "I do not come in with a program strategy."

In an interview from his New York office, the onetime manager of ABC's Wide World of Sports acknowledged that while his expertise lies in the "day-to-day workings of the network," he is "an obvious newcomer" to the process of primetime programming.

"I come to this job clearly with a great degree of inexperience in the entertainment field," he said. "I have a lot to learn."

Iger disputed speculation that Capital Cities/ABC management was stressing bottom-line considerations over creative experience and working relationships with the Hollywood community in its top programming executive.

"I do not come in with any game plan having to be handed to me by the management of the company," he stressed.

And he indicated that his unfamiliarity with entertainment programming would help give him a sense of independence in his new position. "If there's one thing that I bring to this job, in terms of my point of view, it's that I'm my own person. And if people are wise, they'll wait to judge me when they see me."

Iger said he has asked his predecessor, Brandon Stoddard, who stepped down Tuesday to become president of ABC's in-house production division, to stay on through the process of choosing the fall schedule "so he can bring into it his knowledge and experience," Iger declared. "It's a very delicate time. And the important thing to emphasize is I will not disrupt the process one bit. Of course, there's a natural disruption caused by the change. But I'm going to do whatever I can to reduce that."

But Iger also made it clear that he, and not Stoddard, would be mapping out the new season's lineup. Asked if Stoddard would bear the responsibility for the schedule, Iger replied curtly: "I did not say that."

Marcy Carsey, executive producer of ABC's hit show Roseanne, predicted that Stoddard would be working closely with Iger in coming weeks. "I just know that if I were (Capital Cities/ABC executives) John Sias or Tom Murphy or Daniel Burke, I would be at Brandon's house seeking his advice. I can't believe they won't," she said.

Meanwhile, ABC executives confirmed Thursday that Stuart Bloomberg, now vice president of comedy development, will be given expanded responsibilities and put in charge of series programming. Bloomberg has been credited with developing the highly rated half-hour sitcoms-Roseanne, Who's the Boss, Growing Pains and the new Anything But Love-which have been the network's only real primetime successes in recent years.

Iger said that Bloomberg's promotion will help the company "use the talents he has demonstrated towards other areas."

"Bob will be working very closely with Stu," one ABC executive added. "What you want here is a combination of someone who has a broad overview of the business and someone with creative operating experience."

The fact that much of Stoddard's management team, including Bloomberg and senior vice president for programming Ted Harbert, will remain intact under Iger helped ease some of the concern within the Hollywood creative community about the change of leadership.

"I don't feel particularly nervous because the people who were there are still there," noted Carsey. "But I'm sure some people will feel uneasy."

Iger's career at ABC has been nothing short of meteoric. After joining ABC-TV in July 1974 as a studio supervisor, the Ithaca College graduate moved to ABC Sports two years later and then became manager and director of ABC's Wide World of Sports.

In January 1985, he was named vice president of program planning and development for ABC Sports, where he was in charge of scheduling and rights acquisitions. Iger was actively involved in three Olympic telecasts and was responsible for the scheduling of the 1988 Calgary Winter Games.

ABC executives say it was Iger's unusual combination of management experience and creative instincts that led Capital Cities/ABC to select him last August as executive vice president of the ABC Television Network Group without even a formal interview. In that role, Iger was responsible for the East and West Coast business affairs departments. He also worked closely with daytime programming.

In addition, Iger described himself as "playing traffic cop to the network's news, sports and entertainment divisions to make sure they don't collide in the middle of an intersection in their push for programming."

John Sias, president of the ABC Television Network Group, said Thursday that Iger's experience at the network has left him able to "understand a great deal about the network processes, mentalities and audiences. He has worked very successfully with a wide range of people in the network, including people in programming, and wears very well."

Sias also pointed out that Iger's "taste level" in terms of television programming is "very compatible" with Stoddard's.

And Iger stressed Thursday that he intends to "maintain Brandon's legacy in terms of quality programming. He has left us a very solid rapport with the Hollywood community and a very, very solid programming schedule. If I can do all those things, I'll walk out with my head high."

But Iger also acknowledged that in terms of personality, he's "very different" from Stoddard. One immediate change is that he doesn't intend to imitate Stoddard's publicity-shy ways and noted that he always has been accessible to the press.

Still, he admitted that the public attention that will be showered on him is daunting after "having toiled in relative obscurity in the past."

He got his first taste of it when, even before his appointment was official, he received a flood of calls this week from Los Angeles real estate brokers. "I have to applaud them for their extraordinary business tactics," he laughed. "I hope I can match that."

"Like the 3 Stooges: ZZZZ Best-How the Bubble Burst," by Kim Murphy, Los Angles Times, March 30, 1989

To look at them, nobody would have thought they could do it: An insurance adjuster who couldn't seem to hold down a job. A family man who ran a small janitorial business. A former UCLA linebacker who taught himself accounting. And the kid with the big mouth and an overdose of charm.

But together they pulled off one of the biggest swindles in Southern California history, a $100 million con that convinced wealthy investors, a Big Eight accounting firm and Wall Street bankers that Barry Minkow's ZZZZ Best carpet cleaning company was making a fortune repairing office buildings damaged by flood or fire.

Even today, after a 3 1/2-month trial that laid bare the charade, investigators are having a hard time figuring out how such a bunch of seeming ne'er-do-wells managed to pull it off. But then, so are the guys who did it.

Doctoring the Books

"It was literally like the Three Stooges, practically," said Mark L. Morze, the former football player who stayed up nights with a small word processor and a bottle of White Out doctoring the books. "We used to just sit there and look at each other every day, saying, 'I can't believe it's still going along, that people still believe this stuff.' "

By the time it was over, Minkow was found guilty of 57 counts of fraud and conspiracy, and 11 associates of the company he had vowed to turn into "the General Motors of the carpet cleaning industry" stood convicted of various fraud charges.

Minkow, scamming to the end, claimed throughout his trial that he had been manipulated by shadowy organized crime figures into carrying out the fraud.

But at his sentencing this week, when a federal judge handed down a 25-year prison term, the now-23-year-old Minkow admitted that the Mafia story was just that-another story. And the truth, it turned out, was even stranger: ZZZZ Best really was, all along, the tale of a kid who started a company in his parents' garage, brought in some buddies from the gym, cut a few deals with reputed mobsters, dabbled in the netherworld of junk bonds and stock splits-and wound up with an empire worth $200 million on Wall Street.

An Unbelievable Script

"If you wrote a movie script with this cast of characters, no one would believe it," said Assistant U.S. Attorney James Asperger, who tried the case with co-prosecutor Gordon Greenberg. "It was like The Dirty Dozen, only they were out to commit evil."

Although most of the ZZZZ Best principals still face civil suits filed by investors, stockholders and banks that were duped, the initial wave of criminal prosecutions concluded with Minkow's sentencing on Monday.

As they prepared to go off to prison, three of Minkow's top lieutenants spoke at length for the first time about how they pulled it off.

They admit that they deserve to be punished. All profess stinging regret for the people who got left holding the bag when the swindle collapsed. But there is in all of them still a hint of carefully shrouded pride about the entire mad, brazen, larcenous affair, an infectious enthusiasm that allows them to plunge into the story and get caught up in it again, and talk about how they came that close-four days away, they figure-to making ZZZZ Best a legitimate, multimillion-dollar corporation.

"If everything had worked out," Morze said dreamily, "everyone makes out like a bandit. The stockholders make money, the income tax people collect taxes, three or four thousand people get jobs, America gets its carpets cleaned, the investment bankers get paid back, I become wealthy, Barry becomes wealthy, everybody makes out."

Even Morze couldn't resist the next line: "But noooo . . . ."

Minkow's story, by now, everybody knows. How he started the business with a few rug shampooing machines and went on to self-publish his own book about becoming a teenage millionaire. How he started driving a $130,000 Ferrari, bought a mansion with a huge Z on the bottom of the swimming pool and hired fans, at $100 apiece, for the softball team he managed.

Less prominent have been the stories of the men he took with him to short-lived glory, the men, many of them approaching middle age, who suddenly saw the answer to their dreams in the visage of a wisecracking teenager.

Minkow was only 14 when Tom Padgett ran into him in a San Fernando Valley gym. Padgett was a Vietnam vet who could bench press more than 300 pounds, who didn't want to hear from the kid who kept lurking around, nagging about how he wanted to train with him.

Padgett was 30 then and had a decent job as a claims adjuster with Allstate Insurance, but it was starting to get to him; his life wasn't going anywhere. He took up boxing and, by his third fight, got hammered so badly he had to wear dark glasses the next day.

'You Forget to Duck?'

"Everyone at the gym is getting a big charge out of it," he recalled. "They're saying, 'What's the matter, punchy? You forget to duck?'"

The Minkow kid told them all to shut up. "At least Tom had the guts to go in the ring, and that's more than you guys," Padgett recalled him saying. "It shut everyone up-and it really drew me to him."

They got to hanging around in the Valley, and when Minkow, at 15, decided he wanted to start a carpet cleaning company, he got $1500 from one of the weightlifters and another $4500 from Padgett, who took out a loan for him.

It wasn't a bad idea. Minkow had learned telephone sales from working with his mother, and soon ZZZZ Best's vans were parking in front of houses around Los Angeles, promising to clean two rooms for $39.95-without extra charges.

Having Padgett at Allstate was a big boost for the fledgling carpet company. Padgett was able to steer an occasional insurance job ZZZZ Best's way, contracts to repair homeowners' floors after the bathroom flooded or someone dropped a burning frying pan in the kitchen.

But Minkow was having money troubles even from the start, trouble paying back the money he had borrowed to get the company going. Padgett got a notice from the bank that Minkow had missed several payments on the loan Padgett had obtained. Then, his bosses at Allstate called him in and asked him about someone named Minkow who apparently had stolen and cashed some Allstate warrants-similar to blank checks-after finding them in Padgett's car.

When Allstate found out they were friends, and that Padgett had been referring jobs to Minkow, he was out of a job.

Things started looking up a few weeks later, though, when Padgett got hired as an auto appraiser at the Travelers insurance company.

He only had to go out on four jobs a day, leaving plenty of time to make it home by noon to watch Twilight Zone reruns. He met his best friend's cousin, Debbie, and fell in love. He might have cut Minkow off, what with the problems the teenager caused, but he was looking for ways to make Debbie notice him, and Minkow told him, "You want that girl, you got to get the money." Minkow, as always, had a way.

Minkow told Padgett he was taking on some larger insurance restoration jobs on the side, fixing up whole buildings that had been burned or flooded. But to keep his bankers happy, he needed to show that he wasn't getting all his work from one place. Could Padgett borrow some stationery from Travelers, "just for our internal books," to make it look like Padgett was sending him some of the jobs?

Began to Suspect

Padgett agreed, even though he began to suspect that Minkow did not have as many restoration jobs as he claimed-that maybe some of the jobs he made up. It worked for a while, until one loan officer dropped by Travelers to ask about a supposed deal, ran into Padgett's boss and found out that he was not a big-time broker handing out building repair contracts, but an appraiser checking out bent fenders.

Padgett was out of a job again. But at least no one had called the cops.

Not to worry anyway, Minkow said. He would set up Padgett in his own insurance appraisal business. He could hire Debbie as his secretary. And maybe, Minkow said, Padgett could refer ZZZZ Best some work.

The idea was to find legitimate jobs, of course. But in the meantime Padgett would earn most of his keep posing as the wealthy, successful president of Interstate Appraisal Services who was supposedly responsible for sending ZZZZ Best contracts that kept getting larger and larger-contracts that Minkow knew, and Padgett knew, didn't exist.

The phantom jobs paid off indirectly. They were listed as revenue on ZZZZ Best's books, which then could be shown to banks or individual investors to encourage them to lend the company money-money that could be used not only to pay the salaries of Minkow and his friends, but also fuel expansion of the company's legitimate business, the part where ZZZZ Best workers actually went out and cleaned carpets.

That enterprise was taking off. Over the years, the garage turned into five locations, then 21 offices in three states, employing more than 1000 people.

Enter Jack Polevoi. A self-employed businessman, he suddenly found himself at the helm of ZZZZ Best's carpet cleaning operation as it was reaching its peak.

Polevoi, 41, hadn't really needed a job. The sale of his commercial maintenance business gave him enough to live on and build a luxurious house near Minkow's in Westchester County Estates, a new gated community of mansions in Woodland Hills. Nevertheless, Polevoi was impressed with the kind of money being thrown around by this neighbor of his. And when ZZZZ Best commercials blitzed the airwaves-featuring Minkow promising clean carpets and no hidden charges-it was a kick to have such a celebrity around.

"You know, I was proud to introduce him to my friends. . . . He was a star, and a lot of people stopped me and asked, 'Hey, what's it like to have Barry Minkow as a friend?'"

So when Minkow told him he needed him to get the carpet cleaning operations in shape, Polevoi agreed. He brought in his brother, Jerry, to help.

"After the first week I was there, I got caught up in it. It was a great company! I mean, something I'd never seen in my life. Charisma. Everybody couldn't wait to go to work. But after I was there a week, I went into Barry's office, and I said, 'Barry, I been in this business a long time, you're not making any money.' I said, 'You got an overload of people, there's no accountability, the place is like Disneyland here.'"

Managers at outlying offices were hiring limousines on a whim, Polevoi recalled. "The Coke machine in the corporate office, all you had to do was push a button and soda came out."

Polevoi started cleaning house, firing the guys who were sitting around the offices and spending money, setting up interviews to land big corporate carpet cleaning accounts. But even when he landed major contracts to clean hotel carpets, Minkow didn't seem to care.

"I flew back to Phoenix and met the guy (from) the Ramada Inn. He came back with me and closed the deal. We got the Marriott. . . . It just never impressed him. I said, 'This is a national operation.' He said, 'OK, just do your job, Jack.' "

Polevoi was the only man Minkow seemed to trust with his own money, and he stashed thousands of dollars of pocket money for the boss in his desk drawer. When Minkow's girls' softball team had its championship games, the money to hire a cheering section came from there. When Minkow wanted money to buy a Mercedes for his girlfriend when she caught him in bed with another woman, Polevoi went to the drawer.

They Act as Waiters

Minkow was having a new girl over for a candlelight dinner. Would Polevoi and his brother dress up in tuxedos and act as waiters? Jack didn't know where to put the forks and spoons, so he called his wife over to help.

"I became so involved, so obsessed with this whole thing, I wasn't me anymore. I was someone else. I was obsessed with Barry. Barry would come over and say he wanted to go away for the weekend, go out for dinner, I went. And left all my friends behind. Because they didn't want to be with him anymore. My friends were all very successful guys, young, in their 30s, did well. But they were never up to Barry's expectations, because Barry always made megadollars."

Long before Minkow was earning megadollars, Mark Morze, the onetime linebacker, had his own bookkeeping business, preparing tax returns and profit-and-loss statements for dozens of small businesses. He tried opening his own enterprise-a health club at the Sherman Oaks Galleria-but it lost $80,000 the first year, and he was back looking for clients when a loan broker introduced him to Minkow.

Morze, then 35, went to work for ZZZZ Best in late 1985 as a part-time consultant, shopping around Southern California for bank loans to help boost the company's expansion. In the early days, Minkow had turned mainly to private investors: an elderly lady who ran the cigarette concession at a Las Vegas hotel, the wife of singer Tony Orlando, even a reputed local crime figure who delivered $25,000 cash in a brown paper bag. Some of the loans were negotiated at outrageous rates of interest. Most trickled in only fast enough to pay off earlier loans.

To help qualify for major bank loans, Minkow produced more and more contracts for insurance restoration work, most of it forwarded to ZZZZ Best from a guy Morze did not know, Tom Padgett. Morze said he figured the jobs were legit.

As Morze tells it, he began to learn the truth in 1986, when Minkow showed him a document from Interstate Appraisal Services indicating that ZZZZ Best had just completed work on a $2 million project in San Diego. An even bigger job was under way in Arroyo Grande, a tiny beach community south of San Luis Obispo, Minkow told him. Now a company that had loaned ZZZZ Best several hundred thousand dollars wanted to see how it was progressing.

"'Mark,'" Morze said Minkow confessed, "'the San Diego job is such a success that I invented the Arroyo Grande job to buy time, until we get the money from the San Diego job.'" Would Morze drive to Arroyo Grande and photograph any building that could pass as a restoration site?

He found the only three-story building in town, lying on the ground to photograph it so it looked bigger. But the ploy didn't work. The lending company had beaten Morze to Arroyo Grande and quickly learned that ZZZZ Best did not have any contracts there. By the time Morze got back, Minkow was immersed in a tense meeting with officers of the lending company, trying to talk his way out of it.

Morze compared Minkow's protestations to a small boy trying to hide an elephant behind his back. "'What elephant?' he says." The company was reassuring on one point, Morze said, the matter would not be reported to authorities. But they would make no more loans to ZZZZ Best, thank you.

That was when Minkow confessed to him that the Arroyo Grande job wasn't the only one that was fake, Morze said. All of the restoration jobs were. But don't worry, Minkow said.

By this time, Minkow had hooked up with a guy from Encino, Maurice Rind-a convicted stock swindler, it so happened, but also a man with a reputation as a financial wizard-who was helping him merge with a publicly held Utah shell corporation. The move would eventually allow the sale of ZZZZ Best stock to the public. The Wall Street firm of Rooney Pace Inc. agreed to underwrite a public offering, a bonanza that would net ZZZZ Best an initial $11.5 million-enough to pay off the loans that were by now breeding at an alarming rate, enough so they would not have to fake any more restoration jobs.

"We gotta last 60 days, and we're set," Morze recalled Minkow telling him. "Mark, all you gotta do, if anybody asks you about the restorations, you gotta just say, 'Yeah, they're real, and they're making money, and they're moving along.' And I said, 'OK, I'll do it.' That was my start as a co-conspirator."

The 60 days stretched into four, then five months. New loans had to be obtained to carry the company through. New restoration jobs had to be invented to show enough revenue to qualify for the loans. Morze, whose earlier bookkeeping work involved only rudimentary accounting, had to learn new tricks.

"A lot of people think I'm the genius behind the throne that made it all happen," he said. "But I'd never seen a balance sheet in my life. I didn't know what one looked like. The accountants would say, 'Mark, we're going to need your worksheets.' I had to go to an encyclopedia and look it up, I didn't know what a worksheet was. Then they said we need a performance bond. I ran to the business library and looked it up."

Morze jotted down notes on every insurance job ZZZZ Best supposedly did. He cut and pasted checks together-taking the name of a bank from one, a signature from another-then smoothed out the edges with liberal blobs of White Out and a copying machine. "If you saw me at the end of the night making checks, I'd look in the mirror and I'd have little white dots all over me," he said.

The finished copies made it look as though ZZZZ Best was paying carpet and lumber suppliers for restoration materials. He drew up phony invoices to coincide with the checks and drafted two years' worth of detailed bank statements-which IRS investigators later described as nearly perfect-that made the checks add up.

A Hitch Develops

But just before the stock sale came through, there was a hitch. To everyone's horror, Ernst & Whinney, the accounting firm hired to help with the underwriting, wanted to inspect ZZZZ Best's latest restoration job-touted as a $7 million project in Sacramento to restore an office building damaged by a massive water leak.

For months, Minkow, Morze and Padgett had been able to keep investors and their accountants away from the supposed job sites by saying that the insurance companies involved-who were paying for the work-were worried about being sued if anyone was injured.

When one determined loan officer insisted on coming to Padgett's office, he was at his desk, and by prearrangement, his phone was ringing off the hook.

"And so every two minutes, I'd say, well, the reason you can't go to the job sites, like I explained to you before"- ring!- "Yeah, hi Jim. You at the Anaheim job site? Right, OK, are the plumbers there? Oh, they're not there? Fire 'em. OK, let me spell it out: F-I-R-E T-H-E-M. OK? Sign my name on it. Do I have to fire everyone and get ZZZZ Best there? Cause I'm going to do that. OK." Then: "Anyway, the reason you can't go to the job site is a couple months ago somebody broke a kneecap"- ring! They bought the whole thing."

Ernst & Whinney was more persistent. So Padgett and a colleague flew to Sacramento, found an office building where some construction work was under way, and set up a masquerade. They slipped $50 to the security guard so he would greet "Mr. Morze" when he showed up with some special guests that weekend. They took down contractors' signs and replaced them with ZZZZ Best signs.

Morze flew up Saturday morning with an accountant from Ernst & Whinney and a lawyer from the prestigious law firm of Hughes Hubbard & Reed. Padgett waited nervously in a nearby hotel room, at one point calling Minkow in Los Angeles.

"It's like third down and we're on the 25-yard line and there's three seconds left on the clock," Minkow told him. "We gotta kick a field goal. . . . It's all come down to this."'

The security guard gave Morze the appropriate greeting and Morze led the way to the elevator.

"I have never done a construction job in my life," Morze recalled. "I don't know anything about plumbing, I know nothing about electricity, I know nothing about carpeting. I'm sitting there going, 'Please don't ask me any questions. Please don't ask me any questions.'

"And sure enough, these big experts that are here to sign off on a multimillion-dollar underwriting go, 'Well, you guys seem to be doing a good job. Let's go back to the airport and have a few beers.' Back to the airport. On the airplane. Fly home. Call Barry. We did it!"

Later, the ZZZZ Best crew went to work again when the accounting firm demanded a tour of a supposed San Diego job site. This time, they actually signed a $2 million, seven-year lease to get a building and had a construction company work day and night to fix it up, putting in the last nail only hours before the inspectors arrived-for a 20-minute visit. Afterwards, Morze said, Minkow sat back at his desk and laughed: "We spent $100,000 a minute for that inspection."

The public stock offering finally came through in December of 1986, bringing money that would allow them to pay off all the "hooks," as Morze called the loans, and put a little bit in the bank to help the legitimate carpet cleaning business. No more phony insurance jobs. No more lies.

"But now," Morze said, "Barry confesses to me how many hooks there really are. And out of the $11 million we got, the first day, $8 million went out immediately. I say, 'You owed $8 million?' He says, 'Yeah.' I'm sitting there, oh my God, we only got $3 million left." And there were more loans coming due in January and February. At that point, Morze said, Minkow just looked at him. "It's not enough," he said.

Padgett was still desperately in love with Debbie, but she had taken up with another guy and didn't want anything to do with him. He was driving himself crazy with jealousy. "Finally, I figure I'm going to kill this guy, I mean, there's no question in my mind, I'm going to kill him, I mean, don't even talk about it. And Barry's going, 'No, no, no, there's other women.'" Padgett, the supposed source of insurance restoration jobs, took to drinking most of the day and going out at night with a gun, "just looking for trouble." "Imagine," he said gleefully, "how Barry's losing sleep nights, imagine that, you know, here's 86% of his business running around Santa Monica drunk at 3 in the morning with a loaded gun-three loaded guns, as a matter of fact."

The crisis ended when Minkow reminded his friend about the waterfront house in Newport Beach that he had wanted ever since hearing Debbie describe her dream home. It seems that one of ZZZZ Best's investors had such a place he wanted to sell. What if Minkow bought it and let Padgett live there?

"I said, 'Barry, it can't be, I mean, things like that don't happen to me.' He says, 'No, we got this line of credit from First Interstate that will be a big help.'" All Padgett had to do was put on his $800 suit, his Rolex watch, and show up at the bank and convince loan officers that a new batch of insurance jobs were real.

By now, in the spring of 1987, what Morze calls the big "cure" was coming. Drexel Burnham Lambert was talking about underwriting a $40 million private placement of junk bonds with which ZZZZ Best could acquire KeyServ, a nationwide carpet cleaning chain that got its business through the country's premier retailer-Sears Roebuck. With respected ties like that, they would never again have to fake any restoration jobs, Padgett and Morze figured.

They dreamed of making a success with KeyServ, then using $700 million in junk bonds to finance a hostile takeover of a $1.3 billion international corporation.

"It's the only thing that keeps you going in your brain," Morze said. "We get KeyServ, the world is ours. We get KeyServ, the world is ours."

Padgett was comfortably ensconced in the oceanfront house in Newport Beach. With ZZZZ Best stock soaring, Minkow was launching discussions to buy the Seattle Mariners baseball team. Everything was on track.

Then two things happened. First, an article appeared in The Times about some problems at ZZZZ Best a few years earlier, when dozens of customers had complained that large overcharges had been rung up on their credit cards. Minkow quickly threw the blame off on former employees, but the report sent shivers through Wall Street and the stock plummeted.

Then, Norman Rothberg, a thin, bespectacled accountant who rented office space from Interstate Appraisal, went to Ernst & Whinney and confided that the Sacramento restoration job was not real. Ernst & Whinney got on the phone to Minkow. Minkow quickly got Padgett on the phone. "You better figure out what the hell this man has done," Minkow declared.

Rothberg was cornered in a meeting with Padgett and another ZZZZ Best associate, who he said began toying with a gun. After the meeting, he took $15,000 to go back to Ernst & Whinney and say he had made up the story.

Hire Investigators

But the damage was done. The accounting firm hired a team of investigators. Shortly thereafter, Ernst & Whinney and Drexel Burnham Lambert pulled out of the KeyServ deal. It had been only four days-at the most seven-away from closing.

Padgett was on the San Diego Freeway, on his way home to Newport Beach, when the phone rang in his Lincoln Town Car. Minkow needed to talk to him right away. More news stories would be running soon exposing the fraudulent insurance jobs, the boss said.

"He said, 'Tom, it's over.' And he was so tired in his voice. You see, Barry never sounds tired. This time, he was so tired, he said, 'It's over, man, it's all over.' I said, 'We got to fight on.' He says, 'We can't fight on, they've been to Sacramento. They know there aren't any building permits. They've been to San Diego. We're finished. We're caught.'"

Minkow told him he would have to move out of the Newport Beach house right away. "I said, 'Barry, I've only been in there three months, I've waited all my life for a house like this.' He said, 'Tom, they're coming, man, there's gonna be all kinds of charges.'"

Padgett hung up and drove home. Debbie's cousin was there. To surprise him, she had gone out and bought new bedroom furniture. The books were no longer stacked on the floor, they were neatly arranged in a new bookcase.

"She says, 'You'll never believe this, but Debbie called. She wants to come down this weekend,'" Padgett recalled. "And that's the first time I cried."

On July 2, 1987, Morze watched on the evening news as Barry Minkow's attorney announced that the young entrepreneur had resigned from ZZZZ Best.

Their caper may have been over, but Morze had not come away empty handed. Investigators later estimated that he had made nearly as much as the $3 million they believed Minkow took out of the company-Morze admits only about $1 million in income on his tax return for 1987-and it enabled him to buy one new house for his parents, and help his girlfriend buy another.

But days before the end, Morze said, he had emptied his bank accounts and given his last cash to Minkow, who begged him for money to make the ZZZZ Best payroll. Now, on television, angry employees were complaining that they had not received their last paychecks.

"I guess I fell for Barry, too," Morze concluded, "and I think it's probably fitting punishment, and ironic, that I got cleaned out by the same guy that cleaned out everybody else."

Trip to Las Vegas

In those last frantic days, Polevoi and his brother were dispatched to Las Vegas with $700,000 Minkow scrounged up from corporate accounts. Minkow handed over a pile of cashiers' checks and instructed them to gamble the checks at various casinos and come home with cash. Both Polevoi brothers wound up pleading guilty to money laundering charges for that escapade.

After it was all over, Padgett went into his office at Interstate Appraisal and found out that a major insurance company wanted to open a legitimate account with him. "That's the second time I cried," he said. "You can make an argument, maybe I deserve to go to jail, maybe I deserve 20 years, but I don't think I deserved coming that close and getting knocked down."

He got eight years in prison, the same as Morze. Polevoi is looking at 18 months. From having owned his dream house outright when he met Minkow, Polevoi now owes $1 million against it in taxes, stock losses and legal fees.

"What I was hoping through all of this is that the judge would understand how a guy like me got caught up," Polevoi said. "I said, what I did was wrong, no question about it. I want to plead guilty. But have an open mind to what was going through my head." Minkow, he said, "could've made a legitimate company out of ZZZZ Best."

Morze agreed: "We tried it. It coulda worked. It shoulda worked."

But it didn't, and all of the would-be millionaires will be behind bars by mid-April. Minkow, unable to make bail, has already been in prison for nearly a year and a half. He has telephoned Polevoi occasionally to chat and report that it's not all that bad inside.

"I'll tell you exactly what he said," Polevoi recounted. "He said, 'If this is all they can do to you, it's a piece of cake.' They can't torture him. They can't electrocute him. I said to myself, 'this guy is totally invincible.'"

"Australian Firm To Buy MGM/UA For $1 Billion: Qintex Group To Acquire 4000 Films; Kerkorian To Retain Some Assets," Los Angeles Times, April 1, 1989

The United Artists movie studio, maker of Oscar-winning Rain Man, will be sold to an Australian entertainment company for $1 billion under an agreement announced late Friday.

The deal would give Qintex Group, one of the makers of the recent CBS miniseries Lonesome Dove, most of the assets of MGM/UA Communications Co., including rights to Rain Man. Also included would be a library of 4000 movies, among them the James Bond and Pink Panther series, the video library and movie and television production and distribution facilities.

MGM/UA's majority shareholder, Kirk Kerkorian, would retain control of the MGM name and TV and movie studios, as well as 34 MGM movies, including Moonstruck and A Fish Called Wanda.

The agreement between Qintex and Kirk Kerkorian is subject to unspecified government, shareholder and "third-party" approvals, according to a joint announcement by the two companies.

MGM/UA officials refused to elaborate on a news release, which said the deal was expected to be complete in late summer.

How Deal Would Work

It is the second time this year Kerkorian has agreed to sell part of the company he assembled out of the former United Artists and Metro-Goldwyn-Mayer studios. In addition to a collapsed deal to sell an interest in the MGM name to fellow Hollywood investor Burt Sugarman in July, Kerkorian has been publicly shopping all or part of MGM/UA for months.

Kerkorian, who owns 82% of MGM/UA through his Tracinda Corp., pumped $180 million of his own funds into the money-losing company in January. MGM-UA lost $39.5 million in the first quarter of 1989 and $48.7 million in 1988.

Under the complicated agreement with Qintex, Kerkorian will hang onto rights to the MGM name and roaring lion logo as well as movie and TV production units. Also remaining with MGM are 34 movies made since June 1986, including Moonstruck, A Fish Called Wanda, and Willow; 1750 hours of TV programming including the ongoing shows thirtysomething and In the Heat of the Night; and the MGM headquarters building here.

The deal is to work this way: Kerkorian sells 100% of MGM/UA to Qintex for $20 a share, or about $1 billion. Then the company is split, and Kerkorian buys back what will be the new MGM-the MGM movie and TV studios plus the 34 movies in the MGM film and video libraries-for $250 million.

Further intertwining the now independent MGM and UA, Kerkorian is to invest $75 million in Qintex, and the companies sign various distribution agreements.

"New World Buyout Set," The New York Times, April 11, 1989

New World Entertainment Inc., a small production company that makes The Wonder Years for television, agreed today to a buyout offer from Revlon Inc.'s chairman, Ronald O. Perelman, worth at least $120 million.

Mr. Perelman outbid the Italian financier Giancarlo Parretti, who had sought to add New World to Pathe Entertainment Inc., an independent film company he is trying to build by adding to the former Cannon movie studio.

In January, Mr. Perelman acquired another part of New World, Marvel Entertainment Group Inc., the comic book company that produces Spider-Man and the Incredible Hulk, for $82.5 million.

New World said it had agreed to be bought by the Perelman-controlled Andrews Group Inc. for $8.95 a share in cash. In doing so, New World terminated an agreement to be bought by Pathe for $8.20 a share in cash and promissory notes, the company said.

"How Ross Johnson Blew The Buyout," by Bill Saporito, Cynthia Hutton and Rosalind Klein Berlin, Fortune, April 24, 1989

The untold story of how his own naivete, a disastrously flawed strategy, and Wall Street's towering egos combined to doom a CEO's bid for glory in the biggest deal of all time.

The air at the Castle Pines golf club, about 25 miles south of Denver, is so thin even a smallish CEO can smack a ball halfway into the next quarter. Which is exactly what a group of friends and customers of RJR Nabisco boss F. Ross Johnson were trying to do late last August. Johnson had more on his mind than his long game, though. Market tests of Premier, the smokeless cigarette that was supposed to puff up RJR's stock on Wall Street, were not promising. A man who prefers gut instinct over research, Johnson sought some straight dope on the product from trusted clients on the course. Those who lit up confirmed what the market researchers had told him: Premier tasted like a smoldering Hefty Bag. That revelation crystallized Johnson's decision to embark on a leveraged buyout of RJR Nabisco - a deal that ultimately led to the largest, looniest auction in the history of capitalism. Johnson judged his own record by RJR's stock price, and he figured that with Premier flagging, an LBO was now his best chance of increasing shareholder value.

If you think you have read all you want to read about what happened from there on out in this thoroughly chronicled saga, think again - you may have missed something. Did you know, for instance, that before Johnson strolled down LBO lane, he tried to negotiate a merger of RJR's Nabisco food business with that of archrival Philip Morris? Or that in the heat of the bidding contest, Johnson came within an eyelash of reaching an agreement with a new archrival - the leveraged buyout firm of Kohlberg Kravis Roberts - under which the two could have bought RJR Nabisco together for $4 billion less than KKR ultimately paid for it? In the end, of course, Ross Johnson blew his big chance. But how? And why?

Though the RJR buyout played in the press like a two-reel cliffhanger, the critical issues that shaped the outcome have been overlooked. A sometimes pathetic tale, it is full of insight about how business really works when good intentions struggle with pride, ambition, and a thousand other human frailties in the red-hot crucible of competition. The lessons for management begin with the dangers of faulty assumptions. Johnson went into the LBO with the deluded notion that it was his deal, and that all his investment bankers had to do was find the money to finance it. He thought that RJR's directors would give him the deference due a chief executive, never realizing that the board would have no choice legally or morally but to treat him like an outsider.

The execution of the buyout strategy was as flawed as the assumptions that went into it. Johnson's primary partner in the deal, the investment banking firm of Shearson Lehman Hutton, suggested an offering price of $75 a share. This lowball bid made Johnson and his management group seem a bunch of quick-buck artists trying to grab the company cheap. Had either Johnson or his bankers rummaged through RJR's files - as the investment banking advisers to the board of directors later did - they would have found some analyses that could justify the directors in rejecting as insufficient any bid less than $100. This was just one piece of evidence that led the board to wonder whether Johnson had something more than the shareholders' interests at heart. The greed issue grew even more obvious in the contract Johnson negotiated with his partners at Shearson Lehman. The bankers knew that the management contract was incendiary, and they told him so. Unfortunately for him and for them, they did not tell him no. The management group was originally going to put up a mere $20 million for 8.5% of the company. Its members stood to make $100 million in five years and come away with 18.5% of the equity, potentially worth billions if they could meet an ambitious set of operating targets.

But who was the management group? Though Johnson insisted that the 8.5% in equity would be divided among some 15,000 RJR workers - and that insistence is consistent with his past practice - only six names emerged besides his own: Edward A. Horrigan, Jr., the head of R.J. Reynolds Tobacco; James O. Welch, Jr., chairman of Nabisco Brands; Edward Robinson, the parent company's chief financial officer; Harold Henderson, chief counsel; John Martin, an executive VP; and Andrew Sage II, a former investment banker and an outside director. Too much for too few, it seemed to the shocked directors. The biggest deal attracted egos to match. Peter Cohen, 42, the chairman of Shearson, had a $1 billion LBO fund to play with and the drive to plant Shearson's name at the top of the merchant banking heap. He was working under the watchful eye of his boss, American Express Chairman James D. Robinson III, 53, a friend of Johnson's who frequently advised the RJR chief about strategy. Competitiveness contributed to Cohen's failure to reach an agreement with his chief rivals, KKR principals Henry Kravis, 45, and his cousin George Roberts, also 45, to pursue the LBO jointly. One of the sticking points was the reluctance of Salomon Brothers, the powerful bond house that was allied with Cohen, to work with KKR's bankers, the scandal-racked junk bond firm of Drexel Burnham Lambert. Although the competing sides were friends, they did not trust one another when it came to business. Conflict between the bidding groups left the buyers in disarray and the sellers with the whip hand. The dynamics of distrust sent the ultimate price spiraling ever higher - in an auction where a single dollar per share added about $225 million to the final price. Ultimately there was barely a nickel to choose between the final bids, leaving a special committee of RJR directors ample discretion to pick a winner. If, by the end of the process, Johnson had any friends among the directors - a group he had taken pains to treat royally - they did nothing to help him. Says a member of the special committee, Gulf & Western Chairman Martin S. Davis: ''You either play with the managers or you play with the shareholders. We chose to play for the shareholders.'' Out of this tumultuous fray RJR Nabisco's stockholders emerged as the only unambiguous winners.


It would be hard to think of any chief executive less temperamentally attuned to orchestrating and running a leveraged buyout than F. Ross Johnson, 57. For one thing, his whole career was built on being a seller of companies, not a buyer. In that capacity he always seemed to come out on top. As CEO, he peddled Standard Brands to Nabisco in 1981; then he later took over the top job from Nabisco's Robert Schaeberle. He merged Nabisco with R.J. Reynolds in 1985, and the board obligingly anointed him successor to CEO J. Tylee Wilson. An accountant by training who hails from Winnipeg in Manitoba, Canada, Johnson abhorred debt. He didn't come across to his investment bankers as a free spender either.

Says a Shearson executive: ''Ross told us categorically that there was a price at which he didn't want to own RJR.'' Johnson didn't say what that price was, but his Shearson friends pegged it in the low-80s per share. That fiscal prudence is at odds with his public image as a corporate jetsetter who runs with a pack of sports and celebrity buddies. A stylish dresser who towers well over six feet, Johnson has a golf handicap of nine, which underscores his belief that there's no sense in running a business if you can't have fun. He did all he could to make sure RJR executives joined the party; they had generous expense accounts and referred to the company as ''first-class.'' Johnson's plan for RJR would have allowed him to preserve that odd combination of hard-eyed number crunching and flamboyant style. He planned to sell the food companies quickly to pay down the debt and avoid making about $2 billion in capital expenditures over the next three years. The average Nabisco bakery is 30 to 35 years old. The tobacco company that he would hold on to was already highly automated, but he planned to spend $900 million on development, principally for Premier, which he wanted to continue despite the discouraging reviews.

Unfortunately for Johnson, the board of directors of RJR Nabisco has not always been a group of happy campers. His predecessor, J. Tylee Wilson, had built a rocky relationship with the board and was barely on speaking terms with some members by the time he was ousted. Johnson alienated old Reynolds hands by moving the headquarters to Atlanta from tradition-steeped Winston-Salem, North Carolina, where it is still the leading employer and has thrived for more than 100 years. As his ambassador to the board, Johnson recruited his friend Charles Hugel, 60, chief executive of Combustion Engineering, and placed him in the curious role of ''nonexecutive'' chairman in the fall of 1987. As both men understood it, Hugel's role was to run the board meetings and work with Johnson and the board. In the best of times this could not have been an easy role to perform diligently while running your own $3.5-billion-a-year corporation.


The idea of a leveraged buyout had been brought to Johnson many times. For example, Donald Kelly, who had done a highly successful leveraged buyout of Beatrice Foods with Henry Kravis, urged Johnson to meet with Kravis. The two had dinner at Kravis's East Side Manhattan apartment in September 1987. Kravis explained why an LBO would make sense for RJR, but with RJR's stock near $70 in the pre-crash market, Johnson didn't believe there would be a big enough premium to stockholders to justify the deal. Kravis didn't give up. A number of investment banking firms approached Johnson on his behalf, to no avail. RJR retained a consultant named Frank A. Benevento II in November 1986 to investigate a variety of capital structures and reorganizations for the company. Drexel Burnham Lambert also made a number of proposals that were kept in a file code named Sadim, or Midas spelled backwards. Johnson was working on something much more ambitious to raise the stock price: the joint venture with Philip Morris. In the summer of 1988, he tried to entice his rival chief executive, Hamish Maxwell, into marrying Philip Morris's limping General Foods division to RJR's muscular Nabisco Brands and Del Monte. The two tobacco companies would each own 40% of the new entity, which would have revenues of $18 billion, and the remainder would be sold to the public in a stock offering. In this way, Johnson reasoned, RJR shareholders would benefit from the P/E multiple that attaches to food companies, which runs about half again as high as the tobacco multiple. True to form, Johnson volunteered to head the combined concern. Maxwell wasn't about to be enticed. He doubted that a joint venture of such magnitude could succeed, and he was not wholly convinced that Philip Morris's stock price would benefit. Johnson then floated preliminary proposals past Pillsbury and Quaker Oats, but got no nibbles.


Coming on top of these refusals, Johnson's disappointment with Premier convinced him that RJR Nabisco's stock would remain irretrievably undervalued unless an LBO freed it to soar. But his plans to embark on that course were derailed by terrible news: His son Bruce, 26, had sustained severe head injuries when his car drove off the road in Westchester County, New York, on September 7. Johnson spent two weeks in New York until his son's condition stabilized and then flew back to Atlanta to rededicate himself to making a decision. (Bruce Johnson later lapsed into what doctors describe as an irreversible coma.) On October 7, Shearson Chairman Peter Cohen and J. Tomilson Hill, the mergers and acquisitions chief, made a full presentation on an LBO to Johnson and other members of the management group. Johnson asked that Hill and some of his colleagues join him at a dinner in Atlanta with the directors on October 19, the night before the scheduled board meeting.

At this dinner Johnson planned to discuss his idea for an LBO. A week before the dinner Johnson advised Hugel to put together a special committee of outside directors to consider the LBO question. Hugel tapped Davis of Gulf & Western; John Macomber, the former CEO of Celanese, who had sold his company to West Germany's Hoechst AG in 1987; William Anderson, the recently retired chairman of the executive committee of NCR Corp.; and Albert L. Butler, Jr., who owns a real estate company called Arista in Winston-Salem. Hugel also phoned Peter Atkins, 45, a poker-faced partner at the law firm of Skadden Arps Slate Meagher & Flom, who had just piloted the Fort Howard paper company through a litigious LBO. Atkins agreed to become the legal adviser to the special committee.

When the fateful night of October 19 arrived, the outside directors along with Horrigan and Johnson gathered at the Stouffer Waverly Hotel close by corporate headquarters. During dinner Johnson talked about his various schemes to enhance shareholder value and why they hadn't worked. Dividend hikes, outstanding earnings growth, and stock buybacks failed to get the stock moving. In his estimation the only road was a leveraged buyout. As the directors digested their dinner and his words, he added, ''If you don't want to go ahead with this, just say so - and no hard feelings.'' Somewhat disbelievingly, one director said, ''You're putting this company into play.'' Replied Johnson: ''It should be in play.'' Several members of the special committee were shocked at the way things unfolded. They had expected to discuss the LBO concept generally - and had no idea Johnson would come loaded for bear, with a lawyer and an investment banker in tow. Says one of the committee members: ''There's no substitute for trust and no excuse for surprises between management and the board.'' Johnson was surprised too. Neither he nor Shearson was prepared to put the company in play that night. But soon he and the other directors, who were now potential buyers, were asked to leave the room.

The remaining directors immediately focused their attention on what price the company could command. After about 45 minutes Johnson was called back. ''We want to make sure that the number you were thinking about was not frivolous,'' Hugel said. ''Define 'frivolous' for me,'' said Johnson. Hugel told him that anything short of the highest price at which the stock had ever traded - $71 a share - was unacceptable. Johnson left the room to confer with his advisers under the impression that he needed to name a price. ''It was not our intention to generate a number,'' says Peter Cohen. Tom Hill, on hand for Shearson, told Johnson the firm was comfortable with $75 a share in cash, about 35% more than the stock was selling for that day. Cohen still contends that $75 was a logical place to start. Shearson predicated its work on buying the company entirely for cash, and based on conversations with commercial bankers a week before, Cohen felt certain he could find $75 a share - a total of $17 billion. When he reentered the room, Johnson told the board his group was prepared to put up a minimum of $75 a share, but that he couldn't say exactly what price they would offer. One director, civil rights leader Vernon E. Jordan, Jr., a partner in the law firm Akin Gump Strauss Hauer & Feld, raised the possibility of a higher bidder. ''Suppose it goes to $82 or $84?'' he asked. ''So be it,'' Johnson replied. ''It proves what I've been saying.''

''All the criteria indicated it was a responsible price,'' says lawyer Peter Atkins. Perhaps. But it was remarkably cheap in light of the mushrooming amounts commanded by food companies in the fall of 1988. Shearson's $75 a share was tied to selling the Nabisco businesses for $13 billion, a figure that turned out to be low compared with the market rate for food companies. Grand Metropolitan's offer for Pillsbury on October 4 came to $60 a share, or 27 times earnings, and should have sent Shearson a message. And Philip Morris's astonishing initial bid of $11 billion for Kraft, 22 times earnings, occurred on the eve of the RJR board meeting. That night Johnson lost control of his destiny forever, essentially becoming a junior partner in the latest Wall Street deal rather than the dealmaker himself. From there on he played a diminishing role in the negotiations. The board chose to announce the next morning that the company was entertaining the idea of a management buyout at the suggested retail price of $75 a share. Enough information had been discussed to compel the board to make the announcement.


Henry Kravis had been discussing other deals with Shearson and was upset to discover that Shearson was not cutting his firm in on the huge new buyout. That Friday, October 21, Tom Hill, Shearson's mergers and acquisitions chief, called and asked for a meeting to discuss deals that the two were already involved in. Kravis did not disguise his annoyance. ''I see you guys are now our competitors,'' he told Hill. Hill called him back later, asking for a meeting to talk about RJR. That evening Kravis, Hill, and Cohen convened at Kravis's office. The Shearson bankers wanted to know whether Kravis had plans regarding RJR. Kravis said he hadn't made up his mind, adding, ''All I can tell you is that I'd be surprised if you buy this company for $75.''

The press has reported that Kravis demanded to be let into the deal, alluding to the LBO business as his ''franchise.'' He gets testy about that: ''There was no franchise discussion. I never said I've got to be in this deal.'' But RJR was one of 20 or so names KKR kept tabs on as potential targets even after Johnson had rebuffed them. Late Sunday night the phone rang at Jim and Linda Robinson's New York apartment. Both Robinson, the American Express chairman, and his wife, a public relations strategist, were advising Johnson. As it happens, Linda Robinson is also a good friend of Henry Kravis and his wife, Carolyne Roehm, a fashion designer. The caller, a reporter, told Mrs. Robinson that KKR was going to launch a $90-a-share bid in the morning. Did she want to comment? No, she didn't. She was staggered. She called Peter Cohen. It's a bluff, he told her. A bid didn't make any sense to Cohen. He had planned to meet with Kravis the next day, although Kravis says there was nothing in his appointment book. Neither Cohen nor the Robinsons called him.

Cohen woke up that Monday, October 24, to find a $90 offer, $78 of it cash, the rest in securities, on the table from KKR. Kravis had just hit him from behind with a baseball bat. What made Henry jump? He was afraid that Shearson was about to beat him to the punch with the first official offer. Over the weekend he had tried unsuccessfully to reach one of his bankers and learned he was tied up in discussions with Shearson. He also discovered that Shearson had a board meeting scheduled for Tuesday, followed by the parent American Express Co.'s meeting. The boards were ready, he thought, to approve the offer. ''I know what you were doing,'' he yelled at Cohen over the phone on Monday. Cohen told Kravis that the board meetings had been scheduled for months. The two agreed to meet again, but trust had been shattered. Although Cohen met with Kravis on Tuesday, October 25, to discuss the possibility of a joint offer, the friction between the two was increasing.

Later, Kravis offered Shearson a 10% cut in the equity and up to $125 million to go away and let KKR pursue the buyout alone. The proposal turned the atmosphere from chilly to frigid. But Cohen nonetheless told Johnson that Shearson would step aside if he wanted it to. Johnson said no. Argues Cohen: ''If management's game was to max out for themselves, they had a number of ways to do it. This was one.'' Around midnight Cohen called Kravis at his home and told - not asked, told - him to come to RJR's Manhattan offices on the 48th floor of 9 West 57th Street, the building where KKR happens to be headquartered. Why now? Kravis asked him. ''Because if we want to work something out, now is the time,'' Cohen snapped. Kravis, with his partner George Roberts and KKR's outside counsel Richard Beattie, met with Cohen, Hill, Johnson, Jim Robinson, and Steven Goldstone, a lawyer who was representing Johnson.

While Shearson and KKR continued their dance, every house on Wall Street was looking for some way to cut in. Salomon Brothers figured RJR was worth $100 a share and within two days lined up a major European company as a partner. When KKR announced its $90 bid, however, the Europeans vanished. Salomon Brothers' President Thomas Strauss, 46, realized that Shearson would need to raise more money if it were going to match KKR's bid. So he called Cohen, a friend and safari partner, and told him: Peter, you've got a problem. Salomon was the solution Cohen was looking for. With Salomon's banking and bond-selling ability, he could make a fully financed offer for more than $90, without slicing the pie with KKR.


By the week of October 31, Shearson and the management group were ready to strike back with their first firm offer: $92 a share, $2 better and richer in cash than KKR's $90 bid. Although Kravis had blindsided him a week earlier, one-upmanship didn't seem a smart idea to Cohen now. He called Kravis to see if he was still interested in talking. ''I think we should meet again,'' said Kravis. Cohen held back on the bid. The second, critical set of meetings between the Johnson and KKR factions began at around six on the evening of November 2 in a deluxe suite at the Plaza Hotel. What started on a premise of compromise ended some 15 hours later in a virtual spitting match. The players were deeply suspicious of one another, and no leader emerged to knock heads together. Even today neither side can agree on what they were really disagreeing about.

The meeting began with just Kravis and Roberts for KKR, Cohen and Jim Robinson for Shearson, and Johnson. The five met from 6 to 7 PM and made enough progress so that the group decided to bring in the lawyers. They resumed talks, minus Johnson, around 9 PM, joined by KKR lawyers Beattie and Casey Cogut; Jack Nusbaum, Shearson's outside counsel; Goldstone; and Salomon's Tom Strauss and his firm's outside counsel Peter Darrow. Some major issues, such as control of the board and ownership of the equity, were broadly resolved fairly early on. Beattie began to draft an agreement that KKR and the Shearson group would pursue RJR jointly as equal partners in the deal. This was a major concession from KKR. The management contract that Johnson had cooked up with Shearson was also aired. KKR had no quarrel with Johnson and his management team receiving 8.5% of the equity in the new company - as long as it didn't come out of KKR's pocket. Shearson agreed to include Johnson's piece in its half of the equity. The group broke up at 11 PM so each side could huddle and then reconvene at RJR's offices around the corner on West 57th Street. Alas, this was a vastly different scene from the plush, quiet surroundings of the Plaza. Lawyers, bankers, advisers, principals, and assorted staff, as many as 50 wheeler-dealers of various pin stripe, swam through the 48th floor office overlooking Central Park.

Kravis and Cohen tussled over who would manage the junk bond underwriting that would provide the financing: Drexel Burnham, KKR's longtime investment banker, or Cohen's partners at Salomon. The quarrel had that noxious mixture of money - some $200 million in fees were at stake - and turf. Drexel was the object of a criminal investigation and needed the prestige of leading the deal. Salomon had clashed repeatedly with its upstart competitor as Drexel's junk bond business flourished in the '80s. Salomon and Shearson thought the financing that KKR proposed required more junk securities than was prudent and wanted more bank debt. Tom Strauss insisted that Salomon, along with Shearson, play a significant role in the financing. Gradually the distrust that pervaded earlier meetings resurfaced. Kravis had spotted John Gutfreund, Salomon's chairman, wandering around, but Gutfreund was not at the meetings. At times Strauss disappeared, leaving Cohen to carry on alone. Says Kravis: ''We had no idea who was running the show. One minute there's John Gutfreund, then there's Tom Strauss, then we didn't see either of them anymore and Peter Cohen is going back and forth talking on their behalf.''

Exasperated, Kravis and Roberts asked to talk to Gutfreund. He was strolling along 57th Street when Johnson found him. Cohen was having a hard time keeping his aggression holstered. But he hammered away at Salomon all night and finally persuaded Strauss to soften his position - co-management with Drexel was possible. But Cohen, too, was disturbed by men who weren't there, notably Leon Black, Drexel's mergers and acquisitions chief, and Peter Ackerman, one of its leading dealmakers. He had the same doubts Kravis did. Just who was calling the shots? At 5 AM, with each side confused about who was saying what for whom, the group stopped talking. For the next several hours various emissaries tried to reconcile differences, but finally around 9 AM Jim Robinson and Shearson lawyer Jack Nusbaum took the elevator six floors down to KKR's offices. ''We've made a good-faith effort and we came a long way, but we just can't agree,'' Robinson told Kravis. ''We are announcing a bid of $92 for the company.''


It had taken plenty of cajoling before Steven Goldstone, Johnson's lawyer, was willing to show KKR the management group's contract. The document was complicated and still not specific as to whom it covered. Beattie, KKR's lawyer, argued that his client needed to see it, and Goldstone finally relented. Before he handed it over, he said to Beattie: ''I must have your word that you won't reveal any of this or make any copies.'' Beattie agreed, but KKR's staff learned some of the details. Then three days later, on Saturday, November 5, the contents of the contract appeared on the lead business page in The New York Times under the headline ''Nabisco Executives to Take Huge Gains in Their Buyouts.'' The course of business history was about to change. Beattie denies discussing the contract with the Times. However the newspaper got the scoop, Johnson became the biggest symbol of corporate greed since the robber barons. Charles Hugel, the chairman of RJR's special directors committee, couldn't quite believe what he was reading when he picked up his Times that Saturday morning. The board did not know that the contract existed. As the day wore on, directors kept calling Hugel. All were concerned and some were angry: Was Johnson trying to make fools of them? Hugel telephoned Johnson. Why wasn't the board aware of the contract? he demanded. Johnson explained that the agreement had never been finished and that he didn't have a complete version to give to the board. He also denied trying to walk away with $100 million for himself and he promised to send a letter to Hugel immediately to clarify the details.


The contract controversy obscured the momentous benefit that the fight between KKR and Shearson was bestowing on RJR Nabisco's shareholders. The auction that was now under way would be a true one, no collusion, no holds barred. On November 7, the committee sent all bidders a letter outlining the rules. In particular, the committee asked prospective purchasers to provide ''a substantial common stock-related interest'' in their offers for current shareholders. The committee's advisers, the investment banking firms of Lazard Freres and Dillon Read, believed that the RJR shareholders should have an opportunity to reap what could be considerable long-term gain down the line, so they recommended that the board solicit offers that combined cash and securities that could be converted to stock at a future date. The rules also said that the committee could change the rules. The investment bankers at Shearson plotted their strategy around three words: Cash is king. By this they meant that they believed the special committee analyzing the bids would consider cash a superior form of payment than securities.

To Johnson, historically a seller, the three little words made a lot of sense. And he heard them from none other than Charlie Hugel, chairman of the special committee. Hugel confirms taking this position with Johnson, but points out that he did so before the committee promulgated the bidding rules. Unfortunately, Johnson served as the only link between Shearson and the committee, and he kept missing the importance of ''continuing equity.'' The bids were due at 5 PM, Friday, November 18, in the law offices of Skadden Arps Slate Meagher & Flom on Third Avenue. Shearson and Johnson were going to put their best foot forward. The management group, believing that it had been hurt by security leaks, deputized Duncan Stewart, an outside lawyer, as its messenger. What Stewart delivered to Skadden Arps was a bid of $100 a share - $90 in cash, $6 in preferred stock, and $4 in preferreds convertible to 15% of the new company.

The bid topped KKR's $94 offer - $75 in cash and $19 in securities convertible to 25% of the company. But there were two important differences: KKR had more ''continuing equity.'' And KKR said that it would keep as many of the food businesses as it could. Shearson and the management group planned to sell them all off and so became tagged as bust-up artists. By this time another noted merchant banker, First Boston Corp., had also joined the fray, adding a twist of its own. First Boston was teamed with Resource Holdings, a merchant banking outfit headquartered in New York City and partially bankrolled by the Pritzker family of Chicago and Philip Anschutz, a Denver businessman. The First Boston plan had one catch. It depended on a tax loophole that was closing at the end of the year. Both KKR and Shearson were aware that a bid from Resource Holdings and First Boston was likely to come in. Earlier in the week the First Boston group tantalized the special committee of the board by asserting that its offer could be as much as $118 a share. But, unhappily, the financing was incomplete.

Hugel was worried about extending the auction deadline to accommodate the third bidder, fearing that KKR might drop out. For KKR there was always the next deal. But for Hugel, KKR's exit would leave only the management bid on the table and the iffy proposition from First Boston. Directors Davis and Macomber wanted an extension, convinced that a board-led restructuring might produce even higher values, or at least force a better price. The directors still had no firm idea of the breakup value of the company and were afraid of selling it too cheaply. Says Macomber: ''I pushed hard on the restructuring issue. It had to be considered. We had to be ready to move.'' Atkins informed the committee on Sunday that prudence dictated an extension to consider the First Boston bid fully. Then the special committee got a jolt from KKR: a letter, written by lawyer Beattie, that said the information the firm was receiving from RJR managers was inaccurate and misleading. Based on that information, KKR said, it may have underbid.

Throughout the previous week KKR had been reviewing RJR's businesses with the operating executives. The food company managers, furious with Johnson for selling them down the river so he could keep the tobacco works, were open with his opponents. The alleged information shortage centered on the tobacco business. Digging in behind their boss, Edward Horrigan, a member of the management group, tobacco executives gave KKR the cold shoulder. Says a KKR source: ''We were meeting with some people who seemed to have amnesia. They remembered their names and their positions.'' Initially Kravis and Roberts decided to say nothing to the committee about their difficulties. But on Saturday, November 19, after discussing their bid with one of the committee's investment advisers, KKR got the ''distinct impression,'' says a participant, that it was behind in the bidding. That's when it lobbed in the letter.

The committee voted to extend the auction ten days. The management group and Shearson believe the special committee's investment bankers used the First Boston bid as a stalking horse to set up the second, more expensive round of bidding. Their ire centered on one of the committee's financial advisers, J. Ira Harris, 51, a partner at Lazard Freres and a onetime Salomon Brothers executive who allegedly left that firm on bad terms with John Gutfreund. They believe he had a hand in bringing in the Pritzker family. Jay Pritzker, the top financier of the clan, denies the allegation, as do First Boston and Harris. He also denied leaving on bad terms with Gutfreund. Harris told FORTUNE: ''It's ludicrous. This is a flagrant attempt by the management group and its advisers to cover up the consistent mistakes they made in handling this transaction.''

As the high bidder in the first round, the Shearson-Johnson team was in a serious bind going into the second. First Boston, deciding it couldn't get the deal done fast enough to take advantage of the tax loophole, folded its tent. The management group did not want to bid against itself in the event KKR decided to drop out. Furthermore, the group was still committed to pushing the cash part of the deal as high as it could. Shearson's Tom Hill thought this maneuver would thrust the sword at his rival's weakness: ''We knew KKR could not make a deal having a huge cash level and keep the food companies.''

Besides, Johnson still believed the committee would find cash more compelling than junk. Having received KKR's letter of complaint, the special committee directed the offending RJR executives to be more voluble. KKR immediately set out to put the pedal to the metal, challenging its staff to find a price it could go to the wire with - one that would let KKR keep the food assets and still satisfy the lenders that the firm would have the ability to service its debt. The staff debated the price tag in interminable meetings on Tuesday and Wednesday. Kravis wanted the management group to think KKR was less than serious, so he went skiing in Vail, Colorado. Johnson went to Hell, media version. From the day he put his company in play, he had refused to talk to the press. Even after the management contract hit the papers, he kept his mouth shut. But a few days before Thanksgiving, Time magazine (owned by Time Inc., the publisher of FORTUNE) persuaded Johnson to be interviewed for a cover story on the buyout. Although he was coached before the interview, Johnson at once reverted to form: glib and outrageously candid, a reporter's dream and a publicist's nightmare. The interview made him look only slightly less sensitive to the welfare of his employees than Vlad the Impaler. Discussing potential layoffs in the Atlanta headquarters, he said with seeming nonchalance that those workers had ''portable'' jobs and could find employment elsewhere.


While Johnson was wiping the egg off his face, KKR was hatching ideas. On Tuesday, November 29, the day the new bids were to be submitted, KKR's staff gathered for a final meeting: Kravis and Roberts went around the room of associates asking each for a price. The agreed-upon figure: $106 a share, $80 in cash. KKR had already told the committee that if its bid were accepted, it would dump Johnson. No hard feelings, just one of those things. Says Kravis: ''It became clear he was going his way, and we said fine. We'll go our way, but if we end up buying this company, the best thing to do is to find a new CEO.''

