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At Adelphia, we recognize that our present and future success depends on each customer's trust in our ability to deliver quality products and service. Our goal is to earn our customers' trust by making sure that every customer is satisfied with the outcome of every contact (s)he has with our people and service we provide. We have not completed our job until we meet this goal 100% of the time.
With more than 5.8 million subscribers in 37 U.S. states and Puerto Rico, Adelphia Communications Corporation is one of the nation's leading cable service providers. Adelphia achieved exponential growth in the 1980s and 1990s through aggressive acquisition strategies. Having made significant investments in fiber optic technology in the 1990s, Adelphia has added digital cable, high-speed Internet access, local and long distance telephone service, voice messaging, and other related services to its repertoire of home and business offerings. The company ran into significant trouble in 2002 when its fraudulent financial dealings and accounting practices were exposed. As a result of the scandal, founder John Rigas and his family ceded control of the company, and Adelphia filed for Chapter 11 bankruptcy protection. The company then entered a period of reorganization.
The Growth of Adelphia and Cable Television: Early 1950s to 1980s
The corporate roots of Adelphia Communications were inseparably linked with the Rigas family, whose experience in the cable television business predated the incorporation of Adelphia Communications by more than three decades. The patriarch of the family, John J. Rigas, first entered the business during its nascence in 1952 when he started his first cable system in Coudersport, Pennsylvania, with his brother Gus Rigas. The name chosen for the company--Adelphia--is the Greek word for "brothers," an apt corporate title for a business that would employ generations of the Rigas family. Then in his early 20s, John Rigas entered an industry in its infancy when he started Adelphia, unwittingly laying the foundation for what would become one of the largest cable television companies in the United States. It would be years, however, before the Rigas family could claim they stood atop a cable empire. Cable television was decades away from enjoying widespread popularity, decades away from the years that would witness the exponential growth in the number of subscribers across the country. Those days arrived during the 1980s, when Rigas, with lengthy experience as a cable television operator, stood poised to reap the rewards from an industry fast on the rise.
Although Adelphia Communications did not officially exist until 1972, the company entered its inaugural year of business with a considerable head start over other fledgling cable operators. The company served as an umbrella organization for the centralization of the various cable properties owned by Rigas, and, consequently, was supported by more than 20 years of experience from its outset. Adelphia Cablevision, Inc., the cable company started by Rigas in 1952, was the oldest of the five cable companies that Rigas reorganized into one company on July 1, 1986. Joining Adelphia Cablevision were Clear Cablevision, Inc., Indiana Cablevision, Inc., Western Reserve Cablevision, Inc., and International Cablevision, Inc., serving a combined total of 200,000 subscribers.
Together these companies formed the new Adelphia Communications, a Coudersport, Pennsylvania-based cable systems operator beginning business with $30 million in annual sales. In less than a decade the company's sales volume would increase more than tenfold and its number of subscribers would rise sixfold, as Rigas moved aggressively to expand his cable television holdings. In the years ahead the five original components of Adelphia Communications would be joined by a host of other established cable systems as Rigas, with his three sons at his side, mounted an aggressive acquisition campaign.
The company achieved prominence early on in western Pennsylvania and in western New York, where Rigas first established a presence in Niagara Falls in 1972. The addition of International Cablevision--one of the five original companies that formed Adelphia Communications--elevated Rigas's company to the number one position in western New York, giving the company 120,000 subscribers to add to its roster of customers. After taking Adelphia public in August 1986, Rigas completed the acquisition of three cable systems before the end of the year, purchasing the Suburban Buffalo System from Comax Telcom Corp., the South Dade System from Americable Associates, Ltd., and New Castle System from Cablentertainment, Inc.
Expansion Through Acquisitions in the Late 1980s
During the ensuing two years Rigas spearheaded the acquisition of more than ten cable systems, bolstering Adelphia's presence in western New York and extending its area of service into neighboring states. By the end of 1989 the company owned cable television systems throughout an eight-state region comprising Florida, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Vermont, and Virginia. Adelphia lost money each year during its expansion, but perhaps more important to the long-term health of the company was the manner in which it had expanded.
A strategy had emerged during the first few years of the company's existence, one that dictated the direction of its expansion during the late 1980s and continued to describe its physical growth during the 1990s. Instead of purchasing cable systems merely for the sake of increasing the company's magnitude, Adelphia targeted cable systems for acquisition that neighbored existing Adelphia systems, striving to entrench the company's position through acquisition rather than embracing as large a territory of service as possible. The benefits of grouping cable systems together would manifest themselves as Adelphia entered the 1990s, making the company an industry leader and reducing the sting of consecutive money-losing years.
