Schleyer in Limbo


New York— William Schleyer's bid to be chairman and CEO of Adelphia Communications Corp. remained on hold last week, despite a four-day hearing in U.S. Bankruptcy Court for the Southern District of New York.

After sometimes brutal testimony and cross-examination from lawyers representing the Adelphia estate, creditors, equity holders and even the disgraced founding Rigas family, Judge Robert E. Gerber said he was likely to make a decision sometime this week.

Closing arguments were expected to take most of the day last Friday.

"I will shoot for a decision on Monday, but I want to do this right," Gerber said last Thursday, after the third full day of testimony.

Gerber appeared frustrated by the length of the hearing, which started on Feb. 24 and has averaged nearly 12 hours a day.

At issue is the three-year, $40 million contract Adelphia offered former AT&T Broadband executives Schleyer and Ron Cooper to become the company's new chairman/CEO and president/chief operating officer, respectively.

The Coudersport, Pa.-based MSO and its creditors' committee favor the contract, but a committee of equity holders has called the deal excessive, claiming Adelphia did not conduct an adequate search for a CEO.

"I have not made a final decision as to what I would do if the court reduced my compensation," Schleyer said in response to a lawyer's question. "It would depend on a lot of factors, including my conversations with Cooper and others."

Another deal cratered

The equity committee — led by one of Adelphia's largest shareholders, Citizens Communications Inc. chairman Leonard Tow — contends that creditors railroaded Adelphia into selecting Schleyer and Cooper, even after Adelphia directors had already selected another CEO.

Attorneys for the estate and the creditors countered that Schleyer and Cooper were the best men for the job, and the prior CEO choice asked for even more money.

Schleyer and Cooper agreed to accept the positions at Adelphia on Jan. 16. Until Gerber approves their appointments, they are paid consultants to the company receiving $9,600 and $6,400 per day, respectively.

Last July, chairman and CEO John Rigas; his sons, chief financial officer Timothy Rigas and executive vice president of operations Michael Rigas; and two other top executives resigned amid a massive corporate accounting scandal.

Since then, former Fleet Bank N.A. president Erland Kailbourne, also an Adelphia director, has served as chairman and interim CEO amid a search for a new chief.

According to testimony, Adelphia had at least two other serious candidates for the position before deciding on Schleyer and Cooper. And the board actually selected former Renaissance Cable vice chairman (and current Adelphia director) Rod Cornelius as CEO in August.

Adelphia's creditor committee blocked Cornelius's appointment after what company adviser David Kurtz, a managing director at Lazard Fréres & Co., testified was an "ugly exchange."

According to Kurtz, last Oct. 1, the creditors' committee met with Cornelius and interviewed Schleyer, Cooper and someone else identified only as "Candidate X." The get-together with Cornelius ended in a heated exchange centered around his expected pay package.

Kurtz testified that Cornelius asked for $177 million to $265.2 million over three years, based on his ability to raise Adelphia's market capitalization by 20 percent or 30 percent. Cornelius disputed that amount in a deposition that was not released to the public.

A creditors' committee member said he "wanted to puke" after reading Cornelius's contract, Kurtz said.

"It was concluded that Cornelius had lost any ability to work in a constructive manner with the creditors' committee," Kurtz said.

Creditors weren't much more pleased with Schleyer's and Cooper's first proposed contract, which would have paid the two a combined $65 million over two years.

Schleyer said he first contacted Adelphia in July, after Cooper had sent in a resume and expressed interest in the CEO job.

In testimony, Schleyer said he then contacted Kailbourne, proposing that he become CEO with Cooper as chief operating officer.

Schleyer added that he conferred with Cooper before contacting Kailbourne, and both men agreed to the arrangement.

Then Schleyer and Cooper — employed at the time by AT&T Broadband as CEO and COO — lost touch with Adelphia until September, when they contacted the creditors. (The two executives left Broadband after it consummated its merger with Comcast Corp. in November.)

Adelphia's board had already approved Cornelius as CEO, but the creditors were intrigued. They started negotiations with Schleyer and Cooper and notified Adelphia's board.

Capellas comparisons

Adelphia later informed Schleyer that the creditors preferred to base his compensation on that of Michael Capellas, the recently appointed chairman and CEO of bankrupt WorldCom Inc., he testified.

Capellas had first engineered a contract that would pay up to $50 million over three years. A bankruptcy court judge reduced that payout to $30 million over three years.

Schleyer testified he had expected such a model, and first proposed that he receive 100 percent of Capellas' contract.

Adelphia countered with 75 percent of the Capellas contract, which Schleyer rejected.

Attorneys for the equity committee claimed the board had to trim Schleyer and Cooper's original contracts after an article outlining the deal appeared in The New York Times on Jan. 9.

Schleyer rebutted that claim, but confirmed he was not pleased.

"That article was an embarrassment to me personally, and I don't think the board felt good about it," Schleyer said.

In his testimony, Schleyer said that because he believed that it would take longer for Adelphia to emerge from bankruptcy — two years, as opposed to one year for WorldCom — he initially thought that even 85 percent of the Capellas contract was too little.

"If I took 85 percent and it took two years to emerge from bankruptcy, that was like getting 42.5 percent of the Capellas numbers," Schleyer said. "That was a subject of great consternation to me and Ron."

At 85 percent — which the parties eventually agreed upon — Schleyer would receive $8.2 million annually in salary, bonus and incentive awards. Cooper would receive $5.5 million annually.

That works out to 141 percent of the Capellas contract.

Equity committee lawyers argued that WorldCom and Adelphia should not be compared, because of the huge difference in the size of the two companies.

WorldCom's annual revenue stands at about $28 billion, compared with $3.5 billion for Adelphia. WorldCom also has about 60,000 employees, versus Adelphia's 15,000.

But in testimony, compensation expert Pearl Meyer — who was hired by Adelphia to review the employment contracts — said Adelphia should be compared with companies having comparable cash flow. On that basis, even the initial Schleyer and Cooper contracts were reasonable, she said.

WorldCom reported cash flow of $6.3 billion in 2001, the latest figures available, compared with $1.2 billion for Adelphia in the same time frame.

Cash-flow hit

Separately, Cary Stanford, a managing director at Saybrook Restructuring Advisers, also testified last Thursday that Adelphia would have to reduce its 2002 cash flow by about $102 million as a result of accounting changes.

In court, Stanford said the company had been capitalizing costs associated with reconnecting customers, when those costs should have been booked as an operating expense.

While there are no hard rules regarding how reconnects are expensed, most cable companies have leaned toward recording them as operating expenses, which would effectively lower an operator's cash flow.

Capitalizing those costs would allow a company to spread out the expense over a period of time, thus reducing the impact on the bottom line.