The Shearson-Johnson team assumed, with catastrophic consequences, that it did not have to be the highest bidder in the second round. Since the special committee changed the rules the first time, the Shearson bankers reasoned, it might do so again, and they didn't want to lead with their chins. Says Tom Hill: ''We just wanted a place at the table.'' Peter Cohen played safe, raising his price one dollar to $101 share, and sending a message to the committee that his group was willing to negotiate ''any and all'' provisions of its bid. The bids were submitted again at Skadden Arps at 5 PM and the Shearson-Johnson contingent retreated to Nusbaum's office at Willkie Farr & Gallagher at Manhattan's Citicorp Center. There they waited for an opportunity to negotiate their price. And wait they did.

At 8 PM Johnson left for dinner, telling his colleagues they were losers ''no matter what we do.'' He believed the board was a captive of its investment banker advisers, and that his group's bid would have to win by a wide margin before the committee would award him the deal. Cohen went home to celebrate his 20th wedding anniversary. Around 10 PM Nusbaum found out from a reporter that the committee's advisers were negotiating with KKR. ''We were really astounded,'' he says. He sent a letter to the committee demanding to see KKR's bid and insisting on the right to negotiate. Johnson called Hugel, who told him ''it wasn't close,'' but Hugel wouldn't tell him the difference. Cohen came tearing back from dinner and initiated a series of computer runs to evaluate the variety of combinations of cash and debt he could offer to raise the nominal value of Shearson's bid.

Johnson showed up at Skadden Arps's offices the next day, November 30, wanting to address the committee. By now the special committee was reviewing with its investment bankers the KKR offer as it had been completed the night before. The committee also asked KKR to discuss its plans for running the company should it acquire RJR. Hugel, aware that the management group wanted to make another bid, then asked George Roberts to extend the 1 PM deadline he had put on the offer the night before. Roberts said no. Cohen reached Johnson and Nusbaum as they cooled their heels. Full of vinegar, he had a new number to play, $108 a share, and a new way to play it. ''We'll use a stick,'' he told Nusbaum. ''We just called the bid in to Dow Jones.'' It was noon. The committee now had a new $108 offer from management and a $106 offer from KKR that was ticking away. Says Hugel: ''We felt KKR was serious about the deadline, but we had a fully negotiated agreement with them. You don't dismiss that out of hand.'' Hugel went back to KKR and asked again for an extension. Roberts relented. He would delay one hour, but at a price: 20 cents a share reimbursement for expenses the firm figured it would incur during the contest. Hugel agreed. For 60 minutes the special committee had KKR in hand, but it was uncertain about the Shearson-Johnson group: Was it still playing the game and willing to bid higher?

Around 1:30 PM Atkins, the committee's lawyer, told the management group to ''sharpen your pencils and put your best bid on the table.'' Cohen was ready. He offered $112: It broke down into $84 in cash; $24 in payment-in-kind (PIK) securities, which accrue interest but don't pay cash for a period of years. The additional $4 was in preferred stock. Atkins appeared in the KKR caucus room and tried to buy more time. He asked if the firm would enter into a merger agreement at $106 a share under the condition that if the offer was topped within seven days KKR would receive a $1-a-share kill fee. Kravis said no, but surprised Hugel with a new bid of $108, upping the PIK securities in his package. No fuse was attached to this offer because Kravis believed there would be no more bidding and that the committee was beginning its final deliberations.

With KKR on ice, the committee had the leisure of spending the rest of the afternoon with the Shearson crew, negotiating the terms of the securities included in its bid. Some five hours later Hugel approached Kravis and Roberts and asked if the firm would like to make its ''best and final'' offer. Kravis and Roberts agreed to up the ante by $1 in cash to $109. But Roberts didn't make the same mistake twice. Thirty minutes, he told Hugel, or KKR was voting with its feet. ''Every time we went into that room we could see George clench,'' Hugel recalls. ''We had to get out before we froze to death.'' With the score standing at $112 a share to $109, the committee had to make a choice. It was easy: $109.

In the end KKR bested its rival because the firm was more flexible in negotiating with the special committee than were its opponents. At the committee's request, for example, KKR changed the conversion provision of the debentures in its package. At first it offered to convert the debentures into RJR equity after two years, but the committee talked KKR up to four years. The longer conversion period ensures shareholders a greater possibility of future bounty. Lazard Freres and Dillon Read, the advisers to the committee, figured the convertibles would trade at par or above it. If the securities trade at par they are as good as cash. The king was dead. The management group refused to entertain modifications the committee's investment bankers wanted - or at least the investment bankers felt that way.

The committee's advisers discounted the management group's securities more heavily. Including discounts, KKR's bid was calculated to be worth $108 to $108.50 a share, and management's $108.50 to $109. The committee's investment bankers threw their hands up, declaring the bids ''substantially equivalent.'' It was now the special committee's turn. After 12 hours of deliberating the committee called the board to order. After another 15 minutes of discussion, Martin Davis of Gulf & Western made a motion to sell the company to KKR. The oft-pronounced verdict on the directors' decision is that they awarded KKR the company to avoid charges of inside dealings with a management group that would reap a fortune in the buyout. But by then Johnson's management contract was a shadow of its original. In the last-gasp effort to make their offer more attractive, Shearson and Johnson agreed to slice the management equity down to less than half its initial size. ''If this goes on any longer,'' Johnson joked with Cohen, ''I'm going to be paying you guys.'' Of his committee's deliberations, Hugel says sternly: ''Nobody said, 'Let's screw Ross Johnson.' ''

Ultimately the directors bet on the come. The returns from the surviving food and tobacco company - if the various projections are correct - might create an enormous profit for shareholders who hold on to their convertible securities. Hugel, for one, says he is hanging on to his. For a fellow $22 billion in debt, Henry Kravis is sanguine. He is confident that the 3-to-1 debt-to-equity level he structured for RJR has quite a margin of safety to it, even if the tobacco business doesn't. To replace Ross Johnson and call the shots at RJR, Kravis has hired - no small irony - Louis V. Gerstner, Jr., the president of Shearson's parent, American Express, and Jim Robinson's right-hand man. His reported $2.3 million starting salary and $10 million to $15 million signing bonus makes Johnson, who was earning $1.8 million, look underpaid. At Shearson, Peter Cohen is not talking like a loser. The RJR contest, he says, demonstrated his firm's ability to raise huge amounts of cash and has led directly to three or four other big deals. As for Ross Johnson, he watched horrified - as if numbed - as the numbers kept going up and up and up. At the end, he admits: ''I was a spectator at a tennis match.'' But don't feel too sorry for him - he floated away on a golden parachute of at least $23 million. And don't expect any regrets either. Johnson says he would do it again: ''The thing that makes me so comfortable is that I did what I was paid to do - get value for shareholders.'' The shareholders of RJR Nabisco are the ones who really made out like bandits.

"Qintex Tops Murdoch With Successful $1.5 Billion Bid For MGM/UA," by E. Scott Reckard, Associated Press, September 15, 1989

Australia's Qintex Group won a brief but bitter bidding war for MGM/UA Communications Corp. on Friday with a successful $1.5 billion buyout offer, topping media magnate Rupert Murdoch by $100 million.

Kirk Kerkorian, who owns 82 percent of MGM/UA, already had sold many of the assets of the old MGM and United Artists studios. The high price was attributed to MGM-UA's vast movie library, and alluring asset at a time of strong worldwide demand for U.S. entertainment.

″We believe the global development of not just television but movies is going to exceed inflation by a wide margin,″ said John Lloyd, Qintex's chief financial officer.

Kerkorian had been seeking a buyer for all or part of the company for 18 months. Nearly every big American company with entertainment holdings, as well as Japan's Sony Corp., had expressed interest.

Qintex announced a deal in April to buy MGM/UA's United Artists studio and some other assets for $600 million. At the time, the Fox Inc. unit of Murdoch's News Corp. was the final suitor to drop out of the bidding.

In a surprise move Wednesday, Murdoch bid $1.4 billion for all of MGM/UA. But negotiations between MGM's board and Murdoch's News Corporation and its Fox Inc. unit broke down late Thursday.

By bettering Murdoch's deal for all of MGM/UA, Qintex Chairman Christopher Skase turned the tables on his fellow Australian. Murdoch, whose holdings include the Fox studio, had hosted a cocktail party to introduce Skase to Hollywood's elite after the Qintex deal was announced in April.

When Murdoch reentered the picture Wednesday, Skase was in the process of buying for $8 million the palatial Los Angeles estate of the late Edie Goetz, the daughter of the late Louis B. Mayer, one of MGM's founders.

A source close to Skase, speaking on condition of anonymity, said Skase had been angered by Murdoch's offer, although not surprised by it.

Neither Murdoch nor Skase was available for interviews Friday.

Murdoch spokesman Howard Rubenstein said MGM/UA had asked Murdoch to bid for the company. ″He thought he had a deal, but then the transaction fell apart,″ he said, declining further comment.

In buying MGM/UA, Qintex also will assume $400 million in MGM/UA high-yield bond debt. It also promised to make a nonrefundable $50 million deposit on MGM/UA ″promptly.″

Qintex owns an Australian television network and 43 percent of a U.S. company that produces TV movies and specials, including the Lonesome Dove miniseries.

Qintex officials said MGM/UA's 4000-picture movie library, the largest of any studio, was the main attraction. European and Asian markets for U.S. movies and television are booming, and the films can be packaged and sold for distribution in many forms.

The 1000-movie United Artists library includes the Rocky, Pink Panther and James Bond pictures.

Ted Turner owns worldwide television broadcast rights and domestic pay-TV rights to the 3000-picture MGM library, which includes pre-1950s Warners Bros. releases and includes Casablanca, Singin' in the Rain, Gone With the Wind and The Wizard of Oz.

But Qintex will get domestic and foreign home video rights to that library, as well as non-U.S. pay-TV rights.

Lloyd said Qintex also plans to expand MGM/UA's in-house film production to 15 to 20 per year.

After sputtering as Kerkorian bought and sold pieces of the company, MGM/UA produced a dozen films last year, including Oscar-winner Rain Man. But during negotiations for the sale of the company, film production has ground to a halt.

Lloyd said there are no immediate plans to sell MGM/UA assets.

Murdoch, whose four-continent TV, newspaper and magazine empire is valued at more than $8 billion, also sought MGM/UA's movie library as programming for his Fox TV network here, fledgling satellite television networks in Britain and other enterprises.

Lloyd said Qintex's financing probably would be about half in bank loans and half in cash from a consortium of unidentified European and Asian investors.

MGM Grand Inc., a Kerkorian-controlled company that operates a first-class airline and Nevada casinos, will buy back the MGM/UA headquarters building from Qintex in October for $43 million or its independently appraised value. MGM/UA will make about $26 million on that deal, the company said.

A September 23 shareholders meeting to consider Qintex's earlier offer was canceled.

"Sony to Pay $3.4 Billion for Columbia Pictures: Japanese Firm Willing To Offer High Price to Get Film, TV Software for Video Equipment It Makes," by Paul Richter, Los Angeles Times, September 28, 1989

In the largest U.S. acquisition to date by a Japanese firm, Columbia Pictures Entertainment agreed Wednesday to be acquired by Sony Corp. for $3.4 billion in cash.

Sony immediately pledged to put the 65-year-old movie and TV studio in the hands of Sony's U.S. subsidiary and to "keep it as independent as possible, as a full-fledged member of the U.S. film industry."

Sony executives said that they were in talks with producers Peter Guber and Jon Peters, co-chief executives of Guber-Peters Entertainment Co., about taking some management role at the company. Industry sources say Sony is considering making Guber Columbia's chief executive and speculated that Sony might also buy up the small, publicly traded Guber-Peters firm.

Columbia Pictures Entertainment includes the Columbia Pictures and TriStar studios, television programming and syndication operations, a huge film and TV library and the 820-screen Loews movie theater chain. The 2500-employee company has been secretly talking with Sony intermittently for more than a year, and it received a firm buyout proposal last weekend.

Columbia's board voted on the Sony proposal at a meeting in New York at 8:30 AM Wednesday and sat down to sign papers with Sony executives an hour later.

The sale is part of a consolidation that the film industry is undergoing as increasing entertainment viewing worldwide has driven up the studios' values. Already this year, the Warner Bros. studio has been sold to Time Inc. with its parent, Warner Communications; and MGM/UA Communications has agreed to be sold to Qintex Group of Australia.

The Columbia deal represents the first time that a Japanese concern has purchased a major Hollywood studio.

Sony was willing to pay a lofty $27 a share for a company with meager earnings because of the strategic value of Columbia's films and TV programs to a concern with a strong hold on emerging TV and audio technologies, analysts said. Columbia's films will provide the "software" for Sony videocassette recorders, for example, and for the 8-millimeter recorder Sony is trying to popularize.

The purchase of the studio "extends Sony's long-term strategy of building a total entertainment business around the synergy of audio and video hardware and software," said Michael P. Schulhof, vice chairman of Sony Corp. of America, in a statement.

Analysts said that the high price offered by Sony makes it unlikely that a competing bid will emerge at the last minute.

Coca-Cola Co., Columbia's largest shareholder, with a 49% stake, has given Sony an option to purchase those shares, Sony said. Coca-Cola's management has pledged that it will recommend sale of the shares at a board meeting set for October 2. Allen & Co., the New York investment banking firm that holds a 3% stake in Columbia, has given Sony an option to buy its shares as well.

Columbia's two top executives, President and chief executive Victor R. Kaufman and chief operating officer Lewis Korman, will leave the company when the sale is completed, Columbia said.

Schulhof said in an interview that he has held "conversations with Peter Guber and Jon Peters, and we're hopeful some kind of an arrangement can be reached." He would not elaborate. Trading in Guber-Peters stock was suspended at 9:26 AM Wednesday after rumors of the talks were publicized.

Reports of Guber's possible appointment raised questions in Hollywood about Columbia movie chief Dawn Steel's future, as well as the future of other senior personnel at Columbia. Some observers wondered if Guber's connections with Warner Bros. suggested that the new regime might lure talent from that studio.

Schulhof said Columbia is "run by very capable people" and described the studio's future as "business as usual." He refused to comment on Steel's future or on how effective he believes she has been since she began trying to reverse the movie unit's sagging fortunes last year.

"I know her only by reputation, and obviously the company thinks very highly of her," said Schulhof, who is also a director of Sony.

A key player in the Sony-Columbia talks has been Walter Yetnikoff, chairman of Sony's CBS Records unit. Schulhof said Yetnikoff would have a voice in Columbia's "strategic decisions" but added that Columbia would be "independent" of CBS Records and its most famous label, the similarly-named Columbia Records.

Schulhof said major layoffs are "not our style . . . . We're not a (leveraged buyout) outfit; we didn't buy the company to carve it up."

He noted that employment has increased at CBS Records since Sony purchased it from CBS Inc. early last year for $2 billion.

Since it was acquired, CBS Records has again moved into music publishing and has begun manufacturing compact discs for the first time, he said. In all, Sony Corp. of America employs 12,000, operates six major factories and is "very much an American company, run by Americans," Schulhof said.

He said he did not expect the company's Japanese ownership to be an obstacle in Hollywood, where personal relationships are so often crucial.

The acquisition will mean that Coca-Cola will end its difficult seven-year adventure in entertainment with an enormous profit. The stock sale will bring about $1.5 billion before taxes, or $1.2 billion after taxes.

The soft drink company scaled back its involvement in 1987, when it combined Columbia, TriStar and its other entertainment units into one company and spun off 51% of it to the public.

In Britain on Wednesday, former Columbia Pictures movie chief David Puttnam said he believed that Coca-Cola had been looking to sell its remaining shares even in 1987. "I had no doubt . . . this was going to happen," said the director, who alienated many of Hollywood's most powerful figures during his iconoclastic reign.

In a statement, Columbia Chairman Donald R. Keough said Sony was "an ideal buyer . . . . It has all the right characteristics and, very importantly, has the ability to take the company to its next important step."

"Deal To Buy MGM/UA Collapses," by Richard W. Stevenson, The New York Times, October 11, 1989

An Australian entertainment company's deal to acquire the MGM/UA Communications Company collapsed today amid recriminations and legal action, opening the possibility that Rupert Murdoch might make another bid for the film and television studio.

MGM/UA said it had terminated its agreement to sell the company to Qintex Australia Ltd. for more than $1.5 billion after Qintex failed to put up a $50 million letter of credit required by the deal. Qintex's ability to finance the acquisition had been the subject of considerable speculation in Hollywood and on Wall Street since the Australian company failed to deliver the letter of credit as scheduled on September 22.

MGM/UA also said it had filed suit against Qintex in the Federal District Court in Los Angeles, charging breach of contract and fraud and seeking at least $50 million in damages.

Letter From Quintex Chairman

Qintex's aggressive chairman, Christopher C. Skase, a former financial journalist, maintained in a letter to the Brisbane Stock Exchange that Qintex had taken steps to secure the letter of credit but that MGM/UA proposed ''bad faith'' changes in the deal that, he said, ''shifted daily and, in essence, reflected an attempt by MGM to extract higher economic value.'' He added that Qintex intended to sue MGM/UA for damages.

The deal's collapse came less than a month after MGM/UA turned down a $1.35 billion bid from Mr. Murdoch, who already owns the 20th Century Fox studio. Dennis Petroskey, a spokesman for Mr. Murdoch's Fox Inc., said the company had not been in contact with MGM/UA about reopening negotiations. Mr. Murdoch was in Australia, according to Howard Rubenstein, his spokesman, and could not be reached.

Master Negotiators

But analysts said Mr. Murdoch would almost certainly remain interested, although both Mr. Murdoch and Kirk Kerkorian, the financier who owns 80 percent of MGM/UA, are master negotiators who might circle each other for some time before deciding how to proceed.

''I'm sure the phone calls between the bankers have already been made,'' said Jeffrey Logsdon, an analyst at Crowell Weedon & Company in Los Angeles.

The collapse is a severe embarrassment for Qintex and Mr. Skase, who has built Qintex into one of Australia's largest media companies. He had portrayed the MGM/UA acquisition as a big step in building a global communications company.

Jeffrey C. Barbakow, MGM/UA's chairman and chief executive, said the company had worked hard with Qintex to find a solution to the Australian company's apparent financing problems. He said that executives of the two companies had met for the last week and that Mr. Skase was present at a meeting Sunday in Los Angeles.

''Almost every day, Qintex assured us that the letter of credit would be immediately forthcoming,'' Mr. Barbakow said in a statement. ''We believe it is now clear that Qintex repeatedly misled us regarding its ability to furnish the letter of credit.''

Qintex had originally agreed last spring to acquire just the United Artists studio and library, which includes the James Bond, Rocky and Pink Panther movies, from MGM/UA in a complicated deal valued at almost $700 million. But after Mr. Murdoch's surprise bid for the entire company last month, weeks before the original Qintex deal was set to close, Mr. Skase negotiated a new deal for all of MGM/UA that topped Mr. Murdoch's offer.

During the year that MGM/UA has been for sale, many of the world's largest entertainment companies have expressed some interest, including the Sony Corporation, which last month agreed to acquire Columbia Pictures.

Last year, a deal to sell a large stake in MGM/UA to a group including the producers Jon Peters and Peter Guber collapsed at the last minute. The company has been run for the last year by Mr. Barbakow, a former investment banker at Merrill Lynch whom Mr. Kerkorian brought in, largely to find a buyer.

Terms of Terminated Deal

Under last month's revised Qintex-MGM/UA deal, Qintex was to have paid $25 a share for MGM/UA's 50.6 million shares of common stock and $18 a share for 10 million preferred shares. Qintex would also have assumed $400 million in debt.

But Qintex was widely rumored to have been having trouble financing even the previous, smaller deal.

In a letter to the Brisbane Stock Exchange last week, Mr. Skase said Qintex would get backing from about 10 ''major international companies, many of whom have an involvement in the broadcasting and entertainment industry.'' He did not identify the companies or provide any financial details, except to say that Qintex's total financial participation would be about $125 million to $150 million.

Comment by Kerkorian

In a brief telephone interview today, Mr. Kerkorian, who rarely speaks to reporters, said the two companies ''really put in an effort'' to salvage the deal. Asked what had kept Qintex from delivering the letter of credit, Mr. Kerkorian replied, ''Obviously, it's financing problems, maybe priorities.'' He declined to elaborate.

Mr. Kerkorian said the collapse of the deal would not affect his plans to build a theme park in Las Vegas, Nevada, through his other big holding, MGM Grand Inc. He said MGM/UA's board had not yet decided on its next step. Both he and Mr. Barbakow declined to comment on Mr. Murdoch's interest.

Mr. Barbakow, who stood to reap a huge financial gain as part of his employment contract if the deal had been completed, said in an interview that MGM/UA had tried ''everything we could think of that made sense'' to keep the deal on track. ''We weren't able to get anything that worked,'' he said.

Barbakow Statement

In his statement, Mr. Barbakow said: ''MGM/UA has made every effort to cooperate with Qintex, including proposals to reduce the letter of credit, accept substitute security or accept an opinion from Qintex's investment bankers of Qintex's ability to finance the merger. We also proposed that Qintex could proceed without a letter of credit, if MGM/UA also had the opportunity to consider a better offer. Moreover, Tracinda Corporation, MGM/UA's largest shareholder, indicated it was willing to assist in financing up to $135 million of the acquisition cost, without voting rights in the surviving corporation.''

Mr. Barbakow said Qintex's final proposal was to eliminate the letter of credit or any other security, eliminate the minimum damages that MGM/UA would be entitled to if the deal collapsed, postpone the closing by two months and require MGM/UA to invest in Qintex.

''We had no choice other than to terminate the agreement,'' Mr. Barbakow said.

"The Media Business: Turner Broadcasting Seen In Talks To Buy MGM/UA," by Geraldine Fabrikant, The New York Times, November 29, 1989

Turner Broadcasting System Inc. is still negotiating to acquire the MGM/UA Communications Company, several executives close to Turner said today, despite some reports to the contrary. They added that the deal, as it was now being discussed, could be for stock.

An industry executive familiar with both companies said Time Warner Inc.'s film division, Warner Bros., was interested in acquiring the distribution rights to United Artists films in the United States. If that is accomplished, the company would have more films for its distribution network and would bring yet another movie company under its umbrella. It is also interested in acquiring the home video distribution rights overseas to United Artists products, the executive said.

Kirk Kerkorian, who controls MGM/UA through his Tracinda Corporation, had originally agreed to sell the company to Qintex, an Australian company, but that deal fell through when Qintex was unable to post the financial guarantees needed.

Terms of Possible Deal Unclear

Just how a Turner deal would be structured is not yet clear, but one industry expert said, ''No one wants to own a highly leveraged movie company.'' Because the movie business is so volatile, buyers do not want to borrow money and incur heavy debt service they might not be able to meet.

Ted Turner and Mr. Kerkorian were meeting today at the Bel Air Hotel in Bel Air, California. Both Mr. Turner and Jeffrey Barbakow, Mr. Kerkorian's top executive, declined to comment.

A purchase of MGM/UA by Turner would provide Turner Broadcasting with more films for its cable services, including Turner Network Television, which has depended heavily on the films from the MGM library that Mr. Turner already owns.

Turner Board's Approval Needed

Both Tele-Communications Inc. and Time Warner are leading cable operators and have an interest in Turner's services being as strong as possible. Mr. Turner could not make such an acquisition, of course, without the approval of his board members. Apparently they are considering giving it in exchange for some rights and may agree to guarantee the stock payment in some form.

Although Rupert Murdoch's News Corporation was initially rumored to be interested in the company, there is no indication that it still is. The price could be about $1 billion for MGM/UA common stock, as well as several hundred million dollars for its preferred stock and the assumption of an additional $400 million of MGM/UA debt.

"Icahn On TWA Woe: 'We're At Crossroads,'" by Agis Salpukas, The New York Times, February 10, 1990

When Carl C. Icahn won control of Trans World Airlines in August 1985 he donned a pilot's uniform jacket in his office and shouted joyfully: ''We've got ourselves an airline! We've got ourselves an airline!'' These days, Mr. Icahn sounds far less jubilant as he tries to determine the course of a carrier whose fortunes have fallen considerably in the last year. TWA, which became profitable in 1987 and 1988, is expected to report a loss of about $150 million for 1989 even after counting a $150 million gain from the interest on its large amount of cash. And Mr. Icahn, an oft-distracted investor not known for the commitment of a longtime airline industry figure like Robert L. Crandall of American Airlines, is again asking himself whether TWA can remain viable.

''We're at the crossroads,'' he said in an interview. ''Do we survive as a small airline or do we grow? It's up to the unions to decide which road to take.''

An Older Fleet

The problems of the airline, the nation's sixth largest, are not easily fixed. Bigger United States carriers like American, Delta and United, as well as foreign carriers, are quickly expanding on TWA's bread-and-butter routes to Europe. The 30 percent rise in fuel costs in the last year, which has troubled the entire industry, has been particularly difficult for TWA, whose older-than-average fleet is less fuel-efficient. And TWA's unions, which had provided big concessions and helped Mr. Icahn win control in return for saving them from a takeover by Frank Lorenzo, have become more distrustful.

Some of TWA's troubles can be traced to the way Mr. Icahn got back the money he paid for the airline in 1985. He did so by borrowing heavily in taking the airline private in 1988. In that complicated transaction, Mr. Icahn ended up with $469 million for himself, more than the $440 million he had paid for the company. On top of that, he got control of 90 percent of the stock.

But TWA's debt soared. It now has long-term debt totaling about $2.7 billion, of which $1 billion is in leases for the planes it flies. Its interest costs will be about $392 million this year.

Mr. Icahn acknowledged that the debt was high but said that with its strong cash position, TWA could survive a downturn in the industry. He said the interest on the carrier's $1.3 billion in cash would offset most of the interest cost.

Building a Cash Cushion

Conceding that the carrier faces hard times, Mr. Icahn said he was selling some of its assets, including more 747s, to build up a cash cushion that he expects to reach $1.6 billion soon. ''That can weather a lot of storms,'' he said.

He is also putting pressure on the pilots to reopen their contract and accept a 10 percent cut in wages, saving the carrier about $80 million a year. All told, he is seeking more than $400 million in concessions over five years from the pilots alone. A concession from the pilots would open the door for an approach to the machinists and possibly the flight attendants, he added.

If the pilots accept, he said, he is prepared to increase the size of the airline by buying some new narrow-body planes and upgrading TWA's fleet. Its planes average 18 years of age. Mr. Icahn has inquired about buying 16 Airbus A320s that will be owned by Guinness Peat Aviation Inc.

The planes are being taken over by Guinness Peat after Braniff, which has filed for bankruptcy protection, could not meet the payments for them. The 16 planes were part of an overall agreement between Braniff and Airbus Industries to deliver 50 A320s and options for another 50. Mr. Icahn is considering taking over those orders and options.

If the pilots refuse to cooperate, he said, he will sell more planes and routes and shrink the airline.

Carrot and Stick

''I'm not one of these guys that will try to fly out of this mess - that's what killed Braniff,'' he added, saying that Braniff's expansion strategy failed. ''We're going to survive because we're going to be strong financially.''

Mr. Icahn's carrot-and-stick offer to his pilots is a familiar one. Stephen M. Wolf, the chairman and chief executive of the UAL Corporation, used a similar approach with the pilots of United Airlines last year.

''Why should pilots be paid $130,000 a year,'' Mr. Icahn said, ''when you can get pilots for $27,000.''

But leaders of TWA's unions wonder why Mr. Icahn would seek big concessions when he now has such a huge amount of cash. They say he could use the cash to improve TWA's fleet and service.

They say recent actions by Mr. Icahn belie his promise of expansion, and they fear he is maintaining the cash to use for his other investments, as he has done in the past.

Mr. Icahn recently sold the airline's Chicago-to-London route for $195 million to American Airlines. Analysts called the route important to TWA, which is a far bigger force in flying the Atlantic, where it controls 14 to 15 percent of the market, than it is within the United States, where it holds 6 percent.

Mr. Icahn has also sold eight Lockheed L-1011s and three Boeing 747s for $210 million and then leased them back. He is on the verge of another sale and leaseback of Boeing 747s.

The Union's Fears

While Mr. Icahn calls such steps protective, union leaders view them as the beginning of a liquidation of the carrier. They are bitter particularly because they have already given Mr. Icahn more than $1.3 billion in concessions over four years.

Some union leaders and airline analysts think that even if Mr. Icahn does make more major investments in the airline, it has fallen so far behind its competitors that its future is doubtful.

''The problems are so big that one thing alone cannot fix it,'' said Kent T. Scott, vice chairman of the TWA Master Executive Council of the pilots' union. ''The only guy who can fix it is Carl,'' he said, referring to the TWA cash Mr. Icahn could invest.

Mr. Scott said he thinks Mr. Icahn has turned most of his attention to making investments in other companies and has lost interest in making the airline viable.

Buyout Studied

At a recent dinner at Mr. Icahn's office in Mount Kisco, New York, where TWA has its corporate headquarters, Mr. Scott said that Mr. Icahn sounded him out on whether his union wanted to buy the carrier. Mr. Scott said the union was not interested.

Mr. Icahn denies that he offered to sell the airline. He said a buyout by employees would only add to the carrier's already large debt and hasten TWA's demise.

Nevertheless, Mr. Scott said in an interview that the three unions - the pilots, machinists and flight attendants - had explored an employee buyout of the carrier. He thinks Mr. Icahn's demand for the more than $400 million in concessions over five years is too much to give in return for a promise to buy new planes.

One industry executive who has followed Mr. Icahn's career said that as Mr. Icahn realized how much it would cost to refurbish his fleet and upgrade the airline in other ways, he returned to his usual role of making money through other investments. He has made large investments in Texaco Inc. and the USX Corporation, much of it with TWA cash. He has since sold the Texaco stake.

The executive, who asked not to be identified, said Mr. Icahn ''has made a lot of money without having to deal with all the imponderables in the airline industry.''

Mr. Icahn denied that he had lost interest in the airline. As an example of his commitment, he noted that he must approve every expenditure of more than half a million dollars.

Recouping the Investment

After gaining control of the carrier, Mr. Icahn at first moved to shore up its weak points. He acquired Ozark Airlines, a Midwestern carrier that could feed passengers to TWA at its hub in St. Louis.

But his tendency to try to recoup his investment quickly was also at work. After he gained control of Ozark he recovered most of his investment by selling the Ozark fleet and leasing it back.

He helped the company ride out a huge decline in traffic resulting from terrorism abroad in 1986 by redeploying many planes to vacation areas like Florida, the Caribbean and California. He sold, for $140 million, half an interest in the carrier's computer reservation system to Northwest Airlines, linking up with a strong airline that would help build the system. This week Delta said it would join the reservations system.

After losses of $193 million in 1985 and $106.3 million in 1986, TWA earned $106.2 million in 1987 and $308.7 million in the first 10 months of 1988, when TWA went private.

$3 Billion Aircraft Order

Mr. Icahn made another substantial commitment to strengthening the carrier in March 1989. He ordered $3 billion worth of airplanes, with 20 firm orders for the Airbus A320 and 20 options to buy.

The first of the 330-passenger planes, which has a range of 4600 miles and could serve TWA's transatlantic routes, is scheduled to be delivered in 1994.

"The Collapse of Drexel Burnham Lambert; Drexel, Symbol of Wall Street Era, Is Dismantling-Bankruptcy Filed," by Kurt Eichenwald, The New York Times, February 14, 1990

Drexel Burnham Lambert Inc., the once-dominant investment house that fueled many of the biggest corporate takeovers of the 1980s, began selling off its securities yesterday, and its parent company filed for bankruptcy protection. The moves marked the demise of a firm that seemed to symbolize the fast-money era on Wall Street.

Drexel's securities business effectively collapsed yesterday after the parent company defaulted on $100 million in loans and other Wall Street firms sharply curbed their dealings with the investment house.

The parent, the Drexel Burnham Lambert Group Inc., filed for protection from its creditors under Chapter 11 of the Federal Bankruptcy Code late last night, a few hours after the company's board had approved the filing.

Subsidiaries Not Included

The parent's filing does not include the investment firm or a subsidiary that deals in securities issued by the United States Treasury. But unlike companies in other industries that file for bankruptcy, Drexel is not expected to reemerge as a going concern, the firm's executives and lawyers said. More than most businesses, the survival of a securities firm, they explained, depends on the confidence of investors and other dealers; without that confidence, the business unravels quickly.

''After it's all over, Drexel will be left with cash, and a lot of laid off employees,'' one executive at the firm said.

Accordingly, the investment house that pioneered the use of high-yield ''junk bonds'' to finance high-risk ventures yesterday started the tortuous process of closing down. Executives from a number of Wall Street firms visited Drexel, examining the securities holdings of Drexel for possible purchases.

And many of the firm's 5000 employees began to get their resumes together. ''Everybody's looking to go out of this place in a professional manner,'' one executive said.

Because Drexel employs thousands of people in New York, the news of the firm's collapse stirred concern among public officials in the region.

The demise of Drexel represents ''a sad day for New Yorkers and a sad day for the American financial system,'' said Representative Charles E. Schumer, the New York Democrat. ''It represents a significant blow to New York City's economy and marks the end of an era in American finance.''

The rapid collapse of the firm, which on Monday announced that it was seeking a merger partner because of a cash crunch, created fears among some Wall Street executives about the possible ripple effect on other firms. They said that with Drexel liquidating its huge junk bond portfolio, the value of other firms' holdings in the securities could well collapse.

''If forced sales take place, there may be a capital erosion problem starting,'' one Wall Street executive said. ''Drexel could end up taking some companies with it.''

Wall Street was stunned by the rapid decline of Drexel, but some executives said it was simply the way of the finance world. ''This is the nature of the financial services business,'' said Jeffrey B. Lane, president of Primerica Holdings and former president of Shearson Lehman Hutton Inc. ''You go into a steady decline, and then you fall off a cliff.''

The stock market shrugged off the news on Drexel, with the Dow Jones Industrial Average gaining 4.96 points, to close at 2624.10.

Pioneer in Junk Bonds

Yesterday's developments underline the stunning turnaround at Drexel, which was one of Wall Street's most powerful firms until last year, when it settled criminal and civil charges of securities law violations.

Drexel rose from being a Wall Street also-ran in the late 1970s to become one of the nation's most profitable investment banks in the late 1980s as a creator of the modern junk bond market. Under the guidance of Michael R. Milken, former head of its junk bond division, Drexel became a primary player in the takeover battles that swept corporate America during the last decade. With Drexel's bonds, smaller companies that never before could have obtained financing were able to make bids for some of America's largest corporations.

But things started to come unstuck for Drexel in 1986, when the firm was caught up in the scandals that swept Wall Street after the fall of Ivan F. Boesky, the arbitrager. Mr. Boesky paid $100 million to settle charges of insider trading and agreed to testify against Drexel and Mr. Milken.

Milken Indictment

Last year, Drexel pleaded guilty to six felony counts, agreeing to pay $650 million. Mr. Milken was indicted on 98 counts of racketeering, securities fraud and other charges, and has left the firm.

The rapid collapse of Drexel was precipitated by financial dealings between the firm and its corporate parent. Drexel said the parent had assets of more than $3.6 billion and liabilities of more than $3 billion. Federal bankruptcy law permits a company to enter Chapter 11 if the assets exceed the liabilities when there is a prospect of insolvency.

The parent company - which had sizable holdings of junk bonds and other securities that had declined sharply in value and could not be easily sold - last week began to siphon some of the $500 million in capital that the investment bank held in excess of the amount Federal law required.

That move quickly attracted the attention of the Federal Reserve, which alerted the Securities and Exchange Commission and the New York Stock Exchange, which monitor the activities of investment firms. The exchange was already conducting an audit of Drexel's holdings to insure that they were being accounted for and handled properly by the firm.

On Friday, Drexel executives held meetings with the government agencies and the exchange, at which they were directed to stop moving cash from the investment bank to the parent company.

Marathon Meetings

Then, during a marathon series of meetings over the weekend, Drexel struggled to find a merger partner. At the same time, a number of banks, led by Citibank, attempted to put together a loan to bolster Drexel's deteriorating financial position.

Those efforts collapsed yesterday, and the firm announced that it was in default.

As the problems at Drexel continued to unfold, the SEC and the Big Board had teams of auditors at 60 Broad Street, Drexel's headquarters, going over the firm's books.

In a statement yesterday, Richard C. Breeden, chairman of the SEC, who has been a main coordinator in the effort to find a solution to the problems at Drexel, said in a statement that the commission and the Big Board were closely monitoring Drexel's financial position and that the firm was meeting the Federal requirements for capital.

Speaking early yesterday on Drexel's in-house communications system, Frederick H. Joseph, the chief executive of Drexel and the president of the holding company, told employees to begin liquidating many of the securities held by the firm in an orderly manner.

A Speedy Dismantling

The speed of Drexel's dismantling was surprising. A number of other Wall Street firms, like Salomon Brothers, First Boston and Bear Stearns, were examining Drexel's holdings to see if they might purchase the securities.

But before any proposals were made for the purchases, Drexel had sold off billions of dollars' worth of government and corporate bonds, stocks and other securities. The firm also sold tens of millions of dollars' worth of junk bonds from its portfolio of about $1 billion.

Irritation at SEC

Government regulators were somewhat taken aback in recent days by the speed of Drexel's worsening financial troubles. Indeed, SEC officials expressed irritation that they had not been more closely informed. ''The financing squeeze on Drexel didn't materialize over a weekend,'' one person said of the surprise by the regulators at the events. ''Nobody likes catching grenades, and none of them want to preside over the largest bankruptcy in Wall Street history.''

Some Drexel staff members also criticized the top management for not informing employees of the firm's eroding financial position. But Drexel directors insisted that the management had made the best of a difficult situation.

'Heroic Battle' by Joseph

''Truthfully, this has been a heroic battle by Fred Joseph,'' said Roderick M. Hills, a former SEC commissioner who was appointed to Drexel's board after its settlement last year.

Drexel's day began with efforts by the firm's dealers to trade securities normally. But within a matter of minutes at about 10 AM, executives were told by the SEC and Mr. Joseph to halt their trading, pending an announcement by the firm.

Employees then waited for about 45 minutes to hear the news. Soon, the traders saw it running across the tape: Drexel had defaulted on $100 million worth of loans and was holding a board meeting to consider whether to file for bankruptcy.

In seconds, Mr. Joseph was on the in-house communications system, along with Steven Anreder, a spokesman for the firm, and one of the parent company's bankruptcy lawyers.

In his statement on the communications system, Mr. Joseph said that a large investor for the firm had not materialized and that the parent company appeared to be insolvent. He also said that the firm was continuing to discuss selling all or part of the firm to third parties. Mr. Joseph added that customer accounts would be transferred to Smith, Barney.

'An Unhappy Event'

For employees, Mr. Joseph said, the announcement was ''an unhappy event.'' But he added that all employees would receive their paychecks and that the checks would clear the bank.

At that point, to the consternation of some employees, a bankruptcy lawyer began to discuss with the employees what the meanings of a filing for the parent would be. ''Most employees don't have anything to do with that group and are mad because they think that's what brought the entire firm down,'' one executive said.

Executive job placement firms reported a flood of calls from Drexel staff members yesterday worried about their future. ''We're getting 10 to 20 phone calls an hour from Drexel people,'' said Gary Goldstein, president of the Whitney Group, an executive search firm.

Drexel was also besieged by calls throughout the day from worried suppliers, executives of the firm said. Indeed, they say, the car service that some executives use to go home refused to accept the firm's business, fearing it would not get paid.

Holdings Are Diverse

After the discussion on the in-house communications system, Mr. Joseph said employees could begin to trade again and attempt to liquidate as much of the firm's holdings as possible.

Besides the $1 billion in junk bonds, the firm's holdings are diverse. More than one-fifth of those holdings were said by executives at the firm to be liquid, or easily convertible into cash.

For the rest of the day, Drexel began to move out of one business after another. By noon, the National Association of Securities Dealers, which oversees the over-the-counter market, said Drexel had voluntarily ceased making markets in 229 NASDAQ issues for which it was the market maker. Most NASDAQ issues have multiple market makers, and so would not have to be transferred to another firm.

Late in the day, rumors spread that Drexel was losing its designation as a primary dealer in government securities. However, the Federal Reserve issued a statement saying the firm retained that status.

"Pathe In $1.2 Billion Deal To Buy MGM/UA," by Richard W. Stevenson, The New York Times, March 8, 1990

The MGM/UA Communications Company, the film and television studio controlled by the financier Kirk Kerkorian, agreed today to be acquired by the Pathe Communications Corporation for $1.2 billion.

The deal comes five months after the collapse of a plan for MGM/UA to be sold to the Qintex Group of Australia for $1.5 billion after Qintex ran into severe financial trouble.

Industry executives who have followed Mr. Kerkorian's faltering efforts over several years to find a buyer questioned whether Pathe, an entertainment company controlled by the Italian financier Giancarlo Parretti, would be able to raise the money to complete the transaction.

Under the terms of the deal, Pathe would pay $20 a share for all outstanding common and preferred shares of MGM/UA, including the 72 percent controlled by Mr. Kerkorian. Pathe would also assume $393 million in debt.

On the New York Stock Exchange today, MGM/UA's shares jumped by $3.75, closing at $17.75. Pathe's shares gained 50 cents, to $4.75.

Mindful of its problems completing a deal in the past, MGM/UA stipulated that Pathe place $200 million into an escrow account over the next few months as a down payment, starting with $50 million due on Friday. Pathe, which has only tenuous links to the renowned French company of the same name, also agreed to put up distribution rights in some of its movies and as much as $75 million in proceeds from its films as additional security. The companies said they expected the deal to close by June 23.

Craig Parsons, a spokesman for Pathe, said details of the financing would be available in the next few days, before Pathe begins its tender offer for MGM/UA's shares next week.

''If the company didn't feel comfortable with its ability to complete the offer, it wouldn't have made it,'' Mr. Parsons said. MGM/UA, whose films are released under the MGM and United Artists banners, is one of the most fabled studios in Hollywood. But in recent years its focus has been less on moviemaking than on dealmaking as Mr. Kerkorian and MGM/UA's chairman, Jeffrey C. Barbakow, sought to sell all or parts of its film production and distribution operations and its film library.

Several years ago Mr. Kerkorian sold the rights to most of the library to Turner Broadcasting System Inc. He has also proposed a number of other asset sales and spinoffs, none of which have worked out.

MGM/UA has had a few hits in recent years, including A Fish Called Wanda and Rain Man. But many of its films, like the current Stanley and Iris, have been box office disappointments. Much of the attraction of the company to acquirers is in the United Artists film library, which includes the James Bond, Rocky and Pink Panther films.

Since the collapse in October of the Qintex offer, which was for $25 for each common share and $18 for each preferred share, MGM/UA has negotiated with a number of potential acquirers, including Turner Broadcasting. MGM/UA also approached a number of companies, including Pathe, about being acquired by MGM/UA. But last month, Mr. Barbakow said the studio would again start to focus on making and distributing movies and televisions shows.

Growing Foreign Interest

The deal with Pathe reflects the growing foreign interest in Hollywood. Foreign investors and companies are increasingly acquiring or taking a financial stake in film studios and production companies, both as a way to participate in the domestic entertainment industry, by far the world's largest, and as a way of getting access to films for rapidly expanding markets abroad. Pathe, for example, is one of the largest theater operators in Europe, with more than 1000 screens.

If it is completed, the deal will apparently bring to an end Mr. Kerkorian's 20-year involvement in Hollywood. The financier, who is 72 years old, has increasingly been devoting himself to planning for a huge new casino and theme park development being built in Las Vegas, Nevada, by another of his companies, MGM Grand Inc. Both are controlled by his holding company, the Tracinda Corporation.

The deal would also mark the emergence into the Hollywood mainstream of Mr. Parretti, who remains largely unknown in the United States and who has operated here amid uncertainty among analysts and industry executives about his financial strength. Mr. Parretti broke into Hollywood two years ago by acquiring control of Cannon Films, which he renamed Pathe Communications. He holds about 63 percent of the company's stock. The financier also holds a large stake in the French film company Pathe Cinema.

Discussions With Warner

Industry executives said Mr. Parretti had held discussions with Time Warner Inc.'s Warner Bros. studio about selling to Warner the right to distribute MGM/UA films worldwide. Such a deal would presumably bring Mr. Parretti some of the cash he would need to complete the MGM deal.

Time Warner executives declined to comment. But Mr. Parretti is already engaged in a dispute with Warner Bros. over the rights to the distribution of Pathe's films to theaters in the United States and on home video for the next five years. Mr. Parretti agreed on Sunday to sell the distribution rights to Pathe's films to MGM/UA in a deal separate from the acquisition offer. Warner immediately protested that Mr. Parretti had already agreed to sell the distribution rights to Warner.

Industry executives said Warner and Mr. Parretti might still be able to reach a deal on distribution of MGM/UA's films, although they said Warner was unlikely to make such a deal until it was certain that Mr. Parretti had sufficient financing in place to complete the MGM/UA acquisition.

If the deal is completed, one of the biggest winners would be Mr. Barbakow, a former investment banker with Merrill Lynch & Company. His contract with Mr. Kerkorian calls for him to receive MGM/UA stock and options that would be worth more than $30 million if the company is sold at the price agreed to by Pathe.

"The Mogul Behind Pathe's Bid: Italian Financier Giancarlo Parretti Has Amassed An Empire Of TV And Movie Studios. But Skeptics Say He Lacks The Finances To Buy MGM/UA," by Paul Richter, Los Angeles Times, March 8, 1990

Hollywood doesn't always embrace aspiring film moguls, and many were skeptical when Giancarlo Parretti came to town in 1987 with a bankroll and an ambition to build the next important film company.

In 1988, the Italian financier won control of Cannon Group, a struggling mini-studio, and on Wednesday his Pathe Communications announced plans to buy MGM/UA Communications for $1 billion. With these and other purchases, Parretti has assembled a diversified international entertainment empire of film libraries, TV and movie studios, and theaters.

But he hasn't convinced the skeptics.

Parretti, 48, a onetime waiter with a cheerful manner and a murky past, still must persuade Hollywood and Wall Street that he can complete the deal and rebuild a frail MGM to the kind of health that will make the studio worthy of its great name.

"He said he'd announce a deal, and now he has," said one Hollywood film executive, who asked to remain unidentified. "But will it close?"

Pathe's ability to finance such a deal "is not apparent from its balance sheet," says analyst Jeffrey Logsdon, of the Crowell Weedon & Co. investment firm. "You've got to wonder."

And others on Wall Street apparently shared Logsdon's view, for MGM's stock closed Wednesday at $17.75 a share, significantly below the company's offering price of $20.

Parretti, who was said to be flying to Europe on Wednesday and unavailable for comment, has in recent years faced questions not only about his business prospects but also about the sources of his funds and his past business practices. He has been accused in publications here and abroad of money laundering and Mafia ties and has successfully brought a series of libel suits in Europe to defend himself.

The son of an olive merchant from the Umbrian hill town of Orvieto, Italy, Parretti is a short, chunky man who began trying to speak English only two years ago. But if he hasn't yet mastered the language, he appears to have quickly learned the life style of Hollywood magnates.

Last year, he bought an $8.9 million Beverly Hills mansion, which he decorated with paintings by Goya, Picasso and Miro. He has a taste for Rolls-Royce sedans and fine cigars, and he owns a mahogany desk once used by MGM boss L.B. Mayer.

Questions about the extent of his financial resources have been raised as he has bid several times without success for Hollywood properties.

After paying $200 million for control of Cannon, Parretti last year bid unsuccessfully for three struggling independent studios: New World Entertainment, De Laurentiis Entertainment Group and Kings Road Entertainment. Also last year, Parretti was among a long line of companies that bid unsuccessfully for MGM/UA.

But though the first MGM bid failed, Parretti made an important alliance when he hired Alan Ladd, Jr., MGM's former production boss, to head his newly formed U.S. production company, which he had named Pathe Communications. While Parretti's abilities as a studio head are open to question, Ladd knows MGM, has Hollywood's respect and presumably the kind of relationships that Pathe will need to turn MGM around.

Pathe itself controls a film library of more than 1200 titles, a theater network with more than 1000 screens in five countries, film studios in Italy and a film laboratory in France. Much of these assets came from Parretti's 1989 acquisition of Pathe Cinema, France's oldest film company, for $160 million.

For the nine months that ended last September 30, Pathe reported a loss of $54.6 million on revenue of $276 million.

As Parretti became more visible in Hollywood, he has repeatedly been forced to deny allegations about his past.

Last March, Parretti issued a statement to denounce a story in BusinessWeek magazine that said he had indirect ties to at least one Mafia family and that accused him and Pathe Chairman Florio Fiorini of money laundering through a network of private foreign holding companies. Fiorini, a partner on a number of deals, has become well known in Italy for quickly buying and selling companies in the manner of some American corporate raiders.

The BusinessWeek story, which Parretti denounced as "riddled with false statements," said the pair had been implicated in a series of financial scandals in France and Italy, and it quoted business associates and government officials as saying that they had built their fortune "from business deals arranged by high-ranking government officials."

The story said that early in his career, Parretti had been forced to take a job as a waiter on a transatlantic liner after he was accused of falsifying balance sheets at an Italian hotel he managed.

In interviews, Parretti has ridiculed accusations that his wealth was derived from the Mafia, saying such charges reflected only jealousy.

In last November's quarterly report to shareholders, Pathe said the company has won four libel judgments in French courts, against such publications as L'Express and Nouvel Observateur. In an unusual aside, the report to shareholders said Parretti's "sole purpose in initiating these legal actions was vindication against defamation, disparagement, indirect harassment and innuendo. Having won these judgments, it is hoped that future reporting will aim toward a higher level of accuracy."

"Drexel's Fall: The Final Days," by Christopher Byron, New York, March 19, 1990

No one loves an optimist more than Wall Street does. And no one on Wall Street loved to deliver good news more than Fred Joseph did. Yet shortly after 11:00 on a Tuesday morning four weeks ago, the president of Drexel Burnham Lambert Group, Inc., flanked by two assistants, entered an eighth-floor conference room at Drexel's 60 Broad Street headquarters, and prepared to deliver the one announcement he dreaded most in the world: After more than a year of intensifying struggle, his company, until recently the richest and most feared firm on Wall Street, was going out of business.

With a full head of gray hair, handsome features and a trim physique, Joseph exuded grace under pressure. Inwardly, though, he was crushed. Fourteen months earlier, Joseph had stood before his employees and announced the firing of Drexel's most indispensable employee, junk bond king Michael Milken. Joseph had justified the move as necessary to avoid a federal indictment and the destruction of the firm. Now he was about to reveal that Drexel had been destroyed anyway. "I can't do it," he suddenly blurted out as his eyes fell on the intercom speaker before him. "Here, you read it." He handed a piece of paper to one of his aides.

So ended the Drexel era on Wall Street, not with a bang or even a whimper, but with a waffle. It was the sputtering, final denouement to a year of cataclysmic reverses that climaxed in two weeks of near-panic as top Drexel officials, seemingly oblivious to the firm's deteriorating circumstances, at last woke up to the disaster staring them in the face. Thus, even as chairman John Shad and chief financial officer Richard Wright frantically prepared for a meeting with Drexel's bankers by telephoning company executives across the country to sort out the firm's capital position, other executives rushed to file apparently delinquent SEC paperwork.

Overall, the scene was one of surpassing confusion, and presiding over it was Joseph. Much has been written already about Drexel's decline and fall, and the reasons cited range from Drexel's role in the overleveraging of American business to the prosecutorial excesses of the firm's nemesis, former U.S. Attorney Rudolph Giuliani. But the real reason for the collapse-and certainly for much of the feelings of animosity, betrayal and surprise that accompanied it-may simply be Joseph himself.

Anyone who has met Fred Joseph will agree that he is intelligent and well-rounded, with a storehouse of knowledge and experience in the investment banking world of Wall Street. He rose rapidly through the go-go '60s and the back office crunch and consolidation that followed in the early '70s. He survived the move to negotiated commission rates and the institutionalization of the market. And in the '80s, he emerged as the president of the most rapidly emerging investment bank in the country.

When the hard times came, the choices he faced were excruciatingly difficult, and it's possible nothing could have saved Drexel from bankruptcy. But in his wavering efforts to forestall the inevitable, Joseph seems time and again to have made a bad situation worse, precipitating a crisis of confidence that sent customers fleeing. Then he compounded the problem by trying to compensate for their disappearance by using Drexel's own dwindling capital to prop up the collapsing market.

In the past, Joseph had shown he could play tough. A onetime amateur boxer, he'd grown up in a working-class Jewish family in Roxbury, Massachusetts, and run with a Boston street gang before winning a scholarship to Harvard. Later, he twice climbed to the top of major Wall Street firms. But another, less aggressive side of Joseph emerged over time, revealing a man who yearned for acceptance from the world he now refers to derisively as "the Establishment."

In pursuit of that acceptance, Joseph cultivated a sunny optimism and trust that, for a time being, gave big, powerful Drexel a human face. Yet when Drexel's future clouded over, that optimism seemed to become mere pliability, turning Joseph into a kind of Wall Street Jimmy Carter who failed to grasp the real depth of resentment felt toward Wall Street by the rest of Wall Street, and indeed, by government itself. Once, for example, while the firm was still negotiating with Giuliani over the government's racketeering charges, Joseph briefed Drexel's executive committee on the status of the talks and advised it not to worry. "I think Rudy likes me," he told his colleagues. Within a day, Drexel people were stopping one another in the halls to ask with a cruel grin, "Do you think Rudy likes him?"

In the end, Joseph wound up under siege not just by the government and Wall Street but by his own employees. In what may have been his grossest miscalculation of all, he apparently tried to win their support by handing out huge bonuses-not just annually but quarterly. The gesture fanned the flames of greed at the firm. After all, here was one investment bank where even the top man seemed to think loyalty was for sale.

Afterward, according to a well-placed Drexel source, New York-based mergers and acquisitions chief Leon Black began asking Joseph for more money, apparently to match what he thought his West Coast rival, Peter Ackerman, was getting. (Black refused to return phone calls.) During one memorable week last December, Joseph was besieged in his office by money-hungry Drexel executives, all shouting and yelling for bigger bonuses from the dying firm. When Joseph at last stood his ground, more than 30 of them quite within a week.

Joseph wouldn't comment for this article, but during three wide-ranging background interviews-the first last autumn and the third after the bankruptcy filing three weeks ago-it has been possible to watch Drexel's chief executive evolve from a man seemingly convinced of the survivability of his firm to one increasingly suspicious that hostile forces had been conspiring against Drexel from the start. Among those forces, according to a source whom Joseph has spoken freely to about the matter, the Drexel chief includes the Business Roundtable, a prestigious group of corporate leaders; New York Federal Reserve Bank president E. Gerald Corrigan; SEC chairman Richard Breeden; and Treasury Secretary Nicholas Brady; who Joseph is said to believe was silently listening in on the telephone on the night of February 12 when Breeden urged Joseph to put Drexel in bankruptcy. (A Treasury Department official denies the allegation and says that on that night, Brady attended a state dinner and then went straight home.) What's more, Joseph has told associates that he thinks Mike Milken fomented a whispering campaign to discredit the company that fired him. Milken's layer, Martin Flumenbaum, denies the charge.

In fairness, there seems little doubt that many old-line Wall Street people wanted to see Drexel out of business. One memorandum in Drexel's files summarizes a meeting just before Christmas between the firm's top brass and top officials of the New York Stock Exchange. Sources say the memo quotes stock exchange chairman John Phelan as declaring Wall Street's desire to "dance on Drexel's grave." (An NYSE spokesman would not respond to the claim directly but said, "By pleading guilty to six felony counts, Drexel Burnham has faced the biggest regulatory problem in the 197-year history of the New York Stock Exchange. That's the real issue here.")

There's also bad blood between Joseph and Secretary Brady, who headed the WASPy white-shoe investment firm of Dillon Reed & Company in its 1985 defense of Unocal Corporation against a hostile takeover bid speared by T. Boone Pickens and financed by Drexel. The Drexel folks say that Joseph later tried to invite Brady to a bury-the-hatchet lunch, but Brady, an outspoken critic of junk bond financing, wouldn't even return the phone call.

Finally, there's the awkward matter of Drexel's own chairman of the board for the past year, John Shad. In 1963, Shad gave Joseph his first job on Wall Street, hiring the young Harvard man for a position at E.F. Hutton, where Shad was a top official. Later, Joseph moved to another firm, Shearson Hammill & Company, and then later to Drexel, while Shad went on to become chairman of the Securities and Exchange Commission in 1981. Eventually, Shad was appointed U.S. ambassador to the Netherlands. Following the firing of Milken, he was invited to return to Wall Street as chairman of Drexel- a move that was viewed at the time as an effort by the Drexel board to polish the firm's tarnished image.

Shad's contacts on Wall Street, in Washington, and among the moneymen of Europe could've helped as Drexel's troubles mounted. But one top Drexel official who dealt with him daily says that Shad showed little eagerness to get involved. Repeatedly, according to this source and others, Shad told people, "I took this job at the urging of Washington." (Shad wouldn't comment but produced instead an unpublished letter to the editor of The New York Times from Joseph, defending Shad's work as having "exceeded our expectations.")

Wall Street's dislike for Drexel stemmed in part for the firm's ferocious-and largely successful-efforts to keep potential rivals like Merrill Lynch, First Boston, Salomon Brothers and Goldman Sachs from getting into the junk bond business. For much of the '80s, the most profitable business on Wall Street remained Drexel's alone. But in its quest to control the market it had created, Drexel turned into a virtual sorcerer's apprentice of junk bonds-creating an explosion of low-grade credit that clearly got out of control.

The boom started with Milken, who had joined the firm straight out of the Wharton Business School in 1970. By the '80s, he was enjoying enormous success pushing a tax-angled gimmick for financing startups and takeovers: selling bonds instead of stock. Milken had simply realized the opportunity inherent in an obvious fact. Given the favored tax treatment of interest payments (deductible by the company issuing the bonds) over dividends (not deductible), companies with no credit history on Wall Street could still sell bonds by having a firm like Drexel bring the paper to market with much higher interest rates than investment-grade companies were paying. What's more, since studies showed that such bonds did not go into default much more often than investment-grade bonds did, the higher interest rates became a powerful lure to institutional investors like insurance companies and savings-and-loans.

Between 1977 and 1989, Drexel is estimated to have sold more than $100 billion worth of such bonds for clients who ranged from legitimate entrepreneurs to corporate raiders, rogues and thieves. Milken was responsible for virtually every deal, conducting business at a large, X-shaped trading desk in Drexel's Beverly Hills-based "high-yield" department.

None of the brass back in New York completely understood how this one-man market actually worked; in the end, none of them seemed to care much, either. All they knew was that by the mid-'80s, Milken was producing the biggest continuing burst of fee income and profits Wall Street had ever known. Before long, the folks in New York were laying plans to build a 47-story office tower next to the World Trade Center to house a staff that had doubled in size during the last decade.

In the spring of 1986, at the zenith of Drexel's success, federal prosecutors opened a securities fraud probe targeting Milken and essentially focusing on the question of whether he had profited from trading on inside information. Two and a half years of intensifying pressure followed as prosecutors worked to isolate Milken from the firm and force a guilty plea out of Drexel. Finally, confronted with the threat of a RICO indictment of the firm, Joseph yielded in December 1988 and decided to fire Milken, plead the firm guilty to six counts of mail and securities fraud, and pay a $650 million fine. (At the time, Joseph described the fine as affordable, though he now maintains that he privately viewed it as onerous.)

No one knows what would have happened if Joseph had forced Giuliani's hand. But Joseph's decision to capitulate made him look indecisive and weak, especially since it came only days after he'd made a serious of impassioned public declarations of the firm's resolve to hang tough. "I can't tell what it was like," recalls a trader on Milken's syndicate desk. "The life and soul just went out of the firm. It was depressing beyond words."

Joseph was worried that a large number of Drexel's key players would quit. To induce them to stay, he promised employees a remarkable bonus package: year-end 1989 bonuses equal to at least 75 percent of what they'd earned the year before-whether or not they'd brought in any new business. Coming on the heels of the firm's agreement to pay a huge fine, the bonus arrangement created the impression of a chief prepared to trade treasure for support-an open invitation for abuse.

Soon, rumors began to circulate in the halls of the firm that Joseph had even set up what amounted to side deal "superbonus" arrangements with certain employees-particularly in the Beverly Hills junk bond operation-to spur them to do deals without Milken. No figure seemed too outlandish to be possible, and stories spread of one former Milken aide who'd pressured Joseph into a mid-year bonus of $50 million, followed at year's end by another equally large check. A Drexel spokesman says the stories are fiction.