Although the company's profitability had suffered as a result of the ambitious expansion, its revenue-generating capabilities had not. From the $30 million generated in sales during its first year, annual sales shot up to $131 million in 1988, increasing more than fourfold during a three-year span. Further financial growth was expected as the company's physical growth continued unabated, but as before, Rigas made it a practice to set his acquisitive sights on cable systems in proximity to Adelphia systems already in operation. One significant acquisition was the purchase of Jones Intercable in late 1989. Jones Intercable ranked as the third largest cable system operator in western New York, an area where Adelphia already reigned as the largest cable operator. Further, Jones Intercable in many cases operated in locations near towns that Adelphia already served, making the acquisition a strategic boon to the company's plan to develop an entrenched market position wherever it operated. Noting as much, Michael Rigas (John Rigas's son and Adelphia's vice-president) elaborated on the company's acquisition of Jones Intercable by remarking, "Whenever possible we look for systems that are adjacent to other systems that we own. Generally speaking, we try to cluster our systems together."
Another pivotal transaction completed in 1989 provided Adelphia with a powerful money-making business during the early 1990s. In 1989 the company entered into a partnership with unaffiliated parties to form Olympus Communications L.P., a southeastern Florida cable television joint venture that Adelphia managed for an annual fee. Comprising Adelphia's own South Dade System, which was acquired in late 1986, several neighboring cable systems in West Palm Beach, and several cable systems that were acquired in 1989 from Centel Corporation, Olympus Communications served roughly 250,000 subscribers and epitomized Adelphia's clustering strategy. During the first few years of its operation, Olympus Communications performed admirably, recording double-digit revenue and cash flow growth.
In the wake of the Jones Intercable acquisition and the formation of Olympus Communications, Adelphia began looking to acquire additional cable systems in specific areas, notably in Virginia; West Palm Beach, Florida; Syracuse, New York; and Hilton Head, South Carolina. As the plans for further physical expansion in the 1990s were being formulated, the company was also investing its resources into improving the infrastructure of its various cable systems--something it had been doing since its formation in 1986. In January 1990, the company announced it would start a five-year, $25 million system upgrade. Part of the upgrade consisted of the installation of 2,000 miles of cable, including a fiber-optic network that would double the number of available stations from 36 to 72, give sharper television images, and lessen the chance of interrupted service.
Enjoying National Prominence in the 1990s
Adelphia's continued commitment to improving the quality and technological capabilities of its cable systems stood as one of the hallmarks of its success during the early 1990s, proving to be as instrumental to the company's rise as a national contender as its practice to cluster cable systems together. Another definitive aspect of the company's success was its robust cash flow, which in part was attributable to the economies of scale engendered by the concentration of its cable properties. By 1992 Adelphia had transformed itself through acquisition and internal growth into the tenth largest television cable systems operator in the country--up from the 25th slot the company occupied in 1986--but in terms of cash flow the firm placed second to no one. Adelphia's operating margin of 57 percent of revenues represented the highest percentage in the U.S. cable industry, far higher than the industry average of 35 percent.
Aside from the company's enviable cash flow performance, there were other characteristics of Adelphia's operations that were indicative of its success in the past and pointed to growth in the future. By 1992 the company had invested nearly $350 million since its formation to achieve what one industry analyst referred to as "among the best channel capacities and addressability in the industry." The company's cable systems were state-of-the-art, capable of providing a quality of service that distanced Adelphia from competitors and kept its customers satisfied.
In terms of cash flow and technological capabilities, Adelphia held a decided lead over other competitors in the cable industry as the company operated during the early 1990s. In terms of the demographics of its markets, Adelphia also could boast superiority over many of the country's cable operators. Since its formation the company had targeted mid-sized, suburban markets, carving a presence in communities where incomes were high and populations were expanding. The strategy was paying dividends as Adelphia entrenched its position in these lucrative markets, fueling the company's growth. Historically, the primary regions where the company operated had demonstrated household growth rates that eclipsed the national average. By the early 1990s, after years of consistent growth, Adelphia's markets were recording household growth rates nearly 25 percent above the national average, further bolstering hope that the financial growth of the past would continue into the future.
Sales in 1992 amounted to $267 million, up nearly ninefold from the total collected in 1986. In 1993, sales jumped to $305 million. To sustain this pace of financial growth, Adelphia looked to physical expansion and resumed its acquisition program as it entered the mid-1990s. In 1994 the company agreed to purchase all the cable systems owned by WB Cable Association, Clear Channels Cable TV, and those owned by the Benjamin Terry family. In all, Adelphia gained 62,200 subscribers, a figure that paled in comparison to the nearly 1.5 million subscribers the company served at the time, but the acquisitions strengthened the company's position in key markets. The WB Cable system was situated in West Boca Raton, Florida, where Adelphia served 300,000 subscribers. The Terry family cable systems were located in Henderson, North Carolina, and the Clear Channels cable systems were located in the Kittanning, Pennsylvania, area. Further additions to the Adelphia system were made in 1995, when the company agreed to buy cable systems from four small operators that included southeastern Florida cable systems owned by Fairbanks Communications, plus others owned by Eastern Telecom and Robinson Cable TV in the Pittsburgh area, and cable systems in New England owned by First Carolina Cable TV. Together, the acquisitions added 108,000 subscribers to Adelphia's network, and each conformed to the company's strategy of clustering its cable system holdings.
