ADELPHIA COMMUNICATIONS

ABSTRACT
Adelphia Communications was one of many firms that got into financial trouble as the result of poor corporate governance and improper accounting practices in the post-Enron world of early 2002. The primary subject matter of this case concerns poor corporate governance that allowed managers to benefit at the expense of minority shareholders. This corporate finance case involves a firm that was thought of as being well managed and a pillar of the business community before a corporate governance crisis led to its eventual bankruptcy. The case shows that at times, too much managerial ownership can be detrimental to a firms stakeholders. Secondary issues include an analysis of Adelphias rise, the risks and rewards of high leverage, the role of auditors and analysts as monitors, and the costs of financial distress as a firm nears bankruptcy. This case is designed to be taught in a 60-90 minute corporate finance or advanced corporate finance class and is expected to require three to four hours of outside preparation by students.

BUSINESS ENVIRONMENT
After the economic expansion of the 1990s, the global economy slowed and stock markets around the world fell, in part due to the collapse of the Internet and technology Bubble. These declines were punctuated by the tragic events of September 11, 2001, which further pushed down the economy and stock markets. Enrons collapse, amid revelations of billions of dollars of off-balance-sheet debt, rampant fraud, and mismanagement, focused the US business communitys attention on managerial fraud and accounting practices. INDUSTRY BACKGROUND : The cable industry is a classic high fixed cost, low variable cost industry with a high degree of business risk. This cost structure creates incentives that take advantage of economies of scale while the relatively high fixed costs make the industry susceptible to fluctuations. The 1990s brought good times to the cable industry as the expansion of services to the vast majority of the US population led to an increase in the number of cable customers. This increase in the customer base was coupled with the creation of many new television channels, allowing cable industry revenues to grow rapidly; not only did the number of customers go up, but the average customers bills also increased significantly. As a result, the stocks of cable providers typically outperformed the broader stock market. The largest firms in the industry are listed in Table 1. In the late 1990s, cable television was not the only reason for the industrys success: cable connections offered a significant speed advantage over slower dial-up Internet connections. Cable Internet access was thus seen as the growth segment of the industry and most of the major cable firms rapidly expanded into this sector. When the forecasted growth of this segment failed to materialize as quickly as predicted, the industry was beset with overcapacity problems.

TABLE 1: Industry Comparison Market Capitalization (in millions of Dollars) Revenues (2000 actual) (in millions of Dollars)

Contact Information
5619 DTC Pkwy. Greenwood Village, CO 80111 303-268-6300 303-268-6495 December 4364.60 M 5.30%

Address: Phone: Fax:

Financial Highlights

Fiscal Year End: Revenue (2005): Revenue Growth (1 yr):

Key People

Chairman and CEO: William T. Schleyer President and COO: Ronald (Ron) Cooper EVP and CFO: Vanessa A. Wittman
Industry Information

Sector: Technology Industry: Diversified Communication Services

Adelphias Background JohnRigas purchased cable company in 1952 for $300 in Coudersport, Pennsylvania He purchased it to hedge against lost sales for his movie theater 1972, he and his brother, Gus, created Adelphia Communications Corporation Adelphia is Greek for Brothers Signifies the Greek heritage Corporation run by brothers Adelphia has always been a family business In the late 1990s, it purchased Century Communications for $5.2 billion and became the 6 th largest cable company with 5.6 million subscribers

John Rigas (Adelphia Founder) Loves Limelight/Service Board of Director National Cable Television Citizens Trust Company Charles Cole Memorial Hospital President of several committees Ordered network to show him at least onceduring Sabres games Bought homes for people Flew people on private planes for medical treatment Gave huge amounts to charities Had to approve every business transaction

Characteristics of a fraud perpetrator Egocentrism Omniscience Omnipotence Invulnerability The Family Business John Rigas, Founder and Chairman (Father) Tim Rigas, CFO and Board member (Son) Michael Rigas, EVP and Board member (Son) James Rigas, EVP and Board member (Son) Peter Venetis, Board member (Son-in-law) Family Management =

Majority of Adelphias Board of Directors Extravagant Lifestyle symptoms

Majority on adelphias Voting Stock

Several Vacation Homes and luxury apartments in Manhattan Several private jets Construction of a world-class 18-hole golf course Majority ownership of the Buffalo Sabres $700,000 membership in an exclusive golf club

The Fraud Charges

Violation of RICO act Breach of fiduciary duties Waste of corporate assets Abuse of control Breach of contract Unjust enrichment Fraudulent conveyance Conversion of corporate assets

How the Fraud took place

Adelphia backed $2.3 billion worth of personal loans to the Rigases Rigas Management manipulated the books to meet analysts expectations and inflate the stock price Rigases created private partnerships w/Adelphia as a tool for the self-dealing schemes. Fund transfers were made through journal entries that gave Adelphia more debt and the Rigases multi- million dollar assets at no cost. Rigas Management commingled Adelphia funds with family funds causing Adelphia to fund non-corporate projects, such as: Personal loans o Real estate transactions Purchase of Manhattan apartments for private use Purchase of land for a private golf course Cash advances to the Buffalo Sabres $252 million to pay margin calls, or demands for cash payments on loans for which the family had put up Adelphia stock as collateral.

Revenues from Adelphia subsidiaries and otherbusinesses were dumped into one central account. They used this account to pay bills.

Financial affairs of Rigas Family Entities wereintermingled with Adelphia, but not consolidated. (Off-the-balance sheet debt) The Rigases used Adelphias line of credit forpersonal purchases. Transaction Account from Adelphia Communications Tickets to Adelphia Money to the Rigases Money to the Rigases

Buffalo Sabres Hockey Landscaping, Maintenance toAdelphia Family-ownedFarm Rigas Family Entities Money to the Rigases Furniture/Design Services to Adelphia Money to the Rigases Leased Vehicles to Adelphia

Private Car Dealership

Interior Design Shop

2003, 2005 by the AICPA

How the Fraud took place (contd)

Rigases doctored financial records at Adelphia and created sham transactions and phony companies to inflate the firm's earnings and to conceal its mounting debts.

realizing the extent of funds taken, Tim Rigas limited the amount of Adelphias funds his father could take to

$1,000,000/Month

2003, 2005 by the AICPA

How the Fraud Evolved

is commonplace for owners of family businesses to think of the companys money as their own.

controlled by the Rigas family

the ways in which the family used

Adelphia in a rampant self-dealing scheme

2003, 2005 by the AICPA

The Aftermath

The companys stock price plummeted after it was delisted from the NASDAQ for failure to file its 2001 10-K. Shortly after that, on June 25, 2002, it filed for bankruptcy.

2003, 2005 by the AICPA

Litigation

and Timothy Rigas found guilty of conspiracy, bank fraud and securities fraud await sentencing of possible 30 years in prison.

wire fraud. Awaiting a new trial on securities fraud

 2003, 2005 by the AICPA

Litigation (contd)

James R. Brown, VP of Finance pleaded guilty in SEC case against him Michael C. Mulcahey, VP and Assistant Treasurer acquitted of criminal charges Adelphia sues auditor Deloitte & Touche for professional negligence, breach of contract, fraud and other wrongful conduct. Adelphias reorganization plan in emerging from bankruptcy gives the Rigases nothing for their holdings