With morale plunging after the settlement, Joseph apparently hoped to bolster spirits by going out of his way to reaffirm Drexel's commitment to its money-losing retail brokerage division. But the effort backfired when Drexel's financial problems forced him to do an about face. Last April 18, following two days of meeting with Drexel's board of directors, Joseph went on the firm's PA system-a two-way interoffice communications hookup-to announce he was putting the retail division up for sale. Among those hearing the news for the first time were the division's 2300 employees, and pandemonium erupted as furious brokers began screaming back at Joseph from offices around the world. A published account the next day said that one broker demanded to know, "Don't you know that you have a moral obligation to us?"

The sale that was arranged turned out to be a curious echo of a previous deal that Joseph had put together. Fifteen years earlier, as chief financial officer of Shearson Hammill & Company, Joseph found himself on top of a firm starved for capital. The best hope seemed to be a merger partner interested in making use of Shearson's retail brokerage division, the firm's only significant asset. Joseph shopped the firm to several potential investors before finally selling it to a brokerage rival, Hayden Stone, headed by Sanford "Sandy" Weill.

One of Joseph's brokers at Shearson Hammill at the time was Herbert Dunn, who now works in Miami. He recalls Joseph as "a good manager" and "a great communicator." But was he a tough negotiator? Joseph has defended the deal as ultimately benefitting shareholders. But another ex-colleague, who later worked with Joseph at Drexel, maintains that Weill ended up getting Shearson Hammill for what amounted to "five cents on the equity dollar."

The merged firm eventually began Shearson Lehman Hutton, Inc. Weill lost control along the way and by the spring of 1989 was heading a financial services giant called Primerica Corporation, the parent company of Wall Street's Smith Barney brokerage firm. When Joseph put Drexel's retail brokerage division up for sale, Smith Barney wound up buying most of it-and for what a Drexel person involved in the sale says amounted to little more than the assumption of various leases. "It was remarkable," recalls the ex-colleague. "Sandy took Fred's pants off, not once but twice, for exactly the same thing-the sale of a troubled retail operation."

Meanwhile, unmarketable bad deals were beginning to pile up on the Drexel balance sheet. With Milken around, Drexel had always been able to count on his famed network of savings-and-loans, insurance companies and mutual funds to buy anything the firm underwrote, normally on the basis of nothing more than a phone call from Milken. If the issuing companies ever got themselves in financial trouble, Milken stood ready to arrange an "exchange offer" recapitalization, in which the junk bond holders swapped old paper for new, thereby pushing the problem off into the future, perhaps indefinitely.

But without Milken, Drexel had to make it seem that the junk bond market was functioning-even though the firm didn't have anyone with the support of Milken's network, his knack for market timing, or his ability to shuffle around the paper. This meant that Drexel had to hunt up more deals than ever, while standing ready to buy whatever it couldn't sell, lest the firm be perceived as no longer willing to stand behind its merchandise. Under the circumstances, it was a surefire way to wind up with a portfolio of losers.

Several of the bad deals came by way of Peter Ackerman, a top "capital markets" man in the Beverly Hills office. (He declined a request for an interview.) Ackerman, who's 40 or so and who'd worked for Milken on the high-yield desk since the start of the '80s, was known to his colleagues as "the absentminded professor" for his distracted manner and habit of turning up for work in wrinkled chinos and a cardigan. By the mid-'80s, he'd moved up to a suit and tie, and as Milken's problems with the government intensified and he spent less and less time at the office, Ackerman stepped in to fill the void.

Dressing for success didn't guarantee his junk bond deals, however. The first Ackerman turkey to arrive-Paramount Petroleum Corporation-came through a buddy in the oil business who had put together a group that was trying to buy a nearly 50-year-old bankrupt refinery just north of Los Angeles. All the group needed was $43 million-mere pocket change in the Drexel scheme of things. Ackerman said that Drexel would be happy to raise the money, but when it came time to do so, Milken was gone and problems developed.

"Everything fell apart," reports Richard Schuller, a Paramount official who says that Drexel wound up having to make a temporary "bridge loan" of the $43 million so that the deal could go forward. In February 1989, according to Schuller, Drexel tried to sell junk bonds to get the deal off its books, but without success. Meanwhile, the refinery had started up again and was already losing money. In April, the Ackerman team again tried to sell junk bonds, and still there were no takers. In August, Drexel found some Indonesians who showed a momentary interest in the refinery, but with losses now mounting, they backed off. A month later, Ackerman's group moved in and took over the running of the refinery, down to the day-to-day purchasing of crude oil feedstocks. Losses continued, and by October, the situation was desperate. With no other choice available, Drexel put the refinery back into bankruptcy all over again, defaulting on what had become, in effect, a loan to itself.

Ackerman's biggest flop of all involved the refinancing of a leveraged buyout of JPS Textile Group by Odyssey Partners, an Ackerman client. The deal didn't sell well, sticking Drexel with what one research analyst in the Beverly Hills high-yield department says was more than half of the $385 million issue.

By December 1989, Ackerman had decided to get out of the junk bond game, and he moved to Drexel's London office, reportedly to write a book about international relations. But more bad deals were rolling in from elsewhere, at least one courtesy of Leon Black, the New York-based mergers boss whom many in the firm viewed as Ackerman's jealous rival. Black's big turkey turned out to be a costly $1.055 billion financing in April 1989 to help a Drexel client, William Farley, complete the purchase of West Point-Pepperell, a textiles company he'd been after for years. According to a source, Drexel got stuck with $250 million of the amount.

Though Joseph had begun the year by assuring everyone that the firm had expertise and capital enough to absorb the loss of Milken, by June 1989, Drexel was already in financial trouble, and the once-spendthrift firm was beginning to weasel on deals with its own clients. The change in style destroyed the firm's remaining credibility as an underwriter.

Drexel's fate was sealed on Friday, June 9, when a Drexel official telephoned some shocking news to Integrated Resources, a major Drexel client. Integrated had more than $300 million in "commercial paper"-short-term borrowings from other companies-on its books. The paper had maturities of one to 40 days, much of it was held by other Drexel clients, and some $40 million worth was coming due and thus needed to be refinanced the following Monday. Yet the Drexel man reported that in its entire network of investors, the firm couldn't find buyers for more than $13 million of that amount. If Integrated couldn't come up with $27 million on its own, the company would be in default. What followed that night, according to two officials who were there, was a furious, screaming meeting of more than ten executives from Drexel and Integrated in Integrated's offices overlooking Union Square.

One of the witnesses recalled that the Integrated folks demanded to know why the Drexel people, who'd never before had been known to nickel-and-dime anyone, weren't willing to carry the $27 million shortfall on their books for a few days until something could be worked out. The Drexel people (who privately knew they couldn't afford to carry anything anymore but hardly wanted to say so), kept deflecting the issue by demanding that Integrated come up with half the needed money by drawing on a revolving credit line the company had with Mellon Bank.

With their backs to the wall, the Integrated team finally agreed. But when Monday morning rolled around and the Integrated people approached Mellon to explain the situation, they got another stunning surprise. Mellon took the position that if mighty Drexel didn't think enough of their client to lend them a few million dollars for a few days, then Mellon wasn't going to lend anything either. By the end of the day, Integrated was in default on the paper in question, and the company's other creditors, who collectively held more than $1.5 billion worth of Integrated's long and short-term debt, started to wonder if they'd ever see their money again. (In an ironic coincidence, both Drexel and Integrated wound up filing for bankruptcy on the same day-February 12.)

Among those creditors was one of Drexel's biggest and best-known clients, Ronald Perelman, chairman of Revlon. Through his holding company, MacAndrews & Forbes, Perelman had invested $24 million in Integrated commercial paper, according to sources close to Drexel and Perelman. Now Perelman wanted assurance that that he'd get the money back and, according to a MacAndrews & Forbes official, received a written guarantee from Drexel that if Integrated defaulted on the commercial paper loans Perelman had made, Drexel would pick up the tab. Meanwhile other Drexel promises began to pile up. A Drexel finance man says, for example, in a desperate effort to keep its network of commercial paper buyers from deserting it altogether, Drexel soon promised to make all of Drexel's commercial paper lenders whole on any losses sustained by investing in Integrated commercial paper. The finance man says this guarantee eventually added more than $100 million in liabilities to Drexel's suffering balance sheet.

In late October, the firm suffered what a senior Drexel man says were "devastating" arbitrage losses in the failed buyout of United Airlines. Two weeks later, Joseph sent out his first times-are-getting-tough memo to the staff, referring to a "down segment" in the market and the "difficult year" the firm had been through, yet urging people not to lose faith. What the memo didn't say was that Drexel was rapidly going broke-bulging with failed deals and without a flow of new business. Like Integrated resources, the client it had just stonewalled, Drexel could not even roll over its own short-term borrowings, which alone exceeded $2.5 billion at mid-year.

By late November, Drexel's deteriorating finances had caught the eye of Standard & Poor's the credit rating agency, which downgraded the firm's commercial paper. "With the downgrade, our ability to sell commercial paper just fell off a cliff," says the Drexel finance man. In desperation, as the paper came due, the firm began selling off reserves in its broker-dealer subsidiary, which largely served institutional clients. The SEC requires all brokerage firms to maintain such reserves as a cushion against a collapse in the stock market. As autumn began, Drexel's reserves exceeded the required minimum by $756 million. Thereafter, every time a new tranche of commercial paper rolled due, the firm would cover it by selling some securities.

On December 12, Joseph told reporters that Drexel would be profitable for the year and offered the vague reassurance that what the company was now terming its "excess reserves" would keep it in the black. Privately, he knew the situation was grim and had already twice approached Belgian-based Groupe Bruxelles Lambert, which held, according to a spokesman, 46 percent of Drexel's stock, in search of a capital infusion. His pleas were rejected.

Meanwhile, the issue of year-end bonuses for 1989 had executives in an uproar. Sources recount repeated scenes of screaming and hollering in Joseph's eleventh-floor office, as senior Drexel executives complained that they were being asked to take a portion of the bonuses in stock. Leon Black, who is reported to have received $15 million, also complained and later packed up his wife and kids and left to spend the holidays in a rented villa in Acapulco. Yet bonuses came up again in January, when Black returned to announce, together with John Sorte, co-chief of corporate finance, that, in Corporate Finance at least, Drexel would now pay out bonuses quarterly. "I was astonished," says a Drexel staffer who attended the meeting in which the payment schedule was announced. "What would they do next to keep us around-pay bonuses by the hour?" On the other hand, many in attendance seemed downright excited by the notion.

In the aftermath of the bankruptcy filing, newspapers reported that as much as $350 million had been paid in year-end bonuses, though Drexel later asserted that the figure was closer to $260 million, and included $64 million in stock. (Joseph himself took his bonus entirely in stock.) Yet even Drexel's lower figure seems staggeringly high for a firm in an advanced state of collapse, and in Senate testimony last week, SEC chairman Richard Breeden said his staff was opening an investigation. Of course, one may reasonably ask why, with its intense oversight of Drexel's activities during 1989, the SEC should have been surprised by the payments at all.

By the start of February, death rattles were everywhere. Citibank had cut off its credit line to the firm, and despite Joseph's assurances to the contrary, Drexel had to report a $40 million loss for the year. "Some year-end things came up," said a spokesman, blaming post-settlement legal expenses. Joseph did his best to put on a show of confidence. When a reporter asked how he was holding up under the strain, he said, "Only wimps get tired." Within days, though, he was flat on his back at home in New Jersey, suffering from what a spokesman says was an ear infection. It was the last, tumultuous week in the firm's struggle to survive, and Joseph wasn't there.

The final act began on Thursday, February 8. For more than a month, the SEC had let the firm draw down its broker-dealer reserves to pay off commercial paper. But at last the agency declared that enough was enough. Drexel only had $300 million of its cushion left, and if this kept up, the money would be gone in no time.

On Friday afternoon, the Drexel board met in the firm's conference room, just a few steps from the offices of Joseph and Shad. Joseph attended, and according to one person who was there, an effort was made to set up a meeting with the New York Stock Exchange, the SEC, and the New York Federal Reserve. The regulators were said to have balked and insisted on a delay until Monday. The message Drexel got (or thought it got) was to solve its commercial paper problems by putting the touch on its banks. Though this was exactly the brushoff that Drexel had given Integrated, Joseph apparently regarded it as a sign that the government was prepared to put pressure on the banks to help Drexel out. But what could Drexel offer as collateral? What banker in his right mind would lend money to a dying investment firm that nothing better to offer as security than a portfolio brimming with junk bonds?

A meeting with the banks was called for 4:30 Monday afternoon. To prepare for it, Shad and the firm's chief financial officer, Dick Wright, met after lunch on Monday in Wright's office and began telephoning Drexel's high-yield people, apparently trying to figure out what the securities in Drexel's portfolio might actually be worth. Other executives began what looks to have been an effort to clean out their in baskets. In one case, the documents in question included an apparently delinquent SEC 13D form on a Drexel junk bond client named Pay'n Save Corporation.

To prevent insider trading and so-called stock parking abuses, the SEC requires such forms to be submitted within ten days of the accumulation of 5 percent or more of a company's stock. In the case of Pay'n Save, the document lists as the "event date" April 12, 1989-ten months before the actual filing. Drexel's lawyers say that things aren't as they appear and point to an exception in the rules that allows once-yearly filing for firms that make markets on the stocks in question. Drexel, however, had already ceased making a market in Pay'n Save, raising the possibility that the filing was indeed late. A second such 13D form-this one for another Drexel client, First Executive Corporation-also appears to have been filed February 12.

The meeting with the bankers that Monday afternoon came to nothing. Yet with all room for maneuver now gone and no apparent source of funds left to be explored, Joseph still thought that he saw a glimmer of hope. Late that evening, after the meeting had adjourned and some of Drexel's exhausted executives were leaving for home, Joseph turned to a colleague and said, "It looks 80 percent certain we'll get the money." Then Drexel's worn out chief executive went back to his office to resume negotiations with Dick Wright.

Both were in the room about at about one that morning when the telephone rang. It was New York Federal Reserve Bank president Gerald Corrigan, phoning seemingly out of the blue to tell Joseph to telephone the switchboard at the U.S. Treasury in Washington. A conference call was going to be arranged between Corrigan, Joseph, and SEC chairman Richard Breeden. Joseph felt a sudden surge of hope. Was this the call that would bring the news that would save Drexel? Were the Feds at last about to step in and help? Now, after all these months of anguish and setback, of being ridiculed by his colleagues and vilified by his rivals, was Joseph at last going to be rescued by the federal government?

Hadn't he done everything they'd asked of him? He'd fired his key employee, pleaded his company guilty to federal crimes, paid a fine of more than half a billion dollars. He'd done all these things because he was sure they were right, and he'd paid a terrible price. So was he at last to be vindicated? Were Fred Joseph and his firm, Drexel Burnham Lambert, about to join that exclusive club that has no membership rolls or rites of initiation, where the day-to-day disturbances of the markets and men barely ripple the flow of power and influence? In short, were Fred and his firm about the join the Establishment?

On the other end of the phone were the government regulators. Their tone was reasonable, their manner unruffled. There was talk of what a collapse of Drexel could bring on, particularly for the 25,000 or so accounts-many of them held by Drexel's own employees. The money could wind up frozen for months, if not longer. Better, the voices on the other end said, to handle this thing in a controlled way, by voluntarily putting the firm into Chapter 11. You have until 7 AM to decide.

It was the end of Drexel Burnham, and the end of an age on Wall Street. And when he hung up the phone and turned to the young finance man standing next to him, all Fred Joseph could think to say was to repeat what he'd just been instructed to do. He said, "I've just been told by the most powerful men in America to put this company into bankruptcy-immediately." And that is exactly what he did.

"A Hollywood Mystery: Despite Giancarlo Parretti's Lavish Lifestyle And His Bid For MGM/UA, The Italian Financier Remains A Little-Known Outsider," by Alan Citron and Michael Cieply, Los Angeles Times, May 6, 1990

Giancarlo Parretti, the fast-rising Hollywood movie mogul who has admitted that he rarely watches films himself, underscored the point at the Cannes Film Festival a couple of years ago. Encountering actor-director Clint Eastwood and his agent at a party, Parretti said: "Mr. Eastwood, I've always admired your work." The problem was that he was speaking to the agent.

Those types of blunders have helped shape Parretti's reputation as a consummate outsider. But if the Italian financier whose Pathe Communications Co. is trying to purchase MGM/UA Communications Corp. has a hard time sorting out the Hollywood elite, he has clearly seized upon its lavish lifestyle.

Like the film titans of old, Parretti appears to have endless resources and the imagination to use them. A $20 million Gulfstream IV jet with "69GP" on the tail ferries Parretti and his entourage between continents. Ground transportation is a $200,000 Rolls-Royce. Home is a 14-room mansion in Beverly Hills. Nightlife revolves around his own private Los Angeles club, Tramp of London, where he often disco dances the night away. And if he acts as if he owns the place when he walks into his favorite restaurant, Madeo, it's because he does.

"He's like the kid with his nose pressed against the candy store window who can suddenly buy the store," one acquaintance said. "He's living the life I'd live if I had the guts."

Parretti, however, finds himself facing unwelcome scrutiny as he pushes ahead with his audacious bid for an even bigger candy store, MGM/UA. There's the matter of his mysterious past and the persistent published reports, in BusinessWeek, Newsweek and elsewhere, suggesting that he may have ties to organized crime, which he denies. There are the anti-Semitic remarks attributed to him in an Italian newspaper interview, which Parretti vehemently denied making in a subsequent rebuttal, and the prison term he faces over a "fraudulent bankruptcy" conviction in a Naples court.

Then there are the nagging questions over the MGM/UA acquisition, which seems to hang on financing as mysterious as Parretti. Skeptics question why he's investing so much cash in an anemic studio that will see much of its machinery dismantled under the buyout, in which Time Warner Inc. is paying more than half the cost in return for film distribution rights.

Parretti, 49, who is appealing the Naples court conviction, seldom responds to press queries anymore. And when he does, the result is often "flip answers, frequent inaccuracies, dogmatic conclusions or outright dismissal of tough questions," according to a story in Variety. Parretti refused to be interviewed by The Times. People in Hollywood who pride themselves on knowing everyone say Parretti may be the biggest enigma to emerge in years.

"I don't know him and I don't know if anyone knows him," said Brian Grazer, a cofounder, with director Ron Howard, of Imagine Entertainment, an independent company that makes mainstream Hollywood films, as does Pathe.

The limited number of people in Hollywood who have encountered Parretti describe him as a gregarious man who lives like a king. His private jet alone is a luxury unknown to many of his peers. This type of aircraft can seat 12 to 21 people and generally comes with interior appointments costing $200,000 to $3 million. "There is none better," said one specialist.

Parretti can often be found holding court at a corner table at Madeo Ristorante on Beverly Boulevard, an upscale spot with rich wood, smoky mirrors and a large antipasto table. He is greeted by a parade of well-wishers offering hugs and congratulations, often in Italian.

One who has met with him says Parretti appears to be very bright, though his interests are limited. "He mostly talks about food, movies and his private plane," the acquaintance said.

Jack L. Gilardi, executive vice president at International Creative Management, a leading talent agency, said Parretti also likes to cut a rug. In fact, he is even said to be installing a private discotheque in his Beverly Drive mansion. "He loves to dance," Gilardi said.

A handful of Hollywood executives have seen yet another side of Parretti. The financier, who according to MGM/UA executives was not to be involved with the studio's operations during the course of the attempted buyout, recently asked the company's executives to screen test a former Miss Universe who had just met with him and Dino De Laurentiis during a whirlwind tour of Los Angeles.

In a highly unusual move, MGM/UA asked director Tom Manckiewicz to drop his work on Delirious, a John Candy movie, to conduct the test at Parretti's expense. "To rent out an on-location crew was a very easy request to consider" because of Parretti's prospective ownership of the studio, said Ken Spivak, the MGM/UA executive who arranged the test.

A week later, Parretti asked Pathe executives to screen test another prospect, this time his own daughter. The daughter, an aspiring actress, was supposed to try out for one of the three leading roles in Man in the Moon, a forthcoming Pathe film, according to individuals familiar with that incident. Pathe executives arranged for the daughter to be interviewed by director Robert Mulligan, but she was never tested for the role, the sources added.

And Securities and Exchange Commission filings indicate that Parretti's daughter isn't the only one involved in the family business. Documents show that Maria Cecconi, Parretti's wife, controls 88.5% of Pathe, along with him, through a Luxembourg-based company called Comfinance SA. According to the proxy statement filed by Pathe last year, Cecconi is also managing director of Comfinance and owns 30% of the company, while Parretti himself owns only 20%.

Other Parretti properties are held by a seemingly endless network of satellite companies. His $8.8 million colonial-style mansion is registered under Sherwood Development Co., a Panamanian corporation. Tramp of London, his private club in the Beverly Center shopping mall, is in the hands of Roma Trastevere Inc., which shares corporate offices with Pathe. A company called Wachs Restaurant Inc. is listed as the owner of Madeo Ristorante.

Pathe is an umbrella organization for mostly media-related enterprises that include a chain of theaters and a French film library. Parretti gained his foothold in Hollywood when he and his partner, Florio Fiorini, bought the troubled Cannon Group for $200 million in 1988. Prior to that, he backed a religious film called Bernadette directed by a priest.

At a time when many independent film companies are enjoying considerable commercial success, Pathe has yet to establish a Hollywood track record. The company's first major production, Russia House with Sean Connery and Michelle Pfeiffer, won't appear in theaters until Christmas. And securities analysts say they base their expectations for the company almost solely on Parretti's hiring of veteran studio executive Alan Ladd, Jr. to run the film unit.

"Ladd is a wonderful filmmaker," said Lee Isgur of PaineWebber. "And the fact that Parretti was able to recruit him and keep him in his employ . . . says something."

SEC documents show that Parretti paid an unusually high price for Ladd. The contractual arrangement, in fact, virtually excludes Parretti from the company's film business. Ladd, at his "sole discretion," can make 50 films under the contract, within certain budgetary limits. He is paid $750,000 a year, 10% of Pathe's profits and an added $250,000 per film, with a guarantee of at least $2 million annually from the latter fees.

Pathe is also required to maintain a movie development pool of $20 million and to provide up to $125 million a year for films during the contract's six-year term. Ladd must "consult" with Parretti and share control over foreign distribution decisions with both Parretti and Yoram Globus, who serve as co-presidents of Pathe. But Ladd's contract guarantees him control over any film in the works at a company acquired by Pathe-a provision that apparently gives him the legal right to control MGM/UA's film production if the purchase by Pathe and Time Warner goes through.

One executive who has worked closely with Parretti said the financier's arrangement with Ladd shows his hands-off management style. "He's not a movie man at all," said the associate, who asked not to be named. "He doesn't see movies. He doesn't look at trailers or at ads. He's not interested in meeting stars. He's a straight financial man."

Paul Maslansky, who is producing Russia House for Pathe, paints a similar picture. Maslansky said he encountered Parretti only once during the making of the $20 million film, and in that instance Parretti merely socialized with the cast and crew on the London set.

"He (Parretti) is in keeping with the tradition set by other people in his position," said Maslansky, an admirer. "He delegates authority to people. His job is to oversee the running of a major corporation. . . . And he's doing it, it appears, quite successfully."

The son of an olive merchant in the Umbrian hill town of Orvieto, Italy, Parretti claims to have made his fortune by buying, restructuring and selling troubled companies in Europe.

Explaining his thirst for entertainment companies, including his unsuccessful bids last year for De Laurentiis Entertainment Group and New World Entertainment Inc., Parretti has in the past brashly predicted that he will one day preside over the "biggest film group in the world."

Yet Pathe is hardly a financial success story so far. As of December 30, the company listed $6.6 million cash on its balance sheet, while debt exceeded $180 million. About 52% of its revenue came from film operations, while its European theater holdings accounted for the rest. The film division posted a $66 million operating loss for the year, which was partially offset by earnings from the theaters, and fully 70% of its revenue came from overseas in 1989. Excluding extraordinary gains from asset sales and other items, the company continued to post an operating loss in the first quarter of 1990.

Pathe's biggest financial gambit, the MGM/UA deal, appears to be moving ahead, albeit slowly and awkwardly. Pathe last week got a one-week extension, until May 17, to make its third $50 million down payment on the purchase. The company's latest SEC filing also showed that Parretti's Comfinance holding company will contribute $450 million to the deal in return for a one-third stake in MGM/UA. But the filing did not reveal where Comfinance will get the money.

A simmering legal skirmish isn't helping the company's cause, either. The skirmish started when Pathe recently ran a newspaper advertisement saying that Giovanni DiStefano had never been an officer or director of the company. Ted Cohen, Pathe's attorney, said the company took this step when it learned that DiStefano, who was claiming to be a Pathe executive, had a "shady past."

DiStefano sued Pathe in Los Angeles Superior Court after the ad appeared, claiming punitive damages of $281 million. DiStefano asserts that he was a Pathe senior vice president "virtually in charge of sales and acquisitions" from November 1989, until early this year.

Pathe then countersued last week, claiming that DiStefano owes the company $1.7 million for an unpaid loan, rent and services. The company is also seeking contractual damages for failing to purchase Pathe shares as promised.

Sources familiar with Pathe's finances insist that the funds are there to close the MGM transaction-the tender offer expires June 23-and the only delay will be the documentation.

Others aren't so sure. "Since not much is known about it besides the money, we can't tell if MGM/UA is a good deal yet," Isgur said. "Basically, (Time Warner Co-Chairman Steven) Ross, (MGM/UA controlling shareholder Kirk) Kerkorian and Parretti are the only ones who know the total structure of this deal."

Meanwhile, the upcoming release by Pathe of commercially oriented films such as Quigley Down Under, starring Tom Selleck, and Crisscross, with Goldie Hawn, may boost domestic receipts. And as Parretti's stake in Hollywood grows, so does his presence in the film capital.

Pathe has established a reputation for largess among Hollywood fundraisers. The company recently plunked down $8000 for a table at an Earth Day benefit for the statewide Environmental Protection Initiative, and a leading Hollywood organizer said the company's executives are among the most cooperative when it comes to assisting a variety of causes.

And Parretti, who once struggled with even the most primitive English, now spends as much as a third of his time in the United States, according to his associates. The stocky and volatile financier's English is also rapidly improving, though friends say he is still most comfortable speaking in his native language in the company of Italian compatriots.

One of those is independent filmmaker Dino De Laurentiis, who has been a mentor to Parretti since he arrived in Hollywood. It was De Laurentiis who introduced Parretti to many of Hollywood's top power brokers, and legend has it that Parretti hosted his first big party at De Laurentiis' home, where he greeted his guests from the balcony with a pope-like wave.

These days he's more likely to entertain friends and business colleagues at Tramp, the posh dinner and dancing club where Parretti is said to be a regular on the disco floor, or at his mansion, which is said to be festooned with paintings by Goya, Picasso and Miro.

The disco came about because, "like a lot of Europeans, they came here and said, 'Where's the night life?,' " said one acquaintance who has been there. "They thought, if you buy a club and do it properly, people will come. You know, European night life starts at 10 or 11."

Guests say an evening at the Parretti house usually includes fine wine, pasta made by Parretti himself and expensive Cuban cigars. Gilardi, the agent from ICM, called Parretti a great host.

"He's the kind of guy who waits with his family to greet you at the door," Gilardi said.

Whether Hollywood will ever greet Parretti as warmly is less certain. There are those who say he will always be dismissed as an outsider and a man of mystery.

But Gilardi predicted that time will alter those perceptions.

"I've found any time a new person comes in, in some untraditional way, everybody knocks him," Gilardi said. "Giancarlo came in that way, but once you sit down with this man, he's as warm and charming as anyone you'd like to meet. I think the community will accept him."

Parretti also seems to think so. Pathe is throwing a chic party at the Cannes Film Festival later this month, apparently in anticipation of celebrating its acquisition of MGM/UA and Parretti's ascent into the upper reaches of his adopted town's most glamorous business.


Some companies controlled by Giancarlo Parretti and his associates:

COMPANY: Cannon Pictures Inc. LOCATION: Los Angeles TYPE OF BUSINESS: Movie production and distribution

COMPANY: La Cite du Cinema SCI LOCATION: France TYPE OF BUSINESS: Real estate

COMPANY: Comfinance SA LOCATION: Luxembourg TYPE OF BUSINESS: Investment and holding company

COMPANY: Francesca SpA LOCATION: Italy TYPE OF BUSINESS: Real estate

COMPANY: Pathe Communications Corp. LOCATION: Los Angeles TYPE OF BUSINESS: Movie production and distribution and theaters

COMPANY: Pathe-Nordisk A/S LOCATION: Denmark TYPE OF BUSINESS: Movie production, distribution and exhibition in Denmark, Finland, Norway and Sweden

COMPANY: Interfly Inc. LOCATION: Los Angeles TYPE OF BUSINESS: Charter airline

COMPANY: Max Theret Investissements SA LOCATION: France TYPE OF BUSINESS: Controls Pathe Cinema, a theater company

COMPANY: Melia International NV LOCATION: Netherlands TYPE OF BUSINESS: Travel agencies

COMPANY: Renta Corp. LOCATION: Los Angeles TYPE OF BUSINESS: Real estate

COMPANY: Renta Inmobiliaria SA LOCATION: Spain TYPE OF BUSINESS: Real estate

COMPANY: Renta Inmobiliaria International LOCATION: Netherlands TYPE OF BUSINESS: European theater and real estate interests

COMPANY: Roma Trastevere LOCATION: Los Angeles TYPE OF BUSINESS: Nightclub

COMPANY: SASEA Financiere SA LOCATION: Switzerland TYPE OF BUSINESS: Investment and holding company

COMPANY: Sherwood Development Co. LOCATION: Panama TYPE OF BUSINESS: Real estate

COMPANY: Wachs Restaurant Inc. LOCATION: Los Angeles TYPE OF BUSINESS: Restaurants

"The Last Days of Drexel Burnham Lambert," by Brett Duval Fromson, Fortune, May 21, 1990

Don't weep for Michael Milken. Though he broke down in court when he had to admit he was a felon, he certainly cut a good deal for himself. In all likelihood he'll still be plenty rich when he gets out of prison. Contrast that to the dismal fate of his firm, Drexel Burnham Lambert—bankrupt within months of settling similar charges for a similar amount of money. How did so powerful a firm fall so quickly?

At year-end 1988, Drexel Burnham had a brawny $1.4 billion in capital and 50% of junk bond underwriting. A year later its market share had dwindled to 38%, top executives were scrambling to roll over $300 million of the firm's own commercial paper, and Drexel was hemorrhaging—losing $86 million in one month alone.

Did Drexel do itself in? Or was it done in? The truth is that this was a case of suicide—and murder. So potent had the firm become that employees truly believed they could do whatever they wanted without fear of retribution. That's why they could threaten FORTUNE 500 corporations with takeovers and never expect political retaliation. And that's why they could leverage themselves and their clients to the hilt without preparing for the day debt would go out of fashion. Says a former officer: "You see, we thought, 'We are invulnerable.'"

Management was as misguided as it was self-confident. In the good times, CEO Frederick Joseph and the board of directors were lax supervisors, allowing the firm to be run like a Middle Eastern souk. Milken sat at the center of his X-shaped desk in Beverly Hills and was accountable to no one. Eager for Drexel to become an investment banking powerhouse, Joseph knew better than to tinker with the marvelous Milken money machine he needed to finance hostile takeovers. That led to abuses in Milken's operation, which created a backlash ending in federal felony charges.

Even after it settled with the government, Drexel had a chance to survive if it could slim down. But Joseph lost control over his top dealmakers, who, to prove that the firm could flourish without Milken, went on a disastrous spree at precisely the wrong time. Because the bright and hardworking staff had been motivated almost solely by making a buck, esprit de corps degenerated rapidly into every man for himself once the money slowed. The firm floated issues for marginal companies and then flogged them furiously to customers. What couldn't be sold—and this became fatal—had to be inventoried.

Although few participants are willing to speak on the record, the picture that emerges of Drexel's final days is of a firm thrashing desperately to avoid the inevitable. That was nowhere more evident than in the last-ditch efforts to raise cash. Although Joseph and his chief financial officer, Richard Wright, had been warned that a liquidity crisis would likely hit the firm, they failed to alert the directors and senior officers until a few days before the end. As the junk bond market was tanking in the U.S. last fall, Drexel Chairman John Shad, the former chairman of the Securities and Exchange Commission who had railed against junk bond takeovers, was in the Far East assisting Drexel's effort to raise money for the firm by selling junk that couldn't be sold domestically. Even after the onset of the credit crisis, Wright continued urging Drexel's reluctant salesmen to peddle the firm's own risky commercial paper.

Drexel's final throes obscure another story of how business really works when inexperienced outsiders try to wrest power from those who are used to having it. As Drexel's capital evaporated, its bank lenders quietly abandoned it. By February 1990, when regulators stepped in to stop Joseph from dissipating what capital remained, only the top officials at the Treasury Department and the Federal Reserve could have saved the firm. And they were not about to. Says a former Treasury official: "People down here said, 'Hell, no. There's no reason anybody should do anything. We don't like 'em.'"


The story of Drexel's demise goes back to 1978, when Milken moved the high-yield bond department from New York to his hometown of Los Angeles. Milken's father was dying of cancer, and Mike's young children had health problems. Milken told his superiors that at least one of his kids was subject to epileptic seizures, and that he and his wife, Lori, wanted to be closer to their families on the West Coast.

The move paradoxically brought Milken closer to Fred Joseph, then head of the corporate finance department in New York, which had serious image problems. At the time the only Harvard business school graduates Joseph could recruit were those who had been turned down by other Wall Street firms. But the view of Drexel as an investment banking backwater began to change with Joseph's discovery that Milken's big junk buyers—companies like Rapid-American and Reliance Insurance—were also eager to be big junk issuers. They were the engine that propelled Drexel to fourth place among all underwriters by 1986 and enabled Joseph to hire attractive, personable bankers like Martin Siegel, who had made a name for himself in mergers and acquisitions at Kidder Peabody.

Milken and Joseph were a team from the beginning. Milken may have been the much-pampered genius with gleaming new offices in Beverly Hills, but Joseph was the smooth, articulate voice of the firm and the man who was building the institution around Milken. From their offices on opposite coasts, they spoke to each other five to 15 times a day.

One former Drexelite describes the West Coast office that Milken ran as "structurally antisocial," entrepreneurship bordering on anarchy. Milken's Hobbesian style of management may explain much of the corner-cutting that went on in Beverly Hills and caused so much trouble with the regulators. A former Drexel broker recalls hearing one of Milken's salesmen threaten a client over the phone: "If you don't buy these bonds from me, I'll burn your house down!"

Back in New York it was easy to ignore Milken's managerial weaknesses. Fees were rolling in like the waves at Malibu, and Joseph took his fair share of credit for them at the board meetings. Of every dollar the high-yield department made, close to two-thirds went to the firm, and the rest went to Milken and his group. Drexel's East Coast executives, many of them holdovers from the old Burnham & Co., the retail brokerage firm that had bought Drexel Firestone in 1973, had never seen such money.

An executive who joined Drexel in the mid-1970s recalls being shocked that a senior partner's interest in the firm was then worth only about $400,000—a pittance even by the standards of the day. By the mid-1980s, he said, a partner with this much equity was worth about $15 million. Another former officer recalls hearing Robert Linton, then chairman, say that one of his great motivations was watching the book value of his stock go up every month.


When Joseph and Milken committed Drexel to the hostile tender offer financed by junk bonds, they enraged a powerful special interest group—the CEOs of big corporations and their board members, lawyers, bankers, and political representatives. Drexel also made a dangerous enemy on Wall Street in Salomon Brothers, heretofore the top bond house and every bit as tough and sharp-elbowed as Drexel itself.

As early as 1984, Drexel was trying to monopolize the high-yield business. It refused to allocate any bonds on a deal it underwrote for Golden Nugget, the casino operator, to Salomon Brothers, which had customers for them. According to two eyewitnesses, Salomon's chairman, John Gutfreund, was in such a frenzy over these tactics that he warned Joseph that he was going to get Milken. Gutfreund's precise phrase, though his firm denies it, was "knee his nuts off."

The more genteel but equally direct reaction of big business came in 1985 when Drexel financed T. Boone Pickens's $8.1 billion raid on Unocal Corp., then the 12th-largest U.S. oil producer. Fred Hartley, who was Unocal's forceful CEO, had plenty of Washington connections. His investment banker was Nicholas Brady, then head of Dillon Read, a former U.S. Senator from New Jersey, and a good friend of the Vice President, George Bush.

While Hartley worked the press, equating Drexel to a terrorist group, Brady and other Washington insiders got Congress on the warpath. Says a former White House official: "Nick really hung Drexel out to dry. He put the firm in Congress's gunsights."

More specifically, in the sights of then-Congressman (now Senator) Timothy Wirth of Colorado and New York Senator Alfonse D'Amato, who chaired hearings on the dangers of takeovers and junk financing. Fred Joseph was called to testify, as were such Drexel-financed raiders as Carl Icahn and Boone Pickens. Among the chorus of Cassandras prophesying the doom of financial markets if junk bond takeovers were not curbed was SEC Chairman Shad. Said he: "The more leveraged takeovers and buyouts today, the more bankruptcies tomorrow." Unocal ultimately bought Pickens off, and Congress never acted on the 30 or so bills that came out of the hearings, but Drexel had been warned.


On November 14, 1986, Ivan Boesky, a longtime Milken client, pleaded guilty to SEC charges of insider trading violations based on allegations made by investment banker Dennis Levine. Burnham & Co. founder I.W. "Tubby" Burnham, chairman emeritus, was the only board member to suggest that Drexel might throttle back on junk bonds. When Milken heard about Burnham's radical idea, he threatened to quit. Fearing they would lose their Midas, board members put Burnham's proposal to a vote and defeated it resoundingly.

Within two months of what became known as Boesky Day, Aetna Life & Casualty Co. notified Joseph that it would not renew Drexel's excess insurance protection, which guarantees replacement of securities in a customer's account above the $500,000 covered by the Securities Investor Protection Corp. According to sources at Drexel, Joseph was told that Aetna's decision not to renew had been made "at a very senior level" and was "not appealable." Drexel had to self-insure, and that cost the firm about $11 million more than it paid Aetna.

Senior Drexel officials were convinced that Aetna's blue-ribbon board of directors was behind the decision not to renew coverage. On the board were David Roderick, former chairman of USX, and Warren Anderson, former chairman of Union Carbide, both of whom had faced Drexel-financed raiders and been forced into painful restructurings. An Aetna spokesman says that the board was not involved in the decision but that, because of the Boesky scandal, it was made at a higher level of the company than normal.

The government began subpoenaing witnesses and preparing indictments against Drexel and Milken based on information it had obtained from Boesky. Throughout 1988 the competitive pressure on all Wall Street firms to do deals, even bad deals, was intense. Says one of Milken's key West Coast lieutenants: "The government investigation spurred us on to prove that we were still the most powerful. That's why the quality of the credits we underwrote began to fall off."

Preoccupied with preparing a legal defense, Milken was giving the firm only 25% of his prior time and effort. He recognized that Drexel, like everyone on Wall Street, was doing deals on the dangerous assumption that companies could sell assets tomorrow for more than they were worth today, and therefore could afford staggering levels of debt. But he was as much of a deal junkie as anyone else.


When Joseph told the $100 million man of the crisis, he quit the board on the spot.

Drexel had been negotiating with the U.S. Attorney's office and the SEC for almost two years, and government lawyers were furious that the firm had not yet done the decent thing—dump Milken and plead guilty. An impatient U.S. Attorney for the Southern District of New York, Rudolph Giuliani, encouraged his subordinates to threaten Drexel with a RICO (Racketeer Influenced and Corrupt Organizations) indictment if the firm did not settle.

RICO frightened Joseph, and with good reason. Under the statute, the government might be able to lodge a claim on Drexel's assets that would be senior to the claims of the firm's banks. Joseph believed that could lead the lenders to pull their lines of credit if Drexel were indicted.

Shortly after Thanksgiving, Joseph told the other members of the "war committee," a small group that had been set up to coordinate Drexel's resistance to the indictment, that he was thinking of settling. He also kept the 22 board members informed of his every move. The lone voice in opposition to settling belonged to John Kissick, 48, the strapping head of West Coast corporate finance. Hugely popular within the firm, Kissick argued that admitting to guilt would be a mistake on principle because the firm did not know if it was guilty. Kissick had been hired by Fred Joseph in 1975 to run the West Coast corporate finance department, where he worked closely with Milken. He was torn between supporting Joseph—the man who had been his mentor—and Milken, the man who was his friend.

Two of Drexel's other stars faced a similar dilemma. Peter Ackerman, 43, was Milken's brilliant and aloof deputy who designed the packages of securities that the issuers offered. Leon Black, 38, was the head of mergers and acquisitions; he found the targets for Drexel's raiders. Both were busy helping Henry Kravis structure $9 billion in debt securities that Kohlberg Kravis Roberts would use to pay for the monumental RJR Nabisco buyout. Joseph had them pulled out of a meeting to discuss rumors that they might leave if Drexel sold out Milken. According to a senior officer, all Ackerman would say was "Let's see how this plays out." But neither man resigned.

Then the Giuliani team infuriated the Drexel board by demanding that the firm's employees waive attorney-client privileges in any future investigations. That meant the employees could be prosecuted later on the basis of information they had given Drexel's lawyers who were preparing the firm's defense. On December 19 the board voted overwhelmingly not to settle.

That night the corporate finance department held its Christmas party in the grand ballroom of the Waldorf-Astoria hotel. Board Chairman Robert Linton appeared onstage to sing "Rudy the Red-Nosed Reindeer," with lyrics that made it clear Rudy was no reindeer and Drexel was remaining defiant. The crowd of about 800 people went wild, screaming and banging the tables. One skeptical senior investment banker recalls going over to Joseph, sticking his finger in Fred's stomach, and saying, "I hope it's not helium in there like the Macy's Thanksgiving Day balloons."

Joseph's reply came two days later. He met with the board in the morning and announced that a settlement had been worked out. Giuliani backed off on the issue of attorney-client privilege, and Drexel agreed to plead guilty to six felony counts that included dealings with Ivan Boesky. The firm would also pay $650 million in penalties and cooperate fully with the government investigations of its employees and customers.

What apparently tipped Joseph toward settling was hearing a taped conversation of accusations against Milken made by a Drexel trader. This was the first time Joseph realized the government had more against Milken than just Boesky's allegations. He was also shown some spreadsheets on transactions that, combined with the tape, would lead knowledgeable people to the conclusion that Milken bent the rules too far. Joseph informed the board that Giuliani required an answer by four that afternoon, or he would hold a press conference announcing a RICO indictment.

After two years and hundreds of millions of dollars spent warring with the government, the decision came down to a board vote, and it wasn't even close—16 to six in favor of settling. Kissick voted no, as did Joseph in a misguided symbolic protest that infuriated employees, who thought he was being hypocritical.


Especially demoralized were the employees on the West Coast, who thought they saw a sellout. Unsubstantiated rumors spread quickly in Beverly Hills that Joseph cut the deal in exchange for personal immunity from prosecution. Aware of the plunge in morale, Joseph moved quickly to hold his top producers in the high-yield department and corporate finance.

The firm seemed to have money to burn—$1.4 billion in capital, $1 billion more than required by regulations—and Joseph started spreading it around. He guaranteed key employees, although not in writing, that their 1989 compensation would equal at least 75% of 1988's, which had been huge. But unlike the previous arrangement Drexel had had with the high-yield group when Milken was running it, the new package did not tie compensation to the profitability of the firm.

Joseph, according to a senior manager of the firm, had long thought that Bear Stearns & Co. had made a big mistake to let Henry Kravis get away rather than meet his demands for more money. Joseph was determined to keep Ackerman, Black, and Kissick, even at the risk of paying them so much that he became, in effect, their subordinate. In April 1989 he agreed to give Ackerman at least $100 million as a reward for his performance in 1988 and for helping sell the RJR Nabisco bonds in 1989. In addition, Ackerman and Black were told that the more deals they brought in, the higher their bonuses.

When rumors got out about the special arrangements Ackerman, Black, and a few others had negotiated, morale took another nose dive. A former member of the Drexel board jeers, "The key to success was being a pig." To allow his other investment bankers to vent their anger and envy, Joseph brought in a psychologist named Ned Kennan, who is used by many companies, including KKR. What did employees tell Kennan? According to a former top investment banker, "That everybody hated Peter and Leon."

Milken's departure in 1989 forced Joseph to restructure the firm around Ackerman, Black, and Kissick: Black became one of the new heads of corporate finance, Kissick was given Milken's old job as head of the high-yield department, and Ackerman was named head of a new capital markets group.

The settlement also brought John Shad, 66, out of retirement. The SEC insisted that Joseph find a Mr. Clean to install as chairman of the board of the holding company. Howard Baker, former White House chief of staff and Senate majority leader, had turned Drexel down because Joseph would not yield the CEO's title. But Shad, who had been Joseph's former boss in the early 1970s when they were both at E.F. Hutton, consulted with his old friends Nicholas Brady, now Secretary of the Treasury, and Alan Greenspan, chairman of the Federal Reserve, and took the job. Shad's $3.1 million salary went into a trust set up for the Harvard business school, to which he had pledged $20 million for the study of leadership and ethics.


Black, Ackerman, and their colleagues were determined to prove that Drexel could still do deals better than any other firm. In the first half of 1989, its market share actually increased to 70%, vs. 40% for the first half of 1988. But much of that came from the two big bond offerings that Drexel managed for the RJR Nabisco buyout. And now doing deals was putting the investment bankers themselves increasingly at risk. Like everyone else on Wall Street, Drexel had to compete by putting up its own money as a bridge loan. In the past Milken's network of ready buyers made this practice unnecessary.

Kissick tried hard to stop questionable deals but lacked the needed clout. As an investment banker, he knew little about selling and trading junk bonds and was still broken up over the firm's shabby treatment of Milken.

Among Drexel's worst-selling underwritings of 1989 were those that Leon Black did to help William Farley, the T-shirt titan, take over textile maker West Point-Pepperell. Farley needed over $1 billion to swing the acquisition, and Kissick questioned whether such a deal could be sold. But Black did not want to see Drexel welsh on its promise to raise the money for Farley, so he and Ackerman bulled it through. Unfortunately for the firm, Kissick's concerns were verified by the market when Drexel failed to sell $250 million of the paper and had to inventory the stuff.

Ackerman also had his fair share of fiascos. Drexel raised about $140 million to refinance the purchase of one of his clients, Edgcomb Metals, a Tulsa steel wholesaler, by the Blackstone Group, a Wall Street buyout boutique. Six weeks after the deal closed, the company's business deteriorated and over half the bonds were still in Drexel's inventory.

A wrinkle in the refinancing suggests that the motivation behind it was not simply helping a client. Ackerman profited personally. He owned part of Edgcomb through a private partnership, and according to an informed Drexel executive received $6 million to $7 million when the company was sold. A Drexel spokesman disputes this figure as being "way off." But a senior West Coast manager says Drexel sometimes did deals in order to "cash out" its officers' positions.

Unsold private placements and bridge loans Drexel made to clients began piling up in the holding company's inventory. Like many brokerage firms, Drexel was set up as a holding company with a broker-dealer subsidiary; while the broker-dealer was regulated by the SEC, the holding company was not unless it held publicly traded securities. The SEC requires that broker-dealers mark their inventories to market; and as the public junk market slid, the broker-dealer inventory showed losses. But Drexel did not have to mark to market the private debt and bridge loans that were in the holding company's hands, and could maintain the fiction that they were worth their paper values.

By the third quarter of 1989, Drexel's holding company was stuck with an estimated $1 billion of private junk bonds and bridge loans. These represented capital commitments the firm had made to customers, and Drexel had to borrow the money to carry them and to remain in business. Says an ex-Drexel officer: "Our bridges had turned into piers."


Meanwhile junk bond offerings that Drexel had already sold were coming apart. Some, like the bonds of Integrated Resources, the issuer most closely associated with Drexel, were old deals. Integrated was a financial services company that sold real estate tax shelters until the 1986 Tax Reform Act eliminated most write-offs for limited partnerships and cut the heart out of its business. By June 1989 it was unable to roll over its commercial paper, but Drexel did not step up to become the buyer of last resort as the market expected. Says a former Drexel salesman: "When we let Integrated go down, the buyers lost all confidence."

But most of the deals that singed customers were of more recent vintage. One that resulted in third-degree burns was Memorex, the maker of magnetic computer tape and CDs, for which Ackerman raised $555 million last July. Two months after the offering, the company reported a 66% decline in operating income, and the bonds plunged from par to 50 cents on the dollar. It turned out that foreign investors had the right to sell their Memorex bonds back to Drexel at par. When some did so, the firm booked an estimated $30 million loss. Drexel did not step in to support the market for its other customers, however.

The impact of Drexel's refusal to support Integrated and Memorex cannot be overemphasized. The firm had finally killed its famed network of buyers.


That summer Congress passed the savings and loan bailout bill, which required thrifts that owned junk bonds to sell them by 1994. The S&Ls promptly stampeded out of junk, and the secondary market began to slide.

Issuers were beginning to default on a weekly basis. Many of the exploding deals were not Drexel's, but the firm suffered the consequences more than anyone else because it depended so heavily on the business. Fees from new underwritings dropped, and trading in the secondary market became markedly less profitable. In August and September the firm began losing money. In October the losses hit $86 million.

By late summer Ackerman, who has a Ph.D. in political science from the Fletcher School of Law and Diplomacy near Boston, was telling Joseph that he wanted to move to London to write a followup to his doctoral dissertation on the strategy of nonviolent resistance. To hang on to Ackerman, Joseph created a position for him in London developing overseas business for the firm. This sojourn by one of the biggest producers puzzled many at the firm, but not a friend of Ackerman's, who says, "Peter wanted to get as far away as he could."

As Drexel's situation deteriorated, Joseph became more withdrawn. According to a longtime Drexel executive, "Fred sort of blew his cork and became a different human being the last year." Meanwhile Chairman John Shad and an entourage spent a good part of the fall in the Far East trying to sell junk bonds. Shad says he talked only about general market conditions in high-yield bonds and leveraged buyouts. But Drexel's former Hong Kong managing director Marc Faber says: "I took him to see Jardine Matheson, a conservative, blue-chip company. Shad asked the treasurer, 'Do you have any high-yield bonds in your portfolio?' The treasurer said, 'Of course not.' These were investors in quality. Shad was crazy to try to sell junk to these people."

More ominously, Drexel's lenders were losing their nerve. Hit with bad loans to real estate developers, many began to back away from Drexel. That was a nightmare for Joseph and Richard Wright, the chief financial officer, because without bank loans, Drexel didn't have enough capital to finance its inventory and run its business. The banks were offered the inventory of private placements and bridge loans as collateral for the lines but said it wasn't good enough. Wright's staff began to warn him that the high-yield position had to be reduced and that Drexel was on borrowed time.

Wright did not pass the dire message along to the board. Why not? Says one of his former subordinates: "It was difficult to tell whether he didn't believe the warning or whether he felt his timing was wrong."


In November, Standard & Poor's lowered its rating on the holding company's commercial paper from A2 to A3. Overnight Drexel was shut out of the commercial paper market, the source of $700 million of financing. Within three weeks, as holders refused to buy Drexel's paper when it came due, it was reduced to only $300 million of borrowings.

Desperate, Wright flew to Paris to ask Groupe Bruxelles Lambert, the French and Belgian investors who were Drexel's largest shareholders, for more money. Their reply: Non, merci. They wanted to see a return to profitability first. Wright took ill in Paris and was hospitalized, reportedly with an ulcer.

As the new year approached, Joseph and Shad, the head of the compensation committee, made final decisions on the bonus pool. While knowing that the firm might lose money for the year, they set the payout at a healthy $270 million, vs. $506 million in 1988, but decided that 24% of that pool would be given in Drexel stock.

When the bonuses were announced in December, Leon Black was perturbed at how small his was, a mere $12 million. According to several Drexel officers, Black went home and sulked for a couple of days before Joseph relented and gave him $3 million more. Joseph, as if to compensate the firm for the cash drain, took his $2.5 million bonus entirely in Drexel stock.

Meanwhile, Drexel's financial plight was worsening. Throughout the year the firm had borrowed $650 million from its commodities trading unit. The commodities group usually borrowed gold from foreign central banks, then sold the gold and lent the cash to the holding company. But in December, when Drexel was unable to roll over more commercial paper, it could no longer pay back its commodities unit on demand.


The new year began badly. After months of erosion, the junk bond market collapsed as jittery holders began dumping en masse. In January, Drexel lost $60 million.

As more and more banks refused to extend the lines of credit backing up Drexel's commercial paper, the money from the firm's commodities trading unit no longer sufficed to finance the holding company's inventory. Wright, with the approval of Fred Joseph, began to raid the broker-dealer, which still had capital in excess of the regulatory minimum, and Drexel's government-securities dealer. In late January he drained these two units of about $400 million, despite warnings from his staff that the firm would run out of capital within 30 days. He told a member of his group, "Well, maybe the salesmen can sell more commercial paper."

Neither Wright nor Joseph informed the board of directors about Drexel's precarious state. Nor did they report to the New York Stock Exchange or the SEC—which both require that brokers have a certain amount of capital to meet their obligations—that they were taking money out of the broker-dealer. But on February 2, the New York Fed got wind of the transfers and passed the word to the SEC and the exchange regulators, who were aghast. Drexel firmly believed that its longtime nemesis, Salomon Brothers, tipped off the Fed, but Salomon denies the charge.

From this point on, the regulators called the shots. On Thursday, February 8, the stock exchange officials, after consultations with SEC Chairman Richard Breeden, telephoned Wright and told him that he could not take more money from the broker-dealer without SEC approval. Wright relayed the bad news to Joseph, who was at his farm in rural New Jersey.

A meeting of the department heads who ran the firm was hastily convened, and Joseph was hooked in by phone. Wright explained that $400 million in unsecured debt was coming due within the next two weeks, with another $330 million scheduled to mature in March. Then the senior officers heard the head of the commodities trading unit explain his Rube Goldberg borrowing arrangement with the foreign central banks. And by the way, he told his dumbfounded peers, he needed his $650 million back, pronto, to repay the loans. According to a department head, recriminations began to fly about who knew what—and when—about the firm's financial condition.

On Friday, February 9, Wright was feeling the pressure. According to former Drexel officers, in the morning he and his treasurer were urging Drexel's commercial paper salesmen to sell more paper, despite widespread fears that the firm was on the edge of bankruptcy. Incredibly enough, the salesmen were able to flog millions of dollars' worth only two days before Drexel went belly up.

In the afternoon the department heads reconvened to consider the options. About a year too late, Joseph proposed a draconian plan to save the firm: Cut costs, sell inventories of stocks and high-grade bonds, pull out of the commodities and mortgage-backed securities business, and sell off the junk holdings. Everyone was working around the clock that weekend. But when Joseph, telephoned Peter Ackerman to tell him of the liquidity crisis, Ackerman resigned from the board on the spot.

Saturday was spent trying to sell operations to free up capital. But says a board member: "You don't get out of businesses in a day or a week. They were either blind and dumb or in some dream world." By Saturday night a frantic search was on for a merger partner. Desperate senior officers began calling their Wall Street competitors, saying in effect, "How about sending in a team to take a look tomorrow?" A few browsed, including Smith Barney and Nomura, but no one bought.


On Monday morning rumors of Drexel's imminent bankruptcy were sweeping the world's bonuses. Says a former Drexel floor broker: "When I walked out onto the floor of the [New York Stock] exchange, I could sense that something was the matter. Stories were flying that we were already out of business."

They were—almost. Drexel's only hope of salvation was its banks, which had been hounding various members of the firm for days trying to find out whether rumors of bankruptcy were true. Joseph spent the day readying a $1.1 billion bundle of securities that the banks might accept as collateral for a $300 million to $400 million loan. These securities were the same old bridge loans and private placements that Drexel hadn't been able to sell before, plus the right to income from a portfolio of leases. After giving the securities a haircut for their illiquidity, Joseph and the bankruptcy experts he had called in over the weekend put the package's worth at $800 million.

At dusk on Monday, February 12, a bevy of bankers in pinstripes, armed with calculators, marched into a seventh-floor conference room at Drexel Burnham's headquarters. Joseph knew he was not adequately prepared for the meeting and that the bankers would have serious questions about the quality of the merchandise he was offering as collateral. But he thought there was a better than even chance they would lend Drexel the money anyway. After all, he was sure that the regulators were urging the banks to help out. In fact, he figured the federal government, with a wink and a nod, had already lobbied the lenders to make the loan rather than let Drexel fail. Isn't that the way these things are done?

For their part, the bankers were angry that Drexel hadn't come clean earlier. Joseph announced to the not altogether surprised group that Drexel had a liquidity problem and needed to borrow $300 million to $400 million. According to a banker at the meeting, he said the foreign central banks that had been funding Drexel were unwilling to continue that arrangement, but that certainly Drexel's loyal commercial lenders had more courage. Then the bankers received a list of the collateral and recognized it as the same junk they had disdained earlier. They were being asked to take a credit they had already passed on.

Fred Joseph then sealed Drexel's fate. He said in response to a banker's query that the firm had missed a scheduled repayment earlier in the day to holders of some commercial paper. Says a banker who was in the room: "So the situation was already worse than we had thought before the meeting. Drexel was in danger of cross-defaulting on all its loans."

The bankers went through the motions of caucusing. After a few minutes they told Joseph that they could not make a decision that night and that they were not inclined to make the loan anyway. Joseph implored them to call their headquarters and seek approval. The bankers dutifully telephoned. The answer? Forget it.

They huddled again. Sentiment had hardened, but Joseph was not going to give up. He pleaded for the home phone numbers of the banks' top officers so that he could make personal appeals. Joseph's calls took them away from their dinner tables and televisions. But to no effect. There had been no regulatory winks and nods. By 12:30 AM, Joseph let his exhausted troops drift home.

He, however, had one more humiliation to undergo. At 1:30 AM he telephoned the SEC's Richard Breeden and Gerald Corrigan of the New York Federal Reserve, who were at their homes, and informed them—as if they did not already know—that the banks had turned Drexel down. Breeden and Corrigan said that they were speaking for their respective bosses, Treasury Secretary Nicholas Brady and Fed Chairman Alan Greenspan. They suggested that Drexel file for Chapter 11 the next day or face government liquidation. It was only then that Joseph realized his firm was history. As he said to a colleague, "God has spoken."

"The Inside Story of an Inside Trader," by Dennis B. Levine and Sandra L. Kirsch, Fortune, May 21, 1990

The author's arrest set off a series that toppled Wall Streeters like dominoes, from Boesky to Milken. Here's how he slipped into crime - and what it did to his life.

Dennis Levine made history. The disclosure of his misdeeds exposed those of Ivan Boesky, his illicit partner, and Boesky in turn led the government to Michael Milken and Drexel Burnham Lambert. The stocks Levine bought and sold through offshore bank accounts were mainly of target companies in soon-to-be-announced mergers. According to the Securities and Exchange Commission, he made his largest single insider trading profit on securities of Nabisco Brands. The SEC alleges that he bought 150,000 Nabisco shares some three weeks before the company announced merger talks with R.J. Reynolds in 1985. When the stock's price rose, Levine sold for a $2.7 million profit. Here, for the first time, Levine tells his inside story, a personal odyssey to the heights of Wall Street and then down to its criminal depths. Boesky and others involved in these felonies differ with some aspects of Levine's story, but they are not telling their tales. A notable success as an investment banker on Wall Street, Levine was undone by ambition so intense it drove him over the line. Thereafter he found himself in a quagmire of deceit and betrayal.

Waking early in my Park Avenue apartment on May 12, 1986, I read the morning papers, checked on the European securities markets, and ate breakfast with my wife, Laurie, then six weeks pregnant, and my son, Adam, who was 4. By 8 AM I was in downtown Manhattan, meeting with my staff at Drexel Burnham Lambert. At 33, I was a leading merger specialist and a partner in one of the most powerful investment banks on Wall Street. Among the many appointments on my calendar that day were meetings with two CEOs, including Revlon's Ronald Perelman, to discuss multibillion-dollar takeovers. I was a happy man.

In midafternoon two strangers, one tall and one short, came looking for me at Drexel. They didn't identify themselves, but the receptionist said they weren't dressed like clients. For ten months, I knew, the Securities and Exchange Commission had been investigating the Bahamian subsidiary of Bank Leu, the Swiss bank that had executed insider stock trades for me since 1980. That very morning I had spoken on the phone with one of the bank's employees, who reassured me that everything was under control. Still, I knew something was wrong, and I fled. While the authorities searched for me, I drove around New York in my BMW, making anxious calls on the car phone to my wife, my father, my boss. Before leaving the car, I hired a legal team headed by superstar lawyer Arthur Liman, who went on to serve as chief Senate counsel in the Iran-contra investigation and is now representing Michael Milken. By the time I had hired Liman, my darkest secret was being broadcast by TV stations across the country.