The late 1990s marked a period of feverish consolidation across the cable industry: companies were merging, buying up smaller companies, and even exchanging systems with one another in a race to optimize the efficiency of their customer clusters and maximize economies of scale. During this period Adelphia made a number of key acquisitions that boosted the company into the position of the nation's sixth largest cable operator. In February 1999, Adelphia acquired Frontier Vision Partners L.P., a company with operations in New England, Ohio, Virginia, and Kentucky and a total of 702,000 subscribers. The transaction cost Adelphia $550 million in cash and $431.4 million in stock; further, the company assumed $1.1 billion in debt from Frontier Vision. The following month Adelphia purchased Century Communications Corporation for $3.6 billion plus the assumption of $1.6 billion of Century's debt. The acquisition brought Adelphia 1.6 million new subscribers in California, Colorado, and Puerto Rico. In April 1999, Adelphia made a third billion-dollar acquisition with the agreement to purchase Harron Communications Corporation's cable systems in New England and Philadelphia. This transaction cost Adelphia $1.17 billion in cash and added 300,000 subscribers to its roster. The aggregate gain of these acquisitions pushed Adelphia over the five million customer mark, a significant threshold for maximizing the benefits of an economy of scale.
Scandal Erupts: 2002
Adelphia continued to make other acquisitions and consolidation maneuvers through 1999 and 2000, bringing its subscriber base up to an impressive 5.5 million. Though the company was heavily indebted after the succession of major purchases, analysts were looking favorably on Adelphia as late as January 2002, noting that the company was well positioned for acquisition or merger with another major cable company.
On March 27, 2002, however, Adelphia officials disclosed $2.3 billion in previously unrecorded debt incurred through co-borrowings between Adelphia and other Rigas family entities under the umbrella of the family's private trust, Highland Holdings. Under these loan agreements, the Rigas entities were responsible for repaying the debt, but if they were unable to do so, Adelphia would be liable. The revelations and the investigation that followed sent the company spiraling deeper and deeper into a scandal that the Securities and Exchange Commission (SEC) eventually called, "one of the most extensive financial frauds ever to take place at a public company."
While the accounting omissions caused immediate investor concern, the loans themselves seemed commensurate with company practices dating back to 1997 and thus not necessarily illegitimate. Adelphia moved to delay filing its 2001 annual report and restate its financial results for the past three years in order to clarify and properly account for the debt. Still, within a month of the disclosure, Adelphia faced a 70 percent dive in its stock price, investigations by the SEC and federal prosecutors in Pennsylvania and New York, and possible delisting from the NASDAQ.
The Rigases, it appeared, had used much of the loan money to acquire Adelphia stock; they had also used loan money to finance the purchases of cable properties separate from Adelphia. As the scandal unfolded the litany of questionable dealings between the Rigas family and Adelphia continued to grow: it included, but was not limited to, the purchase of office furniture for Adelphia from a Rigas-owned company at exorbitant prices; the building of a private Rigas family golf course with Adelphia funds; the Rigas family's exploitation of company airplanes and other luxuries; and the maintenance of a chef and other family staff on Adelphia's payroll. While the Rigas family used company funds in numerous inappropriate ways, it also manipulated the accounting of the transactions to create a falsely inflated picture of the company's financial condition. By June 2002 it was revealed that the company had significantly overstated its cash flow as well as the number of its cable subscribers for 2001.
The practical implications of the scandal for Adelphia were devastating. In a move aimed at regaining the confidence of lenders and potential investors, a special committee of independent directors and creditors forced the Rigas family to surrender control of the company, and Erland E. Kailbourne was installed as chairman and interim CEO. The next step was to renegotiate loans and sell off assets in order to stabilize the company's debt. But investing in the future of the tarnished cable company proved to be too risky a venture for any of Adelphia's potential buyers, and after a month of scrambling to find alternatives, the company filed for Chapter 11 bankruptcy on June 25, 2002, with debts totaling $18.6 billion.
Despite the chaos, figures for June and July 2002 showed a solid performance for Adelphia's base business. With bankruptcy protection alleviating the immediate pressure to liquidate valuable assets, the company hoped to reorganize and regain its footing. Still, at the close of 2002, the forecast for Adelphia's future remained uncertain.
Principal Subsidiaries: Adelphia Cablevisions, Inc.; Clear Cablevision, Inc.; Indiana Cablevision, Inc.; Western Reserve Cablevision, Inc.; International Cablevision, Inc.
Principal Competitors: AT&T Broadband; DIRECTV, Inc.; EchoStar Communications Corporation.