Crisis grows in Coudersport

NASDAQ delists Adelphia, which could trigger bankruptcy; Allen walks

Why This Matters

Rigas family values

Rigas family values

It's the curse of the rich: The Rigases owned Adelphia stock worth, at one point, $4 billion, but they had a policy of never selling any shares, and so the stock gave them no stream of cash for their personal use. Adelphia's new management (that is, the old directors), however, says the family found creative methods to use the publicly traded cable company for cash and perks, some big, some surprisingly small. Remember, Adelphia's latest SEC filing covers only recent transactions, not the similar, small-scale dipping that the family has engaged in for years (leasing set-top converters to Adelphia's systems, for example). Here's a list of some of their maneuvers:

Timber rightsA Rigas-family company was teeing up a deal to buy 3,656 acres of land, in part for a golf course. Just before that happened, the Rigases used Adelphia to buy the timber rights to that land (a cable operator needs poles, presumably). Price: $26.5 million, or $7,200 per acre. The Rigas family's price to own the land: $465,000, or just $127 per acre. Oh, and to keep some buyer of Adelphia from denuding the family property of trees, a takeover of Adelphia would send the timber rights back to the family. The transaction was not presented to Adelphia's board. The Rigases are handing the land over to Adelphia at cost.

Margin callsUnsurprisingly, the Rigases often borrowed money against their Adelphia stock. But, as Adelphia's stock price has plunged, lenders have called their loans. The Rigases and their companies have had to cough up $241 million so far this year, drawn from Adelphia's cash-management system that regularly commingled company funds with family money.

Supply sideOne way to get some cash was to sell ordinary items to Adelphia. A family office-furniture supplier sold the cable operator $12.4 million worth of office furniture; a Rigas interior-design firm collected $371,000 in fees; a partly owned New Castle, Pa., car dealership sold Adelphia 50 cars. Past filings show that Adelphia systems regularly leased cable equipment and real estate from a family company.

The Golf Club at Wending Creek FarmsAdelphia has spent $13 million building a golf course on 830 acres, most of which are controlled by John Rigas. But, unlike what you would expect if a company pays to build on the land, Adelphia has no lease on the family property. The transaction was not presented to Adelphia's board.

Mondo condoNew management suspects that condominiums in resort towns Beaver Creek, Colo., and Cancun, Mexico, may have been paid for with company funds. Also, Rigas's daughter Ellen Venetis and her husband have "had exclusive use" of two New York City apartments, rent-free.

At the moviesJohn Rigas's Coudersport, Pa., movie theater collected a mere $6,600 from Adelphia last year. But his daughter's movie operation borrowed $3.8 million from the MSO to finance production of Songcatcher, which a New York Times reviewer called a "sweet, lyrical ode to rural America in the early 1900s." Out now on DVD.

Adelphia Communications' financial crisis intensified as multibillionaire Paul Allen walked away from talks to buy systems and investors and lenders began feuding.

Late Thursday, Allen's financial team broke off talks with Adelphia after once offering a lowball bid of just $2,700 per subscriber for some of the company's cable systems. The talks were Adelphia's best hope for raising cash and avoiding Chapter 11.

Other tense moments in a frenzied week include NASDAQ's decision that the exchange would delist Adelphia from its National Market System, which in turn could trigger a $1.4 million demand from certain bondholders. Also, the company acknowledged that it has formally defaulted on $7 billion in bank loans, although the banks are so far not demanding repayment. Either of those moves would plunge Adelphia, headquartered in tiny Coudersport, Pa., but the nation's fifth- largest cable operator, into Chapter 11.

Ex-Chairman John Rigas is out of the loop, as he and his sons were exiled from Adelphia's boardroom and executive offices. Wall Street and industry executives were startled by the Memorial Day weekend disclosure of how extensive Rigases' insider dealings with Adelphia had been.

In an SEC filing, Adelphia detailed not just the multibillion-dollar loan guarantees to family companies but how the once-multibillionaire family exploited company apartments and steered business to a family-owned car dealership and furniture store (see page 8).

Cranky stockholders also attacked Adelphia's "new" management—the directors who have long been on Adelphia's board but aren't Rigas family members.

Leonard Tow, who collected 12% of Adelphia's stock after selling his Century Communications to Adelphia three years ago, blasted the new board's move to sell Adelphia's assets. Tow, in a letter to Adelphia interim CEO Erkie Kailbourne, said that a cable-system fire sale "would strip the company of its ability to conduct an orderly and profitable disposition of the remainder of the company's cable assets when and if it is necessary."

Kailbourne fired back, "We have asked you for any concrete proposal you have as to how to restructure the company's debt" and asked, "what specific, concrete alternative or alternatives you propose. You will, I know, understand that general ideas without concrete details as to how they will be implemented are of little use at this time."

Kailbourne relented to Tow's demands to be added to Adelphia's board of directors and said Tow would be fully briefed during a board meeting that had been scheduled for last Saturday.

As long as Adelphia stays out of bankruptcy court, one key arena is the clash between equity holders and lenders. That's because, while nobody really wins if Adelphia lapses into Chapter 11, if it goes, the banks lose the least and the stockholders lose pretty much everything.

So it is Adelphia's banks that are pressing for system sales. They're ahead of all bondholders, trade creditors and certainly stockholders when it comes to collecting money. Adelphia's total debt stands around $2,700 per subscriber, and banks are owed around $1,600 per sub. So, even if it takes a fire sale to get a fat injection of cash into Adelphia, the banks aren't harmed. And they won't lend any more money without some kind of injection.

The shareholders are at the end of the line in a Chapter 11 proceeding, but they also don't want Adelphia to live on as a shell, stripped of its best properties and left with a bunch of old rural systems bought from Century and FrontierVision that haven't yet been rebuilt.

Adelphia's investment bankers—primarily Salomon Smith Barney—have been scrounging for a player to put some cash in, but it was looking bleak. Allen, chairman of Charter Communications, would love to combine Adelphia's Los Angeles systems with Charter's nearby properties. And he has plenty of liquidity, recently selling $500 million worth of USA Interactive shares lately plus steady sales of Microsoft shares.

But industry executives said that Allen's financial team found the properties in worse shape than expected, requiring a lot of rebuild capital. Further, Allen would have to lend Adelphia cash today for systems that couldn't actually be sold until after six to nine months of local-government reviews. Bankers couldn't readily find a quick way to protect Allen's loans if things still went sour.

"Pre-bankruptcy, it's over," said one Allen adviser of any asset buys. "We'll wait to see if there's another chance in bankruptcy court."