Early in the evening, I drove alone to the U.S. Attorney's office in lower Manhattan, expecting only to be served with a subpoena. The federal officers read me my rights instead. At the nearby Metropolitan Correctional Center, they locked me up with a bunch of drug dealers in a cell whose odor I won't soon forget. It was like an out-of-body experience. As I ate cornflakes at the prison cafeteria the next morning, I watched the story of my arrest on a TV wake-up show. My carefully orchestrated career, years of planning and sacrifice, thousands of hours of work that had lifted me from Bayside, Queens, to the pinnacle of Wall Street - all reduced to nothing. Just like that.

I have had four years to reflect on the events leading up to my arrest. Part of that time - 15 months and two days - I spent in Lewisburg federal prison camp in Pennsylvania. Getting your comeuppance is painful, and I have tried to take it on the chin. Unfortunately, my family also had to endure the trauma of humiliation, disgrace, and loss of privacy - and they did nothing to deserve it. I will regret my mistakes forever. I blame only myself for my actions and accept full responsibility for what I have done. No one led me down the garden path. I've gained an abiding respect for the fairness of our system of justice: For the hard work and creativity I brought to my investment banking career, I was well rewarded. When I broke the law, I was punished. The system works.

People always ask, Why would somebody who's making over $1 million a year start trading on inside information? That's the wrong question. Here's what I thought at the time, misguided as I was: When I started trading on nonpublic information in 1978, I wasn't making a million. I was a 25-year-old trainee at Citibank with a $19,000 annual salary. I was wet behind the ears, impatient, burning with ambition. In those days people didn't think about insider trading the way they do now: You'd call it ''a hot stock tip.'' The first U.S. criminal prosecution for insider trading wasn't until around that time, and it was not highly publicized. In the early years I regarded the practice as just a way to make some fast money. Of course I soon realized what I was doing was wrong, but I rationalized it as harmless. I told myself that the frequent run-ups in target-company stock prices before merger announcements proved others were doing it too. Eventually insider trading became an addiction for me. It was just so easy.

In seven years I built $39,750 into $11.5 million, and all it took was a 20-second phone call to my offshore bank a couple of times a month - maybe 200 calls total. My account was growing at 125% a year, compounded. Believe me, I felt a rush when I would check the price of one of my stocks on the office Quotron and learn I'd just made several hundred thousand dollars. I was confident that the elaborate veils of secrecy I had created - plus overseas bank-privacy laws - would protect me. And Wall Street was crazy in those days. These were the 1980s, remember, the decade of excess, greed, and materialism. I became a go-go guy, consumed by the high-pressure, ultracompetitive world of investment banking. I was helping my clients make tens and even hundreds of millions of dollars. I served as the lead banker on Perelman's nearly $2 billion takeover of Revlon, four months of work that enabled Drexel to earn $60 million in fees. The daily exposure to such deals, the pursuit of larger and larger transactions, and the numbing effect of 60- to 100-hour workweeks helped erode my values and distort my judgment. In this unbelievable world of billions and billions of dollars, the millions I made by trading on nonpublic information seemed almost insignificant.

At the root of my compulsive trading was an inability to set limits. Perhaps it's worth noting that my legitimate success stemmed from the same root. My ambition was so strong it went beyond rationality, and I gradually lost sight of what constitutes ethical behavior. At each new level of success I set higher goals, imprisoning myself in a cycle from which I saw no escape. When I became a senior vice president, I wanted to be a managing director, and when I became a managing director, I wanted to be a client. If I was making $100,000 a year, I thought, I can make $200,000. And if I made $1 million, I can make $3 million. And so it went. Competitive jealousy is normal in business. Everybody wants to make more than the guy down the hall. It is the same in investment banking, but the numbers have more zeroes. Only a small percentage of the people these firms hire at the entry level of associate go on to make partner, and as the pyramid narrows, the competition grows ever more intense. By the time I made partner at Drexel, I was out of control.

My parents always encouraged me to play straight. I come from a strong, old-fashioned family; I was the youngest of three boys. My mother, Selma, was shortchanged by life: She died of a stroke at 53, when I was 23. I'm still very close to my brothers, Larry and Robert, and my father, Philip; we talk often and meet for dinner and backyard barbecues. Until he retired in 1983, my father worked long hours running his own business. His home-remodeling company finished basements, installed siding, added dormers, and so on. He taught me to work hard, believe in myself, and persevere. Off and on, from my early teens, he hired me to canvass door to door for new customers. Those cold calls were hard, but they showed me how to sell. I tried to overcome objections, never taking no for an answer. As a kid I always worked. I would be shoveling snow or delivering newspapers. My folks gave me piano lessons from the time I was 7, and during my early teens I started making money as a musician, playing keyboards at parties and dances. By the end of high school I was in a band that sometimes opened local concerts by touring rock groups, including the Association and the Turtles. I wasn't a particularly dedicated student in those days, but I had a lot of friends. I began studying the stock market when I was 13, reading books and investing part of my earnings - a few hundred dollars at first - in over-the-counter securities. In eighth grade I became a regular reader of the Wall Street Journal. By the time I enrolled at City University of New York's Bernard M. Baruch College in Manhattan, I was heading for a career in finance. Soon I narrowed my focus to investment banking, which seemed a great way to make money.

Laurie and I met at a wedding during my junior year at Baruch. Two years younger than I, she was smart, attractive - blonde, blue-eyed, and athletic - and shared my goals of raising a traditional family while I built a lucrative career. We began thinking about marriage. Upon graduation I entered Baruch's MBA program, going to school at night and working during the day. Baruch offered no special courses in investment banking, so I taught myself. I wrote my thesis on the factors that influence underwriting profits. At first, given my lack of experience, no investment bank would hire me. So I took a job in the corporate counseling department at Citibank, hoping that a stint in commercial banking would provide a springboard to Wall Street.

Initially I analyzed client companies' foreign currency exposures and helped develop hedging strategies to offset potential losses. By the end of the year that I worked at Citibank I was advising corporate clients myself. Laurie and I finally got married and moved into a $379-a-month apartment in Forest Hills, Queens. It was 1977 and mergers and acquisitions was starting to boom. When I began my career, it was rare for people with backgrounds like mine - middle-class, non-Ivy League, without useful social connections - to surmount the barriers surrounding the patrician business of investment banking. But over time those barriers were relaxed. Combined with deregulation, the growth of acquisition activity forced the old-line investment firms into harsh competition, leading them to hire and promote people on merit. Seeing my chance, I began studying the M&A business in my spare time, reading books and following deals in the press.

It was at Citibank that I met Robert Wilkis. A fit, balding junior officer a few years older than I, Bob struck me as terribly urbane when he introduced himself at a meeting for new employees. He was a Harvard grad with a Stanford MBA who spoke five languages. Bob shared my love of the stock market, and we became close friends. We would meet at the fourth-floor stock quote terminal, where he monitored his personal portfolio while I tracked the latest M&A deals. As a lending officer in the world corporate group, Bob had routine access to sensitive information about mergers Citibank might finance. Early in 1978 he told me he had identified a major U.S. company - let's call it ChemCorp - as a takeover target. He said he had bought its shares and recommended I do the same. I did: Borrowing on margin, I purchased $4000 of ChemCorp stock. The merger never materialized and I sold the stock for about what I paid for it. To this day I'm not sure the transaction was illegal; Bob never told me he had inside information about ChemCorp. But it was well over a year before I dared make another such trade.

Meanwhile I landed the investment banking job I had coveted. Smith Barney Harris Upham & Co. hired me in 1978 as an associate at $23,000 a year. Investment bankers usually work on deals in teams of four or five, with the associates at the bottom doing the grunt work while the partner makes the strategic decisions. I tried hard to distinguish myself. If I was analyzing potential buyers for a business a client was selling, I would tell the partner which one struck me as the best fit. Some hard-nosed partners would say, You're not paid to think, but most appreciated the effort.

The firm sent me to Paris for a year. Laurie and I had never been abroad - now we were living in Smith Barney's comfortable apartment on Avenue Foch. I ran into many senior European executives who scoffed at American tax and securities laws. Insider trading was legal in most European countries, and some executives I met seemed to view it as a perk of office. A few said they kept money in Switzerland or Liechtenstein or Luxembourg, where bank-secrecy laws are strictly enforced. During that year Bob Wilkis and I kept in touch by telephone, and in the spring of 1979 he visited Paris on business. Bob had also moved into investment banking by then, as an associate in international finance at Blyth Eastman Dillon. We talked at length about trading on the inside information we came across at work. By nature, investment banking requires that even junior people encounter nonpublic information as they work on prospective deals; both Bob and I learned of transactions long before they were announced.

When Bob was in Paris we decided to open accounts at Swiss banks. I borrowed as much as I could from my Ready Credit account and my family, telling them only that I had found some promising investment opportunities. With the $39,750 I raised, I opened a numbered account at Pictet & Cie in Geneva; Bob's was at Credit Suisse. I didn't really begin buying stocks until Smith Barney moved me back to its New York office a few months later. I went to great lengths to avoid creating a paper trail for investigators to follow. Accustomed to confidential arrangements, Pictet's bankers suggested I use the code name Milky Way. When you call, they said, why don't you just say it's Mr. Way? They sent me no bank statements. I called in my trades from public phones - collect. (The bank extracted a service charge of about $20 per call.)

Bob and I tried to avoid linking our trading activities or creating noticeable patterns. That way, if one of us was found out, the other would be safe. We agreed to pool our information but to avoid any financial relationship. According to our pact, we would keep our trading secret, never share our stock tips with anyone else, and never trade in the U.S. Bob came up with the code name Alan Darby, which each of us used when calling the other at work. The procedure was simple. In the normal course of business Bob might learn that Blyth - or his next employer, Lazard Freres - was representing one company in a prospective takeover of another. Let's call the target Flounder Corp. Bob would phone me at work, identifying himself as Darby if anyone other than I answered. We would set up a meeting, often a quick lunch of pizza or Chinese food. Between bites, he would tell me the inside dope on Flounder. We would also chat about work, family, movies - we were friends, remember -then say goodbye. Before buying any shares, I would do enough research on Flounder to assure myself that its stock was worth buying at current prices even if the takeover never materialized. (Inside information is not always a sure thing: I lost as much as $250,000 on some trades.) If Flounder's fundamentals looked good enough, I would find a moment to step out to a payphone and call my bank with a buy order. Once the public got wind of the takeover and bid up the stock, I would telephone again with a sell order. It was that simple. As often as not, of course, I'd provide information and Bob would trade.

My initial uneasiness gradually ebbed - there were no inquiries, and all of a sudden the balance in my account was over $125,000. As my trading grew, so did my circle of sources: With Bob's knowledge, I began exchanging information with another junior banker and a law firm associate. I never told Bob their names; Bob later did the same with a young colleague. Then, during one of my calls, a Pictet banker told me the conservative firm was uncomfortable with my aggressive trading style, which included short-selling securities and trading options. He politely suggested I change tactics or take my business elsewhere. I simply shifted to the Bahamian subsidiary of Bank Leu, Switzerland's oldest. I was developing confidence about my career as well. Along with the other associates in Smith Barney's M&A bullpen, I read annual reports and labored over financial analysis. We all regularly put in time on weekends and after 7 or 8 PM, when the partners usually knocked off for the evening. The hours were so obscene that my family ribbed me about being a wage slave. But I loved my work. I realized, Hey, I'm doing this, and I'm doing it well.

One of my assignments was as breaking-news coordinator. I closely monitored market developments - partly by watching the Dow Jones news ticker, partly by listening to Wall Street gossip - and alerted the firm to opportunities. I became an idea man, finding reasons Smith Barney should get involved in a transaction, suggesting why one company should merge with another. At first the opportunities I spotted were small. I heard a rumor that a big block of Koehring Co., a producer of excavators and other heavy machinery, might be up for sale, making the company vulnerable to takeover. I told my superiors, and they approached Koehring. Ultimately a bidder did surface, and Koehring hired us to render a fairness opinion for a $250,000 fee. As I rose on Wall Street the fees my ideas generated got bigger, and people kept patting me on the back for being so well plugged in. I spent my career trying to keep abreast of every major M&A transaction, knowing who was representing whom, who was buying whom. I kept a log. People think you have to be brilliant to be an investment banker, but it's not rocket science. If a consumer products company comes up for sale, you have a list of likely acquirers. You do your homework, call them up, and if you're the first with the right idea, odds are you'll get the business. The essence of high-level investment banking is the ability to close deals. What clients pay for is negotiating skill and judgment that transcends anything they teach in business school.

Making a deal happen requires as much psychoanalysis as financial analysis. The people in this high-stakes arena have enormous egos; it's the banker's job to retain objectivity even when others can't. You also must balance the interests of everyone on both sides - the managers, the directors, the major shareholders, the banks, the lawyers, the other investment bankers - and somehow stay three moves ahead of them all. Do it long enough, it becomes an instinct. Smith Barney promoted me to second vice president, but by 1981 I felt I had learned as much there as I could. I moved to Lehman Brothers Kuhn Loeb, then a private partnership and a major force in dealmaking. Starting as a vice president, in three years I rose to senior vice president.

Gradually I was becoming an experienced dealmaker. In June 1984, for instance, I read that Avon Corp. was considering purchase offers for its Tiffany subsidiary. Boom! Click! I immediately called Bill Chaney, Tiffany's CEO, and successfully proposed a $135 million management LBO instead. Not the biggest deal I've ever done, but very profitable for everyone involved - including Lehman, which invested in the LBO. Part of what attracted me to Lehman had been the hope of becoming a partner in a private firm. When Shearson/American Express acquired the bank in 1984, Lehman lost that appeal. A few months later, when Drexel offered me a position as a managing director - the equivalent of partner - I jumped.

Drexel was starting to translate its clout in junk bond financings into M&A deals. The firm had a stable of acquisitive clients, and in case after case I was assigned to get their deals done. Within months I built a string of successes: Carl Icahn's proxy fight against Phillips Petroleum, which forced a restructuring to the benefit of shareholders; Coastal Corp.'s unsolicited $2.5 billion acquisition of American Natural Resources; Sir James Goldsmith's hostile takeover of Crown Zellerbach, completed despite a poison pill; and the Revlon deal, the high point of my career. Winning a battle like the one pitting Perelman against Michel Bergerac of Revlon offers excitement far more intoxicating than insider trading. At the outset Perelman proposed a friendly acquisition. Revlon responded by creating a poison pill defense, beginning a ferocious battle during which Revlon tried almost every weapon in the antitakeover arsenal. The odds were against us, in part because Perelman's company, Pantry Pride, was one-eighth the size of Revlon, and it was still uncommon for small companies to swallow large ones. In the end our side prevailed because our proposals served the shareholders' interest better than management's. To put pressure on Revlon, we kept issuing all-cash tender offers at higher and higher prices. Revlon's board spurned those offers, agreeing instead to an LBO by a group that included Bergerac and other Revlon managers. We topped that group's offer, and kept topping their subsequent offers until, in a historic decision, the Delaware chancery court ruled that once a company puts itself up for sale, it must maximize shareholder value. Perelman's final offer was 75 cents a share higher than Bergerac's. In 1985 my first bonus at Drexel came to well over $1 million in cash. In addition I was offered securities, including Drexel stock; had I held the securities longer, this part of my compensation might have been worth millions. Instead the securities were liquidated and then turned over to the government as part of my settlement.

My relationship with Ivan Boesky began innocently enough. Having learned to listen to the market's tom-toms as part of my legitimate career, I developed a network of sources that eventually included the man considered America's boldest and most influential stock speculator. Like the CIA, Ivan seemed to have sources everywhere: His intelligence was extremely valuable. And he was an important Drexel client. We met in March 1985 at my first Drexel high-yield bond conference. This was a glamorous annual affair in Beverly Hills - dubbed the Predators' Ball - that drew people, from pension fund managers to corporate raiders, controlling untold billions of dollars. When it was over, Ivan offered me a ride back to New York on a private jet. Since I had already made plans to visit one of my brothers who lives nearby, I declined. But once back in New York we began talking regularly, mostly about pending deals.

Ivan's attentions were flattering. He invited me to lunch at ''21.'' He would telephone me at home, at work, even when I was on business trips or vacations, seeking information about deals. My home phone would ring well before 6 AM; Laurie would answer and hand me the receiver, saying, It's Ivan, rolling her eyes. He had such an insatiable desire for information that he would call me up to a dozen times a day. With Bob's knowledge, I began giving him tips in exchange for access to the vast store of market information in Ivan's head. I wasn't telling Ivan anything very specific - it was more a matter of suggesting that, say, his investment in XYZ Corp. seemed worth holding on to. I never told him my oblique suggestions were based on nonpublic information, but over time he evidently learned their value. Then Ivan drastically changed the nature of our relationship by offering to pay for the information I was giving him, based on a percentage of his trading profits. He said something like, You seem to have very, very good information. You should be compensated for it.

Despite my own illicit activities, I was flabbergasted. I couldn't believe he would risk exposing himself so blatantly, by proposing something clearly illegal on its face. I already had a secret life, and it was not something I was anxious to expand: My safety depended on keeping the number of people who knew of my insider trading to a minimum. Besides, by then I had millions in my account at Bank Leu. I turned Ivan down and resisted his overtures for weeks. I'm not quite sure why I finally accepted. Stupidity, I guess. And I don't know why Ivan engaged in illegal activities when he had a fortune estimated at over $200 million. I'm sure he derived much of his wealth from legitimate enterprise: He was skilled at arbitrage and obsessed with his work. He must have been driven by something beyond rational behavior. In any case, I never received a penny from him, though I was due $2.4 million under our formula when I was arrested.

When my scheme fell apart, it did so quickly. In the summer of 1985, Merrill Lynch received an anonymous letter accusing two of its brokers in Caracas, Venezuela, of insider trading; only one was subsequently charged. Unbeknownst to me, for years several Bank Leu executives had been making trades that mimicked mine, for their own accounts or for others' - apparently, the bank's policies condoned this. Disregarding my instructions to spread my orders among several brokers, they had funneled much of the business through Merrill Lynch. At least one trader there, in Caracas, apparently piggybacked on my trades too. Somebody blew the whistle, perhaps out of jealousy. Merrill Lynch, it seems, then informed the SEC, and just as my legitimate career was reaching its peak, the government began its ten-month investigation of Bank Leu.

I thrive on stress, but those months were tough. The Revlon deal was in progress, Laurie's father was dying of cancer, and I was flying to the Bahamas every few weeks to discuss the SEC's investigation with my bankers. Ultimately, despite the Bahamian and Swiss laws in which I had placed so much faith, Bank Leu handed my head to the SEC in return for immunity from U.S. prosecution, agreeing to testify against me. The day the government came looking for me, I was petrified about Laurie's reaction. Laurie is wonderful. Tutoring our daughter, Sarah, with flashcards or playing softball with Adam, she shows the patience of a grade school teacher, a career she gave up to raise our children. She is also assertive: She lets you know exactly what she thinks. Certain that she wouldn't approve and meaning to shield her from any legal consequences of my actions, I had never told her about my insider trading. It was a secret big enough to strain any marriage: Some spouses use drugs, others have extramarital affairs, I secretly traded stocks. Laurie had no reason to suspect: We had always lived within my means. We stayed in a cramped one-bedroom apartment for almost three years after Adam was born, though I could have paid for almost any apartment in Manhattan with my offshore trading profits. Though I called my wife from the car phone before I was arrested, I couldn't bring myself to tell her what the problem was. I asked my father and brother to stay with Laurie at the apartment, and they told her. By then my crimes had become public knowledge. I didn't sleep that night in jail. Instead, I spoke with Laurie on the phone, and her initial reaction was disbelief. She was ashamed of me and beyond anger - furious. We had been living this American dream, and now she didn't know how much of it was real. Was it all a dream? I tried to reassure her, but inside I was an emotional wreck. She told me that a mob of reporters had gathered at the entrance to our apartment building. I feared the stress might cause her a miscarriage. The pressure on us only increased after I was released on $5 million bail the next day.

When I went to my local cash machine to get money, my bank account was empty. The IRS had seized most of my assets to protect its claim to back taxes. Then I learned that a grand jury had been impaneled and the government might use the harsh RICO statutes - designed to fight mobsters - against me. That would have allowed them to seize all my assets, down to the food in the fridge - and the maximum penalty for each RICO violation is 20 years in jail. The death blow came when Bob Wilkis asked to meet with me. To my amazement, he told me that he had tipped others, including a member of his family, and had been executing trades in the U.S. all along. That had created an easily detected trading pattern nearly identical to mine - more than enough to nail me. I knew I was finished, and in the end my attorneys advised me that I had no choice but to settle with the government and tell the truth about everything and everybody involved in my case. I pleaded guilty to four criminal charges related to my insider trading and settled civil charges with the SEC. Turning over cash and other assets, I made full restitution of my $11.5 million in trading profits. Everyone else involved in the case also entered guilty pleas and cooperated. Ivan Boesky turned himself in, pleading guilty to one criminal count and turning over $100 million. At that point I assumed the investigation was closed, but apparently Ivan's illicit activities extended far beyond his involvement with me. I had no inkling of his secret relationship with Marty Siegel, whose office was right next to mine at Drexel. The revelations of Ivan's paying Siegel off for inside information with suitcases of cash surprised me as much as anyone. So did Drexel's collapse and Michael Milken's settlement with the government. I don't think the firm's ethics were materially different from any other investment bank's.

On February 20, 1987, I pulled up to the federal courthouse in White Plains, New York, with my wife and lawyers. As our car approached I noticed dozens of reporters and camera crews standing outside. It reminded me of a lynch mob. Once inside, I learned that few experiences are more humbling than standing before a federal judge, publicly acknowledging guilt and being sentenced to jail. Less than four months after Sarah's birth, I began serving my sentence. Saying goodbye to your family is painful enough, but imagine having to explain to your 5-year-old son why his father is going to prison.

Although minimum-security prison camps have no walls, you are constantly reminded of your separation from family and society. I had no privacy, my ! moves were monitored, and my daily routine was controlled by others. I went from never having enough time to a place where everyone kills time. I mopped floors and mowed grass and spent hours just thinking. At first I could not come to grips with the turbulent changes in my life; I was burning with anger at myself. Eventually I decided to change my priorities and try to regain control over my life. I had entered prison grossly overweight, at 241 pounds. One outward sign of my new resolve: I lost 67 pounds in prison. I got along all right with the other prisoners, many of them drug offenders with no convictions for violence; nobody bothered me. They loved TV shows like Wiseguy and Miami Vice - and the inmates always rooted for the crook.

Having experienced prison, I'm saddened that most Americans apparently believe we can solve our drug problems by building more jails and locking more people up. From what I've seen, prisons don't solve social problems. The other prisoners called me ''Mr. Wall Street'' and asked me for market advice. I always said no. Money had little value, but there was a lively barter economy: If you were long cigarettes, you could often buy a plate of linguini with clam sauce, heated in an aluminum pie tin over an electric iron. As one of the few nonsmokers in an institution that rationed cigarettes, I was a wealthy man. Laurie sent me a copy of Bonfire of the Vanities, Tom Wolfe's novel about a Wall Streeter who gets thrown in jail. I never felt quite like a Master of the Universe, but I saw parallels. On weekends and holidays, I was allowed visits. I have painful memories of Sarah learning to walk in a prison visiting room, and of Adam pleading with a guard who wouldn't let him bring in a Mickey Mouse coloring book. Toward the end of my sentence I urged them not to come. It hurt to be reminded of what I was missing. Until I got out I didn't understand the ordeal Laurie was going through. She had lost her father to cancer, given birth to a new baby, and become a single parent, all in a few months. While I was in Lewisburg she kept her feelings to herself, to spare me worry. And we couldn't talk intimately with guards monitoring our visits and recording our calls.

When I was released, I was so overjoyed to be free that I didn't realize I was coming home to a woman whose anger had been growing since the day of my arrest. Instead of celebrating my return, Laurie forced me to confront the misery I'd caused her. Now that we've had it out, our marriage is stronger than it was when we were divided by secrets. I am rebuilding my life. I still feel the consequences of my mistakes and doubtless will forever. But I've been granted a precious second chance. This time around, I'm spending far more time at home with my family than ever before. I love the investment banking business - it's in my blood - but as part of my settlement I agreed never to work for a securities firm again. I can still advise companies about raising money or doing deals, so I have started my own New York advisory firm, named Adasar Group after my children. My clients are smaller than they used to be, but much to my surprise, most people have treated my reentry into business with fairness and compassion. I also have been addressing students at Columbia, Wharton, New York University, and other schools, hoping to steer them away from the mistakes I made. They are conscious of ethical issues - all the way from misappropriating office supplies to out-and-out felonies like insider trading or illegal dumping of toxic wastes. The enthusiasm of their response encouraged me to write this article. My former life was destroyed because I figured the odds were 1000 to 1 against my getting caught. It would comfort me if I could help even one person avoid throwing away a lifetime on a foolish gamble like that.

"The Mystery of the Instant Mogul," by Edward Jay Epstein, Spy, June 1990

Expansive Italian businessman Giancarlo Parretti's sudden presence has piqued the industry's imagination. How did this Italian socialist bankroll his $1.5 billion media empire? How was this ex-waiter; arrested in 1981 for bank fraud and in 1986 for extortion, able two years ago to buy both the Cannon Group, the force behind the Chuck Norris and Charles Bronson oeuvres, and Pathe Cinema, France's oldest film company? And how is he maneuvering, with Time Warner's help, to acquire MGM/UA for another $1.2 billion? Many have speculated (Gaddafi oil money? The Credit Lyonnais? The Mafia?), but until now, the fact have remained elusive regarding...

Giancarlo Parretti is Hollywood's latest hero-from-zero mystery. Just a few years ago, in 1982, he was an employee of a fish processing company in Hong Kong. Now his empire-which includes movie studios, theaters, film laboratories and distributors, and production companies on two continents-is worth, according to a claim he made in Variety, $1.5 billion. In 1988, he bought the oldest film company in France, Pathe Cinema, as well as the Cannon Group, a Hollywood studio best known for its ninja and vengeance fantasies (and that Parretti subsequently renamed Pathe Communications Corporation). Since then, he has announced a new multimillion-dollar deal almost every month. In March, Parretti stunned both Hollywood and Wall Street by bidding $1.2 billion for MGM/UA-a movie company that both Rupert Murdoch and Ted Turner had looked at months before but decided to pass on. In the documents Parretti filed with the Securities and Exchange Commission, he specified no source for the $1.2 billion other than an "oral, non-binding agreement" for $200 million. He bragged that he didn't even have an investment banker to raise the rest of the financing. Less than three weeks later (and just days after Billy Crystal had joked during the Oscars about Parretti's murky Italian origins) an Italian court in Naples sentenced him in absentia to three years and ten months in prison for fraudulent bankruptcy. Undaunted by this conviction, Parretti was boasting in April that he was on the verge of signing a $650 million deal with Time Warner to distribute his MGM/UA films.

What other deals has Parretti announced over the past year and a half? In January 1989, he announced an $80 million plan to bail out DEG, Dino De Laurentiis' movie studio, from bankruptcy so he could merge it into his own. In February 1989 it was a $160 million film production agreement with Menahem Golan, the Israeli entrepreneur who with his cousin Yoram Globus had built The Cannon Group into a transoceanic filmmaker and theater owner. That same month, he made a $138 million offer for New World Entertainment, a movie and television producer founded by B-movie king Roger Corman. In March 1989, Parretti made a $39 million offer for the production company Kings Road Entertainment. In April, he first floated the idea of taking over MGM/UA, for $1 billion. The next month, he bid $228 million for Telemontecarlo, a media company.

As it turned out, none of these announced deals were actually consummated. Parretti never went through with the Golan plan. Ron Perelman outbid him for New World. The Kings Road purchase fell apart. The Dino De Laurentiis rescue failed. MGM/UA rejected Parretti's bid and accepted instead an offer from an Australian suitor, Qintex (which iteself subsequently collapsed). The Telemontecarlo deal also never got off the ground.

Nevertheless, this stranger in fantasyland had put $90 million into Cannon-and paid another $150 million to buy Pathe in France. (The French government, however, has yet to allow Parretti to take official title of Pathe, because there was confusion about the amount of foreign capital involved in the deal.) He has also just put up $50 million in good faith money on his new, improved, MGM/UA takeover. Where did the money come from?

The mystery began for me when I met Parretti at Le Cirque in New York a little over a year ago. Parretti, a short, compact man with eyes that might be best described as avaricious, waved the question away as one would an annoying fly. He preferred to talk in his not yet perfected English about MGM/UA. "When I went there to visit my friend Kirk Kerkorian (head of MGM/UA), I became obsessed with the beautiful girls in the lobby. Those girls are worth a billion-at least," he said, laughing uproariously at his own joke. Parretti blamed the "Hollywood mafia" for blocking his first bid for the studio: "They are out to stop me, to destroy me." But he declined to identify this mafia, saying only, "I don't care; all that matters is to die in the arms of a beautiful woman." (In a subsequent interview with Italian Communist Party newspaper L'Unita, he named "the Jews and the Japanese" as his enemies-a rather sweeping conceit for a man who would buy Hollywood.)

How was he going to finance his acquisition of MGM/UA (which was already $335 million in debt)? He evaded the question, recounting instead his astrological qualities. "I am a Scorpio," Parretti told me, "and Scorpios make their own world." His grand design, which he described with excited hand gestures, is nothing short of a Euro-American media empire that would include production companies, theaters, tourist cities, television, video stores, film libraries and magazines. "One of the real assets of Cannon is the thousands of unproduced scripts in its vaults. I want to make them into movies for Europe, South America, the world," he said. But before he could explain where the financing would come from or what the surefire scripts were, he was diverted by the arrival of the pasta. He leapt up to help the captain prepare it. When he finally sat down to eat, a plume of cigarette smoke wafted over from the table behind us. A heavily jeweled woman was the offender. Again Parretti jumped up. He unfurled his dinner napkin and fanned the smoke back in the face of the startled woman. "I don't like to be interrupted," he announced.

Parretti is exceedingly difficult to pin down. Where does he live? His business card lists offices in Paris, Rome, New York, Madrid and Los Angeles, but his real office, he said, is his Gulfstream jet. "It's wherever I am, which may be Tahiti or Bora Bora." His secretary is, he says, "my pilot." His schedule changes "with every phone call." The night before we met, he had flown in from Rome. "Tomorrow," he said, "I will be in Rio de Janeiro making a deal." As he raced out the door he handed out "as presents" to the waiters bottles of Tuscan wine he'd bought at the restaurant. He never really answered the $1.2 billion question-the source of his financing.

In Hollywood-when he is there-Parretti lives Jay Gatsby-style in a $9 million Beverly Hills mansion, where visitors are often taken to a walk-in steel vault to look at paintings he identifies as Picassos, Miros and Goyas. He shares the mansion with Maria Ceconi, his wife of more than 20 years, his son and two daughters, and Fabio Serena, his 37-year-old lawyer. (Ceconi, Serena and his oldest daughter are also executives of his holding company.) For getting around town, Parretti owns a $200,000 Rolls-Royce. He owns a large interest in an Italian restaurant, Madeo, on the ground floor of the ICM Building (which has a special satellite hookup to get Italian soccer games), and the private club-disco Tramps.

Like the hero of Gogol's Dead Souls, who spawns rumor after rumor about himself as he moves through the Russian provinces trying to buy up rights to deceased serfs in order to further a financial scheme, Parretti, trying to buy up near-dead film companies, has stirred the collective imagination of Hollywood. "The word is the Mafia is behind him," a top agent suggests. "Parretti is a creature of Credit Lyonnais," says a studio executive. He has been sent to America, the executive says, to salvage the bank's bad loans to Cannon, De Laurentiis, New World and other shaky Hollywood producers. "Parretti is laundering money for the drug cartel," says a Hollywood investment banker, pointing out that movie theaters are cash buinesses and that what Parretti has bought in Cannon and Pathe is 600 movie theaters. "He is fronting for Silvio Berlusconi (the Milanese media king)," insists an Italian movie director. "It's Gaddafi's oil money," says an American film producer.

This proliferation of lurid rumors does not sit well with Alan Ladd, Jr., the well-liked and widely respected former head of 20th Century Fox and MGM/UA, who for the last year and a half has been Pathe's co-chairman and therefore Parretti's man in Hollywood. Like his father in Shane, Ladd wastes no words. "It's all I hear. And it's complete garbage," he says when I visit him at his plush new office at Pathe Communications, on San Vicente Boulevard. Ladd met Parretti at the home of Dino De Laurentiis in late 1988 and almost immediately accepted Parretti's offer to head Pathe, which put Ladd in the difficult position of having to defend a virtual stranger with an iffy reputation to a community he had grown up in.

Shaking his head in disbelief, Ladd cites a recent newspaper allegation that Parretti was involved with Libyan dictator Muammar Gaddafi. "The reporter mixed up Liberia, where Parretti had a shipping business, and Libya." Parretti has had nothing to do with Libya or Gaddafi, Ladd insists. He finds the Mafia money whispers equally absurd. Why would the mob put money in someone as "high-profile" as Parretti? he asks. "Don't you think I investigated before I took this job?"

Ladd says that last spring he went to Europe with Parretti on the Gulfstream-cum-office, where Parretti, Francis Ford Coppola-style, would cook spaghetti for everyone. During the trip Parretti handed Ladd a telephone book-sized listing of the European and South American luxury hotels in the Melia chain, which Parretti claimed he owned. "There were hundreds of hotels, and each of them represented real money," Ladd says. He recalls attending a press conference in Cannes at which Parretti suggested these hotels earned a $300 million profit in two years. There is, Ladd concludes, "no mystery" about where Parretti's money came from. Case closed.

As it turns out, Parretti does not own the Melia hotel chain. Nor did he own it when he handed Ladd the impressive Melia directory. The truth is that he, together with others, had bought the Melia Group in 1987, but the hotels themselves-the company's main asset-were resold almost immediately to the Sol Hotel chain in a complicated transaction that left Parretti and his associates owning the name Melia. According to its annual report released in 1988, Parretti's holding company, which included "Melia International", had a net worth nowhere near the $1.5 billion figure he supplied to Variety; the report claimed a total of $3.6 million (and even this sum is based on questionable evaluations of illiquid investments).And contrary to his claim at the Cannes press conference attended by Ladd that his business earned a biannual profit of $300 million-or a cumulative profit of $1 billion, as he claimed in an interview with the Italian newspaper La Repubblica-they actually lost money, according to his own annual report, in 1986 and 1987. Moreover, the holding company had only $9000 in its bank accounts and in short-term funds at the end of 1987, the last year it filed an annual report. So the hotels did not supply Parretti with the $60 million or so he spent on his first Hollywood buying spree in 1988. Which still leaves the question, where does he get his money?

According to his birth certificate, Giancarlo Parretti was born on October 23, 1941, in the medieval town of Orvieto, Umbria, about 75 miles north of Rome. In 1958, at the age of 17 and without the benefit of any higher education, Parretti went to work as a waiter. During the '60s, he says, he learned some English working as a ship's steward on the Queen Elizabeth and as a waiter at the The Savoy Hotel in London (though neither the Cunard Line nor The Savoy Hotel could find any record of his employment). Eventually he moved to Sicily, where he got a job waiting tables at a plush hotel in Siracusa. This was young Parretti's first real break, for the hotel was owned by Palermo's political boss, Senator Graziano Verzotto.

By 1973 Parretti was managing the hotel and serving as an aide-de-camp to Senator Verzotto, who also owned Siracusa's soccer team and supervised Sicily's state-owned mineral company. Parretti's second break came when his patron was indicted for embezzling $3 million from the mineral company; to make matters worse (or better, depending on your perspective), the senator was nearly gunned down by what was presumably a team of Mafia hitmen. In 1975 he fled to Lebanon, leaving Parretti in charge of his hotels and the soccer team. After Verzotto disappeared, Parretti went into the business of publishing daily newspapers, called Il Diarios. Parretti then went into partnership with Cesare De Michaelis, a key financier for the Partito Socialista Italiano (PSI), which in coalition with the larger Christian Democratic Party has run Italy since World War II.

Here Parretti made a connection that would ultimately put him in a position to attempt a takeover of MGM/UA; his partner's brother was Gianni De Michaelis, who is now Italy's foreign minister but was then, as minister for state shareholdings, in charge of ENI, a state-owned petrochemical concern-the equivalent of a merged Exxon/DuPont-that is Italy's single largest generator of foreign exchange. Gianni De Michaelis is a longhaired, jowly individual whose extracurricular interest is Italian discotheques (a subject on which he actually wrote a book). By hitching his wagon to this rising star, Parretti moved in the inner circles of the Socialist Party, taking credit for helping to bring De Michaelis's close friend Bettino Craxi to power as head of the party-and eventually as prime minister in 1983. (Craxi later denied having any ties to Parretti.) Perhaps more germane to our story, Parretti also became especially active in the party's finances, serving for a time as the treasurer of its youth organization.

His dealings with ENI eventually brought Parretti into contact with his future partner in international finance and film, Florio Fiorini. When the two met in the early 1980s, Fiorini was the finance director of ENI. As such, he was responsible for depositing hundreds of millions in dollars in ENI funds in foreign banks. Part of this money, as later emerged in an Italian government investigation, came from off-the-books kickbacks and commissions paid to the Saudi Arabian oil behemoth Petromin. These accounts-slush funds, really-were suspected of being used to benefit PSI politicians.

In 1981 Parretti went to see Fiorini. Parretti was in serious financial trouble. His Il Diario newspapers, for which he had pledged his hotels as collateral, were $2.3 million in debt-and facing imminent bankruptcy. Moreover, the Siracusa soccer team that Parretti headed seemed to investigators to be missing large sums of money. Indeed, Parretti would subsequently be arrested and jailed for a week on charges of falsifying the team's books. He explained to Fiorini that he had a 3 billion lira savings certificate-the equivalent of about $3 million-that had been given to him by an unknown businessman, and he asked for Fiorini's help in cashing it. Fiorini took this, he explained to me, "as a bit of PSI business." In other words, Italian politics as usual. Using his formidable financial connections, he sent Parretti to a small Sicilian bank, which accepted the certificate and gave him part of the money.

When the bank later checked on the certificate that had been given to Parretti, however, it was discovered it was but a crude forgery. Perhaps unknown to Parretti, "three zeroes had been added to (the) certificate," according to Fiorini, changing a 3 million lira certificate into a 3 billion lira one. This debacle led in July 1981 to Parretti's second arrest, this time on charges of bank fraud. Released again, he went back to Fiorini, telling the corporate moneyman that he needed $27,000 to emigrate to Hong Kong, where his patron, De Michaelis, had arranged a job for him at an Italian-owned tuna plant. Once again Fiorini got Parretti the money.

Shortly thereafter, Fiorini had his own rather byzantine financial troubles. The Banco Ambrosiano, in which Fiorini had placed $160 million in offshore ENI deposits, announced it was missing more than $1 billion. Fiorini became intent on saving the bank-and ENI's deposits. He called its chairman, Roberto Calvi, who had become known as "God's banker" because of his connections to the Vatican, and offered to help the bank. Calvi rejected the plan. Less than two weeks later he was found hanging under Blackfriar's Bridge in London; his death was ruled a suicide. In the ensuing scandal, Fiorini was fired for his unauthorized offer to Calvi.

Parretti, meanwhile, stopped in Hong Kong only briefly. In 1983 he turned up in Paris, and with his connections to the PSI apparently still intact, if not strengthened (despite his two recent arrests), he became its secretary in France-again, one of the vagaries of Italian politics, understandable only to the Italians and perhaps to people in Hollywood. As the "French Connection"-Parretti's joke-he acted as liasion between French Socialist businessmen and politicians and their Italian counterparts.

To aid his work, Parretti set up a shell company called Interpart in 1983. It was strategically located in the 998-square-mile kingdom of Luxembourg, a sort of Delaware-cum-Switzerland that provides such corporations maximum secrecy for their transactions. While this shell began with only $20,000 in capital in 1984, at the end of the year, according to corporate documents, $1 million in cash had been deposited in its account. Four months later, in April 1985, another $4 million materialized. And in December 1986 Interpart received an infusion of $55 million in cash. As this money flowed in-$60 million altogether, which readers will recognize as a familiar sum-so did Florio Fiorini, who after buying his own shell company in Switzerland became a partner and officer in Interpart. The Luxembourg money first was discreetly channeled into a few select causes sponsored by French Socialist politicians. For example, Parretti, the liasion for the PSI in France, made available $7 million through a subsidiary to buy the French Socialist newspaper La Matin de Paris; then he turned over 48 percent of the stock in this company to Paul Quiles, who had been the Defense Minister in the Socialist government. (In 1987 Le Matin, like so many of Parretti's enterprises, went bust.) Through Interpart, Parretti also established yet another shell company, which was then used by Parretti and Fiorini to buy Pathe, with financing supplied by the French state-owned Credit Lyonnais Bank.

This $60 million pot was indeed the one used by Parretti in 1988 to start his Hollywood empire. The complicated series of transactions began when Interpart (along with a Swiss holding company controlled by Fiorini) bought 90 percent of the Melia Group in 1987 for $90 million-Parretti's share of the purchase price was $60 million. After selling the hotels and making a small profit, they used $90 million of the proceeds to buy Cannon. But where did Parretti get the initial $60 million in 1986? Up until that time most of his businesses in Italy, including his newspapers, soccer team, consulting company and hotels, were foundering or bankrupt. He also seemed pressed for cash as late as February 1986, when he was arrested once again, this time at the Rome airport on an extortion charge of a mere $20,000. Such desperation over what in Italy is the price of a car suggests that Parretti had no great cash reserve. Alas, Interpart's scant records are of little use in illuminating the money trail. Parretti's own account describes the Luxembourg "headquarters" as "an empty room", administered on paper by Parretti's wife and daughter. And his independent auditor at the time of the multimillion-dollar injections, Arthur Andersen, dryly notied its concern that there is not a single document explaining the origin of the money in Interpart.

I was somewhat heartened when Florio Fiorini offered to answer the $60 million question. He arranged by fax to meet me in Monte Carlo on a Saturday at "his" bank, the Seychelles Island Bank, at precisely 4 PM. The bank turned out to be a flyspecked three-room suite on a sub-ground level floor of a large apartment building. A travel poster of a palm tree in the Seychelles was stuck up on one wall. Fiorini is a tall, chubby man with boyish features. In the safari jacket he wore that day, he reminded me of the character played by Robert Morley in Beat the Devil. "Seychelles seemed like an appropriate name for this bank," Fiorini mused with disarming honesty, "since it is a shell company."

He told me he had recently returned from a trip to Tripoli. He said he went to Libya regularly because he was a financial advisor to Gaddafi's Libyan Arab Foreign Bank and had acted as an intermediary in buying and selling assets for Gaddafi. Just two days before, a warrant had been issued in Spain for-yet again-Parretti's arrest, on charges that he had been smuggling currency to the tiny, Luxembourg-like country of Andorra, located in the Pyrenees between France and Spain. Rather than accepting this as business as usual, Fiorini actually seemed embarrassed by the development. He pointed to an organizational chart of his own holding company, which had six rows of neat boxes on it, circled the box that had the Melia-Cannon-Pathe entity and said, "This is only a small part of our operation." As he began telling me of his relationship with Parretti, he took out a pad of graph paper and neatly outlined the story, as if he were writing out a confession.

He explained that their original plan had been to put the money into safe commercial real estate in Spain. Fiorini said he also envisioned Cannon primarily as a real estate investment, based on the value of theaters it owned in England, the Netherlands, Italy and the U.S. But then Parretti had become "infatuated with the movie media," as Fiorini put it. Instead of quietly disposing of the film business, Parretti hired Alan Ladd, announced new productions in Cannes, became part of the show business scene and embarked on his Hollywood acquisition juggernaut.

Okay, fine. But what about the $60 million? "That's easy," Fiorini replied. "I made it for Parretti. I sold two insurance companies for him." But when Fiorini sketched out this deal for me, it appeared anything but easy. How had Parretti acquired the two insurance companies for Fiorini to sell? He explained that Parretti had traded two broken-down hotels he'd owned in Sicily to Guiseppe Cabassi, a Milanese businessman and financial supporter of the Socialist Party, in return for the control of two large Italian insurance companies, Ausonia Insurance and Intercontinentale Assurance. Fiorini said that in November 1985, he, Fiorini, had just acquired a shell company that had once belonged to the Vatican, and together with a group of Arab partners he had organized it into an entirely legal international laundry (or "lavanderia," as he put it) to make "troubled companies sparkle." Parretti, interested in his services, had come to him with an offer he could not refuse: In return for selling his two insurance companies, Parretti would pay Fiorini's Swiss holding company 50 percent of the profits. In addition, Parretti would personally give Fiorini 20 percent of his Luxembourg holding company, Interpart. This meant that Fiorini would get 60 percent of the total profit-an incredibly high fee for selling insurance companies listed on the Milan stock exchange. Fiorini claimed that he was personally able to sell these companies for a profit of more than $160 million, which, if true, might explain how Parretti's company got $60 million. But as the records of the companies reveal, there are at least three flaws in Fiorini's account.

First, Giuseppe Cabassi never swapped his insurance companies for Parretti's hotels-indeed, trading two companies supposedly worth $300 million for some crummy Sicilian hotels would be folly on an unusually grand scale, especially since the stock in one of the insurance companies had hit a record high on the Milanese exchange. Instead, the records show, Cabassi paid Parretti what amounted to $3 million for the hotels. But Cabassi never actually got the hotels. As he explained to The Wall Street Journal, "Parretti apparently wasn't in a position to sell them to us." And bearing this out, the insurance companies belonged to the Cabassi Group as late as 1986, which in the case of Intercontinentale Assurance is even acknowledged in the annual report of Fiorini's own holding company. Second, if Fiorini's holding company made a profit of $97 million on these transactions, it would have shown up in the company's annual reports. But it didn't, not in 1986, 1987 or 1988. In fact the company's profit in these years averaged less than $7 million a year. There wasn't any windfall. Finally, and most definitively, Parretti's holding company, Interpart, reported the $60 million in cash deposits that materialized in 1984, 1985 and 1986 not as any sort of capital gain or profit but as a new investment for which shares of stock were issued in return.

So the mystery remains: whose money bought Pathe and Cannon, and whose money might now buy MGM/UA? If Parretti himself did not have millions of dollars to put into Interpart, as seems highly probably given his business failures and bankruptcy problems and arrests, the Luxembourg money must have come from someone else-a party who, first of all, had $60 million hidden away in Luxembourg or other discreet banking centers and, second, trusted Parretti enough to let him act as custodian for his money while it was transformed into more conventional commercial real estate investments. The key to this mystery lies in Parretti's status in 1984, when cash first began coming into Interpart. At that time he was not a typical businessman. To state the relationship bluntly, the Italian Socialist Party was the principal, Parretti its agent abroad. Moreover, it was a connection that has fueled most of Parretti's business career. He had managed money for the PSI's youth organization; published Il Diario newspapers that supported the party; worked as a go-between for the party and the state-owned petrochemical company, in attempting to take over the magazine El Globo; and allied himself for a decade with Italian foreign minister Gianni De Michaelis, whose faction prevailed in the PSI. Nor did Parretti run Interpart entirely on his own: its original administrator was Lamberto Mazza, a trusted financier for the PSI in Italy. And Interpart's early disbursements of funds in France were hardly conventional business investments: the money went directly to PSI's allies in the Socialist network.

Fiorini also had close ties to the party. At ENI, along with others, he had helped run the offshore banking labyrinth through which the company passed funds to be diverted directly to the PSI's coffers. One such deal, with Muammar Gaddafi's Libyan oil company, worked like this: the Libyans agreed to defer for two years 40 percent of the money ENI owed them for crude oil purchases; thus, if ENI sold a barrel of Libyan oil to Italian consumers, it paid the Libyan oil agency only 60 percent of the wholesale price and kept the rest in its own bank account, earning interest. Fiorini estimates that by 1982, ENI was holding $3 billion of this Libyan money and, at the double-digit rates that existed then, earning hundreds of millions of dollars of interest on it. Enter Roberto Calvi, whose Banco Ambrosiano was one of the banks that provided ENI with highly discreet offshore services. Fiorini had negotiated a deal with Calvi in which ENI deposits were transferred from ENI subsidiaries in the Caribbean to various offshore subsidiaries of Banco Ambrosiano.

But everything suddenly changed when the Banco Ambrosiano collapsed in 1982. Calvi was found dead, auditors determined $1.3 billion had disappeared from the bank-including the $160 million in ENI deposits-and Fiorini was fired. This was the difficulty that propelled Fiorini (who was never actually charged with a crime) out of ENI and into partnership with Parretti. The ensuing financial scandal also arguably left the various individuals and institutions who had numbered accounts in offshore Banco Ambrosiano branches with a problem: without arousing public attention, these investors had to reclaim the funds that had been stashed away for them. This, in turn, would require a front, preferably one veiled with the secrecy of Luxembourg's banking laws, into which the money could be deposited and gradually channeled into more conventional investments. Enter Giancarlo Parretti.

The spaghetti financing of the 1980s is now history. On the verge of taking over MGM/UA, Parretti can dismiss questions about the source of his financing, as he did in the French financial daily Las Echos, with such junk bond jargon as "It's a classic American leveraged buyout. You pay with what you buy." But the path to the $1.2 billion turned out to be anything but "classic" American. According to sources close to the negotiations, Parretti and Fiorini first tried French banks for the MGM/UA money. Rebuffed, Parretti then reportedly approached a Saudi prince living in Rome, while Fiorini pursued the Libyan connection by seeking financing from Gaddafi's former oil and finance minister. Neither was interested in going to Hollywood.

Finally, with the deadline for raising the $1.2 billion approaching, Time Warner came through by announcing in April that it would lend or guarantee Parretti $650 million for the deal. It was an intentionally complicated game of musical chairs: Time Warner would theoretically lend the money to MGM/UA, which would transfer it to Parretti's Pathe, which then would hand the check back to MGM/UA's shareholders in exchange for MGM/UA. The point of the exercise was to provide Time Warner with a fig leaf: technically, it was not lending money to Giancarlo Parretti-a man who had just been convicted of bankruptcy fraud in Italy. Also, Paul Weiss Rifkind Wharton & Garrison, Time Warner's legal counsel, was still in the process of ascertaining the circumstances surrounding other criminal charges made against Parretti. (The fig lead did not fool Standard & Poor's, the bond rating concern, which immediately placed the long-term public debt of Time Warner on its credit watch, citing the negative implications of its financing agreement with Parretti's Pathe.) In return for the financing, Time Warner would get the foreign distribution rights to both Pathe and MGM/UA films as well as an option to buy 20 percent of Pathe when and if the deal with Parretti is consummated. (Parretti and Fiorini now own 90 percent of the company.) It is not without irony that after Time Warner's flagship magazine, Time, ran a cover story raising fears of a foreign invasion of Hollywood following Sony's purchase of Columbia Pictures-a competitor-Time Warner was risking both its august reputation and its credit rating in order to help another foreigner take over MGM/UA.

"Kohlberg Kravis Roberts Loan To RJR Renegotiated," by Anise C. Wallace, The New York Times, June 27, 1990

As part of the proposed revamping of RJR Nabisco Inc., partners of Kohlberg Kravis Roberts & Company have renegotiated how they will be repaid a $500 million bridge loan they made to the company when their firm took RJR private in 1989.

The final documents will not be signed until mid-July. But the banks have agreed to amend their existing loan agreements so that it may be easier for the heavily indebted company to repay the KKR partners, participants in the transaction said yesterday. At the same time, the banks are charging unusually high fees on the newly proposed $2.2 billion loan.

While details of the plan have not been made public, it is expected that RJR will use some of the $2.2 billion loan to retire some of its $1 billion in increasing-rate notes held by the banks, as well as some of its outstanding ''junk bonds.''

KKR made the short-term bridge loan when it took RJR private for $25 billion in the largest leveraged buyout in history. The loan was made by all of the firm's partners, including Henry R. Kravis and George Roberts, as well as by the limited partners, which include state pension funds, insurance companies and banks.

In the last several days the lead banks, the Bankers Trust Company, Chase Manhattan, Citibank and Manufacturers Hanover, have been calling domestic and foreign bankers in an attempt to syndicate the $2.2 billion loan. The bankers have stressed that the refinancing package is essential to the company's future health, and it is believed that the syndication will be highly successful.

Bankers are eager to participate because of the high fees involved and because they believe the refinancing of the company's subordinated debt will increase the probability that RJR will be able to repay the bank's original loans, say bankers involved in the syndication.

As with some of the junk bonds issued by RJR, interest on the bridge loan has been accruing in the form of more debt and not in cash. Including the accrued interest, the loan now totals $650 million and will reach $700 million by the end of the year, said an executive close to KKR.

One banker said yesterday that the repayment of the bridge loan was a strong point of contention in the negotiations between KKR and the banks. ''One could assume that there was a great deal of negotiation that allowed this bridge to come out,'' this banker said.

Fees Higher Than Normal

Indeed one banker said yesterday that the fees on the proposed $2.2 billion loan were higher than normal to compensate them for the risk of lending more money to a company that is already so highly leveraged.

In a carefully worded announcement released last week, KKR said that ''under certain conditions'' it would invest the $1.7 billion in RJR, and that played a large part in the banks agreeing to allow the change in the bridge loan repayment.

''This is all linked together,'' said one executive close to the negotiations.

The bank refinancing is expected to be successful and is likely to be funded by mid-July, say bankers. According to bank documents, RJR has budgeted $250 million in fees for bankers, lawyers and underwriters.

The repayment of the KKR bridge loan cannot be made directly from the proceeds of the proposed $2.2 billion bank loan. RJR can use these new funds only to retire some bank debt and to refinance some of the company's junk bonds, a banker said. Executives familiar with the loan amendments said yesterday that RJR would be able to repay the bridge loan to the KKR partners from its cash flow, if the company meets certain operating conditions.

But the repayment of the bridge loan may make the negotiations between RJR and its bondholders more difficult. Some of the company's junk bonds have traded at distressed levels this year. And analysts said that in any exchange offer holders might seek greater terms when they learn that the terms of the KKR bridge loan have been renegotiated. It may be more difficult for RJR to issue $1.5 billion in convertible preferred stock, which is expected to be part of the refinancing.

''I think there will be some resentment by the bondholders,'' said an executive at one bank.

KKR declined to comment on the refinancing.

KKR has said the key to the refinancing is the problem with the so-called ''reset'' provisions included in $6 billion of its junk bonds. By next April the interest rate on the two securities must be reset so that the bonds will trade at their par value plus all accrued interest.

"Credit Markets; RJR Move Helps Lift Junk Bonds," by Kenneth N. Gilpin, The New York Times, July 17, 1990

Word that the RJR Holdings Corporation has begun a $6.9 billion refinancing program for RJR Nabisco served as a long-awaited tonic to the market for high-yield ''junk bonds'' yesterday, and prices of most issues posted strong gains in heavy trading.

The hectic activity in the high-yield sector was in marked contrast to developments elsewhere in the credit markets. Prices of Treasury securities, for example, were virtually unchanged in quiet, featureless trading.

Over the last several months, pieces of the RJR refinancing package have been leaked on a selective basis.

But the details that were announced yesterday were the most extensive yet, and showed participants in the high-yield market that Kohlberg Kravis Roberts & Company, RJR's principal shareholder, intended to inject more equity into the company as well as retire a sizable portion of the company's huge debt.

Word of the refinancing proposal caused prices of RJR bonds to skyrocket on three times normal volume, said Joe Bencivenga, head of high-yield research at Salomon Brothers. And the good feeling spilled over into most other high-yield issues, where price gains of two points or more were recorded.

''At the moment, the market hasn't changed that much,'' Mr. Bencivenga said. ''The thing that has changed is the tenor of the outlook.''

Specifically, Mr. Bencivenga and other analysts said a successful refinancing of RJR, far and away the largest issuer of high-yield bonds, might embolden would-be issuers to offer new debt securities.

''It will take months, not weeks'' before the impact on new issues might be seen, said Kingman Penniman, a high-yield specialist at McCarthy Crisanti & Maffei, a bond rating and research company.

''It has yet to be determined whether people will use this as an opportunity to take money out of the market or to reinvest it,'' Mr. Penniman said.

''If the money stays in the market, it may afford underwriters the opportunity to come up with the type of deals that high-yield investors say they are looking for. It will take months, not weeks before those questions are answered. But predictions of new issues coming to market later this year are much closer to reality now than they were.''

Largely because of the high-yield market's problems early this year, publicly offered new issues of high-yield securities have been virtually nonexistent.

Activity in the high-yield market superseded trading in the secondary market for Treasury securities yesterday, where prices moved sideways and interest rates were little changed.

The Federal Reserve, which was widely seen as lowering the overnight rate for bank loans in the Federal funds market on Friday, seemed to confirm that move yesterday.

The Fed entered the open market in late morning to add reserves to the banking system when the funds rate was trading at 8 percent.

Following on comments by the Fed chairman, Alan Greenspan, to Congress last week, market participants said the easing move was almost certainly a discreet, one-time step, an event that is not likely to be the first in a series.

''This is all we are going to get for a while,'' one government bond trader said. ''And we won't get another easing move until and unless the economic statistics warrant that sort of step.''

With little additional help likely from the Fed, some traders and market analysts said that there could be some downward pressure on prices in coming weeks.

History tends to support the view that interest rates could rise modestly in coming weeks.

''In seven out of the past nine years, yields have backed up an average of 15 basis points at this time of the year, reflecting concerns about the Treasury's August refunding auctions,'' said Joel Marver, chief fixed-income analyst at Technical Data, a credit market advisory firm in Boston.

''Chairman Greenspan's decision to ease the funds rate has prolonged the rally, but I would be cautious about bond yields for the next month or so.''

By late in the day, the Treasury's 8 3/4 percent 30-year bonds of 2020 were offered at a price of 103 9/32, up 1/32, to yield 8.44 percent, down from 8.45 percent late Friday.

Among note issues, the 8 7/8 percent 10-year notes were offered at 102 30/32 in late trading, unchanged on the day, to yield 8.42 percent. And the 8 3/8 percent two-year notes were offered at 100 14/32, down 1/32, to yield 8.12 percent.

At the Treasury's weekly bill auction, bids on three-month bills produced an average discount rate of 7.62 percent, down sharply from the average 7.81 percent rate at last week's sale.

Meanwhile, six-month bills were sold at an average discount rate of 7.52 percent, compared with an average rate of 7.75 percent a week ago.

Activity in the secondary market for investment-grade corporate bonds was very light, dealers said, as market participants chose to focus instead on a total of $750 million worth of new corporate securities that were priced yesterday.

Traders said that prices of most widely quoted corporate bonds were essentially unchanged on the day.

In the secondary market for tax-exempt municipal bonds, dealers said that prices of most issues rose by about 1/8 point in quiet trading.

"Japanese Will Invest Up to $250 Million in Disney Filmmaking," by Alan Citron, Los Angeles Times, September 14, 1990

Japanese investors will pump as much as $250 million into filmmaking at Walt Disney Studios under a joint venture announced Thursday between Disney and two independent companies, the investment firm of Nomura Babcock & Brown and Interscope Communications Co.

The deal calls for Nomura Babcock to co-finance films that Interscope produces for Disney over the next four years. The movies will be marketed and distributed under Disney's three production banners-Touchstone Pictures, Hollywood Pictures and Walt Disney Pictures.

Interscope, which has produced such highly successful fare as Three Men and a Baby for Disney, has 16 projects in development at the studio. Under the plan, Disney will match any investment made by its partners. Nomura Babcock has committed to raise at least $50 million through its Japanese clients, but executives familiar with the joint venture said the investment will probably be much greater.

Financial analysts pointed out that the cash infusion will significantly reduce Disney's risk at the box office. It also comes at a time when the studio is stepping up production. Disney, which led all other studios this summer with 19.9% of the domestic box office receipts, expects to release up to 25 films under its three divisions next year.

"Basically, Disney has come up with a way to fund external production," said Christopher P. Dixon of Kidder Peabody & Co. "It's exciting for everyone. . . . This is yet another example of Disney's focus and ability to come up with unique financial engineering techniques."

Disney Studios President Richard Frank said he values the opportunity to continue working with Interscope. One of the studio's most successful collaborators, Interscope developed Cocktail and Outrageous Fortune for Disney, in addition to Three Men and a Baby.

The privately held company, owned by Ted Field, also developed Bird on a Wire for Universal Pictures this year. Interscope movies have grossed more than $750 million worldwide.

