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Can Vanessa Wittman help bring scandal-wracked Adelphia out of bankruptcy -- and back into investors' good graces?
Joseph McCafferty, CFO Magazine
December 1, 2003
When Vanessa Wittman came to Adelphia Communications Corp. as CFO last March, the cable-television giant was in danger of being disconnected. A victim of alleged fraud and plundering by its controlling shareholders, the Rigas family, Adelphia had been mired in Chapter 11 bankruptcy since June 2002. Even after seven months, an interim management team had failed to improve the company's poor performance, and now a new CEO was assembling a new team. At one point, liquidation had been a distinct possibility—the fifth-largest cable company in the nation, after all, had billions of dollars in assets that could be sold off.
"There was a lot of anxiety about whether the business was fixable or not," says Wittman. Yet the decision was made to salvage the company—clean up the toxic remnants of fraud and get Adelphia back in the good graces of customers, investors, and even employees, who had been demoralized by the scandal. And Wittman, who had just finished guiding Vancouver-based broadband provider 360networks Corp. out of bankruptcy, was tapped to help lead the effort.
At first she was surprised—and then relieved—at how little the finance rank and file really knew about what may be one of the largest frauds in corporate history. Instead of a corrupt environment, full of people who had winked or looked the other way, Wittman found a staff more or less in shock over what had transpired. "There was no culture of greed," she says, and thus no need for a wholesale purging of the ranks. Indeed, Wittman recalls making a jesting query to Adelphia CEO William Schleyer: "Where did you hide all the jerks?"
That sense of humor has helped Wittman maintain her balance while doing one of the toughest jobs in finance: cleaning up a scandal-plagued company (see "Sweeping Up," at the end of this article). Today, Adelphia is striving to regain both its solvency and its credibility. The Rigas family—John and his sons, Timothy, Michael, and James—left the building in May 2002, followed by former vice president of finance James Brown and assistant treasurer Michael Mulcahey. Armed with $1.5 billion of debtor-in-possession (DIP) financing, the company is now preparing a reorganization plan that includes updating its cable systems and emerging from bankruptcy completely intact.
Easier said than done. Adelphia, claims Wittman, is "the most complicated bankruptcy the country has ever seen." Not only must Wittman steer Adelphia through the shoals of Chapter 11, she must also contend with shareholder lawsuits and criminal investigations.
Then there's the matter of separating fact from fiction in Adelphia's accounting. "Nothing was as it seemed," recalls Wittman. "Not only were there the issues of fraud and scandal that had really wracked the company, but the fraudulent accounting masked some pretty poor management. This was a company that had been reporting margins approaching 40 percent—and there were over 10 margin points of alleged fraud in there."
All in the Family
The first public indication that something was amiss came in a footnote to Adelphia's March 27, 2002, earnings release. That footnote revealed the amount of off-balance-sheet debt that had been incurred through co-borrowings by the Rigases—$2.3 billion. (The sum later swelled to $3 billion.) When asked during the earnings conference call what the family was using the money for, Timothy Rigas, then CFO, replied that some of it had been used to buy more shares of Adelphia. The stock price dropped 18 percent on the news.
The loans and other related-party transactions became the object of SEC scrutiny and grand-jury investigations in Pennsylvania and New York. Eventually, on September 22, 2002, a federal grand jury in Manhattan indicted the five former Adelphia executives—John, Timothy, and Michael Rigas, James Brown, and Michael Mulcahey—on 24 counts of securities fraud, wire fraud, and bank fraud. Their actions, charged U.S. Attorney James B. Comey, constituted "one of the most elaborate and extensive corporate frauds in history." (Brown later pleaded guilty to fraud and conspiracy charges and agreed to cooperate with authorities.)
It was a shocking end to the ruling family's hold on an empire that was built over 50 years. John Rigas founded the company in 1952 in Coudersport, Pennsylvania, with the purchase of a tiny cable franchise for $300 and a $40,000 loan from a local doctor and a state senator. Eventually, Adelphia grew—mainly through acquisitions—into the fifth-largest cable company in the country, with more than 5 million customers. But Rigas never wavered from his extremely centralized management style. "It was still being run as if it were a small family business," says Michael Kramer, managing director of Greenhill & Co., an adviser to the creditors in the bankruptcy proceedings.
Rigas, chairman and CEO, and his sons controlled every move: Michael was executive vice president of operations, James was executive vice president of strategic planning, and Timothy was CFO. All held seats on a board of directors that also included John's son-in-law, Peter Venetis. Their ownership of a special class of voting shares made it impossible for other shareholders to challenge their control.
