Cable Pioneer John Rigas Quits Under Fire as Adelphia CEO

John J. Rigas, who used $300 from an overdrawn bank account to build the Adelphia Communications Corp. cable TV empire, resigned under fire Wednesday as chairman, chief executive and president of the company he ran for half a century amid pressures from unhappy shareholders, deteriorating finances and government probes into the company’s accounting and loan practices.

The Enron-like accounting controversy at Adelphia and Rigas’ resignation set off speculation that Adelphia might have to file for Chapter 11 bankruptcy protection.

Adelphia’s latest problems, which include an internal probe into several Rigas family transactions, also could delay a proposed sale of many of its cable operations, including its prized Southern California cable systems, which serve 1.2million subscribers.

The company already has announced plans to sell up to half its cable systems nationwide to slash its staggering debt. Adelphia is Los Angeles’ largest cable provider and operates systems in some of the most desirable areas, including Pacific Palisades, Santa Monica, Brentwood, Arcadia, Manhattan Beach and Redondo Beach.

In a statement, the deeply religious Rigas, 77, said his decision to leave Adelphia came “after much thought and prayer.” He added that Adelphia “needs fresh, independent leadership” to restore its credibility.

But dissident shareholders said Rigas’ resignation doesn’t go far enough because he and his three sons will continue serving on Adelphia’s board and the family still controls the company.

“We believe essentially nothing has changed,” said Scott Schneider, vice chairman of Citizens Communications, which is controlled by dissident shareholder Leonard Tow.

Rigas’ abrupt resignation tarnishes the 50-year career of one of cable’s pioneers, a veteran of World War II who went into the business in 1952. Rigas bought a movie theater and small cable franchise in the tiny northern Pennsylvania town of Coudersport, using the $300 he overdrew from his bank account.

In recent years, as a wave of consolidation swept the cable industry, involving such media giants as AOL Time Warner Inc., AT&T; Corp. and billionaire Paul Allen, Adelphia was seen as a throwback to the industry’s earlier entrepreneurial days.

Rigas and his sons continued running Adelphia as a family enterprise. Despite its being a multibillion-dollar operation, Rigas kept Adelphia based in Coudersport.

Even when his Adelphia stock made him a billionaire, Rigas was on a first-name basis with many of the town’s 3,000 residents, who viewed him as a benevolent hero. As the company’s problems mounted in the last six weeks, local residents formed “prayer chains” at churches and flooded Rigas’ office with flowers and potted plants.

But on Wednesday, Don Gilliland, managing editor of the Potter County Leader-Enterprise in Coudersport, said, “People are feeling pretty grim.”

Adelphia’s problems continued to mount almost daily since late March, when the company disclosed that that it had guaranteed at least $2.3 billion in loans to Rigas family partnerships without showing them on Adelphia’s balance sheet. Wall Street has been wary of any company using off-balance-sheet financing practices since the collapse in December of Enron Corp. and the accounting scandal involving Enron’s accounting firm, Arthur Andersen.

In the last two months, Adelphia’s shareholders have watched the company’s stock lose more than 85% of its value, with its overall market value plunging by $6 billion. The company recently said it probably would have to restate its earnings for the last three years and it would consolidate $1.6billion of the partnership loans on Adelphia’s books. Adelphia’s debt disclosure prompted an investigation last month by the Securities and Exchange Commission.

News of Rigas’ resignation drove down Adelphia stock to an all-time low Wednesday morning, causing Nasdaq to suspend its trading. The stock did not open for trading on Nasdaq but nonetheless slid to $3.30 a share, down $2.40, in so-called third-market trading. The company’s bonds also fell about 20 cents to 70 cents on the dollar. Standard & Poor’s Corp. downgraded Adelphia’s bonds to one of its lowest corporate ratings.

Adelphia announced that veteran banker Erland E. Kailbourne, an independent director, will take over as interim CEO.

Analysts said the developments also raised questions about the relationship between Adelphia and accounting firm Deloitte & Touche, which audits Adelphia and the Rigas family’s partnerships. Deloitte executives could not be reached for comment.

But sources said they have been uncomfortable with signing off on some of Adelphia’s financial statements after unearthing questionable deals involving the company.

Nasdaq has threatened to delist Adelphia for failing to file its annual report by an extended deadline last month. Adelphia has scheduled a hearing for today about the delisting. Nasdaq declined to comment.

Adelphia said it hired as an advisor high-powered lawyer David Boies, who headed the government’s Microsoft Corp. antitrust case and led Al Gore’s legal battles in the Florida election recount. Adelphia added that an audit by Deloitte & Touche was being suspended pending an investigation by Boies.

Sources said the Boies investigation will delay Adelphia’s annual report filing, causing the company’s stock to be delisted and thus triggering defaults on its loans. If so, that could force Adelphia to file for bankruptcy protection and could delay a proposed sale of as much of half of the company’s cable operations to ease its crushing debt. The formal auction process began Wednesday, when prospective buyers received information packets from Adelphia with information on which systems will be available for sale.

Because the Rigas family used the public company as collateral to borrow money for the partnerships, Adelphia shareholders are on the hook for the additional debt, used largely to purchase Adelphia stock. Adelphia and the Rigas family now face more than 18 shareholder lawsuits for securities fraud.

Analysts have predicted a liquidity crunch at Adelphia since the company revealed the off-balance-sheet loans. Adelphia relies on bank credit lines for operating cash and burns through an estimated $1billion a year to run the company. Analysts say the delisting probably will trip bank agreements, putting the company into technical default with its lenders.

“If these defaults happen, then what do they do for money?” said Richard Siderman, an analyst at Standard & Poor’s, which downgraded Adelphia bonds Wednesday from CCC-plus to CCC-minus, one of the lowest corporate debt ratings.

Rigas’ resignation failed to placate dissident shareholder Tow.

In 1999, Adelphia bought Tow’s Century Communications Corp., which operated cable systems in Los Angeles, for $3.6 billion in cash and debt. The move doubled Adelphia’s size and also marked a change from its usual small and mid-size cable markets. The deal also further loaded Adelphia with debt, which totaled $15billion according to a preliminary balance sheet issued in March.

Tow said earlier this week that he would exercise his contractual right to place three directors, including himself, on Adelphia’s board.

In a letter to Kailbourne on Wednesday, Tow suggested that he would aggressively press ahead to wield his influence at Adelphia. Tow said he was disappointed that Kailbourne ignored his right to put his directors on the board. Tow gave Adelphia until Friday afternoon to comply or he “will pursue all appropriate remedies.”

Industry sources say a liquidity crisis at Adelphia could further delay its effort to upgrade its L.A. cable networks. The company is behind schedule in rolling out new services, such as high-speed Internet access.