Interscope, which is known for light, commercially oriented films, already has a "first-look" deal with Disney. Under the new agreement, Disney also has the option of suggesting projects to Interscope. "The new deal will only finance a small portion of our slate," Frank said. "But the most important thing for us is that we are still in business with Interscope."

Disney and Nomura Babcock will evenly split all profits from their joint ventures after costs are subtracted, under the terms of the deal. Interscope's participation was not spelled out, but the company clearly stands to see more of its films produced now.

Chairman Robert Cort said the deal puts Interscope in an extremely strong position.

"We've never been a company that struggled to get its movies made," Cort said. "But this certainly increases our ability to do that. . . . Our voice is now that much stronger."

Interscope also has a strong backer in Nomura Babcock. Founded in 1986, the company is 80% owned by Japan's largest securities firm, Nomura Securities Co., with the balance held by the U.S. investment banking firm Babcock & Brown.

Nomura Babcock is no stranger to Hollywood. In May it invested $100 million in Morgan Creek Productions, another independent film company. Richard Koffey, Babcock & Brown's managing director, said discussions over the Interscope deal started more than a year ago.

Koffey foresaw no problems in raising the funds from the company's Japanese investors, noting that Japanese firms have already made sizable investments in such companies as Largo Entertainment and Carolco Pictures, not to mention Sony Corp.'s purchase of Columbia Pictures Entertainment Co.

"We think this a tremendous transaction to be marketing," he said.

The agreement comes as the funds from Disney's last investment partnership, Silver Screen Partners IV, are running out. Disney has realized about $1 billion from the four offerings. Frank said the company is still exploring whether to continue the relationship.

On Thursday, when the stock market was broadly lower, Disney's stock lost $2.875 a share to close at $96.25.

"The Deal For MCA," by Geraldine Fabrikant, The New York Times, November 27, 1990

MCA Inc., one of the nation's largest entertainment companies, agreed yesterday to be acquired by the Matsushita Electric Industrial Company. The deal, valued at $6.13 billion plus stock in a television station, will be the largest purchase ever of an American company by a Japanese company.

The purchase price is $66 a share in cash and shares in an MCA subsidiary that would own WWOR-TV, the New Jersey-based television station owned by MCA. Analysts yesterday valued the deal at about $69 a share, lower than the $75 or more a share that MCA's chairman, Lew R. Wasserman, had been led to believe he would receive when preliminary talks began in September, one person involved in the talks said.

MCA stock fell 25 cents yesterday, closing at $65.125, below the offer price, in part because the deal will not close until early 1991.

But MCA's board, meeting Sunday, was apparently resigned to the fact that the economy - and the company's prospects - had deteriorated since then, and that no rival bidder had emerged. The 77-year-old Mr. Wasserman said in an interview yesterday, "I feel satisfied or I wouldn't have recommended the deal to the board."

Some experts on corporate acquisitions said the Matsushita-MCA deal may well be representative of deals in the early 1990s. They see more American companies being sold to foreigners, particularly the Japanese, for lack of an American bidder. And they expect prices well below what those companies might have sold for in the 1980s, in the view of Arthur Fleischer, the chairman of Fried Frank Harris Shriver & Jacobson, which represented a large MCA shareholder, David Geffen, in the transaction.

MCA, with 1989 sales of $3.38 billion, owns Universal Studios, Universal Pictures, MCA Records, theme parks and the G.P. Putnam's Sons publishing house, as well as a stake in the USA cable network. In addition to the divestiture of WWOR, the company's Yosemite National Park and Curry Company will be sold to an American buyer within a year under terms of the agreement.

Matsushita had revenues of $37.75 billion in the year ended March 31 and is best known for its consumer electronics products sold under the Panasonic, Quasar and Technics names. But it controls an empire of 87 companies in Japan and many abroad, and its interests include computers, industrial equipment and semiconductors. Like its competitor, the Sony Corporation, which acquired Columbia Pictures, TriStar Pictures and CBS Music (incorporating several different labels, most notably Columbia Records), Matsushita is following the strategy that a manufacturer of "hardware" like high-definition television sets will not be competitive unless it also controls "software," like movies and recorded music, to play on that equipment.

MCA's president, Sidney J. Sheinberg, said yesterday that the company needed such a deal because "size denotes resources - as you expand, you need more and more to compete."

Critics of the sale feared growing Japanese cultural influence through motion pictures and television programs and loss of American control of an important industry, which is an export powerhouse for the United States. J. Richard Iverson, president of the American Electronics Association, said foreign investors were "picking up everything from womb to tomb in the communications field." He added, "If you control the production of material, the display of material and the manufacturing of equipment, you have a significant advantage in the future information age."

Supporters argued that the sale would bring additional financial resources to MCA, and viewed the acquisition as a sign of America's economic health and an increasingly integrated global economy.

Prof. Henry R. Nau, associate dean of the Elliott School of International Affairs at George Washington University, said: "If it makes sense as a business deal, it's something we should accept. Japanese and American markets are increasingly integrated, and we shouldn't assume that any acquisition is contrary to our interests."

The MCA-Matsushita deal capped days of tense negotiations during which talks collapsed over a $2 a share difference in price and then resumed again on Thanksgiving afternoon when the offer was increased by the $2. After a 13 1/2-hour meeting on Sunday, the MCA board unanimously approved the offer. Price was not an issue at the meeting, one person involved in the talks said. The deal was announced yesterday once the final details were in place but it ran into additional tensions on Friday night and Sunday night.

Nevertheless it took on a momentum of its own. It seemed unlikely that MCA would attract another buyer at a comparable price over the next several years at least, particularly from an American bidder.

Felix Rohatyn, the partner at Lazard Freres & Company, the investment banking firm, told the MCA board during the Sunday meeting that only a handful of companies in the world would be able to write a $6 billion check for MCA.

Mr. Wasserman and Mr. Sheinberg first met with the Matsushita representatives Masahiko Hirata, a specialist in finance, and Keiya Toyonago, a senior managing director, in Los Angeles last month.

Before beginning the talks in New York that began last week, Michael Ovitz, the head of the Creative Artists Agency, a talent agency, who brought the companies together, had indicated to Mr. Wasserman that Matsushita would be willing to pay about $75 a share, said two people who were involved in the negotiations. Mr. Ovitz did not return phone calls yesterday. As a result, when the meetings began last Monday and Matsushita offered $60 in cash, Mr. Wasserman said he would not even discuss the offer and made no counteroffer, several people involved in the talks said. One person said some MCA executives wonder whether Mr. Ovitz really did get the $75 figure from Matsushita.

By late Tuesday Matsushita had improved its offer to $64 in cash. Mr. Wasserman, one executive involved in the deal said, asked for a better bid.

By Wednesday, Matsushita informed MCA that $64 in cash was the last and best bid. "We told them we would schedule a board meeting and not recommend the deal," said one person close to MCA. The MCA board was scheduled for a telephone meeting about the price on Thursday.

That evening Mr. Wasserman had dinner with Robert Strauss, a former chairman of the Democratic National Committee and a former United States trade representative, who acted as a go-between. The MCA chairman is said to have indicated that if the Japanese raised their bid by $2 a share, he would recommend it to his board.

About 6:00 Thanksgiving morning, Mr. Strauss called Herbert A. Allen, the investment banker from Allen & Company who was advising Matsushita, to suggest that MCA might accept a $66 cash offer. Mr. Ovitz had gone back to Los Angeles, but was involved by telephone.

Sometime Thursday morning, the pair persuaded Matsushita to raise its price to $66 in cash. One person involved in the talks said Mr. Ovitz had argued that this was a make-or-break issue and that they had to give a little. When they made the offer to Mr. Wasserman that afternoon, he indicated that he would recommend the deal to the board.

But the end was hardly in sight. Mr. Sheinberg, who was staying at his apartment at Trump Tower with his wife, Lorraine, canceled plans to go to the home of the producer-director Steven Spielberg, in East Hampton, Long Island, for Thanksgiving dinner, instead dining at the Four Seasons restaurant in Manhattan.

Throughout the weekend teams of lawyers struggled with the contracts and a number of other issues that made talks extremely tense at several points. But at least two people involved in the talks said that after the price had been settled, they basically expected the deal to close.

One person involved in the talks said one element that was crucial to MCA was that the deal be as airtight as possible so that in the 30 or 40 days until it was completed, Matsushita could not back out. Matsushita, for its part, wanted to assure itself that major MCA shareholders like David Geffen, who owns 10 million shares of the company's 93 million shares, could not tender to another party.

Matsushita sought lockup agreements from such shareholders so that they would agree to tender their shares to Matsushita so long as Matsushita's bid remained outstanding.

Additionally the Japanese company was concerned about signing long-term deals with top management. One person said Matsushita was very worried about what happened at Sony. After Sony acquired CBS Music, friction with its management led to the departure of CBS Music's chairman, Walter Yetnikoff. Sony has found it necessary to put in a new management team and take a much more active role in the running of the company. "Matsushita did not want that to happen," this person said.

Mr. Wasserman made a special arrangement for the sale of his stock. He owns roughly five million shares of MCA stock. But instead of selling for cash, he will receive preferred stock of a wholly owned subsidiary of Matsushita that has been organized for the acquisition. The structure of his preferred stock agreement also became an extremely tense issue.

When the board met Sunday, "there was some disappointment about the price," according to one board member who declined to be named. Mr. Rohatyn, in a presentation to the board, argued that if one used the yardstick of other deals, like Time Inc.'s merger with Warner Communications or Sony's purchase of Columbia, this offer was in the best interest of the shareholders.

But some points still remained unresolved as late as yesterday morning.

As part of its efforts to secure the transaction, Matsushita received an option to acquire 16.9 million shares at $71. The effect of the option is to increase the purchase price should a rival bidder emerge. Under the agreement, Matsushita would receive $125 million should MCA accept a higher offer from another party.

Despite the fact that the deal is complete, MCA was still extremely sensitive to possible criticism that it was selling out to the Japanese, who might attempt to make creative decisions. Mr. Sheinberg said: "We impressed upon our clients the fact that our businesses would continue to be run in the fashion they had been run. The idea that the Japanese interfere in making movies and writing books is borderline silly."

Nevertheless, one person close to MCA acknowledged that the thought of Japanese owning two American movie companies is disturbing. And the cultural difference surfaced even at Sunday's board meeting, albeit as a joking matter. Matsushita has a 250-year business plan, one board member said. "Lew told them he has his own 500-year business plan."

The reaction to the deal was varied and strong. Alfred Sikes, chairman of the Federal Communications Commission, said yesterday that the MCA deal would probably improve the chances that the agency would eliminate regulations that prohibit American television networks from buying Hollywood studios or vice versa.

Current regulations prohibit the television networks from owning an interest in the shows they buy from Hollywood. They also prohibit the networks from syndicating television programs both in the United States and abroad. Representative John D. Dingell, chairman of the Energy and Commerce Committee, has announced hearings on regulations, which prevented the sale of MCA to General Electric, which owns NBC.

If the rules are eased to permit such mergers, industry executives think The Walt Disney Company would seriously consider an offer for one of the networks, probably CBS. Paramount Communications has long been rumored to have some interest in a merger with Capital Cities/ABC. NBC, which is owned by the General Electric Company, has also shown some interest in being able to acquire or merge with a studio.

Federal regulations also prohibit foreign entities from owning American television stations, thus requiring the spinoff of WWOR.

"RJR Offers Cash And Stock For Junk Bonds," by Alison Leigh Cowan, The New York Times, December 18, 1990

RJR Nabisco Inc. announced an offer yesterday in connection with its continuing effort to reduce its costly debt burden that would essentially take the consumer products giant public for the first time since going private nearly two years ago in the largest leveraged buyout ever.

According to a plan disclosed yesterday in a Securities and Exchange Commission filing, the company intends to ask former shareholders, who received high-yield "junk bonds" in the $24.88 billion buyout, to exchange up to $752 million of the bonds for cash and newly issued common stock in its parent company, the RJR Nabisco Holdings Corporation.

RJR Nabisco said it expected the common shares to be listed on the New York Stock Exchange, where some warrants and convertible preferred shares already trade.

Investors and analysts yesterday applauded the company's efforts to reduce its debt to safer levels, and all RJR's publicly traded junk bonds rose yesterday in active trading.

For instance, the junk bonds involved, which carry a 17 percent interest rate, rose $56.25 yesterday, to $830 for each $1000 of face value.

Moody's Investors Service Inc. said it was reviewing RJR Nabisco's debt ratings for a possible upgrade in light of yesterday's plan to issue common stock to help retire the junk bond securities. The bonds, which mature in 2007, are also payable in similar securities, which makes them costly.

"It looks like a good deal," Diana K. Temple, an analyst at Salomon Brothers Inc., said of RJR's latest plan. She calculated that it could save the company as much as $128 million in interest charges in the first year.

Thus, even though issuing the common stock would dilute the number of the company's shares outstanding, Ms. Temple said she had raised her estimates of RJR's net earnings per share from break-even to 11 cents next year. For the following year, she now expects RJR's earnings per share to rise to 45 cents, from 40 cents.

The bond swap plan would also enable the company's principal owners at Kohlberg Kravis Roberts & Company to test the public's appetite for RJR common stock as a possible prelude to a partial sale of its own large stake. Assuming that the proposed exchange offer is completed, KKR would own about 61.5 percent of the company's 975 million shares on a fully diluted basis.

"That might be one of their exit routes," said a trader who insisted on anonymity. "If this goes over well in the marketplace, they can sell out at the public market."

May 1 Deadline

The company has always operated in the public spotlight, given its huge load of publicly traded debt securities, warrants and convertible preferred stock. It had expected it would have to create publicly traded common shares before May 1 to accommodate the owners of the preferred, which becomes convertible then.

Nonetheless, yesterday's proposal moves up the timetable for going public and will greatly improve the float by creating 82.8 million new publicly traded common shares, if the exchange offer is fully subscribed. "Now you'll have three times as much trading," said an RJR analyst who asked not to be identified.

Under the offer, bondholders would receive $465 in cash and 110 shares of common stock for every $1000 of face value of debt they tender. RJR has said it is seeking to buy up to $752 million of the debt securities, about 26 percent of the total outstanding, but would proceed if at least $537 million of the debt securities were tendered. That would reflect 19 percent of the total issue.

Stock May Be $5 a Share

Although the plan takes RJR Nabisco's owners a step closer to reaping the benefits of their investment, analysts and traders said the expected price of the new stock must be a disappointment to RJR's principal owners at KKR. The Wall Street firm paid $5 a share for its initial stake in the 1988 buyout, and as much as $6.25 a share in a recent cash infusion earlier this year.

One trader who insisted on anonymity said yesterday that he viewed the exchange offer as a sweet deal for bondholders, since the debt securities have been trading at 83 cents on the dollar. Thus, for an investor to tender bonds worth $830 on the market in return for $465 in cash plus 110 common shares, the shares would have to be worth at least $365, or $3.32 each. With the warrants trading close to $5 a share, he contended, bondholders have an added inducement to tender their shares.

Jason H. Wright, an RJR Nabisco spokesman, played down the significance of a public stock issue.

"This company, since the moment of the buyout, has been for all practical purposes a public company," he said. "Our bonds have been widely held. We've had 45.5 million warrants and preferred stock that is convertible into over 178 million shares of the company."

"ABC's Iger: Adjusting To Life In A Recession," Broadcasting, January 14, 1991

Among tactics to deal with struggling economy, Entertainment head tells TV critics network will order fewer pilots and give shows more time on schedule

Fewer pilots and greater patience with struggling shows are two changes on the horizon for the television networks as a result of the current economic downturn, according to Bob Iger, president, ABC Entertainment. Iger also said if war breaks out in the Middle East, the primetime schedule will be altered. "We have to be particularly sensitive. It's tough to imagine putting on sitcoms" in the event of war, he said in a press conference last Thursday during the Television Critics Association press tour in Los Angeles.

Iger said he's concerned that network television business-which Michael Gartner, NBC News president, earlier in the week called "crappy"-will get worse in 1991. However, he said ABC will be in a better position to weather the storm "because of our demographic strength."

He said ordering fewer pilots for next season is one of the ways ABC will be affected by the current economic slump. Last year ABC ordered about 30 pilots but will cut back this year by about 20 percent. He also expects the networks to be "more conservative in their approach to pulling shows from their schedules. Advertisers are able to pull their spots from a time period when the show they've bought has been pulled from the lineup. Because of the soft advertising market, there haven't been replacement advertisers waiting in the wings to fill empty slots. He cited Cop Rock as an example of a show that had been kept on the schedule "after we knew it wasn't going to succeed," in part because of the economic ramifications. He said at one point they were considering switching the show with China Beach, which airs on Saturday at 9 PM, but the idea was nixed because of the advertising loss the network would have suffered from moving China Beach. Without citing any other examples, Iger said there were several times this season when the ABC sales department didn't want the entertainment division to make a move on theschedule for just that reason.

Iger also suggested that while it may seem that the tough conditions faced by networks right now may have a negative affect on their willingness to try risky programing, ABC won't pull back on the risk-taking. Iger said the network would roll out its mid-season replacement shows slowly rather than in a bombardment. He said ABC's fall launch strategy would be very much the same to avoid what he called this season's chaotic fall. His strategy will be to roll out new series slowly-whether it be spring or fall-and stick with those shows to give them the best chance of catching on and to cut down on the amount of schedule churn.

He outlined a list of projects to debut this spring. Two reality-based shows, Emergency Room and American Detective, will be ready sometime in the next four months. Baby Talk from Ed Weinberger, which was pulled from the fall schedule after Connie Selleca walked off the set, will be available following the February sweeps. Another Weinberger project, When You're Smiling, starring Ray Sharkey, will be available by April. The network has ordered six episodes beyond the pilot. Eddie Dodd, starring Treat Williams and inspired by the movie True Believers, will be ready in March or April. The puppetry-based Dinosaurs will be available "by the earliest, April," he said. And Stat will be readyin March or April.

Iger also announced that the network has entered into a development deal with MTV and Nickelodeon to have the two cable services develop programs for ABC. He said ABC Entertainment executives have been impressed by projects produced by the two channels and by their ability to produce shows that targer younger audiences.

"New Deals For ABC Productions," Broadcasting, January 14, 1991

Brandon Stoddard, incommunicado from the press for more than a year since he left ABC Entertainment to engineer and oversee the growth of ABC Productions, outlined a slate of projects in which the in-house production division is involved and several production deals signed with producers.

Stoddard said ABC Productions, which produces for ABC as well as for other broadcast or cable networks, is currently working on some 29 projects for ABC, CBS, and cable's Lifetime and HBO, to name a few.

The first project likely to air will be the anticipated My Life and Times, about an 85-year old man who recalls unforgettable moments in his life. Ron Koslow (Beauty and the Beast) is the creator and executive producer. Other series projects include Coconut Downs, a comedy about a family which sees the clientele of their hotel changed due to the opening of a nearby racetrack. The comedy is created, written and produced by Elliot Shoenman, former co-executive producer of The Cosby Show. Shoenman also signed an exclusive two-year agreement with the division to create series.

He said ABC Productions has acquired the Andrew Adelson Co., and Adelson has been signed to an exclusive production agreement, including serving as executive producer of ABCP's first miniseries, the four-hour An Inconvenient Woman, based on Dominick Dunne's bestseller. He said the project, which stars Jill Eikenberry, Jason Robards and Rebecca DeMornay, will air this spring.

Matthew Carlson, co-producer of ABC's The Wonder Years, has extended his exclusive contract with ABCP to create series, including a pilot commitment for a half-hour comedy. Steve Kronish, co-executive producer of CBS's Wiseguy, will also develop programs for ABCP.

Norman Morrill, who wrote the made-fors Intimate Strangers for CBS and The Taking of Flight 847 for NBC, has also signed an exclusive production agreement, for the development of movies and series.

In addition to the slate of series in the works, ABCP has a number of long-form projects in development, including an eight-hour miniseries called Black Rainbow, which he said is being looked at by the other networks. He said John Sacret Young, creator of China Beach, is involved in the project.

In production for Lifetime is the two-hour movie Stop at Nothing, starring Veronica Hamel. Deliver Us From Evil, with Andrew Adelson as executive producer, is being produced for CBS, and HBO has commissioned ABCP to produce two projects, Husband and Wife and Back Alleys.

"Saudi Prince To Become Citicorp's Top Stockholder," by Michael Quint, The New York Times, February 22, 1991

Citicorp, the nation's largest banking company, said yesterday that a member of the Saudi royal family, Prince Al-Waleed bin Talal, had agreed to invest $590 million, in a deal that will help Citicorp strengthen its finances.

The investment will make Prince Al-Waleed the largest single shareholder in Citicorp. The Prince, who quietly bought about 4.9 percent of Citicorp's common stock in the last months of 1990, could eventually own as much as 14.9 percent of the company with his new stake. But he will not be represented on Citicorp's board and has promised not to try to gain control over the company.

Citicorp, urged by the Federal Reserve to improve its financial condition, has been trying since October to raise $1 billion to $1.5 billion in capital from investors around the world through the sale of a new preferred stock issue. The deal with the Prince was for a portion of this stock, which is convertible to common stock. Efforts to sell more of the preferred issue are continuing.

The Federal Reserve informally approved the Prince's investment on Tuesday. And it has indicated that it will grant official approval if the Prince's investment rises above 10 percent of Citicorp's total common stock. The Federal Reserve's approval is required for any purchase of 10 percent or more of the stock of an American banking company.

Although Prince Al-Waleed, who is 35 years old, is a distant relative of King Fahd of Saudi Arabia, he has told officials at the Federal Reserve and Citicorp that he is acting on his own behalf and not as a representative of the Saudi Government or other members of the royal family.

John S. Reed, the chairman of Citicorp, said in an interview that the Prince's investment was the first of several moves that the company was arranging to improve its financial strength. These include selling securities, raising equity capital from investors or selling some parts of its business. "Over the long term, I would like our capital base to be spread more broadly around the world," Mr. Reed said.

A Very Good Deal It Seems

At a time when Citicorp's stock has fallen out of favor with investors and Moody's Investors Service has downgraded Citicorp preferred stock to a speculative "junk" rating, Prince Al-Waleed appears to have struck a very good deal. In addition to an 11 percent dividend on the new issue of convertible preferred stock, he may earn a profit if Citicorp common stock rises above $16 a share. The Prince may convert his nonvoting preferred stock to voting common stock at a price of $16 a share, which is only slightly higher than yesterday's price of $15.375.

The 11 percent yield is roughly the same as on other Citicorp preferred issues, but the other issues do not have the potential for gain if the common stock price improves.

The Prince has said the money for the investment came from a personal fortune he amassed in various business ventures started after he graduated from Menlo College in Atherton, California, in 1979. His first venture after returning to Saudi Arabia was a construction company that grew rapidly as the country used its oil riches to develop modern cities and industry. By 1988, Forbes magazine was estimating the Prince's net wealth at more than $1 billion. He had expanded into a travel agency business and become owner of the United Saudi Commercial Bank.

Looking Beyond the Losses

The Prince's investment is a reminder that some investors are beginning to look beyond the losses that United States banks have suffered from loans on commercial real estate to the parts of their business that remain profitable.

"For many banks, the concerns about credit quality have gotten out of hand," said Robert Albertson, a banking industry analyst at Goldman Sachs & Company.

The climate for investors in bank stocks has improved in the last few weeks, analysts said, after the Federal Reserve and other banking regulators said they were working on changes in accounting rules and in disclosures of bank problems that would make the strengths of large banks clearer to investors. Proposals by the Treasury Department to allow banks to establish branches nationwide and to ease their entry into the securities and insurance business have also improved the outlook for American banks.

"The market for bank stocks would appear from what I can tell to have changed in a very positive way," said Mr. Reed, Citicorp's chairman. In the last few months, stock prices of many banking companies, including Citicorp, have increased by more than 40 percent from the extremely depressed levels of late last year.

Citicorp has been hit especially hard by losses on the more than $13 billion of loans it has for commercial real estate projects and by high expenses in its corporate lending group operating in Europe, North America and Japan. In the fourth quarter of 1990, the company announced a loss of $382 million as it set aside more reserves to cover loan losses and allocated $300 million for expenses associated with cuts. The company plans to cut 8000 workers from its worldwide payroll of about 90,000.

Mr. Reed declined to attribute the problems on real estate loans to the employees who made them. Rather, he blamed himself for allowing such lending to grow to the point where it could wipe out the profits from other, still-profitable operations.

Citicorp has many profitable businesses. Its credit card operation, the largest in the country, earned about $500 million last year, and is the linchpin of a global consumer banking business that earned more than $1 billion in 1990. Citicorp's banking businesses in developing countries around the world are also profitable and growing rapidly.

Mr. Reed said Citicorp was considering selling a part of its credit card business. He said the company would continue to operate the card business but would take an outside partner in order to raise capital and reduce its reliance on credit cards.

Morgan Stanley's Role

After years of growing despite the fact that it had less capital for its size than other large American banks, Citicorp recently hired the investment banking firm of Morgan Stanley & Company to help it arrange investments that would increase its capital.

"We want to be perceived in the marketplace as strongly capitalized," Mr. Reed said, adding that he seeks to raise $4 billion to $5 billion in additional equity over the next few years. At the end of 1990, Citicorp had equity equal to about 3.77 percent of its assets.

Mr. Reed said Prince Al-Waleed was not among the first group of investors that Citicorp approached, beginning in October, with offers to sell preferred stock. But in late 1990, after the Prince began buying large amounts of Citicorp stock in the open market, "we approached him, and said that since he is obviously confident about the company, would he be interested in participating in the private placement."

Citicorp officials noted that the company did not seek money from the Saudi Arabian Monetary Authority, the government investment arm, because it was clear that the financial drain of the Persian Gulf War would not leave the authority in a position to make a large new investment.

Details of the Stock

The preferred stock to be purchased by Prince Al-Waleed will bear an 11 percent dividend, and may be converted into 36.875 million shares of common stock at a price of $16 a share after October 1. Full conversion of the preferred stock would give the Prince about 9.9 percent of Citicorp's outstanding shares, in addition to the common shares he had already bought. In the last months of 1990, the Prince was an active buyer of Citicorp stock, spending more than $200 million to buy about 16 million shares at an average price estimated at about $13 a share.

With 16 million common shares of Citicorp, Prince Al-Waleed is the largest individual shareholder, replacing Mr. Reed, the company's chairman. The largest institutional holder of Citicorp stock, according to the company, is the Wellington Management Company, the investment adviser for some of the Vanguard Group's mutual funds. It has 6.76 percent of the outstanding common shares.

In a written statement issued after the agreement with Citicorp was signed in Washington yesterday around 5 PM, Prince Al-Waleed said, "This personal investment demonstrates my full support for Citicorp and its management."

The announcement of the agreement came after the close of stock trading. Citicorp's common stock closed yesterday at $15.375 a share, up 25 cents. Citicorp stock is well above last year's low price of $10.75, but far below the $29.625 price in early 1990.

"The Media Business; Maxwell's Mirror Group To Go Public," by Steven Prokesch, The New York Times, April 18, 1991

Hoping to reduce his empire's heavy debts and take advantage of a buoyant British stock market, Robert Maxwell announced plans today to take his Mirror Group newspapers public by selling investors as much as 49 percent. The company includes five major British tabloids and might eventually add The Daily News in New York, recently acquired by Mr. Maxwell.

At a news conference today, Mr. Maxwell said that his Mirror Group, might buy the non-British newspapers that he owned as soon as they became profitable. These are The Daily News; The European, a weekly pan-European, English-language newspaper that Mr. Maxwell founded last May, and interests in some German, Eastern European and Israeli newspapers.

Allocation of Proceeds

Although the Mirror Group share price will not be announced until April 30, analysts expect the offering to raise $401.1 million to $445.6 million. The company expects to complete the sale by May 20.

According to a document, $374.3 million of the proceeds from the stock sale will be used to reduce the Mirror Group's bank debt. At the end of 1990, the company owed $725.9 million to banks, with lease obligations and other debts of $472.7 million.

Last month, Mr. Maxwell also cited debts when the Maxwell Communication Corporation, the other major public company his family controls, agreed to sell Pergamon Press, a leading publisher of scientific journals and books, to Elsevier NV, a Dutch publisher. The completion of that $784.3 million deal will leave Maxwell Communication with debts of $1.96 billion.

In the late 1980s, Maxwell Communication borrowed heavily for two big acquisitions: Macmillan Inc., the book publisher, for $2.6 billiion, and the Official Airlines Guide, which provides flight schedules, for $750 million.

The debts of other private companies owned by Mr. Maxwell and his family are unknown.

Mr. Maxwell predicted that The Daily News and The European would be profitable by the end of the year. The Daily News can count on turning a profit by then because of union and supplier concessions approaching $100 million a year, he said. He anticipates a sharp recovery in the paper's circulation.

The newspapers owned by the Mirror Group - The Daily Mirror and The Sunday Mirror; their Scottish counterparts, The Daily Record and The Sunday Mail, and The People, a weekly - are mass market tabloids. The Daily Mirror, with an average circulation of nearly 3 million in March, is the No. 2 paper in Britain after its archrival, The Sun, the tabloid owned by Rupert Murdoch's News International PLC. The Sunday Mirror and The People are Britain's second- and third-largest Sunday papers, after News of the World, another News International tabloid.

Mr. Maxwell purchased the British papers for £113 million from Reed International PLC. in 1984.

The Mirror Group now has other significant assets including a 25.8 percent of Canada's Quebecor Printing Inc., North America's second-largest commercial printer, and 26.4 percent of Donohue Inc., a Canadian forest products company that is a large newsprint supplier to the Mirror Group.

The figures released today demonstrate how Mr. Maxwell has turned around the newspapers he bought from Reed. In 1990, the Mirror Group's operating earnings excluding Quebcor and Donohue rose 35.3 percent, to £88.3 million, or $170.2 million, on revenues of £445 million, or $858 million. In the year ending March 31, 1984, the last full year under Reed, the newspaper group had an operating profit of £4.3 million on revenues of £274 million.

Mr. Maxwell raised earnings by nearly halving the workforce, significantly increasing productivity, investing heavily in modern printing plants and becoming the newspaper industry's leader in color printing and installing equipment to insert special advertising sections.

But the newspaper market in Britain is mature, with declining readership among the young. A recession is hurting advertising.

Analysts said investors might also worry about the Mirror Group's debts, and question the $1.11 billion value the company is placing on its newspapers.

"'Hey, Will You Look At My Pilot?': Brandon Stoddard Is President Of ABC Productions, But He's Allowed To Make Programs For The Competition Too," by Rick Du Brow, Los Angeles Times, May 12, 1991

The production executive was, understandably, miffed. After nearly 18 months of development, his series had debuted to generally favorable reviews. But nine days after the premiere, it was unceremoniously yanked off the schedule. The ratings had dropped 19% from Week 1 to Week 2; with the important May sweeps under way, the network didn't want to gamble on what would happen in Week 3.

"You have to wonder," he said, trying to be judicious, "how advisable it is to take off something that is good when maybe you don't have anything as good to replace it. It certainly does not fill one with optimism."

An old story in Hollywood? Yes-but with a twist. The unhappy executive was Brandon Stoddard, president of ABC Productions. The show was My Life and Times, the first series to come out of the division since he took over two years ago. The network that gave it the quick hook: his very own ABC.

"It feels lousy-no two ways about it," Stoddard said.

So much for favoritism. Or gratitude.

Brandon Stoddard has been ABC's point man and troubleshooter for the better part of a decade now, testing the waters with significant ideas and living dangerously.

As president of ABC Entertainment from 1985 to 1989, he changed the network's slap-and-tickle image, epitomized by Charlie's Angels and Three's Company, and made it a haven for ambitious quality series such as thirtysomething and The Wonder Years.

Though less visible to the public since then, Stoddard has remained out there on the cutting edge of the network business, quietly developing an in-house production unit that ABC hopes can line its pockets through ownership of vastly profitable reruns. Stoddard's job is unique, to say the least. As president of ABC Productions, he can make programs for competing networks-and has. And he can say no to program ideas that ABC may give him.

"Sure," says Stoddard, when asked whether he has the right to tell his own company that he's not interested in one of its proposals. "If a show goes on the air, we may have to live with it for five years. If you're bored with that show or think it's distasteful, that makes it a long five years."

His mandate, however, gives ABC first crack at most of his productions, an arrangement that is finally becoming visible in primetime:

The first example was My Life and Times, a weekly half-hour drama about an 85-year-old man in the year 2035 who looks back on his experiences. And tonight and Monday, as a major entry in the May sweeps, ABC presents the first miniseries from ABC Productions, An Inconvenient Woman. A glitzy, blatantly commercial tale of murder, sex and other nasty doings among the rich of Los Angeles, it stars Jason Robards, Rebecca De Mornay, Jill Eikenberry and Peter Gallagher.

On the other hand, Stoddard's independence has a downside, as he learned last week when, over his protests and pleas for patience, My Life and Times was replaced by Anything But Love. ABC plans to bring the series back May 23, as soon as the sweeps are over, but by then the fall schedule will have been announced.

NBC and CBS also have production arms as the networks try to ensure their economic survival in a market of competing TV alternatives. But while NBC was openly dismayed by a recent government ruling that raised the limits of network ownership to only 40% of primetime programs, Stoddard points to his recent experience as reason to be more optimistic:

"Let's assume that we could own everything that went on the air. The network would never do that. And they would be right. What drives the schedules is the quality of the programs, and nobody has a lock on the best programs. No studio does. So no matter what happens, you're going to have diverse sources on the schedule because it's in the best interests of a network.

"So, for us, even if we had 100% ownership, we'd never produce the entire schedule. We're like Warner Bros.-we're a studio. And for us to be able to produce up to 40% is a lot."

Having produced eight pilots, a series, a miniseries and several TV movies in two years at his job, Stoddard says he's not whistling in the dark, despite the controversial ruling by the Federal Communications Commission:

"I think Capital Cities (owner of ABC) believes we're a necessity. This division is the future, I think. It is about the possibility of more income through this particular unit, and also control over the network's destiny.

"The obvious fact of program ownership is that a show goes into syndication and a Cosby Show can make $600 million. But having control over your destiny is also very important. What is terribly difficult for network management is the point when a hit show can be taken away from them (by the producers). When Murder, She Wrote is up for renewal, when Cheers is up for renewal and can be taken away, that's when the networks have to get out their big checks. And if they own their own shows, they can control that to a great degree."

Stoddard reports directly to John Sias, president of the ABC Television Network Group. Is he in any way responsible to Bob Iger, his successor as president of ABC Entertainment, who guides the network's primetime fortunes?

"No. We set it up with that in mind. Bob and I are church and state. We're very close and we talk all the time. But it's basically done that way so that when he's in those May scheduling meetings (to decide the new fall lineup, which will be announced within weeks), he has only one hat-and that is the best interests of the primetime schedule."

And what hat does Stoddard wear in that period?

"I'm a hustler," he laughs. "I'm just a guy out selling some product. I'm a guy with a film can under my arm, saying, 'Hey, will you look at my pilot?' "

It is a genuinely funny moment in Stoddard's ABC office in Century City because "hustler" is the last word anyone in Hollywood would use to describe the witty, sophisticated advocate of some of the best television that anyone has ever seen. In his career at ABC, he has commissioned such miniseries as The Winds of War, Roots, Rich Man, Poor Man, The Thorn Birds and Masada and such landmark specials as the nuclear war movie The Day After, the Vietnam drama Friendly Fire and the incest story Something About Amelia.

But he is no stranger to straight-up commercial series, and at the moment he is clearly trying to get a fix on just what it takes for ABC to succeed in the new TV environment. He has, for instance, signed Nancy Jacoby, former producer of CBS' Rescue 911, to develop reality shows for ABC Productions, acknowledging that many programs of that genre have taken critical heat as exercises in exploitation.

"My focus and my mandate are about getting product made. But my own feeling is that reality programming doesn't necessarily have to mean exploitation of human misery or bad taste. I just don't believe that. There are many areas of the human condition that haven't been touched yet-programming about families, for instance. My instinct says that is true.

"There are basic audiences that like those kinds of shows. They are not necessarily as huge as those that watch Roseanne. But the networks' share of the audience has lowered, and some executives will be happy with a 16% share in certain time periods nowadays. If the share for a reality show is 16% and the cost is not what it is for an hour drama, it makes some sense to program it."

Stoddard, 54, joined ABC in 1970 as director of daytime programs and is a veteran of virtually every significant area of the entertainment division. He was also the president of ABC Motion Pictures, which turned out such films as Prizzi's Honor, The Flamingo Kid and Silkwood before being disbanded.

Based on his track record, you get the feeling that Stoddard would personally derive the most satisfaction at ABC Productions from seeing a unique series such as My Life and Times succeed. Created by Ron Koslow, who produced the splendidly romantic Beauty and the Beast series cancelled by CBS, it was literate, well-crafted storytelling with considerable promise.

And while Stoddard thinks that An Inconvenient Woman is solid popular fare-"it's entertaining and it's popcorn"-he also continues to be devoted to the larger miniseries form with which he is so identified but which networks think is generally too costly in today's TV market. Noting the enormous success of such long-form programs as Lonesome Dove and The Civil War, he says:

"A lot of people at CBS probably wish that Lonesome Dove was 170 hours long. I still think that when it's the right story done the right way, the long form is going to work. No show got more talked about than The Civil War. Television still has that capacity to excite and ignite an audience and have them glued to the set. We're talking to a network now about a miniseries that will be 10 or 12 hours long."

But the television business is so murderously competitive today that it's clear Stoddard is happy to be free of the ABC Entertainment presidency that he walked away from two years ago:

"I think it just gets tougher and tougher every day. It's as simple as this: As the (audience) shares continue to decline and the costs continue to go up, the guys in charge of the entertainment division have to swim faster and faster as the river flows quicker and quicker in their faces. And I don't see much light at the end of the tunnel. That's a very tough way to go in to work every day. It really is."

A shy man who avoids the limelight, Stoddard was Cap Cities' choice to upgrade the image of ABC Entertainment when it bought the network. When he took the presidency in 1985, "I was disappointed with what ABC had on the air. I was intrigued with taking a network and moving it into another direction and what the hell would happen if you did that. Would it work? Would anyone care? It was intriguing.

"I felt that primetime television was filled with a lot of semi-cartoon, fantasy kinds of programming. And I felt there might be a response from the audience to something a little bit more real, a little bit more honest, a little bit more connected to what was going on in their lives."

The result of Stoddard's turnabout of ABC was evident well after he left his old job for his new one, and his staggering output of significant series, miniseries and dramatic specials in the 1980s ranks with TV's all-time programming achievements.

But in television's current atmosphere-when many viewers just watch shows occasionally as they zap through a myriad of channels-there are concerns that highly promotable series may get corporate preference over those that are not so easy to hype. He couldn't help but notice, for instance, the difference in reception between My Life and Times and Dinosaurs, the hip, heavily promoted children's comedy that debuted two nights later, to big ratings.

"I have some fear and anxiety about the future of quality drama, which needs time to be nurtured," he says. ABC's quick hook on My Life and Times "has left me gun-shy. I'm wary of going into the same battle again. If others are feeling the same way, that will be very sad for network television."

"If you came out in today's world and introduced thirtysomething, " says Stoddard, "it would be tough. It was tough back then (1987). But now-well, think about the show: a bunch of people, relationships, friends, they work in an advertising agency, period. Not exactly a high concept."

Nonetheless, Stoddard will continue his attempt to carve out new directions for ABC: "We have three movies in development at CBS and five at ABC and four projects in development at HBO-one a limited series and three movies. We did a movie for Lifetime cable, Stop at Nothing (with Veronica Hamel). And we're doing a remake of (Alfred Hitchcock's) Notorious for them.

"We have five series pilots, all with ABC, this year. We have a pilot commitment with Fox. We had some series discussions with other networks. We have another aspect, too: If a show is brought to us, then we don't have to take it to ABC first."

Producing for the competition, however, can be risky-especially if you sell the opposition a hit. Does that make for hostility at Iger's ABC Entertainment? "I don't think so," he responds. "They fully understand the value of selling to other places than ABC."

One of his top, upcoming projects for ABC is a series of two-hour films with Doris Day. "We'd like to do one or two a year with her," he says, "sort of like Perry Mason. She plays a lady who was an actress who used to be in a television show like a Cagney & Lacey. She's now retired, and people come up to her and say, 'You know, I got this problem. You've got to help me. . . .' "

Stoddard laughs. Troubleshooting has its moments.

"Trade Group Probing Stock Sales of 3 Firms: Inquiry: Offerings of International Physical Systems, Ropak Laboratories and DVI Financial Were Underwritten By a Brokerage Being Investigated," by Bob Schwartz, Los Angeles Times, June 11, 1991

The National Association of Securities Dealers said Monday that it is reviewing stock trading in three Irvine companies that recently had public offerings underwritten by a small New York brokerage that is under investigation by federal regulators.

Company and association officials said high trading volume and fluctuations in the share prices of Ropak Laboratories, International Physical Systems Inc. and DVI Financial Corp. attracted market regulators' attention.

"Some price and volume parameters have been broken," NASD spokesman Enno Hobbing said. "When there is no ready explanation in the form of news, we look for other things that might have happened."

None of the companies could offer an explanation for the unusual activity in its stock.

But several analysts said Monday that there were rumors on Wall Street about a Securities and Exchange Commission investigation of trading practices at Stratton Oakmont Inc., a Lake Success, New York, brokerage that specializes in underwriting high-risk public stock offerings. One rumor, analysts said, was that Stratton Oakmont's offices had recently been searched by FBI agents and that the firm was about to be shut down.

Neither the FBI nor the SEC would comment on the rumors.

Stratton Oakmont President Jordan Belfort confirmed that the company has been under investigation for some time, but he said there was no truth to the rumor that the FBI had searched the company's offices or that the firm was quitting business.

"I'm looking out my office right now, and all I see are traders," Belfort said. "The rumors are not true. What's happening is that there are a lot of aggressive short sellers right now. . . . In these types of situations, when the shorts get involved, it's who can get out first and sell first."

Belfort said he expected all three stocks to rebound once the short sellers cover their positions.

In short sales, a person or firm borrows stock and then sells it, expecting that the price will drop. Later, the short seller buys back the stock and, if the price indeed has dropped, pockets the difference.

In the case of Ropak Laboratories, short sellers could have made a killing over the past week.

The company, which manufactures skin and eye product laboratory test kits that serve as alternatives to animal testing, saw its stock lose almost half its value Monday. It fell $3.75 a share to close at $4.25.

"Whenever a stock makes a move as dramatic as that," the NASD "market surveillance gets involved," said William Curtis, Ropak Laboratories' chief financial officer.

The company sold nearly 2 million shares in its initial public offering May 16 at a unit price of $4.50, which included one share of stock and a warrant good for the purchase of an additional share at $5.

Two days after the offering, the units were selling for $16, and Ropak shares were selling for prices as high as $10 each as recently as June 3. That is an impressive performance for a company that earned just $72,000 on sales of $1.3 million for the fiscal year ended February 28. The stock dropped $2 last week before it plunged further on Monday.

Curtis said he knew of no company news that would explain the sharp changes in the stock price.

"The company was satisfied with the pricing agreed to in the (initial) offering," Curtis said. "In terms of why it went up afterward and why it went down after that, none of that can be attributed to what's happening here."

The Ropak prospectus for its stock offering stated that Stratton Oakmont was under investigation by the SEC but provided no further details. Curtis said Monday that he knew no details of the investigation.

The price of shares in DVI Financial Corp., which provides financial services to healthcare companies, has fallen from $12.375 a share to $8 over the past week.

"We are looking into it ourselves," said Cynthia Cohn, a DVI vice president. "It's all speculation at this point."

DVI sold 500,000 shares of stock in a secondary offering through Stratton Oakmont last February.

The third company, International Physical Systems Inc., is a provider of medical imaging services. Its offices are next to those of DVI Financial, from which it obtains much of its financing. IPSI stock has plummeted from about $10 a share in late May to just $4.3125 at close of trading Monday. Company officials were unavailable for comment.

Stratton Oakmont underwrote an offering of 500,000 IPSI units last January. Each unit consisted of two shares of stock and a warrant and sold for $6. Individual shares later rose to $7 each.

"You see this from time to time," said a Bay Area stock analyst who did not want to be identified. "One underwriter wholly controls the stock at first, and then once they slide away, it's an avalanche."

Belfort of Stratton Oakmont said his company does not control stock prices.

"We trade with the Street," Belfort said. "They loved them last week, and this week they're going down. . . . I believe over the long term, the fundamentals will dictate higher prices for these companies."

"Marketplace: Boom in Comic Books Lifts New Marvel Stock Offering," by Floyd Norris, The New York Times, July 15, 1991

While much of publishing is in the doldrums, comic books are booming, in large part because companies have discovered that they can raise prices without driving away many buyers.

Now, the owner of Marvel Comics, the largest comics operation, is trying to sell a minority stake in Spider-Man, the Incredible Hulk, Captain America and all its other superheroes to the public.

Investors seem to be lining up to buy shares in the company, the Marvel Entertainment Group Inc., and late last week the company increased both the number of shares being offered and the price being asked. The sale is expected to be completed this week and will be marked by a visit of Spider-Man to the floor of the New York Stock Exchange when trading in the shares begins.

The sale will enable Ronald O. Perelman, who has controlled Marvel since early 1989, to take out as much as five times the $10.5 million he invested in the company, all while still maintaining firm control.

The success of the comic book industry has been increased by a new channel of sales - the comic book specialty store - and through the discovery that "price increases have not resulted in significant reductions in unit sales," as Marvel put it in documents distributed to prospective investors. The company said it had a plan for price increases for three years and expects the cover price of a basic comic book, which rose from 75 cents to $1 in 1989, to rise again next year to $1.25. Marvel charges as much as $34.95 for some hardcover collections of old comics.

Figures provided by the Audit Bureau of Circulations show that Marvel's comics sold an average of 8.7 million copies a month in the last half of 1990, up 31.2 percent from 6.6 million in the corresponding period in 1989. Figures for the first half of 1991 will not be out for several weeks, but they are not expected to match the late 1990 level, reflecting the fact that comic book sales peak during the summer, when the prime readers - those 6 to 18 years old - are out of school. Sales were 6.3 million a month in early 1990.

Marvel's rapid growth is being used as a key selling point in pricing the shares. In raising the estimated price of the offering, to a range of $16 to $17 a share, from the previous estimated range of $14 to $16 a share, underwriters led by Merrill Lynch and the First Boston Corporation are asking investors to pay up to 23 times the most recent 12-month earnings, of 73 cents a share. To justify that kind of multiple, investors must expect the growth to continue.

Comic book sales numbers are confused, at best. Marvel says there are 43 publishers but only 3 have circulation figures audited by the Audit Bureau of Circulations. Marvel claims a 51 percent market share, with DC Comics, a Time Warner subsidiary that is best known for Superman, having about 22 percent. But DC is only a small part of Time Warner, and one selling factor for the Marvel offering has been the fact it will be the only publicly traded stock that offers a pure play in comics.

By some standards, comics remain a relatively small business. In 1990, Marvel sold $70.6 million in books, a gain of 16.1 percent. It appears that some growth came from seizing market share from competitors, but it is difficult to determine how much.

Marvel's growth in the last year came even though it has no characters now in television shows. Marvel will get licensing revenues from any future shows, but it has no rights to revenues from reruns of past cartoon shows.

For longtime followers of Marvel, the audit bureau's circulation figure of 8.7 million copies a month is emphasized in Marvel's prospectus, which adds that sales have been growing rapidly but does not give historical figures. That must have seemed surprising to longtime followers of Marvel. Early last year, in a filing with the Securities and Exchange Commission, Marvel's parent company reported net monthly sales of 9 million copies in 1989.

Asked to explain the apparent discrepancy, a company official said that he was unsure what the 1989 figure referred to but that it might have included some publications that do not include advertising. He spoke on condition that he not be identified.

One key to profitability in the comic book industry has been the growth of the specialty stores. Those stores accounted for 73 percent of sales last year, and they buy books on a nonreturnable basis, leaving the stores to eat the losses if a book does not sell. By contrast, two of every three comic books shipped to the traditional newsstand business end up being returned.

The sale of stock in the company will not help Marvel to expand, because none of the money will stay at Marvel. The offering will raise up to $82 million, but all the proceeds will go either to pay bank debt or to parent companies of Marvel, which is a subsidiary of a subsidiary of a subsidiary of a subsidiary of a subsidiary of a company owned by Mr. Perelman, best known for controlling the Revlon Group.

The money is likely to come in handy for the Andrews Group, a company about halfway up that chain, which has cash problems because of losses at its New World Entertainment subsidiary, which produces television shows. In a filing with the SEC in May, Andrews said it did not expect the cash flow from its operations to be sufficient to meet its financial obligations, although it expressed confidence that it would get aid from related companies controlled by Mr. Perelman.

But the troubles at New World - whose shows include Santa Barbara, Get a Life and The Wonder Years - do not obscure the big success story that Marvel has been for Mr. Perelman. When he bought the company, he put up $10.5 million for all the company's stock, as well as taking out a loan for $73.5 million, which went onto Marvel's books.

Previous dividends have provided $1.9 million to parent companies, and after this offering the plan is to send another $30 million or so in dividends upstream. In addition, Andrews will get as much as $20 million from selling some of its own shares in the company. That produces total cash of more than $50 million and still leaves Andrews with a 60 percent stake in Marvel.

Andrews will keep total ownership of Marvel's British operations, which have been losing an undisclosed amount of money.

Marvel's timing of the offering appears to be excellent. It is coming as summer, the traditional strong selling season, gets going, but before sales for the first half of 1991 are reported. The prospectus for the offering does not emphasize the seasonal factors.

Moreover, Marvel's recent financial results have benefited from a decision taken by previous owners of the company to set up a reserve for losses stemming from a 1988 decision to get out of the children's book business. Those losses were less than expected, which enabled Marvel to raise pretax profits by $500,000 in 1990 and by $400,000 in the first four months of this year.

But those increases accounted for only a small part of the gain in profits. In 1990, the company earned $5.4 million, more than double 1989's $2.4 million, as total revenues, including licensing income as well as publishing revenue, rose 18 percent, to $81.1 million. For the first four months of 1991, profits more than doubled again, from $953,000 to $2.1 million, on a 21 percent rise in revenues, to $25.7 million.

Can those gains continue? The apparent popularity of the offering seems to indicate that many investors believe they can.

"Bank In Reluctant Role As Film Industry Mogul: Credit Lyonnais Has Been Key Backer Of Independent Studios. Now Their Struggles Are Its Own," by James Bates and Alan Citron, Los Angeles Times, June 19, 1991

The name Credit Lyonnais frequently showed up in the 1980s as credits rolled at the end of films.

Once, a lending officer of the French government-owned bank was thanked by a producer accepting the Academy Award for best picture.

Bank officers could approve film scripts and casting decisions on pictures, a rare right for a lender.

For Credit Lyonnais, this was life as Hollywood's premier lender to independent movie producers, financing fledgling filmmakers whom mainstream bankers would not touch. The bank aggressively financed unknown producers who took its money and made big hits such as the Rambo films and the Oscar-winning Platoon. Without the bank, many in Hollywood agree, much of the independent film business that thrived in the 1980s would not have happened.

Now, the bank's Hollywood connections are coming back to haunt it. Many of the independent studios that it bankrolled over the past 10 years are in shambles, either struggling to survive or out of business. In an unprecedented development, Credit Lyonnais finds itself in the position of being Hollywood's newest mogul-by no choice of its own.

The bank is now running the financially ailing MGM-Pathe studio after ousting flamboyant Italian financier Giancarlo Parretti in April. Just weeks before, Parretti was proclaimed "the new king of Hollywood" by Lifestyles of the Rich and Famous host Robin Leach.

To date, Credit Lyonnais has sunk about $1 billion into MGM-Pathe in a series of loans that has baffled investment bankers, Hollywood executives and even members of Credit Lyonnais' staff.

The bizarre twists continue almost daily in a story that one day may make a marketable script. Credit Lyonnais on Monday kicked Parretti, his wife and a longtime business associate off MGM-Pathe's board of directors after what it contends was a failed coup d'etat to regain control of the studio. On Tuesday, a Delaware judge issued a court order upholding the action, which Parretti is fighting in court with a counterclaim.

Credit Lyonnais' experiences have caused it to severely tighten its lending in Hollywood, and fears of a full-scale retreat are unnerving independent producers, who have been responsible for some of the biggest films of recent years. Credit Lyonnais provided seed money to such firms as Castle Rock Entertainment, which produced such films as City Slickers and When Harry Met Sally.

Key Hollywood Role

"They have led the field in the banking community in terms of being supportive of the independents," said Castle Rock President Alan Horn. "If they should leave or reduce their commitment . . . it would deal a severe blow to the entertainment industry. Because we have not seen any American bank or group of banks that's ready or willing to take their place."

But Credit Lyonnais' Hollywood lending is causing a firestorm of trouble in France. French and Dutch officials are calling for investigations into Credit Lyonnais' ties to Parretti. Opponents of France's socialist-led government are hammering away at the issue by linking the bank's involvement with Parretti to his ties to Italian socialists.

MGM-Pathe sources confirm that Credit Lyonnais is seeking a buyer for the company. The bank reportedly is exploring every possible business combination, including one in which it would retain a minority stake in MGM-Pathe. "They want someone who sees the possibilities in this company," one source said. "They have no intention of staying in control."

Whether Credit Lyonnais can get rid of MGM is another matter. One investment banker with ties to Credit Lyonnais describes MGM as "a company that has died a thousand deaths on the operating table."

Credit Lyonnais officials could not be reached for comment Tuesday. In earlier statements, the bank said it was anxious to cut its ties to MGM. "We are trying to sort it out and put everything in order," said one bank officer who requested anonymity.

Credit Lyonnais said its involvement with Parretti stems from its 1981 acquisition of the Dutch commercial bank Slavenburg, with which he had a standing relationship.

"Parretti was one of their best clients," the Credit Lyonnais officer said. "We didn't go out and look for him. He was already there."

Although little known in the United States, Credit Lyonnais is a huge institution, ranking among the world's 20 largest financial institutions and bigger than any U.S. bank. Its hands are in numerous deals-one of its units is favored to assume the wreckage of Executive Life, the failed Los Angeles life insurer, in a deal being arranged by state insurance regulators.

Although the bank has scaled back its involvement with Hollywood, its tracks remain everywhere. It is currently listed in the credits of Hollywood's two top movies-Robin Hood: Prince of Thieves and City Slickers.

The bank's Hollywood connection stems to the early 1980s through Frans J. Afman, who came to Credit Lyonnais when it bought Slavenburg. A Dutch lawyer, Afman was known at the time as "the banker who reads Variety." From the gritty Dutch port of Rotterdam, money began flowing from Credit Lyonnais to Hollywood in Afman-arranged deals.

A tall, charming Dutchman with a bald pate, Afman discovered the entertainment business in the 1970s when he was introduced to producer Dino de Laurentiis by Charles Bluhdorn, the late chairman of Paramount Communications' predecessor, Gulf & Western.

De Laurentiis became a mentor of sorts to Afman, who took enthusiastically to Hollywood. He would frequently breeze into town, presiding from a table at Le Dome. He was a regular at Spago and rented a summer home in Malibu. According to one acquaintance, Afman was important enough that people watched closely to see "who's having lunch with Frans."

Afman became a regular at Cannes and other film festivals, where producers and executives sought him out for money. Credit Lyonnais developed a reputation as the bank the independents could count on, the "happy checkbook," as one former executive put it.

Independents appreciated it, to say the least. Castle Rock's Horn said Credit Lyonnais was the only bank willing to support the company in its early days.

"They have been consistent supporters of us and have been there for us through every phase of our embryonic development," Horn said. "They stood up for Castle Rock when no one else wanted to. We spoke to several U.S. banks. No one would write us a check. They did."

But critics said that its standards were loose. Several lawyers who dealt with Credit Lyonnais said the bank often required little documentation on loans, and that collateral the bank received was sometimes of questionable value, usually something involving foreign film rights.

Loan Trouble

"You often didn't realize how collateralized the loans were until the picture performed or didn't perform," said one lawyer who worked closely with Credit Lyonnais.

One former executive said the bank made huge amounts of money financing independent producers in the mid-1980s, but ran into trouble when it began to do more corporate-type loans to entertainment firms. It provided $50 million to Weintraub Entertainment, now in bankruptcy court proceedings. Another $100 million went to now-struggling independent Nelson Entertainment. Other Credit Lyonnais clients have included Vestron, which filed for bankruptcy protection last year, and debt-laden Carolco Pictures.

Credit Lyonnais already was trimming back its entertainment lending-partly under pressure from French banking regulators-when Parretti came along. Parretti acquired MGM from financier Kirk Kerkorian for $1.4 billion last November in a deal made possible by Credit Lyonnais money.

Metro-Goldwyn-Mayer is still best known as the studio with the roaring lion logo that preceded such classic films as The Wizard of Oz and Gone With the Wind. But latter-day owners stripped MGM of most of its major assets, including its lot, and in recent years it has been one of Hollywood's least productive studios. Last year, MGM captured only 2.8% of the overall domestic box office.

Parretti, the flamboyant Italian financier who controls a slew of European-based companies, bragged of his desire to create an international entertainment empire. A live lion was brought to his office on the day the MGM deal was completed. But within months, MGM had fallen behind on its bills and was unable to release a string of completed films.

In March, creditors moved to force the company into liquidation. The case was settled out of court, but by then Credit Lyonnais had assumed control of MGM and forced Parretti out as chief executive. Now, says one former executive, the joke at the bank is that "MGM is Credit Lyonnais' in-house film company."

Some Credit Lyonnais executives are still puzzled about why the deal was done. No other banker or investment house wanted to touch it.

"Every investment banker who looked at the MGM deal said there is no deal here because it doesn't make sense," said one who did review it.

Concerns were dismissed by bank executives in France. Afman, who left the bank full time in 1988 but remained a consultant until last year, differed with Credit Lyonnais for years over its involvement with Parretti, but denies now that he left the bank for that reason.

One Credit Lyonnais banker conceded that constant questions about financial ties to Parretti by French politician Francois d'Aubert and others have caused the bank embarrassment and forced its hand. "There are a lot of people lobbying against Parretti," the banker said. "There has been an unleashing of passions against him."

In December, D'Aubert requested that an investigative committee look into Parretti. When that failed, he continued to push for an official inquiry. Nothing has come of his efforts so far, but D'Aubert says the bank must end its relationship with Parretti. "Credit Lyonnais is going down a dangerous path," he said recently. "They are chasing bad money with good money."

"Steaks, Stocks-What's the Difference?" by Roula Khalaf, Forbes, October 14, 1991

Former meat broker Jordan Belfort now pushes dicey stocks

At 23, Jordan Belfort was peddling meat and seafood door-to-door on New York's Long Island and dreaming of getting rich. Within months, he was running a string of trucks, moving 5000 pounds of beef and fish a week. But he expanded too quickly on too little capital. By the time he was 25, he filed for personal bankruptcy.

"I was pretty talented," shrugs the smooth-talking Belfort, now 29. "But the margins were too small."

Looking for a product with more fat in it, Belfort founds stocks. Steaks, stocks - from a hustling salesman's standpoint, what's the difference? Today Belfort's two-year-old Stratton Oakmont brokerage, operating out of Lake Success, New York, specializes in pushing dicey stocks on gullible investors. And, while the product may be as perishable as meat and fish, the margins do appear quite handsome. Stratton's total commission revenues should hit $ 30 million this year. The firm now boasts nearly 150 brokers. Belfort, who owns over 50% of Stratton's equity, may have personally made $3 million last year alone.

Belfort's customers, on the other hand, haven't always shared in this prosperity. A year ago, even before customers began lodging complaints, the Securities and Exchange Commission started investigating Stratton Oakmont's sales and trading practices. Subpoenas have been issued to a number of Stratton Oakmont's former brokers. Belfort confirms the investigation and says the firm is cooperating fully.

The Queens-born son of two accountants, Belfort earned a biology degree from American University. After failing in the meat business, he learned the stock brokerage business at a succession of shops - L.F. Rothschild, D.H. Blair and F.D. Roberts Securities. His postgraduate work came at Investors Center, the 850-broker penny stock house, where he went to work in 1988, and which was shut down by the SEC a year later.

In 1989 Belfort teamed up with 23-year-old Kenneth Greene, an Investors Center graduate who had occasionally driven one of Belfort's meat trucks. In early 1989 the lads opened an office in a friend's car dealership in Queens, then set up a franchise of Stratton Securities, a minor league broker-dealer. Within five months, Belfort and Greene had earned enough in commissions to buy out the entire Stratton operation for about $250,000. As Belfort's righthand man, Greene owns a 20% stake in Stratton Oakmont.