The Rigases seemingly ran the company as if it were their own private cash machine. The family has been accused of commingling the accounts of Adelphia with their other businesses, borrowing—and at times allegedly stealing—to pay for lavish homes and other personal expenses, including a private jet and construction of a golf course.
The Rigases didn't play by the rules on the accounting and control side, either; in fact, there were virtually no internal controls. CFO Timothy Rigas was chairman of the board's audit committee, an outrageous conflict that the Wharton School graduate should certainly have known was wrong. According to reports and company insiders, Adelphia capitalized millions of dollars in costs that clearly should have been expensed. U.S. Attorney Comey charged that the Rigases "exploited Adelphia's Byzantine corporate and financial structure to create a towering facade of false success, even as Adelphia was collapsing under the weight of its staggering debt burden."
The alleged fraud made it impossible for the company to file its 10K for 2001, causing it to be delisted from Nasdaq in June 2002. The delisting put the company in default on $1.4 billion worth of convertible bonds, leaving bankruptcy, which it filed for later that month, the only option. In the filing, Adelphia reported $18.6 billion in debt and $24.4 billion in assets. "If what [the defendants] are accused of is true, the behavior is much more egregious than what happened at Enron and WorldCom," argues Greenhill's Kramer, "because they didn't just manipulate the accounting—they stole from the company."
Under New Management(s)
The first attempts to right the company after the Rigases left didn't go as smoothly as many had hoped. Although John Rigas resigned in May 2002, the board remained full of his cronies. The new CEO, a retired Fleet Bank executive named Erland Kailbourne, was a longtime friend.
Under pressure from creditors and shareholders, the board replaced Kailbourne in February 2003 with William Schleyer, former CEO of AT&T Broadband and a respected cable-industry veteran. Schleyer brought along his right-hand man at AT&T Broadband, Ronald Cooper. There was controversy over the duo's compensation—almost $65 million over two years, contingent on emerging from Chapter 11 and hitting certain valuation targets—and as a result, the package was scaled back somewhat.
The hiring of Wittman went smoothly, but the departure of Christopher Dunstan, who was hired by Kailbourne to replace Timothy Rigas as CFO, did not. In his resignation letter, Dunstan alleged that Adelphia failed to appoint an independent investigator to examine transactions with one of its directors. The company later negotiated a settlement with the former CFO that included more than $700,000 in severance, and he agreed to help with any continuing investigations and court proceedings.
But if Dunstan was gone, his charges lingered. Many wondered why board members, who somehow failed to notice the Rigas family's alleged plundering, were allowed to keep their seats even after a new management team was installed. In January 2003, shareholders filed suit aiming to "remove the company from its continued domination by a Rigas-elected board of directors." In June, four board members appointed during the Rigas era finally agreed that they would step down when the company emerges from bankruptcy.
Still, the interim team is to be commended, maintains Wittman. "The prior board did a stand-up job of stepping into a very difficult situation and making hard decisions," she says. "They basically had to take the family out of a family-run business. They kept the wheels from flying off."
Now the wheels are snarled in a tangle of litigation. In addition to multiple class-action shareholder suits, Adelphia itself has sued the Rigas family and the company's former auditor, Deloitte & Touche LLP. Most recently, the creditors' committees filed a lawsuit on Adelphia's behalf against a group of more than 450 banks, including Bank of America Corp. and Wachovia Corp., which they accuse of knowing about the improper loans. "The pending litigation has slowed everything," explains Kramer.
Despite these initial missteps, industry experts say Adelphia has done a remarkable job of getting its house in order quickly. One early decision was to move the company from Coudersport to Denver, where Schleyer and Cooper had worked at AT&T Broadband before it was sold to Comcast. "It was a smart move," comments Mark Kersey, a senior analyst at Current Analysis Inc., a Sterling, Virginia-based technology market research firm. "It would be [much more] difficult to attract top management to Couders-port [than to Denver]."
Convincing Wittman (one of the few new executives at Adelphia who didn't come from AT&T Broadband) to come aboard was also a major coup, says Kersey. Having just finished helping 360networks through a successful bankruptcy, says Wittman, "there were those who asked, 'Why in the world would you go and do another bankruptcy? It's a total mess. Wasn't it bad enough the first time?'" Her answer: she enjoys a challenge.
But Wittman didn't realize how big a challenge Adelphia posed. Every day during her first six weeks on the job, she found out "something more stunning than the last [day]," she says. During her first days as CFO, she found herself getting up in the middle of the night to work. When she mentioned her inability to sleep to one of the senior lawyers on the team, he sympathized. "Yeah," he said, "that happens to everyone for the first few months."