To push his stocks, Belfort hired the same kind of motivated young salesmen who had driven his meat trucks. He taught them his trusted cold-calling technique, the "Kodak pitch." That is, the first tout is not some obscure over-the-counter issue but a blue chip, often Eastman Kodak. Only after an investor takes the blue-chip bait do Belfort's brokers pitch the higher-margin garbage. A former Stratton broker recalls Belfort's motto: "Whip their necks off, don't let 'em off the phone."

Belfort's brat-pack brokers quickly came to idolize him. One 28-year-old broker is said to have gone from laying carpets to earning gross commissions of $100,000 his first month, $800,000 his first year. He got to keep about half of that. On average, Stratton Oakmont's brokers make around $85,000 a year.

Sounding like a wet-eared version of New Jersey's great penny stock salesman Robert Brennan, Belfort says he's helping his clients invest in America's future. "To me, the most important thing is to get involved in fundamentally sound companies, earnings-based companies," he says.

Ventura Entertainment Group is a good example of Stratton Oakmont's merchandise. A North Hollywood, California-based maker of TV movies, Ventura is the successor to a 1988 blind-pool offering. Belfort started pushing Ventura almost from day one, and last year underwrote a secondary issue for the company. At the time of the offering, Ventura was coming off a year when it lost $455,000 on revenues of $3 million.

The fellow behind Ventura is 52-year-old Harvey Bibicoff, whose previous company was electronics retailer Discovery Associates. Under him, the company, now called Leo's Industries, racked up huge losses.

Belfort's game is more than just one of collecting commissions and underwriting fees. Look at the Ventura secondary, for example. Last year Stratton Oakmont sold 400,000 Ventura units (one share and one warrant) for $12 each. The shares jumped to $15, and Belfort told his brokers to quickly buy back the warrants for $1 each from pleased investors, while continuing to push the stock. Within months, Belfort unloaded most of the warrants on investors for $10 - a 900% profit. The recent price of Ventura's shares (after a 2-for-1 split): 63 cents. Cynically, Belfort now concedes that Ventura was a good story, but "a story only lasts for so long."

And then there was Nova Capital (now called Visual Equities), an art investment company controlled by Alvin Abrams, the 56-year-old president of penny stock underwriter First Philadelphia Corp. - a man whose past includes repeated censures and fines by the SEC and the National Association of Securities Dealers, dating back to the 1960s. In 1989 Belfort acquired a block of Nova warrants for $1 each. He exercised the bulk of his warrants at $2.50 to $2.75 and retailed out the stock to investors for $5. Stratton brokers continued to tout the shares. The price rose above $9. As the stock went up, Belfort exercised more warrants and sold the shares. (The stock has since fallen to $3.) By one estimate, these and other warrant deals have earned Stratton upwards of $10 million over the past two years.

Many Stratton Oakmont stocks - including DVI Financial and Ropak Laboratories - have taken a pounding in recent months as word of the SEC investigation spread. But having made a killing from his warrant deals, Belfort appears unwilling to use the firm's capital to support the stocks. Sounding like a kind of twisted Robin Hood who takes from the rich and gives to himself and his merry band of brokers, Belfort justifies his record this way:

"We contact high-net worth investors. I couldn't live with myself if I was calling people who make $50,000 a year, and I'm taking their child's tuition money."

Approaching 30, Belfort seems to have it made. He drives a $175,000 Ferrari Testarossa, and says he's taking it easy and looking to use Stratton to diversify into other businesses. Recently, for example, he bought an option to purchase a 15% stake in Judicate, a publicly traded, Philadelphia-based arbitration firm. Judicate - 1990 losses $814,000, on revenues of $1.9 million - made news last summer when it landed a contract with the NASD to settle disputes between brokers and clients. The way things are going, Belfort is going to need all the help he can get dealing with Stratton Oakmont's roster of burned clients.

"Robert Maxwell, 68; From Refugee to the Ruthless Builder of a Publishing Empire," by Craig R. Whitney, The New York Times, November 6, 1991

Robert Maxwell, who died today after going overboard from his yacht off the Canary Islands, fled the collapse of Czechoslovakia in 1939 to become one of the most powerful publishers in Britain and the world, presiding over a multibillion-dollar empire he assembled with brass and bravura over 40 years.

An avowed socialist whose newspapers here supported the Labour Party, the 68-year-old publisher ran his businesses with legendary ruthlessness and attention to earnings, paring by the hundreds the staffs of the companies he acquired and instantly dismissing editors of his newspapers when they disagreed with him.

As a global businessman with interests in scores of countries, he borrowed money on a heroic scale, but kept his bankers, executives and staffs toeing the line by the power of his physical presence and his insistence on having his way.

Despite his physical size - he was about 6 feet tall and weighed about 290 pounds - Mr. Maxwell was compulsively active. With his beetling black eyebrows and his booming baritone, he had a talent for self-dramatization and knew how to skirt the edge of scandal. Even after taking large parts of his empire public this year, he kept his own financial affairs well hidden in a multinational web of holding companies, the most closely guarded of them a private family trust in Liechtenstein.

Once described by British Government fraud investigators as unsuited to run a public company, he lost his seat on the board of his first company, Pergamon Press, but eventually won it back. "I have never worried about what the Establishment believes about me or doesn't," he said a few years ago. "I don't give a damn."

5 Family Members Die in Auschwitz

This complex figure who sought and cultivated political and government connections in the Soviet Union, Eastern Europe and Israel as well as in the United States, was born on June 10, 1923, into a Hasidic family called Hoch in the Ruthenian village of Slatinske Doly, then part of Czechoslovakia and now in the Soviet Union, and was given the name Ludvik. He was selling trinkets on the streets of Bratislava in March 1939 when Hitler's allies in Hungary occupied his homeland as the Nazis marched into western Czechoslovakia.

His mother and four other members of his immediate family died in the Auschwitz concentration camp, and his father is believed to have been shot either there or during transport to the camp. Only two of Mr. Maxwell's sisters survived it.

Though Mr. Maxwell never made much of his religion, he was an outspoken supporter of Israel all his life. He escaped the Holocaust by making his way to France and joining a group of Czechoslovak volunteers in the French Foreign Legion in March 1940.

After the French defeat that year, he escaped again, being evacuated with other Czechoslovak troops to Britain. He later claimed he learned English in only six weeks. Soon after his arrival he joined the British Army as a volunteer and earned a battlefield commission as lieutenant. His talent for languages then led him into intelligence work.

It was on such an assignment to Paris, just after its liberation in July of 1944, that he met the woman who would become his wife, a French Huguenot named Elisabeth Meynard. Proposing to her in December, he promised that he would win a Military Cross, recreate a family, make a fortune, and become Prime Minister of England. "And I shall make you happy until the end of my days," he said.

The first promise, at least, he kept in 1945, winning the Military Cross for "heroism in the face of enemy action" at the Dutch-German border. When the war ended, he was discharged as captain, a title he insisted on using in civilian life for 20 years afterward. He also acquired his name, Ian Robert Maxwell, at the suggestion of a Scottish officer friend.

Company Is Lost In a Scandal

For the next two years he served in occupied Germany with the British Foreign Office as head of the press section in war-ravaged Berlin. There he would make business contacts that led to the purchase of his first company, a publisher of scientific journals and textbooks that he bought from its German and British owners and renamed Pergamon Press.

With a bank loan and money borrowed from his wife's family and from relatives in America, Mr. Maxwell built it into a thriving company by 1964, when he took a step toward fulfilling his political ambitions by winning a seat as a Labour Party Member of Parliament for the rural constituency of Buckingham, north of London.

His political and business fortunes took a turn for the worse in 1969, when he lost Pergamon in a financial scandal after trying to sell it to Saul P. Steinberg, the New York financier. Mr. Steinberg contended that Mr. Maxwell had misled him about the company's worth, and pulled out of the deal.

The principal shareholders then angrily ousted Mr. Maxwell from Pergamon's board. The next year, Labour lost the elections to the Conservatives, and, embroiled in the scandal, Mr. Maxwell lost his seat.

A protracted British Government investigation concluded in mid-1971 "that, notwithstanding Mr. Maxwell's acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company."

"Not true," Mr. Maxwell responded with fury. Ultimately he recovered, going heavily into debt to buy back Pergamon privately in 1974 after reaching an out-of-court financial settlement with Mr. Steinberg and his investment partners. He sold the company again to a Dutch publisher, Elseviers, last March for £440 million ($770 million).

He would never again run for public office, but as a newspaper publisher - one of the few, in the past decade, to back the Labor Party instead of the Conservatives - he exercised another kind of political influence. He also helped revolutionize the newspaper business in Britain, ruthlessly eliminating the ancient practices of overstaffing and the overlapping jurisdictions that had given Fleet Street unions a stranglehold over management and allowing Conservative publishing rivals like Rupert Murdoch to follow his example.

Newspaper Payrolls Are Slashed

When Mr. Maxwell bought the British Printing and Communication Corporation in London in 1980, it was nearly bankrupt. He told the unions that the only way to save any jobs at all was to cut the payroll from 13,000 to 7000 workers. Later, as Maxwell Communications Corporation, the company came to be regarded as a model of efficiency.

So, too, was Mirror Group Newspapers, which Mr. Maxwell acquired as a privately owned company in 1984. There he found typesetters earning more than assistant editors and many people working four-hour days and four-day weeks. His arrival as chairman came at 3 AM the morning after the sale.

Told that the entire staff of The Daily Mail and The Sunday Record in Glasgow was holding a meeting to decide whether to work for him, Mr. Maxwell replied, "If they don't return to work I will close down their papers and they won't open again."

"Forward with Britain," The Mirror proclaimed under his leadership, and it and its sister papers in Scotland increased their circulation from 3 million to nearly 4 million last year, though it fell this year by about 300,000. Mr. Maxwell sold 49 percent of Mirror Group Newspapers to the public this year for £245.5 million ($421.8 million), more than twice what he had originally paid for them.

His editors would soon learn that having him as publisher was an entirely new experience. "When I fire someone it is like a thunderclap," he told Sebastian Faulks of The Independent, not one of the newspapers he owns, last year. "My primary duty is to hire and fire editors. I treat them like a field marshal."

Magnus Linklater, one editor who worked for him, said, "Balance is not something usually associated with Robert Maxwell." He had a habit, Mr. Linklater said, "of suddenly appearing out of the blue, and woe betide the person who is not at his desk and doing what he's expecting them to be doing."

Mr. Linklater was hired to run a new afternoon tabloid, The London Evening News, that Mr. Maxwell launched in 1987. Asked at the time by a reporter from another newspaper whether he would dismiss Mr. Linklater if he wrote editorials supporting the Conservative Prime Minister, Margaret Thatcher, instead of Labor's leader, Neil Kinnock, Mr. Maxwell paused briefly and then answered:

"He would have my permission to do so. I would have him certified. But he would certainly be able to do it."

Mr. Linklater survived, but the newspaper did not, and the flop cost Mr. Maxwell the equivalent of $50 million. Later, he said, "I made certain that never again would I launch a paper and leave it in the hands of the professionals."

A Weekly Paper For All of Europe

The publisher, who at the end claimed to be able to speak 11 languages, launched a European-wide English-language color weekly newspaper, The European, in May of last year. Visiting its offices one weekend and finding that he had no office in the newsroom, he took the nameplate off the door of the one used by its first editor, Ian Watson, and took over that room on the spot.

Last winter, he replaced Mr. Watson as editor, easing him upstairs to the board of directors. The weekly has reportedly lost money since its inception, and Mr. Maxwell kept it as part of his private business operations.

In recent years, he turned his business eye toward the United States, acquiring the publishing house of Macmillan in 1989 for $2.6 billion and Official Airline Guides for $750 million. The acquisitions came at a price of a heavy debt load that later forced him to sell Pergamon and part of the Mirror Group, but Mr. Maxwell's real interest soon became The Daily News in New York City, which he acquired from the Tribune Company of Chicago last spring, ending a long and costly strike from which the tabloid has not yet recovered.

Mr. Maxwell always insisted that The Daily News was "in danger of becoming profitable" by early next year, and promised to spend most of his time running it. At first, he did, parking the yacht that took him on his last voyage, the Lady Ghislaine, named after his youngest daughter, in the East River off 30th Street and holding court. Hailed at first for saving two-thirds of the paper's jobs, he was made an honorary Grand Marshal at the Salute to Israel Parade on Fifth Avenue. But later he seemed to fade from public view and to spend more of his time in London.

To the members of the sedate British Establishment he said he despised, Mr. Maxwell was regarded as an upstart outsider, the piratical financier the satirical press weekly Private Eye called "Captain Bob." An American author, Seymour M. Hersh, contended in a recent book, The Samson Option, that he had close ties with Israel's top leadership, and that Nicholas Davies, the foreign editor of The Daily Mirror, was buying and selling arms in partnership with an Israeli intelligence operative.

Mr. Davies denied the charge last month, but later, confronted with evidence that he had met an arms dealer in Ohio despite his denials, he acknowledged that he had not told the truth about the trip and The Mirror dismissed him. But Mr. Maxwell maintained his lawsuit against Mr. Hersh, who has filed a countersuit.

New Interests In Eastern Europe

Mr. Maxwell's critics have often made fun of the fawning biographies he published of Eastern European Communist leaders like Erich Honecker of East Germany, Nicolae Ceausescu of Romania and Todor Zhivkov of Bulgaria.

After they fell, he pirouetted neatly around and acquired interests in newly democratic newspapers in Hungary and Eastern Germany, and last year formed a $250 million fund to invest in joint ventures in the region. Prime Minister John Major, paying tribute to him today, said he had offered useful advice at the time of the failed coup in Moscow last August.

Mr. Maxwell never took a car when a helicopter would do, and roared in and out of his London headquarters -called, naturally, Maxwell House - by helicopter every day from the Headington Hill Hall estate he rented from the city authorities in Oxford.

An ardent soccer fan, he owned clubs in both Britain and Israel at various times, but controversy attended his every attempt to buy another one. Last year, he was said to be growing disillusioned with the sport in Britain, saying it "could not be in a sorrier state," and put his interests in four clubs on the market.

Mr. Maxwell is survived by his wife, three sons and four daughters. Two of the sons, Ian Robert Charles Maxwell, 35, and Kevin Francis Herbert Maxwell, 32, are directors of the publishing company. Another daughter died of leukemia in infancy, and another son, the eldest, died in 1968, seven years after an automobile accident.

"As the Empire Was Crumbling-A Special Report; Frantic Moves Came to Light In Days Before Maxwell Died," by Steven Prokesch, The New York Times, December 9, 1991

At the time of his mysterious death on November 5, Robert Maxwell almost certainly knew he was about to be caught.

He had drained hundreds of millions of dollars from his two flagship public companies and from employee pension funds in a frantic attempt to keep his heavily indebted publishing empire afloat.

The auditors of the Maxwell empire, Coopers & Lybrand Deloitte, were to conduct their next regular audit of the pension funds in a couple of months. And Coopers would have quickly discovered the transactions, said a person very familiar with the details of a special financial examination of the empire conducted for the banks after Mr. Maxwell's death. He agreed to discuss the report only if his identity was not disclosed.

'Basically Grabbing Cash'

The Coopers team also found evidence that some of the diverted money went to The Daily News in New York to cover its losses. That raises more doubts about the future of the newspaper, which Mr. Maxwell acquired in March.

The maneuvering by Mr. Maxwell to prop up the private companies that controlled his empire "was doomed to failure," the person familiar with the Coopers report said.

"It wasn't a sophisticated fraud like BCCI," he said, referring to the scandal surrounding the Bank of Credit and Commerce International. "The guy was basically grabbing cash, and Coopers found it out within days of going in." The Coopers team was led by Richard Stone, the partner in charge of the accounting firm's corporate finance division.

That discovery led the main holding companies of the Maxwell empire to file Thursday for the British equivalent of bankruptcy protection.

It is now apparent that the pressure on Mr. Maxwell to find money for the private companies was increasing sharply in the weeks before his death, according to the Coopers report, bankers, and directors and executives of the Maxwell empire.

"It would appear that there was a desperate need for cash from June onwards," the person familiar with the Coopers study said. And "the window of opportunity" to take the money was the second half of the year, he said, because audits of the two public Maxwell companies - Mirror Group Newspapers PLC and the Maxwell Communication Corporation - had been completed and the pension fund audits were six months away.

In the four to six weeks before the death of Mr. Maxwell, executives and directors of some of his companies and some bankers began to realize that something was seriously amiss. And they confronted him.

In a meeting last week with the staff of the company's Daily Mirror, Ernest Burrington, the new chairman of Mirror Group, described Mr. Maxwell's behavior in the weeks before his death as "the increasingly desperate actions of a desperate man."

Goldman's Stock Sale

Goldman Sachs & Company, the American investment bank, had repeatedly demanded in late October that Mr. Maxwell repay at least part of a loan of about $60 million. When he did not, Goldman sold 2.2 million shares in Maxwell Communication on October 31. They were part of the shares in the Mirror Group and Maxwell Communication that Goldman was holding as collateral.

Citibank had been seeking payment of about $45 million owed to it for foreign currency that Mr. Maxwell had bought on October 18.

And the Swiss Bank Corporation disclosed that a private Maxwell company had failed to deliver the promised collateral and then failed to repay a loan of £55.8 million, or about $101 million, on November 5. That was the day Mr. Maxwell's naked body was found floating in the sea off the Canary Islands.

Spanish authorities are expected to release the autopsy report this week. In public comments, Spanish officials have suggested that Mr. Maxwell died of natural causes, perhaps a heart attack. But the mounting disclosures about his financial problems have fueled public speculation in Britain that Mr. Maxwell may have jumped overboard, then died of a heart attack.

The Anger-Daily Mirror Turns On Its Late Owner

The Daily Mirror, Britain's second-largest daily newspaper after The Sun, has published some of the most tantalizing disclosures in recent days. The paper's staff, which once revered Mr. Maxwell for buying the declining Mirror Group in 1984, now has every reason to dig up the dirt on "the publisher," as he liked to be called.

Since his death, investigations have disclosed that at least £350 million, or about $636 million, had been taken from the Mirror Group pension fund "apparently without due authority," the company said. The fund, which had a surplus, now needs an injection of an estimated £110 million, or about $200 million. In addition, at least £97 million, or about $176 million, is missing from the company itself.

The Mirror's front page headlines have gone from "The Man Who Saved The Daily Mirror" on the day after he died to "The Lie" by Thursday and "Bedded and Fired" today, with an article accusing Mr. Maxwell of forcing his secretary to sleep with him, then discharging her.

In a letter to readers on Saturday, Richard Stott, The Daily Mirror's editor, assailed Mr. Maxwell. "Whatever demons drove him to these acts in the last two months of his life," he said, "the final brutal truth is that far from going down as the man who saved this great national institution, he will be remembered, I'm afraid, as the man who nearly destroyed it. A thief and a liar."

Mr. Stott is now leading an employee group that is trying to buy control of the Mirror Group.

The Discovery-Millions Missing And Aides Object

In an article in The Daily Mirror on Thursday, Lawrence Guest, finance director of the Mirror Group, recounted how he had confronted Mr. Maxwell on October 21 and asked about £47 million, or about $85 million, that he had discovered to be missing from the company.

He told his boss that "he was so worried about it he was unable to sleep," the paper said. Mr. Guest recalled that Mr. Maxwell brushed him off and said: "You will receive everything. Don't worry." Mr. Guest said he first asked Mr. Maxwell about the missing money on October 15 in the presence of Mr. Burrington, then the deputy chairman, and two other directors.

Confidential notes Mr. Guest wrote at the time say: "I am now convinced that MGN resources have been used to support other parts of the business. but I have no proof. I think I have frightened the chairman, but my main concern must be to get the money back."

A Mirror Group executive who insisted on anonymity said in an interview that the additional £50 million discovered to be missing last week appears to have been removed "probably only days before Maxwell died."

Eavesdropping Devices

The Mirror this weekend and interviews with Mirror executives disclosed that recording devices, some still working, had been discovered in offices of senior Mirror Group and Maxwell Communication executives, including Mr. Guest. The wires led to an office in a building next door used by Mr. Maxwell's director of group security, the newspaper said.

It also said Mr. Maxwell had decided to put Michael Stoney, another Mirror Group director with close ties to the Maxwell family's private companies, above Mr. Guest as deputy managing director of finance "just over a week" after Mr. Guest's challenge and two days before Mr. Maxwell left on the trip that ended in his death. Mr. Maxwell did this despite objections from two directors. Attempts to reach Mr. Stoney were unsuccessful.

In a statement last week, Lord Donoughue, a former executive vice chairman of an investment management firm controlled by Mr. Maxwell, said he and his managing director quit in July after a fight with Mr. Maxwell. The issue was the practice of lending stocks from a Mirror Group and Maxwell Communication pension fund. The stocks were some of the fund's assets that the investment firm had been given to invest by another Maxwell-controlled investment firm.

Lord Donoughue said he found out in early 1991 that the stocks had been lent without his knowledge. He objected and was promised it would not happen again.

In July, the managing director and Lord Donoughue discovered the practice had not ceased. "They protested strongly to Mr. Maxwell and asked for the matter to be placed on the agenda of the next meeting of Pension Fund Trustees," Lord Donoughue said. Mr. Maxwell refused and there were "vigorous exchanges." Mr. Maxwell insisted that the decision was his to make, and the two resigned.

The Finances-Billions in Assets, But No Net Worth

Court-appointed administrators overseeing the bankrupt Maxwell empire say that the debts of the family's top holding companies, Headington Investments Ltd. and Robert Maxwell Group PLC, and their subsidiaries total about £1.4 billion and that the value of the assets "appears to be significantly less than the liabilities." A study by the Bankers Trust Company conducted after Mr. Maxwell's death valued the assets at £1.1-1.4 billion, or about $2-2.54 billion.

The debts could turn out to be even higher once investigations into how much Mr. Maxwell actually took are completed. At what Coopers says was its suggestion, a special team from Price Waterhouse, the accounting firm, is examining Maxwell Communication. The Serious Fraud Office in Britain and the British pension fund regulator are also investigating the Maxwell empire.

The Coopers report says Mr. Maxwell took at least £500 million, or about $908 million, from the pension funds and the two public companies.

"Maxwell was at the center of this," said the person very familiar with the report. "It seems to be on his instructions that things happened."

Maxwell executives say it appears that a small number of other people were involved. "It would certainly be a handful," said Alan Shillum, managing editor of Mirror Group Newspapers. "It had to be more than him."

On the Auction Block

A vast portion of the Maxwell empire is now on the auction block. Besides the Maxwell family's 51 percent stake in the Mirror Group and its 68 percent of Maxwell Communication, the assets include The Daily News; AGB International, a market research firm, and a half interest in Thomas Cook's American travel agencies. It also includes interests in newspapers in Germany, Eastern Europe and Kenya; soccer teams, and investment firms.

Mirror Group, with a stable of tabloid, racing and giveaway papers, is one of Britain's leading newspaper companies. Maxwell Communication's businesses are mainly in the United States and include Macmillan Inc., the book publishers, Official Airline Guides, Collier encyclopedias and half of Macmillan/McGraw-Hill School Publishing.

The health of heavily indebted Maxwell Communication is so fragile that bankers and analysts predict that if a significant amount of assets are indeed gone, it will soon have to seek bankruptcy protection or will be forced by banks to liquidate.

The Motivation-Heavy Obligations And Falling Stock

There is evidence that Mr. Maxwell may have sold the shares he borrowed or simply took from the pension funds to meet the obligations of his private companies. There is also evidence that he used the shares and others from Maxwell Communication as their loan collateral.

"I think it is likely that assets from pension funds were used for both those purposes," a Mirror executive said. "I have heard that said to me by fellow executives here, but I don't have any firsthand evidence."

When asked if the Coopers examination had found evidence of this, the person very familiar with the report said yes.

It is also believed that Mr. Maxwell may have used the proceeds to buy Maxwell Communication shares to try to stop the long slide in their price. Such stock manipulation would have been illegal. Much of the Maxwell family's own stake had been pledged as loan collateral. And the slide left several loans with inadequate security and bankers' demands that Mr. Maxwell provide them with more collateral or repay them.

The Coopers report says that of the assets taken from the public companies and the pension funds, more than £300 million, or $545 million, went to buy Maxwell Communication shares; about £150 million, or $272 million, went to provide needed collateral for the bank loans of the private companies; about £100 million, or $182 million, was used to pay a pension obligation to a printing company that Mr. Maxwell had previously sold to management, and about £80 million, or $145 million, went for interest payments and to cover the losses of such enterprises as The Daily News and The European, a pan-European weekly newspaper introduced last spring.

The Promises-Shifting Collateral From Debt to Debt

In some instances, Mr. Maxwell appears to have pledged the same collateral to different bankers. The Japanese securities that the Swiss Bank Corporation was promised as collateral were also promised to Credit Suisse, according to bankers and The Independent, a British newspaper. It was not clear whether Credit Suisse had received them. Swiss Bank confirmed that it had been informed that the shares had been used as collateral for another loan at some point. Attempts to reach Credit Suisse officials were unsuccessful.

Maxwell Communication has also announced that some of its shares in Berlitz Inc., the language instruction company, are missing. Maxwell Communication fears this will delay the completion of a pending $265 million sale of its 56 percent stake in Berlitz to the Fukutake Publishing Company of Japan, thereby depriving the company of badly needed cash.

Several British newspapers say Swiss Volksbank had received Berlitz shares as collateral. Attempts to reach Swiss Volksbank over the weekend were unsuccessful.

Move by Shearson

And according to a document filed with the Securites and Exchange Commission in Washington, 1.9 million Berlitz shares, or 9.9 percent of the total, had been pledged as collateral to Shearson Lehman Brothers for a loan of other marketable securities before Mr. Maxwell died.

Shearson Lehman took possession of the shares on November 6 - one day after Mr. Maxwell's death - after the loan had not been repaid. Shearson Lehman still owns the shares, which obviously poses problems for the deal with Fukutake.

Asked about these reports, Peter Laister, chairman of Maxwell Communication, said in a statement, "We will not confirm or deny the details arising from these investigations - our whole objective is to see justice is done as quickly as possible." But one executive in the Maxwell empire and a banker said such deals had been uncovered.

The Family-Maxwell's Sons Face Questions

After Mr. Maxwell's death, his sons Ian and Kevin assumed the helm. Kevin, 32 years old, became chairman of Maxwell Communication and the head of the private companies. His 35-year-old brother became chairman of the Mirror Group. With the end in sight, they severed their official ties with the public companies on December 3, citing increasing conflicts of interest.

One unanswered question is whether the brothers and other senior executives were involved in the diversions of resources. The Financial Times reported that the brothers, along with their father, had authorized loans at one time or another. The paper also said three Mirror directors, whom it did not name, had told it that the brothers' signatures were on documents authorizing transfers.

The brothers, their father and three others were directors of Bishopsgate Investment Management, a firm controlled by the Maxwell family that oversaw some pension assets. At least two of their signatures were required to move assets.

Charles Wilson, editorial director of the Mirror Group, said Mr. Maxwell's signature was usually one of those on the documents that had been found authorizing transfers. He would not say whether Ian or Kevin Maxwell had signed any such documents. "The only thing we can say is it was not always the same two directors," he said.

Kevin Maxwell was asked about his brother's and his involvement at a news conference in New York on Friday. "There are certain areas I cannot comment on at this time," he said. "If you are the subject of a serious fraud investigation, it doesn't take a genius to figure that out."

"Maxwell's Empire: How It Grew, How It Fell-A Special Report; Charming the Big Bankers Out of Billions," by Roger Cohen, The New York Times, December 20, 1991

It was in the summer of 1990 that Jean-Pierre Anselmini first noted a troubling change in the normally ebullient Robert Maxwell.

When Mr. Anselmini entered his London office, Mr. Maxwell would turn over the papers on his desk. When key financial meetings were held, Mr. Anselmini said he was not informed. When he asked questions, he was met by silence. When he complained to Mr. Maxwell and his son Kevin about a transaction with Goldman Sachs & Company, he was curtly told to get out of the office. Yet Mr. Anselmini was the deputy chairman of the Maxwell Communication Corporation, one of the top three jobs in the late Mr. Maxwell's flagship company.

Nagging Question

By the time Mr. Maxwell died under mysterious circumstances on November 5, at age 68, while cruising on his yacht off the Canary Islands, his sprawling empire was in complete disarray. Mr. Maxwell had always operated on the basis that other people were fools, and the many banks that helped him build his web of companies may have proved him right.

Their support - as well as the credence accorded him by a host of London institutions and the high-powered people who sat on his boards - raises this question:

How did Mr. Maxwell, already in his 60s and with a questionable record as a corporate manager, persuade the banks to back a wildly ambitious and somewhat irrational scheme: the transformation, from 1984 on, of a solidly profitable if unglamorous printing and publishing business into a global media company with razzmatazz as conspicuous as its debts?

The banks, which could collectively lose $2 billion on their Maxwell loans, offer little in the way of a convincing reply. "Any banking relationship can be seen as a four-legged stool, involving the honesty and integrity of both the bank and the client," said Dan Brockbank, a spokesman for the National Westminster Bank, a Maxwell creditor. "We could not know that in Mr. Maxwell's case, two of the legs were missing."

The answer to this question seems to lie in a combination of Mr. Maxwell's talents as a businessman, which included remarkable courage and energy; his gall and litigiousness, which tended to cow critics into silence, and the gung-ho atmosphere of the 1980s, which encouraged media giants like Rupert Murdoch's News Corporation and Time Warner Inc. to become global forces while banks rushed to lend them more money.

Mockery of Agreements

But Mr. Maxwell maneuvered in a way that made a mockery of his borrowing agreements with banks. From interviews with dozens of current and former executives, as well as the Maxwell companies' court-appointed bankruptcy administrators, it is apparent that by August 1990 the interlocking deals among his many companies had begun to unravel.

"From mid-1990, I was gradually excluded, to the point where my job became quite pointless," said Mr. Anselmini, who resigned as deputy chairman on October 4. "I had no information. For Mr. Maxwell, I did not exist any more."

Mr. Maxwell had little time for advice. A Czech-born Jewish immigrant who had changed his name three times and survived humiliation by Britain's clubby City establishment, he was incorrigibly suspicious of others.

"He was a peasant to the roots of his fingernails, with the peasant's mistrust of others," said Peter Jay, a former British Ambassador to Washington who was Mr. Maxwell's chief of staff from 1986 to 1989. "Things were run on a need-to-know principle: if you needed to know, you weren't told."

But as the treatment of Mr. Anselmini and the departure of four other leading executives show, Mr. Maxwell's isolation grew palpably in the last 18 months of his life.

The reasons are now clear. Burdened by more than $2.3 billion of debt incurred by Maxwell Communication in its overpriced 1988 acquisition of Macmillan Inc., the publishing house in New York, and by huge private debts that he never fully acknowledged, Mr. Maxwell had embarked on a frenetic juggling of his public and private assets. His empire collapsed earlier this month beneath $4.4 billion of debt.

Because his web of private companies was a largely secret world - "with the family's Chinese walls, we knew nothing of the private side," said Reg Mogg, a former finance director of Maxwell Communication - the maneuvers necessarily excluded directors of the public companies.

The Juggling-Trying to Keep The Banks at Bay

From mid-1990, Maxwell Communication shares were being pledged as collateral for bank loans in a process that would leave 512 million shares, or 78 percent of the company, in banks' hands by the time of Mr. Maxwell's death at sea last month. Officially, the Maxwell family owned only 68 percent.

In an apparent bid to bolster the value of that collateral, Mr. Maxwell devised costly and possibly illegal deals in which other parties would buy his stock in return for payments. One such deal was arranged with Goldman Sachs on August 14, 1990. Starting in April 1991, there was a sharp increase in spending on price support for Maxwell Communication shares, said John Talbot, the Arthur Andersen & Company accountant now in charge of the private Maxwell holdings.

Orders for the shares in April and July exceeded $236 million, "but the largest ones were in April," Mr. Talbot said in an interview. The orders came from offshore investment trusts, but were ultimately paid for by one of Mr. Maxwell's private companies, usually Bishopsgate Investment Trust. The scheme is now under formal investigation by the Serious Fraud Office of Britain.

40 Percent Surge in Stock Price

Maxwell Communication's share price shot up to 239 pence in April, a 40 percent rise from February. An important aim, investigators believe, was to make the company look solid as Mr. Maxwell prepared to offer the public 49 percent of his Mirror Group Newspapers PLC. But it was also essential to keep the banks at bay; they held more and more Maxwell Communication stock.

The Mirror Group stock offering on May 9 raised $455 million. But it also further complicated Mr. Maxwell's life.

Mr. Maxwell's ownership of the Mirror Group had been very reassuring to the banks that had made loans of more than $1.7 billion to Maxwell private companies. It was the one sure cash cow in a largely impenetrable web of private holdings that included the money-losing AGB market research company, British soccer clubs and The Daily News in New York. With 49 percent of the Mirror Group gone, "we felt nervous and began to press for more collateral," one banker said.

The nervousness was justified. Most of the other private holdings were money losers. By November, the National Westminster Bank alone held no less than 32 percent of the Mirror Group as collateral against loans of $282 million to the private companies.

But these Mirror Group shares had to be propped up, too. As the share-support operation continued, Mr. Maxwell apparently turned to gambling on the foreign exchange markets, and more than $1.4 billion was funneled from the treasuries and pension funds of Maxwell public companies into his private companies.

If these projects did nothing for the bottom line, they did a lot to satisfy Mr. Maxwell's ballooning hubris as he came to see himself as a visionary of European integration and a global monarch of the information age.

"The story of Maxwell in his later years is one of his using shareholders as cannon fodder in a vast and pompous empire-building mission," said Derek Terrington, an analyst at Kleinwort Benson, an investment firm, who had urged investors to dump Maxwell stock since August 1988. "I would ask, what is in this expansion for shareholders? I never got a coherent reply."

Mr. Terrington added: "The banks that funded it all must take a huge whack of blame. Their gullibility continues to amaze me."

Richard Davey, a senior officer at N.M. Rothschild, another London investment firm, agreed: "The banks made some extremely foolish loans and they are going to lose a lot of money."

At the end, in the days before Mr. Maxwell's death, at least four banks - the Swiss Bank Corporation, Citibank, Goldman Sachs and Shearson Lehman Brothers - had awakened to the dangers.

Alone on his yacht, the Lady Ghislaine, Mr. Maxwell knew that they were circling him with repeated demands for immediate repayment. Indeed, the Swiss Bank had been promised a payment of $100 million on the day he died. But by the time the banks closed in, it was too late.

The Warning Signs-A Deal Goes Sour And Charges Fly

Yet the warning signs were there far earlier. About 20 years earlier, London's City establishment, roughly the equivalent of Wall Street, had pronounced what amounted to its death sentence on Mr. Maxwell's business career, which had been dedicated to the building of Pergamon Press, a scientific journal and reference book publisher.

When Leasco, an American company owned by the American financier Saul P. Steinberg, agreed to acquire Pergamon in June 1969, a bitter controversy ensued. Mr. Steinberg, who declined to comment on the furor, felt that he had been misled about the true value of Pergamon.

A report on Pergamon by the City's corporate watchdog committee in 1971 found that Mr. Maxwell's "apparent fixation as to his own abilities causes him to ignore the views of others if these are not compatible." Mr. Maxwell's reports to shareholders betrayed "a reckless and unjustified optimism," it said, that sometimes led him "to state what he must have known to be untrue."

Mr. Maxwell was, in short, found to be "not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company."

'Actually Weeping at One Point'

Ousted from Pergamon, which he had founded in 1951 with the motto "We shall find a way or we shall make one," Mr. Maxwell seemed finished. Lord Shawcross, then the chairman of the City panel, remembers him "actually weeping at one point as I prepared a press release on his travails."

At the age of 48, Robert Maxwell - the former Jan Ludwik Hoch, Leslie du Maurier and Leslie Jones - a man who had been hounded from his Czech homeland by the Nazis, had seen his parents killed in Nazi death camps and had fought with great bravery in World War II, found himself a pariah in his adopted land.

"What has happened now amounts to a repeat performance," said Owen Stable, a judge who was one of the two authors of the 1971 report on Maxwell. "I thought back then that he was one of the biggest crooks I'd ever met. He invented deals between his private and public companies. He was incapable of distinguishing between other people's money and his own."

In particular, the report criticized Mr. Maxwell's inflation of the sales of a Pergamon encyclopedia unit, the International Learning Systems Corporation. The report also examined dealings between Maxwell Scientific International Inc. and Pergamon, which, it said, had been used to inflate Pergamon's profits by as much as a third during a year.

"He sold a lot of scientific journals to related private companies and inserted them as profit," recalled Ronald Leach, an accountant who was the other investigator. "It's an old accountancy trick, but not one to be recommended."

A Maze of Companies

Over all, Mr. Stable and Mr. Leach found that "a large number of private companies including foreign companies exist in which Mr. Maxwell or his family have an interest." But like many bankers, brokers and other inquirers during the 1980s, they were ultimately frustrated in their bid to reach an overall understanding of the maze of hundreds of interlocking companies with maddeningly similar names.

Confronted by what they called Mr. Maxwell's "strenuous efforts" to prevent the investigation of all these companies, they abandoned the effort. This decision had an important consequence: the structure, financing and beneficiaries of Mr. Maxwell's private companies were never understood.

The Transformation-Maxwell's Energy Builds an Empire

For some time, before the rapid expansion of his empire in the mid-1980s, Mr. Maxwell had no public companies.

Although his legal appeal against the 1971 report was scathingly dismissed in 1972, Mr. Maxwell never rested in his bid to recover Pergamon and his reputation.

"There was an energy emanating from him that I've never encountered in anyone else, an almost irresistible energy," said Jospeh Lapid, his Israeli business consultant during the 1980s.

By 1974, Mr. Maxwell had bought back Pergamon, which had performed poorly under Leasco, and taken it private. Within a couple of years, it was profitable again. By 1981, he had bought the money-losing British Printing Corporation and, after overcoming labor union domination and overstaffing, made it highly profitable.

And in 1984, 15 years after losing a bitter battle with Rupert Murdoch to buy The News of the World, the British Sunday tabloid, he fulfilled a lifelong ambition and bought a newspaper, The Daily Mirror. Again, he broke the unions and turned a money-loser to a profitmaker.

The stage was set for the denouement of Mr. Maxwell's life, one in which he seemed intent on making up for the time lost as a result of the 1971 scandal. In British Printing's 1985 annual report, his aims were detailed: to become "a multifaceted worldwide information and communications enterprise with revenues of £3 billion to £5 billion by 1990, with profits to match."

It was, in the view of several analysts, a grotesque claim. British Printing's sales were not even at a tenth of that level. But in the 1980s - when media was the buzzword and money was plentiful - banks took no heed.

An extraordinary debt-backed spending spree began, culminating with the $3.3 billion purchase of Macmillan and the Official Airline Guides in 1988. A year before that - at the time British Printing changed its name to Maxwell Commuication and took as a logo an "M" smothering the globe - Mr. Maxwell made another huge bid, for Harcourt Brace Jovanovich, another American publisher. Harcourt fended him off, but incurred ruinous debts in doing so.

Mr. Maxwell also picked up newspapers, news agencies, computer and pharmaceutical companies, and television stations in France and Israel. And he bought heavily in Eastern Europe, whose former Communist leaders he had once praised in Pergamon publications. His activity in Eastern Europe revived talk - never proved - that Mr. Maxwell had a sideline in spying.

Still Short of His Goal

Despite his bulldozing tactics, Mr. Maxwell was well short of his goal of annual sales of £3 billion. Sales of Maxwell Communication for the 1990-91 fiscal year totaled £996.9 million.

But he had fufilled part of his vow. The solidly profitable printing operations had almost all been sold. Even Pergamon, his core company, had been sold for £446 million. In effect, the company's dull but lucrative ballast had been divested, replaced by a host of much flashier, but generally more fragile, media properties.

Yet the banks went along, seeming confident that profits would eventually flow. "His past failings were duly noted, but we felt his record at British Printing and the Mirror merited our confidence," said Richard Whitehead, an offical at Lloyds Bank. "There was a longstanding relationship here."

The Unraveling-Confidence Begins To Evaporates

The marketplace, however, was much less sanguine. As the confidence of the 1980s evaporated, Mr. Maxwell's acquisitions began to look grossly overpriced, and his debt load ominous. And starting in 1990, his attempts to dispose of some assets inevitably met a depressed market.

"When most of my colleagues looked at Maxwell Communication this year, we felt that the profits were overstated, the debt burden was quite likely to lead to downfall, and we'd become increasingly concerned by the way in which it seemed the share price was rigged," said John Kenny, an analyst at Barclays de Zoete Wedd. "I did not see anyone buying the stock, yet on many occasions it was going up."

Mr. Maxwell's dealings with Goldman Sachs had already aroused the misgivings of the City, as well as Maxwell Communication directors. Two separate options offered to Goldman Sachs in August 1990 and January 1991 for a total of 45.6 million shares, suggested to some that Mr. Maxwell was desperate to support the price of the stock.

The August option, which guaranteed Goldman Sachs a set price to sell the stock to Maxwell the following November, covered a period in which Mr. Maxwell was barred by stock exchange rules from buying Maxwell Communication shares. Goldman Sachs denies any wrongdoing.

Maxwell's Old Tricks?

The annual report for the year ended March 31 did nothing to ease analysts' concerns. The sale of Maxwell Communication's Canadian printing operations to Mr. Maxwell's Mirror Group for what many regarded as an inflated price suggested that he was up to his old tricks again.

In addition, a remarkable profit of £80.7 million on foreign exchange operations amounted to more than half of the company's operating profits - and indicated that very large sums were being speculated. "You don't make £80.7 million by putting £100 million into play," Mr. Kenny observed.

In March, Mr. Maxwell complicated things further, buying The Daily News in New York.

He paid a price for such whims. Peter Walker, a Conservative politician who had agreed to become chairman of Maxwell Communication, decided on July 15 not to take the job after concluding that the structure of the company made no sense. Other executives who departed this year included the former deputy managing director, Richard Baker, who had been with Maxwell 23 years, and Harry A. McQuillen, the former president of Macmillan.

"As independent directors left and were not replaced, there seemed to be less and less control," said Mr. Mogg, the former finance director of Maxwell Communication.

The Fatal Flaw-Company Money For Private Needs

By May, after the Mirror Group stock offering, the share prices of Maxwell Communication and Mirror Group started to fall. Mr. Maxwell's fatal flaw, underlined in the 1971 report, became evident once again: "When he was under pressure," said Mr. Davey of Rothschild, "he ceased to make any distinction between his public and private companies. It was all one big pot in which he freely dipped."

During the spring, said Roger White, a spokesman for the accounting firm Coopers & Lybrand, shares of Berlitz Inc. owned by Maxwell Communication were passed to Bishopsgate Investment Trust, a private Maxwell company, where they could be used to provide more collateral to banks. Later, they were pledged to Shearson Lehman Brothers and Swiss Volksbank.

In July and August, the draining of public company assets began in earnest, Coopers said. About $540 million in stocks and other assets were taken from Bishopsgate Investment Management, which managed Maxwell pension funds, and transferred to another private company with a similar name, London & Bishopsgate International Investments. The assets were then liquidated.

Where Did the Money Go?

Where this money - and the rest of the $1.4 billion that disappeared from the public companies - ended up is still being investigated. But the best guess of analysts and investigators is that it was spent to support stock prices, speculate in foreign currencies and cover the steep losses of the private companies.

No evidence has emerged of a Maxwell slush fund since Mr. Maxwell's body was found in the water on November 5. Spanish authorities have said he probably died of a heart attack, but said it could not be determined if it occurred before he entered the water. And there has been considerable speculation that Mr. Maxwell, knowing his shaky empire was about to collapse, committed suicide.

Who aided Mr. Maxwell in this wild juggling of money is still to be resolved. His sons Kevin and Ian are under scrutiny, as is a key investment aide, Larry Trachtenberg. Whether the directors of his numerous companies failed in their fiduciary responsibilities has still to be addressed.

During this difficult period, Mr. Maxwell twice visited Israel. In August, he went to the wedding of the daughter of his office manager, Mr. Lapid, arriving by helicopter outside of Jerusalem.

"He descended from heaven in the middle of the ceremony, which was typical of him, and to everyone's surprise read aloud from the prayer book in Hebrew," Mr Lapid said. After the ceremony, Mr. Maxwell said to Mr. Lapid, "It is 50 years since I read a Hebrew prayer, and I have seldom been so moved."

A month later, Mr. Maxwell went to the Yad Vashem Holocaust museum, accompanied by Mr. Lapid. When he saw the name of his native village, Slatinske Doly, he broke down and cried.

If some profound return to his roots was taking place, Mr. Maxwell did not have much time to savor it. Stock prices of his public companies continued to slide, as creditors sold their collateral; Maxwell Communication's first-half results were due in November, and Coopers & Lybrand's audit of the Mirror Group would begin in December.

"When he went to his boat on October 31, he had to know that the game was practically up," Mr. Davey of Rothschild said.

"Judge Gives MGM Reins To Creditor," Eugene Register-Guard, December 31, 1991

Italian financier Giancarlo Parretti lost control of MGM-Pathe Communications Co. on Monday after a judge ruled that he reneged on an agreement with his major creditor.

The ruling by Chancery Court Chancellor William Allen gives control of the legendary Hollywood studio to Credit Lyonnais Bank Nederland NV.

Credit Lyonnais sued Parretti on June 17, claiming he continued exerting day-to-day control over the studio after agreeing to relinquish control to the French bank.

Allen said that he weighed conflicting testimony and concluded Parretti "did not give truthful testimony."

Parretti willfully breached the agreement with Credit Lyonnais at the outset and the bank was therefore entitled to remove him and his associates from the board of directors, the judge said.

Charles Meeker, president of the studio, said the Pathe name could be dropped from the studio's title as early as next month. He said the bank has no immediate plans to sell the company.

In a statement, Credit Lyonnais said the decision should bring new stability to MGM's management.

"The decision permits MGM's management to turn its full attention to the company's recovery, and the bank intends to work closely with management in achieving that goal," the Credit Lyonnais statement said.

Liliana Avincola, president of the studio's parent, Pathe Communications Corp., said the ruling does not change Parretti's principal ownership of the studio. She said the company plans to go ahead with its lawsuit against the bank in Los Angeles Superior Court.

The lawsuit filed in July alleges that the bank dealt in bad faith with Pathe and Parretti, among other allegations. The suit seeks more than $1 billion in damages.

Parretti bought MGM/UA Communications Co. in November 1990 from financier Kirk Kerkorian for $1.3 billion and renamed the company MGM-Pathe Communications Inc. The studio produced such classic films as Gone With the Wind and The Wizard of Oz.

"Historic Studio Back, But Will It Roar Again?" by John Horn, Associated Press, January 6, 1992

The Italian financier who bought the esteemed MGM studios and almost turned it into a laughingstock is gone, booted from the corporate suite by a judge who called him inept and a liar.

MGM-Pathe Communications Co., the company that made The Wizard of Oz, Gone With the Wind and Ben-Hur, is back in what Hollywood considers better hands. Now Hollywood is asking: Will the historic studio-or what's left of it-roar like its logo lion again?

"The climb out is going to be considerable," said one MGM executive, speaking on condition of anonymity. "But even if we're not running yet, we're at least walking at a brisk pace."

The financier, Giancarlo Parretti, is now in a Sicilian jail for alleged tax fraud. But in 1990, he bought what was then MGM/UA Communications Co. for $1.3 billion in a highly leveraged deal. Chaos at the studio ensued almost immediately. A check to Dustin Hoffman bounced. Labs stuck with unpaid bills refused to process MGM film. Advertising agencies wouldn't return artwork. Thelma & Louise, Delirious and other new movies missed their release dates. Everyday up to 70 creditors called begging for payment. MGM had no cash.

Mr. Parretti didn't help. He misled the press, harassed studio executives with memos and concocted fantasy schemes. Film production nearly ground to a halt. To avoid an involuntary bankruptcy five months after his purchase, Mr. Parretti's biggest lender, Credit Lyonnais Nederland NV, insisted he relinquish operating control to MGM's new chief, Alan Ladd, Jr.

Then it accused Mr. Parretti of breaking loan agreements. On December 30, a Delaware Chancery Court awarded the studio to the bank and Mr. Ladd. Rebuilding began that afternoon. "With Parretti out, the town knows the bank is behind us 110 percent and that will take all doubts away," Mr. Ladd said.

But if confidence comes back to MGM, it's less certain that profits will. Before selling what was then MGM/UA to Mr. Parretti, billionaire Kirk Kerkorian parceled off many of its assets, including selling Ted Turner the video rights to the rich MGM film library.

"Trans World Airlines Files For Bankruptcy," by Martha M. Hamilton, The Washington Post, February 1, 1992

Trans World Airlines Inc. landed in bankruptcy court yesterday with an agreement in hand from its creditors and its largest union to help it reorganize.

TWA's operations will not be interrupted by the filing, which the airline had said several months ago would occur early this year. TWA Chairman Carl C. Icahn said yesterday the filing will eliminate about $1 billion in debt from TWA's balance sheet and save it approximately $150 million in annual interest charges, allowing it to successfully reorganize.

In filing for protection from its creditors yesterday, TWA became the most recent of a long list of airlines that have ended up in bankruptcy court, including Eastern Air Lines, Pan American World Airways and Midway, which were forced to shut down.

TWA's bankruptcy appeared to be a chastening experience for Icahn, the former corporate raider turned manager. "I've lost on TWA," Icahn told a news conference in New York yesterday. "It has been the worst investment I've made in the last decade."

Icahn said he expects TWA to emerge from bankruptcy in about six months to compete as a low-cost carrier against other major airlines. But airline industry analysts were more pessimistic about TWA's long-term chances for survival.

Kevin Murphy, an airline industry analyst with Morgan Stanley Corp., said TWA doesn't have the critical mass to survive in an industry dominated by such giants as American, United and Delta unless it merges with another carrier. "The odds so far are that those who go into bankruptcy liquidate, so he does have his work cut out for him," Murphy said of Icahn.

"If the economy doesn't recover and the industry doesn't recover, it's going to be very difficult," said Paul Karos of First Boston Corp. "In the long term, strategically, they still need some kind of a partner to be a player." Once TWA is reorganized and emerges as a carrier with lower debt, it could be an attractive takeover candidate, he said.

TWA and Continental Airlines, which is also in bankruptcy, have discussed a possible merger, but those talks have been on hold since December, a Continental spokesman said. TWA has been steadily shrinking - particularly in its international operations, which once were the centerpiece of the company.

Like other financially troubled airlines, TWA has raised cash by selling assets, including its routes into London's Heathrow Airport, which it sold to American Airlines. USAir Group Inc., based in Arlington, recently agreed to buy TWA's routes from Baltimore and Philadelphia.

TWA operates a major hub at St. Louis, where it is headquartered, and has substantial operations at New York's Kennedy Airport and in Paris.

"A year ago, we thought we had a buyer, but unfortunately Mr. Icahn kept selling off pieces and it became less attractive than it had been," said Senator Jack Danforth (R-MO). "If you know anyone who'd like to buy TWA, call me."

Icahn said yesterday that he will not sell additional assets or lay off workers. He also said he anticipates being able to acquire additional aircraft cheaply now that other airlines are cutting back on aircraft orders.

"He's saying the right things," said Bill Compton, who heads the Airline Pilots Association at TWA. "The problem is, we've got this six-year track record of hearing promises. If he were to fulfill or live up to those promises, I would say maybe this thing has got a chance."

Icahn took over the airline in 1985. In 1988, TWA borrowed money to buy out its public shareholders in a deal that produced $469 million in cash for Icahn, leaving him in control. Icahn will retain 20 percent to 40 percent ownership in the carrier under the agreement with creditors, who will receive a combination of cash, notes and equity in the airline. Once the airline is reorganized, its debt will be reduced to about $600 million, which Icahn said he believes is a manageable load.

Icahn said yesterday that he had reached an agreement with the International Association of Machinists that will save the airline money through work rule changes that the union agreed to in exchange for pay increases. TWA is still in negotiations with its pilots and flight attendants.

TWA also is in talks with the federal Pension Benefit Guaranty Corp., which said yesterday that the aggregate underfunding of TWA's pension plans would amount to about $933 million if the plans were terminated. But TWA chief counsel Mark Buckstein said, "We're not terminating the plans. We've never missed a payment, and we've never asked for a waiver."

TWA and its creditors had reached an agreement last year that the airline would file a "prepackaged bankruptcy" that would include a plan for reorganizing and that would be filed with the Securities and Exchange Commission before being filed in bankruptcy court. What TWA did yesterday was different - skipping the SEC.

Barry Ridings of Alex. Brown & Sons Inc., the Baltimore company that has been retained as a financial adviser for one of three major creditor groups, said that going directly to federal bankruptcy court would cut time off the process of restructuring. "It gets us the cash that much faster," he said.

"Fox Locks In Cameron With A 5-Year Deal Worth $500 Million," by Bernard Weinraub, The New York Times, April 22, 1992

In the age of megadeals, one of the biggest of them all was announced today when 20th Century Fox and James Cameron, the director of Terminator 2 and other films, signed a five-year agreement the studio said was valued at about $500 million.

A buoyant Joe Roth, the chairman of Fox studios, said the amount represented a portion of the costs of the next 12 films that Mr. Cameron will produce for the studio, 4 of which he will direct.

The arrangement is unusual in that it gives a director artistic control over all his films, as well as enormous financial leverage and independence. Exactly how much money will go to Mr. Cameron personally was left undisclosed, but it is considerable. Although Fox will provide a hefty share of the financing for the films, other sources, probably from overseas, will also invest.

From the viewpoint of Fox, including Mr. Roth and his boss, Rupert Murdoch, the chairman of Fox Inc., the deal virtually guarantees a potential blockbuster movie for each of the next five years, so strong is Mr. Cameron's track record. Mr. Cameron is known for such science-fiction extravaganzas as The Terminator, which grossed $38 million in 1984, Terminator 2: Judgment Day, which grossed $204 million in 1991, and Aliens, which grossed $81 million in 1986. Many of these movies were enormously expensive to make, too: estimates of the cost of Terminator 2 reached as high as $100 million.

"This is the first time I can remember where a director of this stature has said, 'I'll give you my exclusive services as a writer, director and producer,' " said Mr. Roth. "He's arguably one of the biggest names in the industry and what he told us, in effect, is that he wants to control his own destiny, he wanted continuity in his work."

Dawn Steel, a producer and a former head of Columbia Pictures, observed: "It's really a very important deal for Fox. There are few filmmakers who can generate their own material like James Cameron. It's crucial for a major studio in terms of a release schedule to fill slots with pictures like this. Joe Roth can now sleep easier at night."

Fox Was Not Alone

Mr. Cameron, who said that several other studios had been competing for a similar deal, noted that his production company, Lightstorm, would raise a portion of the financing for the films but that he would, essentially, remain totally independent as a filmmaker. The deal was worked out by Mr. Cameron; Larry Kasanoff, who runs Lightstorm; Jeff Berg, the chairman of International Creative Management, a major talent agency who represented them, and Fox.

"You won't see too many deals like this one," said Mr. Berg. "The significance of the deal is that you have a stream of creative rights that Jim Cameron and his company will be generating over the next five years. Fox is buying a program of films that Cameron will be delivering. It's unusual to have a writer-producer-director making his own films for Fox as well as guiding his own company."

Even rival studio executives acknowledged that all sides in the deal will emerge triumphal, including Mr. Berg, Mr. Cameron's agent. "Jeff Berg was indispensable in presenting the deal and guiding it to a close," said Mr. Cameron.

Control of the highly lucrative foreign film distribution and ancillary rights to the films was not a part of the accord. "We will announce these deals in the near future," said Mr. Kasanoff.

Much Money From Overseas

An estimated 60 percent of the profits of many American films, especially the kinds of high-tech adventures made by Mr. Cameron, come from overseas markets. According to today's announcement, Fox will control domestic distribution rights, including theatrical, video and television outlets. But the foreign market - as well as music and merchandising - remains up for grabs, giving Mr. Cameron and Mr. Kasanoff enormous financial flexibility.

"We were looking for a domestic partner only," said Mr. Cameron of the arrangement with Fox. "It was basic to our plan that we hold back foreign rights and deal with them separately."

Mr. Kasanoff said: "This is, in fact, a deal for the recessionary age, a deal where each partner puts up a percentage of the money, a deal that allows everyone to share the risks. We wind up owning the films. Our partners have access to a slate of films they may not otherwise want to bear the entire freight of."

He added: "What we want to do is really control our own destiny. Fox wins because they get all our films exclusively. On the other hand, we have a place to go to - Fox - that will distribute all our movies. We have each other now. We may have just made a deal where everybody wins."

From Truck Driver to 'Terminator'

Mr. Cameron, who is 37 years old, has gained a reputation as one of the most creative filmmakers of the last decade. Born in Canada, he grew up in Niagara Falls, New York, and studied physics at Fullerton College in California. He was working as a truck driver in 1978 when the B-movie director Roger Corman hired him to create special effects.

Mr. Cameron's 1984 film, The Terminator, which he made on a shoestring, became a classic of apocalypse-minded science fiction. His followup, Terminator 2: Judgment Day, emerged as the top-grossing film of 1991.

"A Deal of Real Heroes: Marvel to Acquire Fleer," by Eben Shapiro, The New York Times, July 25, 1992

In a deal that combines two passions of American youth, the Marvel Entertainment Group, the nation's largest publisher of comic books, has agreed to acquire the Fleer Corporation, one of the nation's largest trading card companies, for $28 a share, or $265 million.

Marvel's portfolio of superheroes includes Spider-Man, Captain America, the X-Men and the Invisible Woman.

Fleer, in addition to selling baseball and other sports cards, also makes Dubble Bubble gum. Investors and analysts said Marvel appeared to be getting the better of the deal.

"Marvel's buying it on the cheap," said Ronald Morrow, an analyst with Smith Barney. "The price is a little low for shareholders."

"We think it's worth more," said Walter Morris, head of research for the Strong Funds, a large mutual fund company in Milwaukee that is one of the largest holders of Fleer stock.

Investors and analysts said Fleer was probably worth $30 to $35 a share. "I think it's possible that somebody could come in with a higher bid," said Alexander Paris Jr., an analyst with Barrington Research Associates in Chicago.

He added that even though the price was low, it would be hard to find a better match than Marvel and Fleer, both of which rely on boys aged 6 to 16 for the majority of their sales.

Agrees to 'Breakup' Fee

"The businesses fit together hand in glove," said Mr. Morris of the Strong Funds. "We'll wind up supporting the deal."

Fleer has agreed to pay Marvel a $6.5 million "breakup" fee if the deal does not go through. Fleer executives did not return telephone calls.

In a statement about the deal, Fleer's chairman and chief executive, Paul Mullan, said, "It will create exciting new product and cross-promotional marketing opportunities, enhancing our growth prospects in both trading cards and comic books."

After the deal was announced, Fleer's shares rose $2.50 each, to $28, in over-the-counter trading. Marvel's shares closed at $33.375, up $1.625, on the New York Stock Exchange.

Fleer is hooking up with Marvel in an effort to do battle better against the industry leader, the Topps Company of Brooklyn. Analysts said the deal signaled that the days of explosive growth in the baseball card business had ended. The market has become thick with competitors and returns of unbought cards have been high.

Marvel has been gradually expanding its presence in the trading card business since 1990, when it introduced its Marvel Universe trading cards. Marvel focuses on cards with entertainment figures; Fleer has specialized in sports.

"The acquisition of Fleer enables us to rapidly increase our presence in the $1.2 billion market for sports and entertainment cards," said William Bevens, Jr., chief executive of Marvel. "The overlapping consumer demographics and distribution systems of the two companies uniquely position us to become a clear industry leader within the card marketplace."

Boards Have Approved

The definitive purchase agreement, which will be carried out through a tender offer, has been unanimously approved by the boards of both companies. A majority of Fleer's shareholders must tender their shares before the deal can be completed.

Terry Stewart, president and chief operating officer of Marvel, said trading cards could help sell comic books. He said that last year, Marvel's premier issue of a new series, "The X Force," contained a card featuring a superhero. "If you wanted all four, you had to buy four copies," he said. The issue sold 3.7 million copies, making it one of Marvel's best-selling comic books ever.

Marvel's deal to buy Fleer follows a March announcement by Topps that it planned to enter the comic book business. "This is not a response to that," Mr. Stewart said.

The Topps switchboard was closed yesterday afternoon. Both companies also announced second-quarter earnings yesterday.

Marvel said its profits for the quarter increased nearly threefold, to $7.2 million, or 30 cents a share, from $2.5 million, or 11 cents a share, a year earlier. Sales jumped 63 percent, to $37.5 million, from $23 million for the 1991 period.

Fleer's profits increased nearly 4 percent, to $8 million, or 85 cents a share, from $7.7 million, or 82 cents a share, a year earlier. Sales increased 20 percent, to $48.4 million, compared with $40.1 million a year earlier.

"Phar-Mor: Top Executives Stole Half Net Worth," Tampa Bay Times, August 5, 1992

Phar-Mor Inc. said Monday that two top executives fired last week had embezzled $350 million from the discount drugstore chain, more than half of the company's net worth.

Former president Mickey Monus and Patrick Finn, former chief financial officer, orchestrated an "elaborate financial swindle" in which they diverted funds from Phar-Mor for personal use, the company said in a statement. Monus and Finn were fired Friday.

Chief executive officer David S. Shapira, who took over as president, said a financial review of the company turned up the fraud and embezzlement. He said evidence was uncovered that financial statements were falsified to conceal losses and overstate income.

The company has asked the FBI to investigate Monus.

Neither Monus nor Finn could not be reached for comment.

Shapira also said Phar-Mor immediately laid off 100 of 800 employees at its Youngstown headquarters as part of a company-wide streamlining, and will account for the $350 million loss through an accounting charge against earnings.

"To say that the actions of two former officers of this company were outrageous and shocking does not convey my feelings," Shapira said. "I intend to return Phar-Mor to profitability as soon as possible and to reestablish honest relationships with our banks and our vendors."

The privately held Phar-Mor still has a net worth of $220 million, said Shapira, who also is chief executive officer of Giant Eagle Inc. of Pittsburgh, which has a 35 percent stake in the company.

Lazard Freres & Co., a New York investment banking firm, was given 17 percent ownership of Phar-Mor in 1989 in exchange for $200 million. The Edward J. DeBartolo Corp. owns about 10 percent.

Westinghouse Electric Corp. disclosed that its Westinghouse Credit Corp. subsidiary had an $84 million investment in the drug chain and "believes there is a probability of a loss."

Westinghouse said it holds about $50 million in Phar-Mor bonds, $26 million or about 3% of its common stock and an $8 million indirect investment through a limited partnership.

Paul Froehlich, a Phar-Mor spokesman, said he did not know how much stock Monus owns.

Phar-Mor operates 300 discount drug stores in 33 states with 25,000 employees. It recorded sales of $3.1 billion in the fiscal year completed June 30.

Many analysts think Phar-Mor was destined to be one of the biggest success stories in retailing since the ascension of Wal-Mart Stores Inc. Phar-Mor moved aggressively into the Tampa Bay area, opening eight stores in the past four years.

The vast layouts feature huge quantities of heavily discounted health and beauty aids, soap and other household items that sell elsewhere at far higher markups.

Phar-Mor can sell cheaper because much of its stock is acquired from manufacturers as distressed merchandise. That's why the selection changes so often.

The company later bolstered its allure as a suburban gathering spot by surrounding its spacious stores with prescription shops, liquor stores and 99-cent video rental operations.

The company's disclosure of fraud and embezzlement Monday transformed what had been a case of financial irregularities into a criminal scandal.

It also put a much bigger cloud over the dealings of Monus, known as a sports aficionado and leading investor in professional athletics.

On Friday, the World Basketball League founded by Monus announced it was suspending play immediately. The league heavily supported six of the teams by agreeing to cover up to 60 percent of the franchises' expenses.

Monus withdrew Monday as a leading investor in the Colorado Rockies, a major league baseball expansion team. Monus with other investors contributed $26 million of the $95 million needed to pay the Rockies' franchise fee.

And on Tuesday, an Ohio judge granted Mahoning National Bank the power to go after Monus' personal assets to recover more than $1 million in unpaid loans.

"Phar-Mor's Accounting Firm, Coopers & Lybrand, Under Fire," by Patricia Lamiell, Associated Press, August 9, 1992

When Phar-Mor Inc. last Monday disclosed it had uncovered an internal fraud of up to $350 million, the event raised some questions about its accounting firm, Coopers & Lybrand.

Phar-Mor fired Coopers, but people inside and outside the big discount drug store chain are asking how accountants could have failed to detect irregularities of that size on a $3 billion balance sheet.

The closely-held company, based in Youngstown, Ohio, said officials are looking into a possible scheme by top management to overstate the company's earnings and inventory. The company also said there was a possible diversion of up to $10 million of company funds to a minor basketball league owned by the company's cofounder and former chairman, Michael I. "Mickey" Monus.

Monus was dismissed, as were the company's chief financial officer, Patrick Finn, and two other company officials who were formerly employed at Coopers.

Coopers has denied any responsibility for Phar-Mor's problems. But Phar-Mor spokeswoman Carol Robinson left open the possibility that the company may take some legal action against the accounting firm after completing an investigation.

Although Phar-Mor fired its auditor after Monus and Finn were dismissed, it hasn't accused Coopers of any wrongdoing.

This would not be the first time Coopers has faced such scrutiny. In 1990, the company agreed to tighten its procedures after the federal Office of Thrift Supervision charged Coopers with failing to report lax practices at Silverado Banking, Savings and Loan Association of Denver.

A number of other big accounting firms have defended high-visibility legal actions alleging collusion or fraud.

Robinson said Coopers issued audits for the company for the fiscal years ending June 30, 1990 and 1991. Coopers reportedly had not yet done the 1992 audit.

Accountants said an audit statement does not guarantee that fraud is not present. It would be difficult, but not impossible, for Phar-Mor to misrepresent to Coopers the size of its earnings and inventory, they added.

At a retail business such as Phar-Mor, inventories represent a very high percentage of net worth, said Dan Guy, vice president of auditing for the American Institute of Certified Public Accountants. While auditors rely heavily on the company's inventory figures, they typically observe company officials doing inventory checks, Guy said. They even do their own spot checks and compare them with company figures, he added.

Still, there is a high margin for error. ″Auditors typically, in a retail establishment and manufacturing firm, use inventory as a risky item,″ Guy said, meaning that there is a ″high inherent risk of material misstatement.″

Fraud of the magnitude alleged at Phar-Mor would require the collusion of several people very high up in the company, said Paul Newman, chairman of the Accounting Department at the University of Texas.

″At that point, you know that there's fairly widespread ability to circumvent the accounting controls of the company itself,″ Newman said. ″It makes it very difficult for the auditors, who to a certain extent have to rely on those controls working, to get a good fix on the inventory balance.″

On the other hand, ″collusion at that level would be very difficult to maintain,″ Newman said. ″It's a difficult coalition to hold together, because if one person decides not to play, then they're all in trouble.″

Phar-Mor has hired Coopers's Big Six rival, Deloitte & Touche, to do an audit, which Robinson said the company hopes to have in place in two to four weeks.

In addition, two of the company's lenders, PNC Financial Corp. and County NatWest, have hired Peat Marwick, another accounting firm, to do a separate audit. Robinson said she expects that the company will cooperate with Peat Marwick.

Meanwhile, however, the company is taking a carefully crafted and tough public stance with regard to Coopers. ″We are holding them responsible for their certified audits,″ Robinson said.

"PolyGram To Buy 51% Stake In Interscope's Film Division," by Geraldine Fabrikant, The New York Times, August 11, 1992

PolyGram NV said yesterday that it had agreed to buy a 51 percent stake in the film division of Interscope Communications Inc. for $35 million.

Interscope, which is owned by Ted Field, a scion of the Chicago department store family, has produced 25 films, including Cocktail, The Hand That Rocks the Cradle and Three Men and a Baby.

The agreement reflects the determination of PolyGram and Interscope to build a major film production and distribution business. Up to now, The Walt Disney Company has distributed Interscope's films.

But creating a movie distribution company is likely to prove challenging. A number of distributors started in the 1980s have failed or are under financial pressure.

Credible Film Producer

Mr. Field said he believed Interscope had become a credible film producer. "Now we want to move into distribution," he said in a telephone interview.

PolyGram, one of the four largest record companies in the world, has been tiptoeing into the film business. Through a series of separate deals, it acquired Propaganda Films, Working Title Films and A&M Films. PolyGram is controlled by the Dutch electronics giant Philips NV.

The full extent of PolyGram's investment in Interscope was not completely clear yesterday, because specific financial details of the deal were not disclosed.

But Mr. Field did say Interscope was planning to produce 30 films in the next five years, which would be primarily financed by PolyGram. Interscope spends an average of $16 million a film, so PolyGram's commitment to movie production could be as high as $500 million.

Wall Street's Concerns

PolyGram's stock fell 50 cents yesterday, to $27.375, on the New York Stock Exchange. Analysts said they were worried that the unpredictable and costly movie industry could prove to be difficult for PolyGram, which has limited experience in the movie industry.

Still, several analysts said they were impressed by the success of Interscope. "They are very good people," said David Londoner, a media analyst at Wertheim Schroder & Company. "But without knowing the terms of the deal, it is difficult to evaluate."

Mr. Field, a member of the family that founded Marshall Field & Company, the Chicago department store, started Interscope in 1982. Like the store, whose motto was, "Give the lady what she wants," Interscope has focused on producing films that give audiences what they want: entertainment with mass appeal. Cocktail took in $77 million at the box office and The Hand That Rocks the Cradle grossed $88 million.

This year, in addition to The Hand That Rocks the Cradle, Interscope has released Cutting Edge and FernGully.

Credit for the President

In Hollywood, Interscope's president, Robert Cort, gets considerable credit for the company's success. Mr. Cort was a marketing executive at 20th Century Fox and Columbia Pictures before joining Mr. Field seven years ago.

Mr. Field, a onetime racing car driver, began indulging his fascination with the film business in 1984, when he produced Revenge of the Nerds.

Under the terms of the deal, PolyGram will pay for all film production costs, prints and ads, and the movie company's overhead. Mr. Field said his company planned to seek a new distribution deal with a major studio that would handle its films for the next three years, until Interscope and Polygram had their own operation in place.

Nomura Babcock & Brown, which had financed Interscope's films with Disney, will continue to do so until the end of the year, Mr. Field said. At that point, PolyGram, and possibly some third parties, would finance the films.

Creative Freedom

As such, Interscope will have a free hand in its creative decisions. Up to now, Disney has had some say in those decisions.

"We want autonomy," Mr. Field said, "and we want their margin," referring to the fees that studios get for distributing films.

He added: "We are not unhappy with Disney, but by definition we want to be in the position they're in. The fact that we can greenlight our films is very important."

PolyGram has earmarked $200 million for the film business over a three-year period ending in 1994.

But the company said yesterday that the figure might rise in later years. It also said it had an "exit provision" that would allow it to limit its investment if Interscope did not perform as well as expected.

PolyGram is not buying either Interscope's television operation or the company's music business.

"A Scandal Waiting to Happen," by Michael Schroeder and Zachary Schiller, BusinessWeek, August 24, 1992

When Colorado officials were shopping around for investors for their Colorado Rockies expansion baseball franchise, Michael I. Monus of Youngstown, Ohio, looked like just the ticket. Monus, who had other sports interests, was the high-living president of Phar-Mor Inc., the $3 billion drugstore chain. That was good enough for everybody. "We were comfortable with Monus," says Jerry McMorris, another Rockies investor. "Phar-Mor is a big company."

Until a couple of weeks ago, everybody was comfortable with Mickey Monus. Then, on August 4, came a startling revelation. In an unfolding scandal that threatens the company's survival, Phar-Mor Chief Executive David S. Shapira has accused Monus, Chief Financial Officer Patrick B. Finn, and two others of masterminding a three-year, $350 million fraud to siphon off some $10 million in cash and overstate the value of the company's inventories and earnings. The FBI and the U.S. Attorney's office in Cleveland now are investigating Monus, who has disappeared. Through his attorney, he declines to comment. Shapira, who cofounded Phar-Mor with Monus a decade ago, says he's dumbfounded: "It's a scheme that couldn't possibly work in the long run."

Part of the reason the scheme worked as long as it did, a BUSINESSWEEK investigation has found, is that Monus operated with amazingly little oversight. In the past 10 years, Monus took stakes in, or purchased outright, more than two dozen companies. He also founded a fledgling pro basketball league and sponsored women's pro golf tournaments.

Along the way, the executive acquired some powerful backers, including PNC Financial Corp. and Westinghouse Credit Corp. Youngstown shopping mall magnate Edward J. DeBartolo and the prestigious Lazard Freres & Co.'s Corporate Partners investment fund took stakes in Phar-Mor. J.P. Morgan was the agent bank for the Rockies partnership deal.

Most of those high-powered outfits aren't commenting, and those who are talking have been pointing fingers. Colorado Governor Roy Romer says he thought the Rockies partners had investigated Monus. The partnership says it figured the National League did that job. The league says it's not taking any blame: "Since Phar-Mor didn't know about this until recently, I don't see how baseball could have known," a spokeswoman says.

For their part, Phar-Mor execs blame the company's outside auditor, Coopers & Lybrand, for much of their troubles. Coopers, which now has been replaced by Deloitte & Touche, isn't buying it. "Responsible boards have oversight of their management and knowledge of their company's operations," says Harris J. Amhowitz, Coopers' general counsel. "This whole affair is unusual and apparently designed to posture, bluster, and transfer blame."


Many of Monus' big-league ties seem to have been drawn in by Phar-Mor's blitzkrieg success. The drug chain, after all, took just 10 years to grow into a 305-store behemoth. In fiscal 1992, ended in June, revenues topped $3 billion. It's true that financial information for private companies is scarce, but few investors seemed even to ask for details-indeed, one Phar-Mor backer says that he only started receiving actual financial statements this year.

Nonetheless, Phar-Mor had made some filings with the Ohio Securities Division. They show the drugstore chain lost money in fiscal 1984 and 1985 and never cleared more than $1.4 million in any of the next three fiscal years. In the last six months of 1988, the latest period for which Ohio has a profit report, the retailer made almost $5 million on sales of $462 million.

Even if they hadn't seen those filings, investors might have wondered about Monus himself. In the stuffy drugstore trade, the flamboyant 44-year-old was out of place. He traveled by white limousine, often with an entourage. In his quiet hometown of Youngstown, Monus is anything but quiet. About the time his first marriage broke up, Monus began dating a local teenage girl. And he was building a new 18,000-square-foot home, complete with indoor basketball court.

Monus also seems to have avoided scrutiny based on the company he kept. Much of Phar-Mor's management and startup money came from the venerable Tamarkin Co., the family grocery chain and distribution firm. The family isn't talking. There's also the Shapira family's Giant Eagle Inc., a 50-store Pittsburgh supermarket chain with an estimated $1.5 billion in sales. The company bought Tamarkin, where Monus was working as a vice president, in 1981. Giant Eagle bankrolled Monus and Shapira's idea for a discount chain of drugstores in exchange for 50% of the action. That backing gave Monus enormous credibility, since Shapira is a member of Pittsburgh's establishment.

But running one of the nation's largest private drugstore chains wasn't enough for Monus. Friends say he saw Phar-Mor as a means to branch out into professional sports-his real passion. In 1987, he cofounded the World Basketball League. Basketball was just the beginning. By 1990, Monus, a low-handicap golfer, started sponsoring two Ladies Professional Golf Association tourneys at a cost of more than $1 million a year. In 1990, he invested in the Rockies.


Packaging the games was the next step. Monus planned to use his part-ownership in Sure Shot Teleproductions & Transmissions Inc., a satellite communications firm, to televise his sports events, including the Rockies. Ad dollars would be squeezed from Phar-Mor's huge suppliers, such as Coca-Cola Co. and Fuji Photofilm, former WBL owners explain. "He fancied himself the new Ted Turner," says Michael C. Smith, an original WBL partner and part-owner of the Calgary 88s.

But the WBL was Monus' downfall. Shapira contends at least $10 million in Phar-Mor money was funneled to the money-losing WBL, which peaked at 10 teams. Eric Newsome, a former Youngstown Pride player and part-owner of the now-defunct Boca Raton team, says Monus treated players like members of the National Basketball Association, putting them up in first-class hotels. Monus let star players live in his Youngstown home and frequently cosigned car loans for them, Newsome says.

As the league's general partner, Monus controlled at least 60% of each team. That meant he was on the hook for most of the league's expenses-and losses. Whenever the teams needed cash, the owners say they called Phar-Mor CFO Finn, or a contact at Phar-Mor's small business division. Finn's attorney declined to comment.

Blair Habuda, a CPA who headed that division from last November until he was laid off recently, confirmed that his group handled the personal investments of Monus and other Phar-Mor backers. He said the division had a check-writing machine with Monus' signature that was routinely used to move Phar-Mor funds to the WBL and elsewhere.

Still, the league was doomed from the start. Travel cost a fortune. U.S. fans stayed away in droves. In Youngstown, announced attendance of 1200 people or so was regularly inflated by 100% or more, local sportswriters say. It was hard to take the WBL seriously: One team's mascot was a helium-filled pig.

After Monus failed to pay bills through most of the 1992 season, the league folded on August 1. Local owners were left with debts of over $200,000. "Monus left a trail of unpaid bills and broken promises," says Milton Kantor, a Dayton (Ohio) grocery distributor and partner in the local WBL franchise.


If the WBL wasn't enough to raise red flags among Monus' backers, his other business failings might have. In 1989, he invested in and became a director of British Columbia-based Battery One-Stop Inc. Last December, its U.S. operations filed for Chapter 11, after expansion plans failed.

Phar-Mor had its own ups and downs. Indeed, retail consultants and some distributors say Phar-Mor had a cash crunch beginning in the first quarter of 1991, at least partly because of massive new store openings. Phar-Mor wasn't paying many bills and was taking substantial unauthorized deductions from contract prices. Relations with suppliers grew so bad that Phar-Mor brought 200 together for a posh reception. Says one who attended: "We all joked that you didn't get an invitation unless Phar-Mor owed you more than $1 million."

The crisis passed after the company raised badly needed capital. Between June 1991, and last March, Phar-Mor raised some $467 million, including the $200 million Corporate Partners paid for a 17% stake. Phar-Mor also upped its revolving credit line by a third, to $600 million.

With revelations of inflated earnings and inventories, it's doubtful that Phar-Mor ever posted anything but meager profits. Shapira confirms that Phar-Mor hasn't been in the black for the past three years, perhaps longer. Now, to keep afloat, Phar-Mor must keep supplies coming in. And amid the scandal, many suppliers are stopping shipments. Indeed, Phar-Mor has laid off nearly 700 employees, most of them from its huge distribution facility near Youngstown.

Besides layoffs, Shapira has halted the planned expansion of another 300 stores over the next five years and stopped building a new distribution center in Jacksonville, Florida. One investor estimates that up to 30 existing stores may be closed. Yet Shapira remains upbeat. "The company has suffered a tremendous blow, but I'm confident it will emerge strong," he says. A lot will depend on how deep Monus' alleged fraud runs-and whether Monus turns up.

"Bluth Entertainment Lays Off Staff," Los Angeles Times, August 26, 1992

About 100 employees in Burbank and Culver City are among 480 workers laid off by Don Bluth Entertainment Ltd. while the Dublin, Ireland-based animation company struggles to find new financing. Bluth, which produced such animated features as An American Tail, Rock-a-Doodle and All Dogs Go to Heaven, laid off all its animation staff pending a hearing today before a bankruptcy judge in the High Court of Dublin, spokesman David Palmer said. Palmer said the company was financed by a group of European investors who had a falling out with their Dutch bank.

"Mickey's Secret Life," Newsweek, August 30, 1992

A half-finished mansion on Creekside Drive in Youngstown, Ohio, is the last monument Mickey Monus built to himself The 14,000-square-foot behemoth, with grand curved staircase, indoor pool and basketball court, was to be homebase for Michael I. Monus, president of the $3 billion Phar-Mor discount drug chain, partner in the Colorado Rockies expansion baseball team and up-and-coming icon in the American cult of the entrepreneur.

Now people are discovering a different Mickey Monus. Phar-Mor has accused him and others of pulling off a $350 million swindle-what experts say could be the biggest corporate fraud this century. Monus, 45, was fired on July 31. The company says he had been cooking the books like a master chef for at least three years. Accountants, lawyers and FBI agents are still trying to figure out exactly what happened. So far, there's been no criminal charge. Monus is keeping a low profile and has said only that he will clear his name.

Meanwhile, the Creekside mansion stands quietly, its shiny insulation paper exposed to the August heat. The construction workers are gone, leaving only twittering birds in the big wooded lot-and the occasional rubbernecking townsperson with the nerve to pass a police barricade. Last week Phar-Mor filed for bankruptcy protection and sued its erstwhile accountants, Coopers & Lybrand. Coopers countersued; each says the other should have uncovered the scheme long ago. But it's hard to know who could have predicted such a spectacular scandal. Even in the bright light of success, Mickey Monus was an enigmatic loner. An obsession with making his mark powered Monus's climb; it also seems to have caused his fall.

Shy and ungainly, Monus became a national figure in business and a local hero. Acquaintances say he grew up lacking the gentility of his parents, whose marriage had joined two of Youngstown's finest families. Monus is "unprepossessing," says John McHale, executive vice president of the Rockies. His large, fleshy face wasn't brightened by warmth or an easy smile. He liked to dress casually, but still looked stiff. "He seems to have been born without any natural grace," says Nancy Beeghly, a columnist for the Youngstown Vindicator.

He went to prep school, then Babson College, and came back to work for relatives in the distribution business, just in time to watch the steel mills of the Mahoning Valley shuttered and unemployment spike. In the early 1980s, he and a friend, David Shapira, visited a "deep discount" drugstore in Cleveland and decided they'd seen the future. The Phar-Mor stores they launched did what they came to call "Power Buying," scooping up huge batches of inventory at special prices. Shoppers got fewer selections but great savings. The formula worked. Phar-Mor soon outpaced the companies that had provided the startup money, primarily Pittsburgh-based Giant Eagle, a supermarket chain in which Shapira's family holds the biggest share. By 1988, there were 100 Phar-Mor stores, and Venture magazine honored Monus, who was running the show, as one of the year's top entrepreneurs. By 1991, there were more than 200 Phar-Mors, coast to coast. Big money-from Westinghouse Credit Corp. and an investment arm of prestigious Lazard Freres- signed on to the cause.

For downtrodden Youngstown, Mickey, as everyone knew him, was a savior. It wasn't just the thousands of jobs Phar-Mor brought to the valley, or the abandoned buildings that Monus renovated to install his national headquarters right downtown. Monus seemed bent on restoring Youngstown's self-esteem. Locals gush about how Phar-Mor lured a Ladies Professional Golf Association tourney to Youngstown the last three summers-and ESPN came! Proceeds were used to fund Camp Tuff Enuff, for kids "at risk" for drug abuse. Monus founded the semipro World Basketball League and a hometown team with the only possible name: the Youngstown Pride.

But was Monus "beloved"? No, says a local official. Repeatedly described by acquaintances as "tight-lipped," Monus would brush by colleagues without acknowledging them and, in meetings, pace up and down, rarely making eye contact. He was such a tough negotiator that suppliers' reps "dreaded" meetings, says an industry executive. No doubt Monus could be highly persuasive; one admirer describes him as very articulate. But he seemed to sparkle only when he could play or hobnob with athletes on the basketball court or the golf course.

Success did not transform Mickey Monus. In fact, the way he threw his weight around began to leave marks. Phar-Mor stores kept getting bigger as he expanded into lines such as sportswear and fax machines that violated his own stick-with-the-basics formula for recession-proof growth. When Monus appeared to be using his post as Youngstown State University board chairman to help a friend, "it left a bad taste," says one local business leader. After a divorce, he took to hanging out at the Boatyard, a local bar where the walls are hung with outboard motors and the bathroom vending machine offers "Double Your Pleasure" packs: two condoms and two sticks of Doublemint gum. When he married a new young bride, she wore a $500,000 18-karat-gold mesh dress loaned by Carillon Importers, which sells oceans of its Absolut Vodka through Phar-Mor.

While empires like Michael Milken's or Donald Trump's seemed to crumble slowly, Monus's collapsed almost overnight. The basketball league sprang leaks first. "Please be honest about the [league's] financial position'," begged a memo from the Dayton Wings last spring. "Enough is enough." Team owners threatened to keep their players out of the All-Star game in May, till Monus ushered them into Phar-Mor's boardroom and said the money was coming. It didn't. But Phar-Mor itself appeared to be thriving. On July 22, Monus cut the ribbon at the 300th store in Ashtabula, Ohio. He promised 300 more, and told local reporters: "There's no stopping us now." Two days later Phar-Mor's board stopped him. Hidden at headquarters, the company alleges, were two sets of Phar-Mor books, one with hugely inflated profits. According to court documents, Monus embezzled about $10 million, mostly to prop up the basketball league. But with his board, banks and investors thinking Phar-Mor was worth more than twice its real value, Monus could pull in more pay and perks, sell stock at inflated prices and attract still more cash to keep it all afloat.

Notifying the Feds, investors and then the public, Shapira swung into action. Locks were changed, 1000 workers laid off, a tiny handful of alleged accomplices fired. The league and the Pride went belly-up. In Youngstown, heads were spinning. "This is just incredible," says a local woman whose husband grew up with Monus. "A brain tumor. That's the most likely explanation."

In fact, Monus's descent is far from incredible. Steven Berglas, a Harvard Medical School psychologist who treats top executives, says that many powerful men spiral into what be calls "the success syndrome." Of course, most execs keep the dark side of ambition at bay. But for others, often desperately insecure beneath the pinstripes, no achievement is enough. They leave marriage for sexual conquests and hang out with athletes for some borrowed glory. They ravenously seek more thrills, trying to "dare the Devil and beat him," says Berglas. As the rules of reality pale, behavior ranges from tormenting headwaiters to breaking taboos. Whether it's John DeLorean, Donald Trump or John Gutfreund, the common note is self-destruction.

The public, at times, is almost a coconspirator. Long fed on the Horatio Alger myth, Americans in the 1980s made entrepreneurs into superheroes, displaying a profound will to believe. In fact, some in Youngstown think there's more to this story. "It doesn't smell right," says a caller to local station WWBN, wondering if Monus might be the fall guy for a larger scam.

How can a $350 million fiction last so long? Private companies like Phar-Mor aren't exactly structured for scrutiny; they don't have to file with the Securities and Exchange Commission, where most cases of fraud surface. While Monus wasn't technically top dog at Phar-Mor, he had lots of freedom. Until last fall there was no internal audit department in the company, and, as in many such companies, the board was quite literally family, from Monus and Shapira circles. Shapira insists that the board was plenty active-but fully deceived-until he got a "tip" in late July.

Sadly, failures of private companies are hardly private matters. Big out-of-town creditors are outnumbered by the little guys like Frank Cardon, a local computer salesman who says he's not only lost his biggest client but stands to lose $35,000 in unpaid bills. Local officials are scrambling to keep the LPGA from defecting, and along with it, critical tourism and charity dollars. Season tickets have been thrown out and laid-off workers aren't spending money. But the loss is more than economic, says columnist Beeghly. "We were the fifth largest steelmaker in the world," she says. "I don't think we ever got over that. People wanted something magical again."

Thursday night, Monus surfaced at the Boatyard, quietly celebrating his 45th birthday. The town didn't turn out to wish him well. But there is sympathy as well as anger for Mickey; never well loved, he seems not to inspire hate. Behind the cool exterior, the awkward little boy shows through. Says one local observer: "It's hard to look at Mickey and see him as a mastermind." Even as a bad guy, Mickey Monus doesn't quite fill the role.

"Merlin's Magic May Animate DBE," by Adam Dawtrey, Variety, November 11, 1992

John Boorman's Merlin Films is joining Hong Kong-based Media Assets in its $14 million bid to buy what remains of bankrupt Dublin animation studio Don Bluth Entertainment, it was revealed in the Irish High Court yesterday.

But Justice Frank Murphy again postponed his decision on whether to accept the Merlin/Media Assets offer, after the possibility emerged of a rival bid from the U.S. company First National Film Corp, a distributor based in Austin, Texas.

Said Rick Maestre, a Film National exec VP: "We have no comment at this time." Founded in 1989, the company boasts about $4 million in assets, including rights to the unreleased animated movie Happily Ever After, billed by the company as "a sequel to Snow White and the Seven Dwarfs."

Another hearing has been scheduled for today, with FNFC promising it will come up with a higher bid for Bluth's feature film assets, comprising three uncompleted pix.

The official liquidator, John McStay, has recommended that the court accept the Merlin/Media Assets offer.

Merlin and Media Assets have offered to pay $14 million for the three films–A Troll In Central Park, Thumbelina and The Pebble and the Penguin–plus another $5 million if the movies are successful.

They will spend $6 million immediately to complete the first two films. Although A Troll In Central Park is already almost finished, the partners want to release Thumbelina first, it's hoped some time next spring.

Sources close to the bid say that they hope also to finish The Pebble and the Penguin, on which about $11 million has so far been spent, and which may need another $15 million to complete.

In addition, Merlin and Media Assets plan to invest an unspecified sum to reconstitute the animation studio as a going concern, with the cooperation and involvement of Don Bluth and his partner Gary Goldman.

Meanwhile, it is understood that a month ago, MGM canceled its deal to distribute the three pix in the United States, apparently believing that the films stood little chance of being completed. However, that agreement could be reactivated if the Merlin/Media Assets bid is accepted by the court. Merlin Films was set up in 1990 by director John Boorman as a film and TV financing vehicle, benefiting from Irish tax breaks. Its directors include ICM's Jeff Berg, who is Boorman's agent.

Media Assets is the software acquisition arm of Hutchvision, a joint venture between Hutchison Whampoa Ltd. and the family companies of its chairman, Li Ka Shing. The Hutchison empire also includes the satellite TV venture Star TV.

"Court Puts Stamp On Bluth Sale," by Adam Dawtrey, Variety, November 12, 1992

Don Bluth's Dublin-based animation studio is finally poised to rise from the ashes of bankruptcy, with new owners and filmmaker John Boorman as its chairman.

The Irish High Court yesterday gave the green light to the sale of Bluth's three incompleted feature films to a joint venture backed by John Boorman's Merlin Films and Hong Kong-based Media Assets.

Justice Frank Murphy refused a request by First National Film Corp. for another postponement, to give the U.S. company time to put together a rival bid.

Merlin/Media Assets will pay $14 million upfront, plus another $5 million if the films are successful. They will also invest $6 million immediately to complete the first two movies, A Troll In Central Park and Thumbelina.

The partners plan to use these two films as the foundation on which to rebuild Bluth's studio. Their first priority is to rehire many of the staff who lost their jobs when Don Bluth Entertainment went into liquidation, and to put a financial plan in place for the reconstituted company.

The partners hope eventually they will be able to complete the third movie, The Pebble and the Penguin, which is still at a very early stage, requiring perhaps another $15 million investment.

The exact structure of the Merlin/Media Assets joint venture has yet to be revealed, although it is clear that the latter is providing the bulk of the cash, funnelled through Merlin's Dublin tax shelter.

Merlin will contribute considerable film industry expertise– aside from Boorman himself, the company's board includes Boorman's longtime financial adviser Kieran Corrigan, and ICM's Jeff Berg.

Merlin and Media Assets plan "a close involvement" in the management of the animation studio, which has attracted criticism in the past for inadequate financial controls. Sources close to the new owners say that the $60 million already spent by DBE on the three incomplete movies should have been enough to finish all three — but that they still require a further investment of about $20 million.

A Troll In Central Park is nearly finished, but will be released after Thumbelina, which the new owners plan to complete by the end of January for release in March. As a well-known fairy tale, Thumbelina is felt to be the safer commercial bet.

No name has yet been announced for the new company, but Merlin sources indicated they are hoping for permission to retain the name of the old bankrupt studio, Don Bluth Entertainment.

"Wall Street Mystery Features a Big Board Rival," by Randall Smith, The Wall Street Journal, December 16, 1992

Here's a tantalizing Wall Street mystery.

The Securities and Exchange Commission recently cracked down on one of the largest-ever sales of unregistered securities. Investors had poured $440 million into investment pools raised by two Florida accountants, who for more than a decade took in money without telling the SEC or making required financial disclosures to investors. The pair had promised investors hard-to-believe annual returns of 13.5-20%, to be obtained by turning the money over to be managed by an unnamed broker.

Regulators feared it might all just be a huge scam. "We went into this, thinking it could be a major catastrophe," says Richard Walker, the SEC's New York regional administrator. But when a court-appointed trustee went in, the money was all there. Indeed, the mystery money manger was beating the promised returns by such a wide margin that the two accountants ditched their their accounting business in 1984 to concentrate on their more lucrative investing sideline.

Who was the broker with the Midas touch? The SEC, which last month went to court to shut down the operation, won't say. Neither will the lawyer for the two accountants, Frank J. Avellino and Michael S. Bienes of Fort Lauderdale.

But the mystery broker turns out to be none other than Bernard L. Madoff-a highly successful and controversial figure on Wall Street, but until now, not known as an ace money manager.

Mr. Madoff is one of the masters of the off-exchange "third market" and the bane of the New York Stock Exchange. He has built a highly profitable securities firm, Bernard L. Madoff Investment Securities, which siphons a huge volume of stock trades away from the Big Board. The $740 million average daily volume of trades executed electronically by the Madoff firm off the exchange equals 9% of the NYSE's. Mr. Madoff's firm can execute trades so quickly and cheaply that it actually pays other brokerage firms a penny a share to execute their customers' orders, profiting from the spread between bid and asked prices that most stocks trade for.

In an interview, the 54-year-old Mr. Madoff says that he didn't know that the money he was managing had been raised illegally. And he insists the returns were really nothing special, given that the Standard & Poor's 500 stock index generated an average annual return of 16.3% between November 1982 and November 1992. "I would be surprised if anyone thought that matching the S&P over 10 years was anything outstanding." In fact, most investors would have been delighted to be promised such returns in advance, as the accountants' investors were. That's especially true since the majority of money managers actually trailed the S&P 500 during the 1980s.

The best evidence that the returns were very attractive: the size of the pools mushroomed by word of mouth, without any big marketing effort by the Avellino & Bienes partnership. The number of investors eventually grew to 3200 in nine accounts with the Madoff firm. "They took in nearly half a billion dollars in customer money totally outside the system that we can monitor and regulate," says the SEC's Mr. Walker. "That's pretty frightening."

An SEC civil complaint filed in New York federal court November 17 charged that Messrs. Avellino and Bienes "have operated A&B as an unregistered investment company and have engaged in the unlawful sale of unregistered securities," and ordered the money returned to investors by a court-appointed trustee, New York attorney Lee Richards. The two 56-year-old accountants declined to comment. Their attorney, Ira Lee Sorkin, says that they didn't know that the notes that they had issued to their clients should've been registered with the SEC, and he says that investors have got their money back and haven't complained. If the notes had been registered, they would have had to include a description of how their money was being invested, and by whom. In addition, Avellino & Bienes would have had to send investors annual reports and financial statements.

But how did Mr. Madoff rack up his big investment returns? Early investors in the late 1970s were told-and Mr. Madoff confirms-that their money was being used to engage in so-called convertible arbitrage in securities of such companies as Occidental Petroleum Corp., Limited Stores Inc. and Continental Corp. Promised annual returns in this period, one investor said, were 18-20%. In such a strategy, an investor buys a company's preferred stock or bonds that pay high dividends and are convertible into the company's common stock; the investor simultaneously sells borrowed common stock of the same company in a "short sale" to hedge against a stock price decline. The investor earns the spread between the higher dividend paid on the convertible securities and the lower dividend on the common stock, plus interest from investing the proceeds of the stock short sale. Using borrowed money, or leverage, to magnify returns, an investor can reap double-digit returns. But the strategy carries big risk if interest rates raise and stock prices go down.

Mr. Madoff said his investment strategy changed around 1982, when his firm began using a greater variety of strategies tied to the stock market, including the use of stock index futures and "market-neutral" arbitrage, which can involve buying and selling different stocks in an industry group.

Mr. Madoff said, "The basic strategy was to be long a broad-based portfolio of S&P securities and hedged with derivatives," such as futures and options. Such a strategy, he said, allowed the investors "to participate in an upward market move while having limited downside risk." For example, he said, the Madoff firm made money when the stock market crashed in 1987 by owning stock market index puts, which rose in value as the market declined.

In the mid-1980s, one investor says, the limited reports that Avellino & Bienes sent to investors changed, and investors stopped being told in which securities their money was invested. The interest rate on some new notes sold by the accountants was also lowered to 16% or less. One investor who complained about the vaguer reports and lower returns was told that if he didn't like them, he could withdraw his investment. He chose to remain.

Perhaps the biggest question is how the investment pools could promise to pay such high interest rates on a steady annual basis, even though annual returns on stock fluctuate drastically. In 1984 and 1991, for example, the stock market delivered a negative return, even after counting dividends. Yet Avellino & Bienes-and Mr. Madoff-maintained their double-digit returns.

The answer could be that Mr. Madoff's use of futures and options helped cushion the returns against the market's ups and downs. Mr. Madoff says that he made up for the cost of the hedges-which could have caused him to trail the stock market's returns-with stock picking and market timing.

Certainly, the investment pools' returns were less astounding by the standards of the early 1980s, when short-term interest rates briefly topped 20%. But the annual returns on Treasury bills hit a peak of 14.7% percent in 1981, and remained under 12% in the three other years that bills had double-digit returns, 1979-82, before falling later in the '80s.

One person familiar with the Avellino & Bienes case speculated that having the assets of the investment pools under management may have helped Mr. Madoff's firm by giving him an inventory of securities that could help him to execute other trades for his firm. Not true, said Mr. Madoff. "One thing has nothing to do with another."

As the investment pools swelled, two other accountants, Steven Mendelow of New York City and Edward Glantz of Lake Worth, Florida, started their own pool, Telfran Ltd., to invest in Avellino & Bienes notes. Telfran by itself sold $89.6 million in unregistered notes, a separate SEC civil lawsuit charges. The two men, also represented by Mr. Sorkin, declined to comment. The SEC said Telfran made money by investing in Avellino & Bienes notes paying 15-19% annually, while paying Telfran investors lower rates.

All the while, Mr. Madoff was scoring investment returns that comfortably exceeded the hefty returns Avellino & Bienes was promising its noteholders. That excess return generated big profits for the two accountants, the SEC suit indicates. The SEC has asked those profits be returned as "unjust enrichment," a demand Mr. Sorkin calls "totally unwarranted." For his part, Mr. Madoff says he charged the investment pools only what he described as standard brokerage commissions. He termed turnover in the accounts "not very active", almost nil in some years.

"Icahn Poised To Quit TWA," The New York Times, January 5, 1993

After making the final installment of a $200 million loan to Trans World Airlines, Carl C. Icahn is expected to resign as chairman of the company as early as today.

The loan by Mr. Icahn, his promise to help fund TWA's pension plans and his resignation are part of an agreement that is intended to allow the airline to complete its sale to creditors and employees.

Lawyers were working to complete the agreement by today, but a TWA spokesman said it might not be finished until tomorrow. A Federal bankruptcy judge approved the plan last week.

Under terms of the deal, Mr. Icahn would turn over the remaining $150 million of the loan to TWA before resigning as chairman and giving up his stock. Mr. Icahn agreed to lend the airline money and pay millions to its pension fund in return for being relieved of his liability for TWA's underfunded pensions.

"Company News; Phar-Mor Fraud Estimate," by Kenneth N. Gilpin, The New York Times, January 23, 1993

Phar-Mor Inc., the discount drugstore chain that was pushed into bankruptcy in August, said yesterday that a scheme by former executives to inflate profits was more extensive than previously estimated.

The company said that so far the fraud and embezzlement scheme amounted to $499 million, not the $350 million it estimated when its existence was first disclosed. It says the scheme was carried out by Michael I. Monus, Phar-Mor's former president and chief operating officer, and other former executives.

In a news release yesterday, Phar-Mor said the fraud largely involved improper or overvalued inventory, invalid or uncollectible accounts receivable, underestimates of liabilities and improperly claimed or valued assets.

An audit of Phar-Mor's balance sheet as of September 26, 1992, is being conducted by the accounting firm Deloitte & Touche, the company said. Phar-Mor said yesterday that changes in its accounting policies on inventory and fixed assets had resulted in charges of $102 million. The company has established a reserve of $209 million to cover liabilities as part of its restructuring.

Criminal indictments against Mr. Monus; Patrick Finn, Phar-Mor's former chief financial officer, and other executives are expected soon.

The company also announced a number of personnel changes and provided fresh information on its financial condition.

Daniel J. O'Leary, named earlier this month as chief financial officer, was approved Thursday for that job by Judge William T. Bodoh of United States Bankruptcy Court, Phar-Mor said.

Mr. O'Leary previously served as president of Fay's, a diversified retailing firm.

In addition, the company said that as of January 20 it had more than $217 million in cash, well above the $50 million when Phar-Mor filed for bankruptcy on August 17.

The company said it had not drawn on the $150 million credit line established on October 20 and did "not anticipate a need for such borrowings." Relations with Phar-Mor's vendors are good, the company said, and shipments from "substantially all" of its suppliers are continuing on normal terms.

Phar-Mor, based in Youngstown, Ohio, had sales of $3.14 billion in its fiscal year ended June 30.

"Company News; TWA Files Its Plan To Leave Bankruptcy," by Agis Salpukas, The New York Times, February 18, 1993

Trans World Airlines filed its plan yesterday to emerge from federal bankruptcy protection.

The plan would give TWA's creditors control of the airline in exchange for eliminating $4 billion in debt.

The main parts of the reorganization plan were known, having been worked out with creditors before TWA filed for Chapter 11 bankruptcy protection in January 1992 when it was still owned by the New York financier Carl C. Icahn.

The plan still must be approved by Judge Judith K. Fitzgerald of the United States Bankruptcy Court in Wilmington, Delaware.

Problem With Pensions

A significant hurdle in the reorganization was overcome last fall when the airline and the Federal Pension Benefit Guaranty Corporation reached an agreement with Mr. Icahn on his responsibility in making up for underfunding of the carrier's pension plans. The agreement allowed Mr. Icahn to relinquish control of TWA.

Under the plan filed yesterday TWA's unsecured creditors will get 55 percent of the common stock and all of the preferred stock and new debt securities in the company that emerges from bankruptcy.

The remaining 45 percent of the common stock will go to the airline's employees, who have agreed to grant about $660 million in concessions over a three-year period.

Under the plan, creditors agreed to eliminate about $4 billion in debt and claims against the airline, thus substantially lowering its costs.

TWA's attempt to rejuvenate itself as a smaller carrier comes at a relatively opportune time. Airline traffic has been going up recently, and the industry has been able to put through substantial fare increases.

Another carrier, Continental Airlines, has been able to remain viable under bankruptcy protection and has recently strengthened itself through a combination with Air Canada.

Glenn R. Zander, a co-chief executive of TWA, said its survival plan had been devised by reaching agreements with the carrier's unions and settling a $1.2 billion claim from the Federal pension agency.

"We've demonstrated that Chapter 11 can work to the benefit of TWA's employees, suppliers, creditors and the communities we serve," he said.

TWA and other carriers operating in bankruptcy protection have been criticized by leaders of major airlines. They have argued that bankrupt carriers have an unfair competitive advantage because they can put off paying many of their obligations.

"Explosion At The Twin Towers: The Overview; Blast Hits Trade Center, Bomb Suspected; 5 Or 6 Killed, Thousands Flee Smoke In Towers," by Robert D. McFadden, The New York Times, February 27, 1993

An explosion apparently caused by a car bomb in an underground garage shook the World Trade Center in lower Manhattan with the force of a small earthquake shortly after noon yesterday, collapsing walls and floors, igniting fires and plunging the city's largest building complex into a maelstrom of smoke, darkness and fearful chaos.

The police said the blast killed at least five people and left more than 650 others injured, mostly with smoke inhalation or minor burns, but dozens with cuts, bruises, broken bones or serious burns. The police said 476 were treated at hospitals and the rest by rescue and medical crews at the scene.

The explosion also trapped hundreds of people in debris or in smoke-filled stairwells and elevators of the towers overhead and forced the evacuation of more than 50,000 workers from a trade center bereft of power for lights and elevators for seven hours.

No Bomb Fragments Found

The blast, which was felt throughout the Wall Street area and a mile away on Ellis and Liberty Islands in New York Harbor, also knocked out the police command and operations centers for the towers, which officials said rendered the office complex's evacuation plans useless.

James Fox, an assistant director of the Federal Bureau of Investigation in charge of the agency's New York office, said that no bomb fragments were found but that a joint terrorist task force of Federal agents and city detectives had examined the wreckage and believed that a car bomb had caused the explosion.

There was no warning of an impending explosion, Police Commissioner Raymond W. Kelly said. Jack Killorin, a spokesman in Washington for the Treasury Department's Bureau of Alcohol, Tobacco and Firearms, said that after the blast, authorities received at least nine telephone calls claiming responsibility.

Mr. Killorin said the first call was made 15 minutes after the blast to a non-emergency number of a New York Police Department precinct by an individual who mentioned the conflict in Bosnia. He said other claims were made between an hour and several hours after the event by callers who cited that and a variety of other reasons for the attack. He declined to elaborate.

Some law enforcement officials said an explosion of such size, without a claim of responsibility in advance, might suggest that it went off accidentally.

Mr. Kelly was more oblique about the cause of the blast, saying only that a car bomb or other type of explosive device was not being ruled out.

Four hours after the explosion, a bomb threat forced the evacuation of the Empire State Building in midtown Manhattan, and there were numerous other bomb threats in the city, the police said. But it was unclear if any were related to the World Trade Center explosion or only the macabre work of pranksters.

As the day ended, a series of investigations began - into the cause of the explosion and its possible perpetrators, and into what went wrong in what many called a botched evacuation, with no alarms and no instructions for thousands caught in dark, smoky stairwells, in stark contrast to carefully laid plans.

Mayor David N. Dinkins, visiting in Osaka, Japan, was notified by City Hall and, in a telephone news conference, called the Fire Department response the largest for any non-natural disaster in the city's history. He said he had spoken with President Clinton and had thanked him for the cooperation of Federal investigators.

The effects of the blast radiated outward, disrupting most non-cable television transmissions throughout the metropolitan area, halting traffic in most of lower Manhattan and PATH train service under the Hudson River from the trade center to New Jersey, and transforming an ordinary Friday in the financial district into an afternoon of turmoil, death and destruction.

On a day of high drama, tragedy and heroism, there were a thousand stories: rescuers digging frantically for victims in the collapsed PATH station under the towers, soot-streaked evacuees groping for hours in the city's tallest buildings, a woman in a wheelchair carried down 66 stories by two friends, a pregnant woman airlifted by helicopter from a tower roof, and the tales of many others stumbling out, gasping for air, terrified but glad to be alive.

And among the most poignant was that of a class of kindergartners from Public School 95 in Gravesend, Brooklyn. Caught on the 107th floor observatory, they took all day to walk down, singing to keep up their spirits.

Many of those who walked down scores of flights from the upper reaches of the trade center towers said there had been no alarm bells and no instructions from building personnel or emergency workers. While little panic was reported, witnesses said confusion reigned in the darkness of crowded stairwells where smoke billowed and unknown dangers lurked below.

Many put moist towels or handkerchiefs to their faces against the smoke. Others, frightened, remained in their offices, hoping for rescue. As smoke seeped in under the doors, some broke windows to get air. Dozens of people, meantime, were trapped for hours in elevators frozen between floors, among them another class of kindergartners from P.S. 95.

The worst fires were extinguished by midafternoon. By then extensive efforts to assist those caught on the upper floors were already well underway. But the trade center, with 250 elevators and miles of corridors and stairways, posed a major challenge and long after dark last night rescue workers continued to search the labyrinth for stragglers and others still trying to get out.

On a day of confusion, the police and the Emergency Medical Service repeatedly revised the number of people killed by the blast. By early evening the police said five had been killed while the medical service said seven were dead. Several hours later the police increased the number to seven, but shortly after 11 PM, the police scaled back the figure to five, saying they could not confirm the medical service's report of seven fatalities. There was no clear explanation for the discrepancies.

The blast, which erupted at 12:18 PM on the second level of a four-story underground parking garage beneath the trade center's 110-story Twin Towers and the complex's Vista Hotel, sent cars hurtling like toys, blew out a 100-foot wall and sent the floor collapsing down several stories, creating a crater 60 feet wide that reached deep into the bowels of the parking complex.

'Everything Was on Fire'

It also collapsed the ceiling of a mezzanine in the adjacent Port Authority Trans-Hudson train station, leaving dozens trapped under rubble on a concourse one floor above the platforms where hundreds awaited trains. Witnesses and rescue workers told of a blast of incredible force - of bodies hurtling through the air, of cars wrapped around pillars, of people burning and scores trapped.

"We crawled under pipes when we arrived and everything was on fire," said Edward Bergen, a 38-year-old firefighter who was one of the first to reach the scene of the blast. "Suddenly, a guy came walking out of the flames, like one of those zombies in the movie, The Night of the Living Dead. His flesh was hanging off. He was a middle-aged man."

Fire Capt. Timothy Dowling, of Engine Company 6, recalled a ghastly scene of fires lapping in the darkness, illuminating a smoking hell of twisted cars and broken concrete. "It looked like a bomb had exploded because of the amount of fire and damage to the floors. All we could do was put water on the flames."

'The Dust Was Blinding'

Ken Olson, 34, a pipefitter, was in the basement when the explosion hit. "All of a sudden all hell broke loose," he said. "All the pipes ruptured, the dust was blinding. Luckily we all stayed together and got out."

Nearby, Vito de Leo, 32, an air conditioning mechanic, was eating lunch at his desk with other basement trade center workers. Suddenly, the desk rose up, came down and landed on top of him. But its well protected him from a rain of falling debris. "The furniture collapsed, the walls collapsed, the ceiling collapsed," he said. "There was total blackness. I thought I was dead."

Later, wading through knee-deep water amid gas pipelines dangling overhead in the garage, a cadre of firefighters, police officers and other rescue workers found two bodies in a lunchroom used by mechanics, another body in the mangled wreckage of a car, and more victims under the debris in the garage.

The five or six victims - three men, one woman, one unidentified and one unconfirmed - were all believed to have been killed by the blast. They were not immediately identified but the Port Authority said that they were all believed to be authority workers or people working under contract to the agency. The authorities said that more bodies might be found in the rubble as the search went on.

The police said 420 workers and visitors at the trade center were treated at hospitals, along with 44 firefighters, 11 police officers and one Emergency Medical Service worker.

Meantime, as several fires erupted around the scene of the explosion, heavy smoke billowed up through the corridors, elevator shafts and stairwells of the trade center. Because of the time, shortly after noon, many workers were at lunch at nearby restaurants or at fast food outlets on the ground floor, from where they easily escaped.

But the police estimated that as many as 50,000 people - workers, tourists and other visitors were still in the building, many of them trapped on the highest floors - and it was not merely the blast that shook the entire complex, not merely the growing volumes of smoke pouring upward, that frightened them.

Darkness and the unknown perils that awaited them below added to the fears. Much of the power to the trade center had been knocked out by the blast - Consolidated Edison said four of its eight feeder cables to the center were shut down.

And within an hour, at the request of the Fire Department, which was trying to protect rescue workers and firefighters in dangerous areas, all power to the trade center was shut off by Con Edison, as well as natural gas and steam to the complex, which houses thousands of offices in six buildings bounded by Church, West, Liberty and Vesey Streets.

Pat Richardi, a Con Edison spokeswoman, said that no hazardous materials, such as polychlorinated biphenals, were in any of the transformers or cables of the trade center, which was completed 22 years ago.

Many of the people climbing down stairs told of having to stop frequently because of panic below; some let pregnant women and old people go through; some nearly passed out with exhaustion; others told of tense minutes in which they sat down on the steps, trying to regain breath in stifling, smoky air.

"It was like sardines, cattle, a herd," said Larry Bianculli, 31, of Hicksville, Long Island, who walked down 104 floors with his wool scarf over his sooty face.

Sherri Chambers, 21, a bank employee, said it took her two and a half hours to descend from the 60th floor. "You couldn't even see it was so smoky," she said. "I kept wanting to sit down, but I didn't because if I sat down I thought I wouldn't get up. Firefighter Bill Chupa, 40, of Ladder 20, said many people were trapped in elevators and screaming for help. He said firefighters broke open elevator doors and found people in groups of 8 or 10, lying in darkness on the floor to escape the smoke.

After freeing those in elevators, the rescuers turned to the stairwells and began escorting people down. By midafternoon, there was a steady stream of survivors coming from the towers, many with faces blackened by smoke and gasping for air.

Some of the most spectacular evacuations came when police helicopters landed on the roofs of the trade center towers and carried away 23 people, including a pregnant woman.

Don Burke, who works for the Port Authority on the 66th floor, ran back to his office when he discovered there was a fire and, with a colleague, carried Cathy Collins, a lawyer who uses a wheelchair, to safety in relays.

In a shopping area on the ground floor of the trade center's World Financial Center at 250 Vesey Street, medical and rescue workers set up a triage area of folding chairs, oxygen tanks, blood pressure devices, blankets and other medical aids.

While there was little panic, aides to Gov. Mario M. Cuomo told of a pregnant woman screaming as they descended from the Governor's 57th floor offices in a chaos of darkness and disorder.

The Governor, who was in Albany, said President Clinton had called him to express concern and offer aid from the Federal Emergency Management Agency. Mr. Cuomo also raised some questions: "What emergency devices were available? Did they work? Why were there no lights? Why were there no public announcements? The Port Authority will be called upon to answer, and I'm sure they will."

Power was partly restored to the trade center towers at 7:20 PM, and by 9:30 rescue workers said everyone had been evacuated.

The ceiling collapse in the PATH station forced a halt to all train service to New Jersey from the trade center, but PATH service from midtown, operating on another line, continued to operate through the day. Subway trains were rerouted and continued to run, but streets throughout the area were closed to clear the way for emergency vehicles.

"Primerica Will Buy Shearson for $1 Billion," by Michael Quint, The New York Times, March 13, 1993

The American Express Company said yesterday that it had agreed to sell its Shearson brokerage subsidiary to Primerica, the New York financial company that already owns Smith Barney Harris Upham, a smaller securities firm, for $1 billion plus a share of future profits.

The sale, after 12 years of rocky marriage, is the latest in a series of moves by American Express to raise cash and to allow it to concentrate on rebuilding the profits of its charge card business. The sale, which is to be completed in three or four months, is one of the first major actions by American Express's new chairman, Harvey Golub, who readily entertained the offer from Sanford I. Weill, chairman of Primerica, an old friend.

Smith Barney Shearson

The new firm will be called Smith Barney Shearson, and will be headed by Frank Zarb, president of Smith Barney. Although he said he expected to find cost-cutting opportunities totaling $100 million to $200 million within a few years, Mr. Zarb declined to estimate how many employees would be cut as a result of the merger. But he said cuts would not come from the ranks of the brokers who manage customer accounts and who generate an average of about $300,000 of revenues a year.

"Even in cities where we both have offices, it does not make sense to cut those people," Mr. Zarb said.

American Express, which said it would lose $630 million in the sale, will keep Lehman Brothers, a specialist in corporate finance and trading and Wall Street's third-ranking firm in offering new stock and bond issues. But it said it planned to sell Lehman as soon as its financial condition was strengthened. Mr. Golub said Lehman needed to cut costs to improve its profits and add about $400 million of capital to be eligible for the same credit rating as other large securities firms.

Cornerstone of Venture

Mr. Weill is no stranger to Wall Street. He created Shearson during the 1960s and 1970s and then sold the company to American Express in 1981 for $930 million of stock.

The cornerstone of his new venture was a little-known consumer loan company, Consumer Credit, in Baltimore. Expanding his reach, he acquired Primerica and its Smith Barney subsidiary in 1988. Since then, profits have grown rapidly to $593 million in 1992, with the Smith Barney subsidiary earning $170 million last year, up from a loss of $33 million in 1988.

American Express found Wall Street a much less hospitable place than it imagined in 1981 when it paid $930 million of stock to buy Shearson. The acquisition of Lehman Brothers in 1984, and the troubled E.F. Hutton brokerage firm in 1988, resulted in added costs and layers of management that culminated in a 1990 loss of nearly $900 million and a financial rescue by American Express that pumped $750 million of cash into the company.

After three years of cost-cutting, Shearson Lehman still lost $116 million last year, mostly because of heavy legal expenses and losses resulting from financings in the late 1980's that went awry. That loss, coming at the same time as its charge card business faced pressure from other credit cards, led to the decision to sell.

American Express raised about $3.5 billion in the last year from the sale of the Boston Company, a money manager and specialist in mutual fund record keeping, to Mellon Bank, and from the sale of all but about 24 percent of the First Data System, a computer service company.

American Express is not the first large company to be bruised by a Wall Street acquisition. The Prudential Insurance Company, for example, suffered several years of losses and meager profits after it acquired Bache Securities. After scaling down its aspirations and cutting costs sharply, the securities firm, now known as Prudential Securities, earned a good profit last year.

General Electric, owner of Kidder Peabody & Company, has occasionally talked of selling the securities firm, which has often failed to meet GE's profitability standards.

Also Sells Insurance

Besides owning Commercial Credit, the consumer loan company, and Smith Barney, Primerica sells term insurance through 100,000 agents across the country, manages mutual funds and retirement investment accounts through American Capital Management and Research, Houston, and owns about 25 percent of Travelers Insurance.

Mr. Weill said his appetite for Shearson was whetted by Smith Barney's need to find new headquarters after its lease on Sixth Avenue expires in early 1995. "We knew that Shearson had excess space, so I told them that if this deal was ever going to make sense, now is the time," Mr. Weill said.

By allowing Smith Barney to move into Shearson's building on Greenwich Street, just north of the World Trade Center, the acquisition saves the firm most of the $300 million cost of a new headquarters building. It also gives Smith Barney a modern computer and communications system. Mr. Weill estimated that it could have taken Smith Barney seven years to match the system it is acquiring from Shearson.

One of the most unusual aspects of the sale is the business ties between Lehman Brothers and Smith Barney Shearson that will continue for one to two years after the sale. For example, the agreement calls for Lehman to provide Smith Barney Shearson with a share of new stock and bond issues that is equal or slightly greater than the share that would have gone to Shearson when it was affiliated with Lehman.

"This is something both companies wanted," Mr. Zarb said, "because it assures Lehman of access to Shearson's ability to distribute securities, while the Shearson brokers do not lose access to new securities issues handled by Lehman."

Difference in Payments

He noted that Shearson brokers kept a slightly higher portion of the revenues - estimated at about 40 percent - that they generated than Smith Barney brokers, but that the difference was not large enough to disrupt the combination of the two firms. For the first year, he said, the formulas for calculating payments to brokers of Shearson and Smith Barney will not be changed.

The two firms will also share their securities research and Smith Barney will continue to handle some processing and computer work for Lehman.

When the sale is completed in the next few months, American Express will receive $850 million of cash, $125 million of Primerica preferred stock yielding 5.5 percent and convertible into common stock at $49 a share, and $25 million in warrants to buy additional Primerica stock.

In addition, American Express is almost certain to collect $50 million a year for three years, assuming that Smith Barney Shearson revenues stay above $2.5 billion, plus 10 percent of after-tax profits of the new firm in excess of $250 million a year, for five years. Primerica plans to pay for the purchase by issuing $500 million of stock or some similar security, and borrowing $550 million.

Smith Barney Shearson and Lehman will evenly share legal expenses of existing lawsuits if those costs rise above the $50 million reserve already held by Lehman.

James Hanbury, an analyst at Wertheim & Company, estimated that the Shearson part of Smith Barney Shearson could almost immediately show an annual pretax profit of $250 million, or 10 percent of revenues. That profit can increase, he said, noting that Smith Barney and Merrill Lynch earn profits of about 18 percent of revenues.

"Bluth's Toons Drawn To WB," by Suzan Ayscough, Variety, March 15, 1993

Warner Bros. has wrestled rights to Don Bluth's animated films away from MGM via a deal with Hong Kong-based Media Assets, sources confirmed late yesterday.

WB is in the final stages of negotiations with Media Assets for all rights to completed pic A Troll In Central Park and to Thumbelina, which will be ready by April. If inked, the deal will also include The Pebble and the Penguin (in development) and at least one Don Bluth Ltd. pic per year, sources confirmed.

Warner Bros. — which holds worldwide video rights to MGM films anyway –"came up with a better offer," a person close to the deal said.

Whether or not the WB deal is signed, MGM is out of the running for Bluth's family fare, which reduces MGM's '93 distrib slate to 10 pix from 12.

Bankruptcy problems

MGM owned domestic rights to Thumbelina, A Troll In Central Park and The Pebble and the Penguin until the bankruptcy of Dublin-based Don Bluth Entertainment last August. (At that time, J&M Entertainment of Britain owned all non-U.S. rights.)