Wittman's first order of business was to help Adelphia get its hands on $1.5 billion in DIP financing. Although the company had already arranged the loan, it couldn't access all of the funds until it had an interim budget in place. "In record time, we negotiated the covenant with the banks and got access to the DIP facility at the end of May," says Wittman.
An even more daunting task for the new finance team was to restate Adelphia's results for fiscal years 1999, 2000, and 2001, which meant also compiling 1998 numbers to get an opening balance. "It was a giant ball of hair," declares Wittman. "There were over 7 million transactions that had to be reviewed." Chief accounting officer Scott McDonald concentrated on the restatements so the CFO could focus on bankruptcy duties. McDonald found plenty of fraud—and sloppy work. "There was horrible record-keeping, lots of financial manipulation, and inconsistently applied policies where policies existed," says Wittman. Working lots of overtime, McDonald and his colleagues finished the restatements in eight months and delivered them to Adelphia's new auditor, Pricewaterhouse-Coopers, in November.
Meanwhile, the finance team is working on the sale of noncore assets, including cable-system interests in Latin America and, adds Wittman, "grass seed for the golf course." The staff also completed the construction of the intercompany balances—necessary for developing a valuation model for the company—and a five-year plan. "We have been going with our hair on fire since May," says Wittman, who is quick to credit Schleyer, Cooper, and her finance staff for their hard work. "There is no way you could clean up a mess this big," she says, without a "really deep, very dedicated team."
The Credibility Question
In addition to the messy bankruptcy, Adelphia has major operational hurdles ahead. Industry experts say the company lagged its competitors in providing subscribers with high-end services, such as digital cable, high-speed Internet access, video on demand, and high-definition television. "This is where all the growth in the industry is coming from," says Current Analysis's Kersey. While the networks of most of the large cable providers have been about 95 to 99 percent updated to provide high-end services, Adelphia's stand at only 70 to 80 percent. "That certainly puts them in a more vulnerable position," says Kersey. He says Adelphia will continue to lose market share until it can update those subscribers.
Still, he's not ready to count Adelphia out. "They have some great markets, and very valuable assets," he notes. "The key is how quickly they can emerge from bankruptcy, and how quickly they can upgrade their systems." Unfortunately, the answer to that question could be later rather than sooner, thanks to the amount of litigation holding up the reorganization plan.
Even when Adelphia does exit Chapter 11, it must win back its credibility with customers and investors. "There is no question that what happened at Adelphia hurt it with customers," says Stephen Effros, president of cable-TV consultants Effros Communications. And it happened at a critical time in the industry. Many cable companies are looking to become one-stop communications providers for the home, offering cable-TV, phone, and Internet service. "Customers need to have a lot of trust in a provider before they go to a single supplier," says Effros. "That means companies need to provide the best customer service possible."
Adelphia can do that, he says, only by first regaining the trust of its employees. Wittman, who spent the first few days of her tenure meeting with employees and customers, hopes the decentralization of the company will enable employees to take more ownership of their jobs. She says morale is on the mend: "People are very charged up about getting this thing fixed."
Adelphia hopes to deliver a preliminary reorganization plan to its DIP creditors by the end of 2003, and is pushing to emerge from bankruptcy in mid-2004. Wittman is confident that the company will emerge in good condition. "This is a really terrific business," she says. "It should not have been in bankruptcy in the first place." She is also sure that what happened at Adelphia can never happen again: "We have to be beyond reproach, on every front."
Joseph McCafferty is news editor of CFO.
May: John, James, Michael, and Timothy Rigas resign as Adelphia executives and directors.
June 25: Adelphia files voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. That same day, lenders agree to provide $1.5 billion in debtor-in-possession (DIP) financing.
June 28: Court grants Adelphia immediate access to $500 million of $1.5 billion DIP financing.
July 24: Adelphia files lawsuit against John Rigas and other former executives and board members of Adelphia.
August 23: Adelphia's $1.5 billion DIP financing is approved.
November 6: Adelphia files a lawsuit against its former auditors, Deloitte & Touche LLP.
January 17: Adelphia announces it has entered into agreements with William Schleyer and Ronald Cooper.
January 28: Adelphia board authorizes the move of corporate headquarters to Denver.
March 7: Bankruptcy court approves employment agreements of chairman and CEO Schleyer and president and COO Cooper.
March 21: Adelphia names Vanessa Wittman CFO.
March 25: Adelphia announces the resignation of CFO Christopher Dunstan.
May 13: Adelphia elects two additional directors.
May 28: Adelphia forges agreement with DIP lenders for access to $1.5 billion facility.
June 4: Four carryover directors announce plans to resign from Adelphia's board.
July 31: Adelphia files its schedules of liabilities and statement of financial affairs.
October 23: Adelphia amends its schedules of liabilities and statement of financial affairs.
October 24: Bankruptcy court sets the bar date for January 9, 2004.
Source: Adelphia Communications
New executive brooms at WorldCom and Tyco clear out the remnants
Adelphia isn't the only high-profile, scandal-plagued company in need of an extreme makeover. Both WorldCom Inc. and Tyco International are striving to restore their good business names, even as the executives who sullied their reputations await trial.
Amazingly, WorldCom, author of the biggest scam of all—where former CFO Scott Sullivan and others are alleged to have cooked the books by a stunning $11 billion—is already poised to exit bankruptcy under the moniker of its largest acquisition, MCI. And instead of staggering under the weight of $40 billion in debt, it will have a manageable $5.5 billion.
The new MCI will also boast a state-of-the-art system of controls and corporate-governance practices. "They seem to be on their way from worst in class to best in class," says Nell Minow, chairman of The Corporate Library, a corporate-governance research firm. "They are doing all the right things."
Those things include sweeping out the board room and executive offices and hiring Michael Capellas, former president of Hewlett-Packard Co. The board appointed independent board members known for their integrity, including former U.S. Deputy Attorney General Eric Holder and Dennis Beresford, former chairman of the Financial Accounting Standards Board. Last April, MCI hired Robert Blakely, a respected former CFO of Tenneco with 21 years of experience, as CFO.
MCI also conducted a vigorous internal investigation, headed by former Securities and Exchange Commission director of enforcement William McLucas. When it was finished, the company asked for the resignations of 50 employees. Many were not accused of taking part in the fraud, but had a high likelihood of being aware of it. "People who looked the other way have demonstrated their uselessness," says Minow. "They have to go. They are no less culpable."
The company has also established a corporate-ethics office that reports to Capellas. "We can't afford to be anything less than 'best of breed' in corporate governance and ethics," asserts Beresford.
Breen Sweeps Clean
At Tyco, meanwhile, CEO Edward Breen wasted no time in exorcising the inner circle of former CEO Dennis Kozlowski. Immediately following his July 2002 appointment, he fired about 50 executives, as well as the entire board that had hired Breen himself. He then assembled his own team of nine independent directors.
Next, Breen tapped former United Technologies CFO David FitzPatrick to replace the post vacated by Mark Swartz, who, like Kozlowski, is under indictment for looting the company of some $600 million. "Breen and FitzPatrick hail from companies with long-term perspectives, and are more patient about growth," says Brian Langenberg, a principal at Langenberg & Co. in Chicago.
But getting rid of Kozlowski and Swartz—whose alleged offenses include self-dealing transactions, unapproved bonuses, and fraudulent stock sales—was just the beginning. An in-house probe revealed major breakdowns in financial controls, including transparency problems in the plastics division and suspect operating income in the ADT unit.
In short order, Breen expanded the ongoing internal audit into a full-scale, independent investigation that kept 25 lawyers—led by superstar attorney David Boies—and 100 accountants busy for five months. The investigation uncovered breakdowns in the control processes associated with executive compensation, and problems with reported revenues, profits, cash flows, use of reserves, and nonrecurring charges, among other financial shortcomings.
So far, several repair measures have been implemented, says Tyco spokesman Gary Holmes, including splitting the plastics group into two reporting segments, changing the definition of free cash flow to include cash paid for the acquisition of new dealer accounts, and providing details of how "organic growth" is calculated.
FitzPatrick asked all financial managers and executives to sign an ethical code of conduct, and he is confident that the problems have been addressed. "During 2003, a considerable portion of my time was spent looking backward," says FitzPatrick. "Now, I'm ready to look forward."
Still, several hurdles remain to be cleared. "Breen's on target, but he's been left with no systems in place to track what's going on," observes Langenberg. "There's no operating plan or strategic-forecasting methodology." Then there are the continuing reporting gaffes. When the internal review was completed, in late 2002, Tyco pronounced itself free of fraud, and Breen said that restatements for prior quarters were a thing of the past—only to see the company restate one more time. So far, Tyco has made $1.1 billion worth of adjustments since Breen's arrival.
Despite Tyco's woes, the company's prospects are good. Its portfolio is strong, says Langenberg; many of the companies rank first or second in their respective industries. By his lights, Tyco's stock prospects are "more bull than bear." As long, that is, as it keeps the bull out of its financial reporting.
Joseph McCafferty, with Marie Leone and Craig Schneider