During the bankruptcy hearings last November, however, the Irish High Court greenlighted the sale of the three pix to a joint venture backed by John Boorman's Merlin Films and Media Assets, which paid $14 million upfront with another $5 million pending. They reportedly pumped $ 6 million into Troll and Thumbelina'(which had already hit $ 20 million budgets apiece) as part of the deal.

Earlier this year, J&M sold non-U.S. rights to Media Assets. J&M previously agreed to an $8 million investment in the three films and recouped the $3 million plus it had already paid in cash, per one source. "Media Assets paid us off handsomely."

Media Assets is about to launch Don Bluth Ltd. with the creators of An American Tail– Bluth and creative partner Gary Goldman — according to Media Assets exec VP Nicolas James.

James refused comment on the pending studio deal but confirmed that "we're planning a minimum production of one Don Bluth film a year." During the bankruptcy, "we bid for certain assets, including the three films and others in development. Don and Gary are very much a part of the new company. They are very much on board and we've rehired key animation staff and put the nucleus of the new team together."

Neither WB nor MGM representatives would comment.

"Disney Snaps Up Miramax For Estimated $60 Million, Independent Company Gained Fame With The Crying Game, Weinstein Brothers to Retain Control," by James Bates, Los Angeles Times, May 1, 1993

The two brothers behind the quirky hit film The Crying Game can now cry all the way to the bank.

Miramax Films, which gained international attention this year with its Oscar-nominated thriller that mixes sexual intrigue with Irish terrorism, is being bought by The Walt Disney Company in a deal that marries Hollywood's most successful studio with its leading independent distributor.

Although no terms were disclosed in Friday's announcement, analysts and Hollywood executives estimated that Disney will pay close to $60 million for Miramax and its library of more than 200 films, with some of the payments contingent on Miramax's performance.

Disney also has agreed to give brothers Harvey and Bob Weinstein, Miramax's co-chairmen, the kind of autonomy the tightly run company rarely granted until recently.

For Disney, the deal means access to the kind of prestige films it has had trouble producing on its own. But it may also push the boundaries of Disney's wholesome image because some of Miramax's biggest hits, such as Madonna's Truth or Dare, have centered on steamy adult sexuality.

On a broader scale, the Miramax acquisition underscores the rising stature of independent film companies and the recognition that critically acclaimed "art house" films can also be major box office successes.

Miramax's low-budget The Crying Game has grossed nearly $60 million, which is unheard of for a small, independent film. In addition, all but one of the films nominated for best picture at this year's Oscars came from the independents' ranks.

The Miramax acquisition, made through Disney's distribution arm Walt Disney Studios Motion Pictures, is unusual for Disney, which in the past has launched film ventures from the ground up. The 15 to 20 films a year Miramax releases will boost and broaden Disney's box office reach, with speculation that the company may soon be distributing 40 to 50 films a year-about twice the major studio average.

One question raised is whether the Weinsteins will fit into a company that likes to call itself "Team Disney." In the past, the Weinsteins have clashed with filmmakers and developed a reputation for sometimes running roughshod over small filmmakers and employees. The brothers have been working to repair their reputation.

Walt Disney Studios Chairman Jeffrey Katzenberg predicted that things will go smoothly.

"They have had to live from hand to mouth as any independent has had to," he said. "As the marketplace has become more and more difficult and the risks become greater and greater financially, giving them the financial resources ensures that they will continue to be the best, most successful independent film company in the world."

Acquiring Miramax is one of several moves Disney has made recently to add to its product line the kind of art house films that often have trouble finding an audience because major studios shun them. In addition to the Miramax deal, Disney recently agreed to distribute movies made by filmmakers James Ivory and Ismail Merchant, whose work includes the critical hits A Room With a View and Howards End.

Miramax will remain in New York, operating as a separate company under the management of the Weinstein brothers, who have been given five-year contracts.

Executives from Miramax and Disney emphasized that Miramax will operate as it has in the past, using the same marketing and distribution apparatus but backed by Disney's huge resources.

"This company is named Miramax. It is a standalone, independent and autonomously run company," Katzenberg said.

Miramax had been rumored to be an acquisition candidate for a couple of years, although Disney and Paramount Studios only recently came into the picture as the most likely buyers. Independent film companies frequently need to seek partners or sell stock to the public because they tend to be chronically short of cash.

But Harvey Weinstein denied that the company needed to find a buyer. "We were in the unique financial position of not having to do anything. This company has been successful in 11 out of the last 12 years," he said.

Katzenberg said: "This deal was never shopped to us. It wasn't in any way, shape or form put up for auction. We approached them."

As a private company, Miramax does not release financial figures. But in March, the Weinsteins told The Times that preliminary figures showed Miramax in 1992-before The Crying Game took off-would earn $4.7 million on revenue of about $75 million.

Founded 14 years ago, Miramax was named after the Weinsteins' parents, Miriam and Max. Known as shrewd marketers, the brothers built the company on the success of such independent films as Cinema Paradiso, sex, lies and videotape, The Crying Game and Scandal.

The duo has developed a reputation as two of the more colorful figures in film with a passion for movies and a lack of concern for such basic things as decorum. Indeed, neither brother wore a necktie to the news conference.

From a financial point of view, the Miramax acquisition represents a relatively small risk for Disney, which had about $7.5 billion in revenue the last fiscal year. "Even if they make a mistake, it's not going to change Disney's fate or direction," said Merrill Lynch analyst Harold Vogel.

Disney is expected to keep the Miramax banner separate from the Disney name, much as it has done with its Touchstone Pictures and Hollywood Pictures units that release more adult-themed films.

Jeffrey Logsdon, an analyst with Seidler Amdec in Los Angeles, said that as a result, Disney's image will not suffer if Miramax releases more explicit films because Disney has already broken the adult theme barrier thanks to films like Down and Out in Beverly Hills, Beaches, Pretty Woman and What's Love Got to Do With It.

"Disney Signs Licensing Deal For DIC Library," by Dave McNary, United Press International, July 12, 1993

The Walt Disney Company, continuing to expand its booming home video business, said Monday it has signed a multimillion-dollar multi-year licensing deal for the DIC Animation City Inc. library.

Details of the deal, which includes more than 1000 half-hour DIC children's shows, were not disclosed.

Disney, through its Buena Vista Home Video operation, will create a new video label for DIC programs. The deal also provides for interactive and multimedia opportunities, the companies said.

'We believe DIC is not only one of the leading producers of animation but also complementary to the product we're presently releasing,' said Bill Mechanic, president of international theatrical and worldwide video for Disney.

DIC, which has its offices within a few blocks of Disney's headquarters in Burbank, California, has produced Inspector Gadget, Alvin and the Chipmunks, The Real Ghostbusters, The Care Bears, Sonic the Hedgehog, Supertrolls and Super Mario Bros, in addition to creating series around figures such as Macaulay Culkin in Wish Kid, Hammerman with MC Hammer, and its Pro Stars series with Michael Jordan, Wayne Gretzky and Bo Jackson.

Disney already is the dominant force in children's video due to its highly successful marketing of its animated library, including such hits as Beauty and the Beast, Fantasia and The Little Mermaid.

Beauty sold more than 20 million copies earlier this year to break a record set by Fantasia. Disney expects its home video version of Aladdin, to be released this fall, to set a new record.

"Buena Vista is the 'gold standard' when it comes to family-oriented video," said Andy Heyward, president and chief executive officer of DIC. "They associate themselves only with the finest product and offer unparalleled distribution into the marketplace."

Disney executives have estimated the company has a leading 22.4 percent share of the $12 billion home video market. The business is expected to see double-digit revenue growth in the business this year with 70.4 million U.S. homes now owning VCRs, with the market hitting $21 billion by the year 2000.

Disney's other successful home video titles include 101 Dalmatians, Pinocchio, Cinderella, Bambi, Who Framed Roger Rabbit, The Jungle Book and The Rescuers Down Under.

The success of the Disney animated videos show the growing acceptance of purchasing home videos as gifts, particularly for parents wanting wholesome entertainment for their children. In recent years, analysts say, consumers have overcome initial resistance to buying a videos as prices for the videos have dropped into the $15 to $30 range.

Sales of videocassettes marked one of the few retail areas that performed strongly during recent Christmas seasons.

In addition to the high recognition of its name, Disney has the additional push coming from its 220 Disney Stores, taking advantage of CEO and Chairman Michael Eisner's strategy of 'synergy' - using one area of the business to encourage sales in another.

In its second quarter ended March 31, operating income for consumer products increased 18 percent to a record $86.2 million on a 34 percent increase in revenues to $320.8 million.

"DIC Entertainment Formed For Kids' TV Fare," by Brian Lowry, Variety, July 26, 1993

CapCities/ABC Video Enterprises and DIC Animation City have confirmed a long-discussed joint venture to form a new entity, DIC Entertainment LP, to produce live action and animated children's programming.

The deal will provide the network unit product to distribute in the international market, in conjunction with DIC's overseas sales operation.

The Burbank-based animation company, which produces such upcoming Saturday-morning shows as ABC's Sonic the Hedgehog, CBS' Dennis the Menace and the Fox Children's Network's Where On Earth Is Carmen Sandiego? will continue to operate separately from the new company, which will also be headed by DIC prez Andy Heyward.

Heyward exec producer

Heyward will exec produce all programs and act as general partner, with CapCities as a limited partner. It was unclear whether any of the aforementioned shows or only future product would fall under the CapCities deal, and DIC officials declined comment beyond the announcement.

DIC had vigorously denied earlier reports that the company was being sold to CapCities/ABC.

The company was apparently reluctant to acknowledge the deal when word first leaked out, fearing the news would hamper efforts to sell programs to ABC's competitors. DIC reportedly has been in talks with various parties over the past two years regarding an outright sale of the company, including CapCities and Polygram.

In addition to the DIC arrangement giving CapCities a line into the children's area, CapCities/ABC Video Enterprises — through its ABC Distribution Co. unit — also distributes programs from ABC Productions, documentary supplier ABC/Kane International and New York-based Ultra Entertainment. The company also holds equity interests in three European production outfits: Germany's Tele-Munchen, France's Hamster Productions and Tesauro S.A. of Spain.

DIC operated under a heavy debt load before retiring a significant portion of that burden with the company's principal lender, Prudential Insurance Co. of America, in April 1992. The CapCities/ABC deal gives DIC a deep-pocketed partner intent on producing and owning shows of value to the world market.

"Turner Gets Nod to Buy New Line and Castle Rock Entertainment: The Deals, Worth a Combined $750 Million, Establish the Cable Mogul as a Major Hollywood Force," by Alan Citron, Los Angeles Times, August 18, 1993

The directors of Turner Broadcasting System on Tuesday approved the purchases of New Line Cinema and Castle Rock Entertainment, establishing cable mogul Ted Turner as a major force in Hollywood.

Turner Broadcasting will swap more than $500 million in stock and assume $50 million in debt for New Line, one of the most successful independent production and distribution companies, best known for the Nightmare on Elm Street franchise. It will pay about $100 million cash and assume another $100 million in debt for Castle Rock, which has produced such hits as In the Line of Fire and A Few Good Men.

The deal caps a long-running effort by company Chairman Turner to enlarge his entertainment empire. The Atlanta-based entrepreneur sees expanding opportunities in film and TV production, thanks to technological advances that will broaden the television spectrum. Turner also foresees growth of the foreign theatrical market. One direct benefit will be sorely needed programming for his TNT and TBS cable television networks.

Michael Wolf, a Turner consultant who heads the media and entertainment practice for Booz Allen & Hamilton, said Turner will seek ways to reshape the film business.

"Turner has already redefined the other businesses he's been in-news and cable," Wolf said. "The opportunity for Ted here is to change the rules of the game in the movie business. Right now it's not that exciting from a financial point of view. But it holds the promise of creating a lot of value for Ted's shareholders, if Ted can change the rules of the game."

The 14-member Turner Broadcasting board-including representatives from Turner's biggest shareholders, Tele-Communications Inc. and Time Warner Inc.-OKd the deals at a meeting in New York. Sources said the pact guarantees creative autonomy for New Line and Castle Rock. Scott Sassa, head of the Turner Entertainment unit of Turner Broadcasting, will oversee the companies.

Turner set a February deadline for completing the acquisition of New Line, a publicly traded company. The Castle Rock purchase is expected to be finalized before the end of the year.

New Line was one of the big gainers on the American Stock Exchange on Tuesday, rising $1.63 a share to close at $18.88, before the deal was announced. Turner Class B stock rose 62.5 cents a share, closing at $24.13. New Line shares will be swapped approximately one for one for Turner shares.

Turner and New Line executives praised the strategic value of the deal in a formal statement.

Yet many observers consider the biggest winner to be Sony Pictures Entertainment, which owns 44% of Castle Rock, because Sony retains the right to domestically distribute Castle Rock films through 1997 and the perpetual syndication rights to the hit TV series Seinfeld.

Turner will also finance all Castle Rock production.

"Our strategy has always been to have pictures from (Castle Rock) coming into the system on a fully financed basis," said Alan Levine, president of Sony Pictures' film entertainment. "I view both Castle Rock and us as winners."

Castle Rock Chairman Alan Horn said Turner will allow the company to continue to make "the kinds of pictures Castle Rock has become known for in this community." The five partners of the company signed seven-year management contracts with Turner as part of the deal.

Castle Rock expects to increase its current output of between five and six films a year to as many as 12 a year under Turner.

"Company News; TWA Emerges From Bankruptcy Protection," The New York Times, November 4, 1993

Trans World Airlines Inc. officially emerged yesterday from Chapter 11 bankruptcy protection. The airline is now owned by its employees and creditors and is operating under airline industry veterans, headed by the former chairman of Piedmont Airlines, William Howard.

TWA's emergence means that it can distribute new common stock to creditors, who have a 55 percent stake in the airline, and to employees, who own 45 percent. The stock will be listed on the American Stock Exchange. TWA sought protection from creditors January 31, 1992, and gained approval for its reorganization plan in mid-August. In the course of bankruptcy protection, it trimmed about $4 billion in claims. It also negotiated the departure of Carl C. Icahn, who bought TWA in 1986 and left last January.

"The Digital Domain Of Scott Ross, Jim Cameron And Stan Winston: The CEO of IBM-Backed Startup Digital Domain Presents His Vision Of How He And Two Of the Film Industry's Biggest Luminaries Are Building A Digital Studio For A New Generation," by Scott Ross, Red Herring, December 1993

In early 1993, three of the film industry's biggest heavyweights, Jim Cameron (director of Terminator 2 and The Abyss), Stan Winston (winner of seven Academy Awards), and Scott Ross (former general manager of Industrial Light & Magic), joined forces with IBM and founded Digital Domain, a new generation digital production studio bent on pioneering the industry. In this month's Opportunities In Technology section, Digital Domain's CEO, Scott Ross, paints his vision of the future of the visual effects market, and the potential for top digital studios to jump into the content business.

With all the discussion swirling today about "Information Highways," the "Interactive Digital Marketplace," the merger of TCI and Bell Atlantic, the Paramount "play," and the promise of thousands of new multimedia services to the home that will revolutionize your life and mine, only a few people seem to be asking where all the digital content will come from. Everyday, the news chronicles yet another cable or telephone company announcing a field test of digital delivery to the home over twisted-pair phone lines, cable TV coaxial cable, or satellite. But in the long run the wire isn't what's important. It's what runs over the wire - the digital content - that counts.

Digital Domain was created to fill the need for digital content. While our plan is to build the business by beginning with high-resolution special effects for films, TV commercials, and theme park simulation rides, we're ready to branch into digitally-based content as networks and markets develop.

Digital Domain was formed in 1993 and is co-owned by Jim Cameron, the writer, producer, and director who brought us Terminator, Terminator 2: Judgement Day, Aliens and The Abyss; Stan Winston, character creator, seven-time Academy Award nominee, whose latest achievement was the design, construction and "breath of life" given the dinosaurs in Steven Spielberg's Jurassic Park; IBM, the company that helped define and develop digital computing; and me.

As CEO of Digital Domain, I am responsible for turning our collective vision into reality. For five years Jim, Stan, and I worked together, they on their movies, I as general manager at Industrial Light and Magic, the eleven-time Academy Award-winning special effects studio of George Lucas' Lucasfilm. Over the years, Jim, Stan, and I discussed creating a studio that would set the pace for effects and other digital media. We shared the conviction that digital technologies are completely reshaping the visual world of the '90s, just as they revolutionized the audio world of the '80s. We feel that now is the time to gather together the artists and software technicians who can supply the vehicles for the digital highways in the years to come. Thanks to our history and artistic pedigree, we knew we could base a company on creating special effects for movies and commercials. After all, eight of the top ten grossing films of all time are special effects films. We could also work on theme park simulation rides and high-end television commercial effects.

We were excited about applying computer technologies, like those developed for video editing, to the business of feature film and digital infotainment. Beginning in the '80s and rapidly accelerating to the present, the video production industry has replaced the videotape linear editing process with non-linear, random-access methods pioneered by Montage, Editdroid, and others. While not true "digital" editing - the actual content on the frame is not digitized - these systems use the power of computers to organize and combine video segments from multiple tapes and/or Laserdiscs into one seamless master for reproduction or broadcast. In the '80s, the advent of the CCIR 601 and the 4:2:2 digital video standard enabled us to place multi-layer video effects on one frame without creating generational loss on "black boxes" such as Harrys, Paintbox, and Ultimatte.

We also felt that, as in the computer industry, the video postproduction industry would experience the same shift from proprietary hardware systems to open systems in which the application is the driver, not the underlying hardware. This would mean that software suppliers can develop products for multiple hardware platforms, increasing both their market size and their ability to leverage their investment. We feel that one of Digital Domain's key advantages is that we opened for business just as this phenomenon is taking hold and, thus, have avoided the expensive commitment to proprietary systems that will soon be obsolete. The industry is developing standards, such as those coming from the Motion Picture Expert Group, or MPEG. MPEG is developing standards for the compression and decompression of digital images so that all manufacturers will be able to compress and playback images the same way. Standards are crucial for developing digital highway content since many types of networks will be employed as various telephone and cable companies test and build their permutations of the data highway.

By the early '90s, it seemed obvious to us where things were going. Computer systems were revolutionizing film and video. Not only did the new machines make editing easier, they also unleashed new effects like those seen in Terminator 2 and Jurassic Park, letting producers combine images from multiple origins, including computer-generated images. What's more, the economics of this business continue to be subject to the same price/performance factors as affect the computer industry. This means that a system that costs a million dollars this year will cost a hundred thousand dollars in just two or three years.

We began our search for co-investors by making a list of potential partners: companies and individuals with expertise in entertainment or technology. IBM was on that list, but I don't think anyone gave it serious thought until I was invited to join a West Coast focus group IBM held to gather opinions on digital production from the creative community. There I met the group exploring the concept of creating a digital production studio.

Realizing that we both shared the same essential vision, we agreed to join together in February 1993. Rae Sanchini, now president of Lightstorm Entertainment, was also instrumental in forming the company. The contracts closed in April.

The summer of '93, we found a production and office facility in Venice, California, and spent the rest of the year moving into and refurbishing four buildings while working on our first productions: Jim Cameron's True Lies and the Neil Jordan/Tom Cruise vehicle Interview with the Vampire.

We are up and running on Silicon Graphics workstations and servers using the SOFTIMAGE Digital Studio product line primarily for animation, Alias Research's PowerAnimator system for 3D modeling, Parallax Matadors for paint effects, Pixar's Renderman for rendering, and Discreet Logic's Flame product for compositing, along with many proprietary tools written by our software development team. We'll add an IBM Power Visualization System to the mix later in the year for digital compositing. The ever-increasing microprocessor power available to these workstations is fueling the entire digital revolution. The power of RISC microprocessors is doubling every twelve to eighteen months. And today we're at a point where every doubling really means something.

Just as the computer industry is now turning toward concepts like "natural computing," the use of verbal commands, full-motion video and the like to simplify their use, we must also facilitate the creation of digital content. There are only two ways for digitized content to get on the data highway. The first is to digitize preexisting analog content, enabling viewing on demand of such old standbys as Gilligan's Island or a movie like Jurassic Park. Something similar happened when digital sound first arrived: the first CDs were merely digital conversions of popular records. And in the first days of television, TV shows were just popular radio shows, like Jack Benny's, recycled for the new medium. But sooner rather than later, we'll need to create content expressly for the new medium, exploiting not only the creative range that comes with the digital medium, but also its interactive characteristics.

To do this, we need to assure that the creation of digital content is no more complex than the creation of film or video content. Today, this is not the case. We want to pioneer and simplify the concept of "digital directing." We have to take the digital creation process from the technicians and return it to the creative community. This calls for a highly iterative and interactive process. Today, directors hand over responsibility for effect creation to the technical wizards and see the result only after the wizards have performed their magic - which may or may not be what the director had in mind. But the power available in the new workstations is beginning to allow for real-time creation and manipulation. Fairly soon, director and wizard will sit together and bring to the screen exactly what the director visualizes.

Digital Domain's major near-term goal is to develop this kind of advanced "production-friendly'' environment for creating digital imagery for feature films, commercials, theme park rides and new media content. We want to create an environment that allows the creative community to direct the creation of digital imagery as easily as they currently direct live action productions. In the long run, this will facilitate the growth of the digital highways by removing the bottleneck in digital production. After all, what's the use of creating a network that delivers content at billions of bits a second when the tools for creating that content still operate at only 24 frames per second?

The switch to digital visual should expand our creativity. Until now, filmmakers have been limited by the technology of film. Every movie has only one negative, which complicates and limits what can be done to the frame. But with digital technology, we create a digital frame. On that frame, we can combine the input from cameras and computers. More importantly, we can manipulate the frame - without the fear of ruining what we have on the frame already - until we have arrived at exactly the image we want. For example, camera negatives can be digitized at an early stage in the postproduction process. They can then be downsampled to a workstation and used to edit the film on a nonlinear system. All effects work can be composited digitally and supplied as a sort of digital B-roll. The effects can then be compiled into the cut of the film at the same generation. At 4000 pixels, the quality of the resulting image is better than that of a print from interpositive and internegative. Since the effects suffer no generation loss, the need for large-format photography (i.e. VistaVision or 65mm) may in many cases be obviated. No loss of resolution, no worries about generations!

Digital production virtually erases the boundary between production and postproduction. In a movie like Terminator 2 it's tough to differentiate which shots were filmed as live action during the traditional production phase and which were effects added in postproduction. Another advantage of digital editing and production is the flexibility it gives creators. The concept of the digital backlot, for example, allows a director to film actors and then "place" them on a digitally created set - say, a street in Victorian London for a Sherlock Holmes movie.

The end result should be that we're placing the artistic tools into the hands of artists. Thus, Digital Domain will be first and foremost a place for creative people. No machine, no piece of software, can create an original idea. People have creative vision, not computers. People put amazing images up on the screen, so we can go into the movie theater and dream with our eyes wide open.

We want Digital Domain to bring these creative people together, to build an interface for directors and producers to work in a hands-on manner, side-by-side with the creative crème de la crème of visual effects and computer animation. We want to be the most advanced center for the creation of digital motion images in the entertainment community. This will make us a studio for the 21st century and help release the power of digital imagery. As the data highways open, the results will be felt everywhere: we'll communicate more productively, conduct business more efficiently, educate our children more effectively, and entertain ourselves more pleasurably.

The creative talent of the future will combine the traditional Hollywood linear story with the software technology and wizardry of Silicon Valley. This new generation of creative artists will bring us the interactive digital software and entertainment of the future. Today, we are recruiting these talented and creative people and building a talent base so that when the distribution systems are in place, the world will look to Digital Domain as the studio to provide new entertainment for the digital world.

"Must the Show Go On?," by Rebecca Ascher-Walsh, Entertainment Weekly, December 17, 1993

River Phoenix's death stalls Dark Blood - The actor's upcoming films have been put on hold, and may never see the light of day

River Phoenix's death from a drug overdose on Halloween night left Hollywood grief-stricken in an unusually public way. But while the mourning of friends and family made front page news, one drama was quickly stifled — that which surrounded the panicked director and producers of Dark Blood, the movie Phoenix was making at the time of his death. Barely halfway through production, they suddenly found themselves without a star.

The $8 million movie — an intended Fine Line Features release about a love triangle involving an estranged married couple (Judy Davis and Jonathan Pryce) and a drifter played by Phoenix — had completed five weeks of filming in remote Torrey, Utah, and director George Sluizer (The Vanishing) had reassembled the cast and crew in Los Angeles for interior shots. On October 31, with three weeks of production remaining, Phoenix died. The next morning, Dark Blood's producers and director told the cast and crew they were being let go.

On November 18, Dark Blood was officially abandoned. Now the film's insurance company (which has asked everyone associated with the project not to release its name) finds itself the somewhat surprised owner of the movie, which sits locked away in a lab's vault. The producers and director are no longer speaking about the film, and in all likelihood, it will never be seen by the public.

The filmmakers' decision to shut down their movie is nearly unprecedented. "In 99 percent of the cases, it is best to finish the film," says one insurer. "And I can't think of what that one other case would be." That case just might be Dark Blood. Recasting Phoenix was unfeasible: The cost of starting over would have been prohibitive, and cast members had already scheduled other projects. Trying to finish the film without Phoenix, says a source close to the production, "would have been like doing Who's Afraid of Virginia Woolf? and Richard Burton dies. You can't have an argument between Judy and River and only show him from the back. Technology's not at the point where you can computer-generate him."

Still, at least one party has explored getting Dark Blood completed and released. Writer-director Larry Cohen (It's Alive, The Ambulance) says that Steven Ransohoff, vice president of Film Finances, which issued the completion bond guarantee for Dark Blood (and thus backed the production's bank loan), approached him. "I got a call from him to see if I might be interested in talking," says Cohen. "[We agreed] I would have to see the picture and see what the story is about, to see if we can manipulate it." Cohen's previous experience with 11th-hour retooling made him a logical candidate; he had previously worked with Film Finances to rewrite Wicked Stepmother after star Bette Davis dropped out of the 1989 comedy 10 days into production.

"I just told him I had given his name to someone," Ransohoff says. "There's no plan at this point to do anything."

Phoenix isn't the first star to die in the middle of making a movie; films from Gone With the Wind to Plan 9 From Outer Space have continued shooting after a cast member's death, often by simply recasting. In fact, this is the second time in less than a year that a production has had to deal with the accidental death of a young star. And as the producers of Dark Blood found themselves frantically seeking a solution, they may have looked to the frenzy surrounding The Crow last spring.

The Crow halted production for seven weeks last March when actor Brandon Lee was killed by a stunt gun's dummy bullet while filming his character's death scene. Within a week, the cast and crew had made the decision that they wanted to complete the movie. "We looked at the material," says a source close to the production, "and we saw that what was not [yet] photographed were the more important emotional underpinnings to the story." First-time director Alex Proyas and producer Edward Pressman (Hoffa) rewrote the script; for one scene they went so far as to employ a lookalike for Lee, whose resemblance was heightened by colored contact lenses and a latex mask cast from Lee's face. "It was the eyes that really threw me," says actor Ernie Hudson, who shared a scene with the double.

Upon its completion, however, The Crow was rejected by Paramount (its original distributor) and Columbia and is now being shopped to Miramax. But Hudson says that completing the film was crucial, since "we were all committed to Brandon." The source agrees, adding, "Who gives a shit if the producers and insurance companies take a loss?"

In the case of Dark Blood, there are ways for the insurance company to recoup some of its losses: The wardrobe and props may be sold, and exterior shots can be converted to stock footage. In the future, a producer could also buy the script from the insurance company and attempt to start from scratch. But more likely, Dark Blood will simply stay on the shelf, maybe someday going the way of two other uncompleted movies — Orson Welles' It's All True (1941) and Marilyn Monroe's Something's Got to Give (1962), which have been the subjects of documentaries about the makings of the films.

Even people close to the production can't imagine a happy ending. "We've all been asking these questions," says ICM agent Martha Luttrell, who represents Judy Davis. "None of us knows what will happen. It's so unusual. I would think that people would want to see the footage since it's River's last movie, but I don't know how comfortable we would be with the footage going out, since it's uncut and we haven't seen it." Even if a director were able to finish the project, "what the original editor and director would have done with it remains the unanswered question," says New York University film professor Robert Sklar. For now, Phoenix's last effort remains, in the words of the insurance company executive, "an unfinished piece, like half a painting." But, he adds quickly, "if you paid a lot of money for it, why not own it?"

"Company News; Memo About Phar-Mor Destroyed, Report Says," by Kenneth N. Gilpin, The New York Times, January 20, 1994

A confidential May 31, 1991, memorandum that raised questions about apparent irregularities in the way Phar-Mor Inc. was conducting its business was ordered destroyed by Phar-Mor's chairman and chief executive, David Shapira, only days after it was drafted, a report released yesterday shows.

The report comes after a 10-month inquiry into the collapse of Phar-Mor, a discount drug company based in Youngstown, Ohio. It was prepared for Judge William T. Bodoh of the United States Bankruptcy Court in Cleveland by the bank examiner, Jay Alix, head of a Jay Alix Associates in Southfield, Michigan.

Phar-Mor filed for Chapter 11 bankruptcy protection in August 1992 after disclosing that three of its top executives had engaged in a six-year scheme of fraud and embezzlement.

Mr. Shapira did not participate in the scheme. And Mr. Alix made it clear yesterday that his investigation did not turn up any information that suggested otherwise. "We discovered nothing that would indicate David Shapira knew about or participated in the fraud," he said.

An Unfavorable Light

But the memorandum, which Mr. Alix said he did not learn about until after he had filed a draft version of his report with the court in August 1993, and the circumstances surrounding it do not cast Mr. Shapira in a favorable light.

The memorandum was drafted by Charity Imbrie, Phar-Mor's general counsel and the person Mr. Shapira asked to be his "eyes and ears" at the company, the report said.

In it, Ms. Imbrie raised a number of points relating to the outside business interests of Michael I. Monus, who at the time was the president and chief operating officer of Phar-Mor. She also questioned whether Mr. Monus was paying sufficient attention to his duties at Phar-Mor.

Mr. Monus was the reported mastermind of the fraud and embezzling scheme. A Federal grand jury in Cleveland indicted Mr. Monus on January 29, 1993 on 129 counts of fraud and conspiracy. His trial is expected to begin on February 14.

A Discussion of Contents

Ms. Imbrie discussed the contents of her memorandum with Mr. Shapira during a meeting on June 4, 1991, the report said. At the meeting, Mr. Shapira told Ms. Imbrie he was "aware" of many of the issues raised in the memorandum, and told her "we are working on them," it said.

He then directed Ms. Imbrie to destroy all the copies of the memorandum, and ripped up his copy in her presence, the report said. On the advice of her outside counsel, Ms. Imbrie did not destroy her copy.

No illegality was suggested in the report, but the timing of the memorandum and Mr. Shapira's reaction to it were unfortunate, because the memorandum was drafted only weeks before Phar-Mor issued $200 million in stock to its corporate partners.

In testimony before the examiner, Mr. Shapira said there was nothing in the memorandum "of any importance" that was not disclosed to the partners.

Aspects Called 'Inaccurate'

A lawyer for Mr. Shapira, David Armstrong, said in a telephone interview from Pittsburgh, that "Significant aspects of the memo are inaccurate." He added that Mr. Shapira had no knowledge of the fraud.

Mr. Alix's report contains exhaustive material about Mr. Monus, the fraud and what it cost Phar-Mor:

*Mr. Monus was involved in a number of businesses that had extensive relationships with Phar-Mor. Many of those businesses and their transactions with Phar-Mor were not disclosed to Phar-Mor's board.

*Mr. Monus and Patrick B. Finn, Phar-Mor's chief financial officer, concealed the fraud from Mr. Shapira and others by keeping two sets of financial records. The misstated records were passed on to Mr. Shapira. The accurate ones were kept by Mr. Monus and Mr. Finn.

On March 3, 1993, Mr. Finn pleaded guilty to five criminal fraud counts. He was sentenced to two years and nine months in prison and fined $7000.

*Mr. Monus and the World Basketball League, in which Mr. Monus had a substantial interest, funneled about $15 million out of Phar-Mor.

*Mr. Alix put the size of Phar-Mor's losses stemming from the fraud at more than $1 billion.

In a statement yesterday, Phar-Mor said the report "confirms that the size and extent of the fraud is substantially consistent" with its own previous estimates.

"American Express to Spin Off Lehman Brothers: The Investment Banking Unit Will Become An Independent Company, Leaving A Core of Service Businesses," by Scot J. Paltrow, Los Angeles Times, January 25, 1994

Stripping away the last of its ill-starred Wall Street acquisitions, American Express said Monday that it will spin off its Lehman Brothers investment banking unit into an independent company owned by American Express shareholders and Lehman employees.

What will remain is a core of service businesses-the signature charge card, corporate services, travel and financial planning-that can be marketed under the American Express brand name, said Chairman and Chief Executive Harvey Golub, who took over a year ago with a mandate to streamline and invigorate the firm.

Following the $1 billion sale last March of the Shearson retail brokerage business to what is now Travelers Corp., the long-predicted Lehman spinoff will complete the reversal of what had been the strategy of Golub's predecessor, James D. Robinson III. Robinson had acquired disparate financial services companies in what proved to be a vain hope that they would fit together.

American Express said it will inject $1.09 billion in capital into Lehman to make the newly independent company financially viable and assure it an "A" credit rating. In exchange, American Express will get a share of Lehman's potential future profits, as well as the share of Travelers profits Lehman receives as a result of the sale of Shearson. But the former parent will have no directors on Lehman's board.

Lehman employees will pay $160 million for newly issued shares of Lehman stock, boosting the total capital infused into the new company to $1.25 billion-the amount Golub said credit ratings agencies told him was needed to get the good rating.

Strong ratings are critical for securities firms, in part because they depend on short-term borrowing in their day-to-day business.

"We will end up with two separate entities at the end of the day, both of which are prudently and adequately capitalized and both of which will end up with excellent ratings from the ratings agencies," Golub said. American Express said its shareholders will receive a dividend in the form of stock in the newly independent Lehman.

The spinoff will be completed in May or June, Golub said.

When American Express sold Shearson to Travelers, Travelers Chairman Sanford Weill did not want the Lehman segment of the business, which specializes in investment banking, trading and underwriting new issues of stocks and bonds. So American Express held on to the unit while taking steps to shore it up for an eventual sale.

The spinoff will give Lehman executives what they have dreamed of for years: freedom from American Express.

Long an independent pillar of Wall Street, the august Lehman Brothers was acquired by American Express in 1984 and merged with Shearson. But the Lehman culture never fit with Shearson or American Express, and the firms never developed the synergies that Robinson envisioned.

Instead, during crisis periods for Shearson Lehman, American Express had to pay more than $2 billion in capital to the securities businesses.

American Express also announced its fourth-quarter and year-end earnings Monday. For the quarter, it reported income from continuing operations of $291 million, or 57 cents per share, compared to $255 million, or 51 cents, for the same period in 1992.

The spinoff was not announced until after the markets closed Monday.

American Express stock closed up 62.5 cents at $31.50 on the New York Stock Exchange.

Back to Basics

The landscape of American Express Co. has changed dramatically over the past few decades as the company sought to diversify. Here is a brief chronology of events.

* 1968: Acquires Fireman's Fund Insurance Co., a large property and casualty insurer.

* 1977: James D. Robinson III becomes chairman and chief executive.

* 1979: Hostile attempt to take over McGraw Hill Publishing fails.

* 1981: Acquires Shearson Loeb Rhoades, a leading brokerage house. Shearson becomes an independently operated subsidiary and acquires Robinson-Humphrey, a brokerage firm; Foster & Marshall, a securities firm, and Balcor, a real estate syndicator.

* 1982: Reorganizes under a holding company called American Express Corp.; its travel services become a wholly owned subsidiary, American Express Travel Related Services.

* 1984: Purchases Investors Diversified Services, a financial planning company. Shearson acquires Lehman Brothers Kuhn Loeb, a brokerage firm, and becomes Shearson Lehman Brothers Holdings Inc.

* 1985: Fireman's Fund Insurance Co. is spun off, marking the beginning of American Express' formal exit from the insurance business.

* 1987: Optima Card is introduced, allowing cardholders to extend payments for purchases over time.

* 1988: Shearson subsidiary acquires E.F. Hutton, becoming Shearson Lehman Hutton Inc. Shearson later discovers that Hutton came with huge hidden liabilities.

* 1990: Shearson subsidiary reports a $900 million first-quarter loss, one of the biggest ever by a securities firm.

* February 1993: James D. Robinson III resigns as chairman and CEO. Harvey Golub is named to replace him.

* March 1993: Retail brokerage segment of Shearson is sold to Primerica Corp.

* January 24, 1994: Plans are announced to spin off Lehman Brothers to its shareholders and the firm's employees.

"SEC Fines Broker, Bans Executive In Fraud Case," by Rob Wells, Associated Press, February 2, 1994

A Long Island, New York securities firm agreed Wednesday to pay $2.5 million to settle charges of fraud and deceptive sales practices, the Securities and Exchange Commission said.

Three executives of the firm, Stratton Oakmont Inc. of Lake Success, New York, were collectively fined $300,000 and one was permanently suspended from the industry.

The settlement, unusually harsh in the securities industry, comes as regulators renew efforts to crack down on rogue brokers and investor fraud.

″This is consistent with the commission's current emphasis on eliminating retail sales abuses,″ said Richard Walker, the SEC's regional director in New York.

The SEC filed a civil lawsuit in U.S. District Court in Manhattan in March 1992 that charged Stratton Oakmont engaged in fraudulent and deceptive sales practices and made fraudulent price predictions on securities it recommended.

The firm also was charged with engaging or encouraging improper trading of Stratton customer accounts and manipulating the market price of Nova Capital Inc., an art investment company in Atlanta.

The manipulation took place between November 1989 and August 1990 and between January 1991 and April 1991, said Martin A. Kuperberg, an SEC associate regional director.

Stratton, which didn't admit or deny the SEC's charges, agreed to pay $2.05 million to create a fund to reimburse Stratton customers who lost money in dealing in Nova common stock. In addition, the firm agreed to pay a $500,000 civil penalty.

Jordan Belfort, a senior executive and the firm's former president, was barred from the securities industry and ordered to pay a $100,000 fine, the agency said. Kenneth Greene, who supervised Stratton's sales force, also was ordered to pay a $100,000 fine and was barred from the industry for five years, after which time he may apply for reinstatement.

Daniel Porush, currently the firm's president, was fined $100,000 and barred from holding a supervisory position in the industry for one year.

Stratton Oakmont, in a statement, said the firm ″remains a fully operational, well-capitalized broker-dealer and looks forward to continuing to serve fully its clients.″

The settlement will not interrupt the firm's business and said it has sufficient reserves to cover the fines and create the settlement fund.

Kuperberg said the settlement shows that securities regulators will push to remove senior management from brokerage firms that the agency finds has misled retail investors.

"Report Sheds Light On Evolution Of Phar-Mor Scandal," Chain Drug Review, February 14, 1994

As Phar-Mor Inc. cofounder and former president and chief operating officer Mickey Monus prepares to go to trial March 2 for allegedly masterminding the fraud and embezzlement scheme that plunged the deep-discount drug chain into bankruptcy, a picture is emerging of a retailer run for six years by autocratic executives who used the company coffers as if they were their personal pocketbooks.

In a 1000-page, two-volume report released last month, an independent bank examiner tells how some Phar-Mor officials at the highest levels kept two sets of financial records, funneled corporate money into outside businesses and falsified earnings reports to deceive investors.

The report also documents the use of $10.5 million of the chain's money to finance the failed World Basketball League and the diversion of more than $75,000 from company funds to build an addition to Monus' house.

The report, ordered by Judge William Bodoh of the U.S. bankruptcy court and prepared by bank examiner Jay Alix, head of Jay Alix Associates of Southfield, Michigan, comes after almost a yearlong inquiry into the near collapse of the chain.

Phar-Mor filed for protection from its creditors under Chapter 11 of the bankruptcy code in August 1992 after disclosing that three of its top executives had engaged in a fraud and embezzlement scheme for six years. At the time, Phar-Mor estimated the plot had cost the company about $500 million. Alix's report puts that figure at nearly $1 billion.

"A broad spectrum of people were falsely led to believe that Phar-Mor was a healthy, growing company that was a good investment, a good customer and a good employer," says Alix.

From 1987 until 1992 quarterly and annual financial reports showed Phar-Mor to be earning healthy profits and expanding rapidly. The company's supposed success attracted many big-name investors. But now it appears that the retailer never earned a penny of profit in the five years before it filed for bankruptcy protection.

According the report, the fraud scheme touched the highest levels of Phar-Mor's administration. While it was previously believed that Monus was the highest-ranking official involved, Alix's report suggests that another member of the company's board of directors, Nathan Monus (Mickey Monus' father), may have been aware of and profited from some of the deception.

Mickey Monus, who continues to profess his innocence and says the plot was masterminded by former chief financial officer Patrick Finn, was indicted by a Federal grand jury in Cleveland last year on 129 counts of fraud and conspiracy. If convicted on all charges Monus could face 1400 years in prison and more than $33 million in fines.

In reality, says John Sammon, the Assistant U.S. Attorney who will prosecute the case, Monus would likely be sentenced to some 15 years in prison and be required to pay less than $1 million in fines if convicted on one or more counts. On March 3, 1993 Finn pleaded guilty to charges of bank fraud, mail fraud, wire fraud, engaging in a monetary transaction in criminally derived property and preparation of false and fraudulent tax returns. In November he was sentenced to 33 months in prison and fined $7000.

A month earlier former vice president of finance Jeffrey Walley pleaded guilty to two counts of engaging in a transaction involving illegally obtained money and one count each of aiding and abetting bank fraud and aiding and abetting wire fraud. He was sentenced to six months house arrest.

Both men are expected to testify against Monus.

Alix's report says that, while Monus, Finn and Walley were the only Phar-Mor executives indicted in the case, several others, including former controller John Anderson; Stanley Cherelstein, the former controller of Tamco Distributors Co., a Phar-Mor subsidiary; Joel Arnold, Phar-Mor's vice president of operations who was asked to resign in September 1992; Richard Jones, former assistant to the controller who voluntarily resigned in June 1993; Thomas Rothbauer, currently a Phar-Mor staff accountant; and Chris Brautigam, currently Phar-Mor's special projects manager "may have had knowledge that facts were being misreported or that improper accounting for transactions occurred." Phar-Mor chairman and former chief executive officer David Shapira and all other members of the company's board of directors were apparently unaware of the fraud, the report says.

But questions still surround Nathan Monus, a board member and an associate of his son in various business ventures outside of Phar-Mor. The bank examiner's report says that Mickey Monus often selected his own outside businesses to act as vendors to Phar-Mor.

In one such case, Phar-Mor bought jewelry from a middleman, Jewelry 90, a company owned by David Karzmer, a business partner of Mickey Monus. If Phar-Mor had bought the jewelry directly from a wholesaler it could have saved about $2 million, the report says. Nathan Monus, who once held a 50% stake in another Karzmer company, acted as a paid consultant to Jewelry 90 for two years. During the first six months of 1992 he was paid close to $355,000 by the company. Both Monuses declined to be interviewed by Alix and investigators, citing their Fifth Amendment rights against self-incrimination.

Shapira, while apparently unaware of the misdeeds at Phar-Mor, occasionally showed bad judgment, the report suggests. In one instance, after receiving a confidential 12-page memo from Phar-Mor general counsel Charity Imbrie that raised questions about possible irregularities-including Monus' diminished attention to Phar-Mor's business and the use of the retailer's employees for noncompany activities - Shapira told Imbrie to rip up all copies of the memo, saying he felt it contained false, misleading and possibly defamatory statements. On the advice of outside counsel, Imbrie retained a copy of the memorandum.

Shapira's action in this instance is an example of the blind eye Phar-Mor executives turned toward the fraud and embezzlement within their own ranks, Alix says.

"There are several possible reasons to explain why astute businesspeople may have continued to advance capital and credit to do business with Phar-Mor," says Alix.

The continual growth of the retailer may have led investors and insiders to become greedy, he says, while the feeling of power and the collusion by those aware of the plot helped conceal the deception.

"All along we got consistent audits and unqualified financial statements from extremely qualified accountants," Shapira told The Wall Street Journal last month. "Everyone came to the conclusion that this was a sound company growing quickly."

But it was only because of doctored financial records that the perception continued to exist.

According to Alix's findings, Monus ruled Phar-Mor like "an autocrat," demanding complete loyalty from his subordinates and frequently ordering them to alter financial records, inflate store inventories to bolster the value of the company's holdings, and, when cash became short, falsify the amount of outstanding debt so the company would look attractive to Wall Street.

The altered financial records allowed Monus to obtain more than $1 billion of credit and capital for the company from such investors as Sears Roebuck & Co., Westinghouse Electric Corp., real estate developer Edward DeBartolo, Sr., and Corporate Partners, an investment firm affiliated with Lazard Freres. In reality, Alix says, Phar-Mor had $238 million in pretax losses in 1992 alone and would have never been able to attract the money if its true financial condition were known.

The deception worked for a long time, the report says, allowing Phar-Mor to appear to be one of the 1980s' retailing success stories. In less than a decade the chain built 300 stores and saw its sales climb to more than $3 billion. But behind the scenes, Monus, Finn, and to a lesser extent Walley, were using the company's assets as if they were their own money, diverting more than $15 million to the World Basketball League and covering up their actions by keeping two sets of financial records: "the David report," falsified records that were passed on to Shapira and the company's directors so that the bottom line appeared to be growing, and another one accessible only by Monus and Finn that carried the nickname "the cookies."

The report says the conspirators were able to conceal the wrongdoing by moving fraudulent asset account balances to store inventory account balances at the end of each fiscal year. Advance payments from exclusivity contracts were also used to hide fiscal irregularities.

The scandal caused Phar-Mor to close about half of its stores, which at one time totaled more than 300. It currently operates 168 units in 23 states. Chief executive officer Tony Alvarez, who began running the chain in September 1992, says the company is regaining its fiscal health faster than expected and that it could even potentially emerge from Chapter 11 as early as September.

"Executives Say That Viacom Has Won Paramount Battle," by Geraldine Fabrikant, The New York Times, February 15, 1994

Viacom Inc. finally won the drawn-out bidding war for Paramount Communications Inc. last night, several executives involved in the deal said.

They said Viacom had received more than the necessary 50.1 percent of Paramount shares, ending its five-month battle with QVC Network Inc.

The price is high: Viacom is paying $9.75 billion, or about $80.61 a share in cash and stock for Paramount, the New York-based entertainment company, whose holdings include Paramount Pictures, the Simon & Schuster publishing house, Madison Square Garden, the New York Rangers hockey team and the Knicks basketball team.

The executives, who spoke last night only on the condition of anonymity, said Viacom and Paramount would make a formal announcement of Viacom's victory this morning.

Shareholders had until midnight last night to tender their shares to either Viacom or QVC. Proxy solicitors were still counting Paramount shares last night, but the executives said Viacom had passed the 50.1 percent threshold by 9:30 PM.

Viacom's chairman, Sumner M. Redstone, could not be reached for comment last night. Nor could QVC's chairman, Barry Diller, who had hoped until the last minute that shareholders would prefer to bet on his management skills and the relative strength of his company's stock as a better long-term investment.

But on Sunday, Mr. Diller made a Viacom victory almost a certainty when he said QVC would not raise its offer one more time.

The Paramount takeover battle pitted old adversaries against each other: Mr. Diller and Paramount's chairman, Martin S. Davis, have been enemies since Mr. Diller left Paramount in an angry dispute in 1984. It also created new alliances as each bidder, seeking money to finance higher offers, created a network of investors that read like a who's who of the media business: Cox Enterprises, Advance Publications, BellSouth, Comcast, NYNEX and Blockbuster Entertainment.

And it especially benefited Paramount shareholders, who have seen the price of their stock climb from $61.125 just before the deal was first announced in September to a closing price of $76.125 yesterday, down 75 cents. Viacom initially offered $69.14 a share in cash and stock for Paramount, but competing offers from QVC forced it to raise its complicated bid to the current $80.61.

Shareholders preferred the cash-and-stock bid by Viacom because it was willing to give them more cash: $107 a share for 50.1 percent of their holdings, compared with QVC's $104 a share. And even though the total value of the QVC bid was higher, Viacom also offered some protection against declines in its stock price. Mr. Diller was not willing to make that offer for the securities in the QVC bid.

While Mr. Diller has lost, there was no doubt that this was a fight that matched worthy opponents.

Mr. Diller, 51, has long been considered a visionary who pioneered such developments as the television movie-of-the-week and went on to run Paramount Pictures. He later joined 20th Century Fox, where he built the Fox television network at a time when network broadcasting was thought to be a dying business.

To Mr. Redstone, 70, the acquisition of Paramount will be the culmination of a career in the entertainment business that began with the management of his father's drive-in movie theaters. He built the business into one of the largest theater circuits in the country.

In 1987, Mr. Redstone fought a takeover battle, not dissimilar from the fight for Paramount, to acquire Viacom. At the time, he was considered to have paid too much for Viacom, though he has since proved his critics wrong.

Even with the Paramount takeover, Mr. Redstone will remain in control of a combined entertainment giant that includes Viacom's new merger partner, the Blockbuster Entertainment Corporation, which is helping to finance the Paramount bid. The combined company will be a behemoth in the entertainment business, with sales of about $12 billion, making it slightly smaller than Time Warner Inc., with roughly $14 billion in sales.

The merger of the three companies is expected to be completed in several months.

A New Challenge

To be sure, Mr. Redstone now faces an even tougher challenge in some ways. He must meld Viacom, which owns the MTV and Nickelodeon cable channels, with Paramount, whose crucial movie business has not been doing well. Indeed, Paramount said it would report a loss of $18 million for its third quarter, which ended on January 31.

Mr. Redstone must begin reshaping that operation in the context of a company that will carry a substantial debt load. Some analysts say they think Viacom will soon begin selling assets to reduce that debt.

Concerns about the impact of the merger have already caused Viacom's class B stock, which does not have voting rights, to plummet in value. Viacom's class B shares closed yesterday at $29.875, down $1.75, on expectations of a Viacom victory. Only a month ago, the stock was trading at about $42 a share. Right before Viacom made its bid, the class B stock was trading at about $59.

While analysts expect Viacom's class A voting stock and its class B nonvoting stock to continue to fall, the company's debt load is far less than when Mr. Redstone bought Viacom in 1987.

Big Interest Payments

For sure, the earnings of the combined company will be severely depressed by the heavy interest payments on its debt. But Viacom should be able to manage those interest payments. The combined company will have $10.2 billion in debt, and cash flow, based on some estimates, of $1.7 billion. Interest and preferred dividend payments would be about $600 million, a person close to Viacom said.

David Londoner, who follows Viacom for Wertheim Schroder, said the cash flow appeared sufficient to make interest payments, finance film development and provide for other normal expenses.

"But it is still an uncomfortable debt load going forward," he added. Noting that $3.6 billion of debt comes due in a year, he said, "It looks like Viacom will be all right, but there is no way to forecast where interest rates will be in a year."

And even as the merger was confirmed, there were new indications yesterday that the merged Viacom-Paramount might face even greater financial pressures than had been expected. The problems involve Viacom's plan to merge with Blockbuster Entertainment.

Yesterday, there was a growing chorus of criticism from financial analysts who follow Blockbuster and from some institutional shareholders. Viacom is spending too much for Paramount, these critics say, asserting that Blockbuster's chairman, H. Wayne Huizenga, made a mistake in agreeing to sell control of his company to Mr. Redstone.

'Ridiculously Overpriced'

"As a Blockbuster shareholder, I don't think it is the smartest thing the management has even done to merge with Viacom and then acquiesce to buying Paramount, which is ridiculously overpriced," said Larry Haverty of State Street Research, which owns more than three million Blockbuster shares.

And Craig Bibb, a PaineWebber media analyst, predicted that Blockbuster shareholders might vote against the merger with Viacom. He predicted that Blockbuster stock would continue to fall "unless the market believes that a shareholder revolt has some chance of success."

Although analysts said any problems with the Viacom-Blockbuster deal would not derail Viacom's bid for Paramount, the criticisms underscored the challenges that will give Mr. Redstone scant time for celebration.

To be sure, blocking the planned Blockbuster-Viacom merger would be an uphill battle for dissident shareholders. Mr. Huizenga, along with some colleagues and Philips Electronics, an investor, already control 23 percent of the stock and are legally committed to voting for the deal.

'How Upset We Are'

"Wayne had the trump card," Mr. Haverty said. 'You can't imagine how upset we are. We had something that was worth $34. Now it is worth $24."

At the time the merger was announced, some analysts thought that Blockbuster was wise to sell out, because its core video rental business was expected to be challenged by technological developments in the cable television industry that would make it easier to order films at home.

Some Blockbuster executives have said they agreed to merge with Viacom because they did not think it would ultimately win Paramount, some people who have spoken to Blockbuster's management said. And certainly they did not expect Viacom's stock to fall as far as it has in recent weeks, the sources added.

"Coming Together-Sort Of: A 'New' Beatles Single: "Free As A Bird", Grew Out of A Tape John Lennon Recorded At Home in New York," by Rip Rense, Los Angeles Times, March 26, 1994

Ever since word leaked out that a "new" Beatles song-an unreleased John Lennon home recording completed by the three remaining Beatles-was in the works, fans have been trying to imagine what the song sounds like and whether it might lead to an entire album.

The answer to what the song sounds like has been substantially answered by a source who has heard a version of it.

The question of whether recent recording sessions by Paul McCartney, George Harrison and Ringo Starr (supposedly working with original Beatles producer George Martin) will lead to a full album remains open, but it looks doubtful. There are no immediate indications that the three Beatles plan to reconvene for more sessions.

The new song, recorded in February in England, is titled "Free As A Bird," according to William P. King, publisher of Beatlefan, an Atlanta-based magazine long relied upon by fans of the group for accurate information.

Recorded at McCartney's and Harrison's home studios, the song is reportedly a plaintive ballad celebrating the joys of home life. It features dual vocals by Lennon and McCartney, says King, as well as a new verse written and sung by McCartney, a guitar solo by Harrison and elaborate production scored by Martin.

According to information provided by producers of the long-running syndicated Westwood One radio series The Lost Lennon Tapes, "Free as a Bird" was recorded by Lennon at home in New York in October, 1977. It was one of several unfinished tunes by the late Beatle apparently earmarked for use in a never-realized Lennon-Ono autobiographical Broadway show titled The Ballad of John and Yoko.

The recent McCartney, Harrison and Starr recording sessions were originally meant only to produce incidental music for the upcoming, 10-part Beatles Anthology documentary video series being produced by the remaining Beatles and their company, Apple Corps Ltd.

The series will first be aired on television in 60-minute segments beginning in late '94 or early '95, then offered for sale with each part expanded to 90 minutes.

But the surviving Beatles reportedly asked Ono to supply them with tapes of unreleased songs composed and recorded by Lennon, for the purpose of finishing at least one of them.

Ono happily complied. "She knew there is a lot of public interest in a reunion," said Ono spokesman Michael Phillips. "A lot of people probably thought she'd be first to object. She just felt like well, she shouldn't be the one to say no . . . and thought it ought to be given a chance. And it was good karma."

Ono handed tapes of four partially completed songs to McCartney at her home in New York in January, after the Rock and Roll Hall of Fame dinner at which Lennon was posthumously honored. The remaining Beatles are said to have "worked on" all of the songs before settling on the one.

The recent sessions also yielded two instrumental tracks, both of which are expected to be used as incidental music for the video series, which consists largely of never-seen footage from Yhe Beatles' own collection.

The anthology will be accompanied by the release of four to six CDs of mostly unreleased Beatles music-BBC recordings, alternate versions of released songs, studio outtakes and recordings from Yhe Beatles' private collection. "Free as a Bird" will be released to coincide with part one of The Beatles Anthology, with a video that Harrison reportedly suggested Ono direct.

One home demo of the song, aired on The Lost Lennon Tapes several years ago and subsequently bootlegged, provides an idea of what "Free" might sound like. The demo begins with a simple, poignant piano introduction. It has a sweet, arching melody with chords somewhat reminiscent of Lennon's 1970 song "Love."

The phrasing and melodic twists of the vocal, however, are rather unlike any other Lennon composition. A sample of Lennon's incomplete lyrics: "Free as a bird / It's the next best thing to being / Free as a bird / Home, home and dry / Like a homing bird, I'll fly / A bird on the wing . . . ."

For the new sessions, Lennon's voice was reportedly heavily processed and enhanced by producer Martin to bring it up to studio quality, and McCartney added vocal harmonies to it throughout.

How will the song be released? Most likely, King says, on The Beatles' old Apple label, either as a single or as part of the new CDs. And what name will the electronically reunited group use?

"I would think, seeing that all four of them are on it, that they would use The Beatles," said King.

"Company News; Broker's Suit Is Dismissed," The New York Times, March 29, 1994

A Federal judge has dismissed a suit filed by Jordan Belfort, the former head of the Stratton Oakmont brokerage firm, against the National Association of Securities Dealers.

The suit contended that the NASD had acted illegally in refusing to list for trading companies in which Mr. Belfort had a large stake. At the time, civil charges filed by the Securities and Exchange Commission against Stratton Oakmont and Mr. Belfort were pending, and the NASD refused to list the stocks until Mr. Belfort sold his stake. The SEC charges were later settled, under terms that included banning Mr. Belfort from the securities business.

In a decision last week, Judge John S. Martin of the Southern District of New York dismissed the suit on the ground that Mr. Belfort had not exhausted his administrative remedies within the NASD.

"Company Town; Fox Heats Up The Animation Wars: Movies: Heavyweight Don Bluth Discusses The Deal That Will Bring HIm And Gary Goldman Home From Ireland," by Jeff Kaye, Los Angeles Times, May 6, 1994

While The Walt Disney Company has proven repeatedly that animated films can reach the highest box office echelons, no other studio has been able to duplicate that success.

But with the potential payoff so huge-not just in ticket sales but in videos, merchandising and other areas-the major studios are embracing animation like never before.

In the latest move, 20th Century Fox announced earlier this week that it is investing $100 million in an animation division to be headed by veterans Don Bluth and Gary Goldman, who will leave the independent animation studio they set up in Ireland nearly eight years ago.

Bluth, in his first interview since the announcement, says the pair are looking to Fox for the kind of sophisticated scriptwriting and marketing that his company lacked. With the muscle of the studio behind them, he said, "I think we have a shot at being competitive."

Bluth and Goldman have enjoyed success with films such as The Land Before Time, An American Tail and All Dogs Go to Heaven. Their first film offering, The Secret of NIMH, was initially a flop, but has had an incredible renaissance in video sales. However, their most recent movie, Thumbelina, stalled at about $10 million, which Bluth blames on bad marketing.

One reason for optimism over the Fox deal is the involvement of newly installed studio President Bill Mechanic, a former Disney executive who built its video merchandising operation into one of the company's most profitable businesses.

"Animation is potentially a great business," says Mechanic, "but not a great business in and of itself. I don't think we would have invested so heavily without a Don Bluth. Don and Gary are preeminent in the field."

Mechanic also points out that Disney's position in animated features was built up only over the past decade. "Nine years ago, when I started there, there wasn't great success," he says. "There was a great history."

But Disney's renewed commitment to animation enabled it to reclaim its former glory. Now, he believes, Fox can take a similar path.

"I would hope we would do the same thing with Don and Gary," he says.

Under terms of their five-year deal with Fox, Bluth and Goldman will create a separate animation production company that will work under the newly formed Fox Family Films division.

No site has been picked for the as-yet-untitled animation studio, but it definitely will not be in California, Bluth says.

"I don't like earthquakes," he says, "and it's too crowded with animation at present."

He says the studio will be located somewhere in the western United States.

Bluth and Goldman will have a staff of about 200, the same as his company in Ireland. The new team will begin production on its first feature film in October, with a release target date of Christmas 1996.

Bluth and Goldman will probably make a film every 18 months, which Fox will augment with work from other producers in order to release an animated feature each year, Mechanic said.

Although Bluth doesn't begin work at Fox until May 31-Goldman starts July 15-he said he already has three projects in development for the new venture.

Bluth, Goldman and more than a dozen colleagues walked away from Disney in 1979, disappointed with its then-lackluster attitude toward animated films.

With financial incentives from the government of Ireland, they eventually created a studio on the banks of the River Liffey in Dublin. Since then, they've attained some success but also weathered some financial problems, including two bankruptcies.

Bluth is now an employee rather than an owner of the Dublin company that bears his name. Don Bluth Ireland Ltd. was taken over by Media Assets of Hong Kong, which was itself taken over by Rupert M