Rumble in the Magic Kingdom?

Substantial changes expected to come from Disney board meeting today; will Eisner end up with only one title? Plus: Indictments handed out in Adelphia case, Xerox acknowledges probe, and junk bond defaults plummet.


Walt Disney on Tuesday will hold a board of directors meeting that many observers believe will result in substantial changes in its corporate governance.

Among the likely topics to be discussed: chief executive Michael Eisner’s succession plan, a reduction in the size of the board from its current 16 members, and an increase in the number of independent directors.

Bear in mind that a couple of weeks back, hedge fund manager Herb Denton of Providence Capital hosted a meeting among a large number of institutional investors. At the gathering, the portfolio managers discussed corporate-governance issues they believe Disney should consider. Among their recommendations: separate Eisner’s chairman and CEO titles.

Board members Stanley Gold and Roy Disney, who are credited with bringing in Eisner during the 1980s when corporate raiders were threatening to bust up the company, are reportedly major proponents of change.

Back in January, Disney did get out in front of the corporate accountability issue when company management said it would no longer use its independent auditing firm to perform nonaudit-related consulting work.

In August, Disney admitted that three of its independent board members had adult children employed by the company, receiving salaries ranging from $81,863 to $152,608. Another independent board member’s wife is employed at Lifetime Entertainment Television, a cable network half-owned by Disney.

Indictments Handed Out in Adelphia Case

Five former top executives of Adelphia Communications Corp.—including several high-ranking employees in the cable company’s finance department—were indicted on Monday on charges they stole hundreds of millions of dollars from the company.

According to wire service accounts, John Rigas, the 78-year-old founder of the cable giant, was indicted, along with his sons Timothy and Michael, for allegedly perpetrating securities fraud, wire fraud, and bank fraud. Timothy J. Rigas formerly served as Adelphia’s chief financial officer, while Michael J. Rigas was the company’s vice president of operation. Both executives resigned near the end of May, as did the elder Rigas. Adelphia filed for Chapter 11 bankruptcy protection on June 25.

In addition to the charges against the Rigas family members, the Manhattan federal court also indicted James R. Brown, former vice president of finance at Adelphia, and Michael C. Mulcahey, the onetime director of internal reporting at the company.

The former Adelphia executives were arrested on July 25. Attorneys for the five defendants deny their clients committed any wrongdoing.

Adelphia’s current management has also filed a lawsuit against the three Rigas family members. That suit claims the three conspired to use company money for their own gain. Specifically, the company suit asserts that off-the-book transactions and self-dealing by the Rigas family led to damages and loss of market capitalization of about $1 billion. Adelphia management is seeking triple damages.

To date, Rigas family members have been hit with about 40 civil suits, not to mention Monday’s criminal indictments. Last week, John Rigas and three of his sons went to court to convince a judge that they’re entitled to payments under Adelphia’s directors’ and officers’ liability insurance.

So far, the primary provider of the D&O insurance, Associated Electric & Gas Insurance Service Ltd., has failed to make any payments to the Rigas family members. According to a report on Dow Jones Newswires, Associated Electric indicated it has “serious doubts” whether the Rigas defense costs would be covered even if the bankruptcy stay on D&O payments is lifted.

Indeed, Associated Electric reportedly claims that much of the alleged wrongdoing conducted by Adelphia’s former top managers appears to have occurred before the December 31, 2000, inception of the insurance policy and a January 23, 2001, signing of the policy by the elder Rigas.

Xerox Acknowledges Federal Probe

Late last night, management at Xerox Corp. indicated the U.S. attorney’s office in Bridgeport, Connecticut, is indeed investigating the company’s past accounting issues.

As disclosed on April 11, Xerox concluded its settlement with the Securities and Exchange Commission related to accounting matters that had been under investigation since June 2000.

Under the terms of the settlement, the company restated its financials for the years 1997 through 2000 and adjusted its previously announced 2001 results.

On June 28, Xerox filed its 2001 10-K, which included its restated financials from prior years.

The company said it will cooperate fully with the U.S. attorney’s office.

Finance Executives: We Should Go Beyond GAAP

More than half (56 percent) of U.S. general and finance managers say companies should report more than is required by generally accepted accounting principles to provide visibility into their operations and restore confidence in financial reporting. This, according to a Web survey conducted by Hyperion Solutions, a business performance measurement company.

“It’s no secret that companies’ integrity is under question generally, and that financial reporting is under suspicion specifically, so it would follow that the majority of managers would advocate stepping forward and essentially saying ‘we have nothing to hide’ by providing additional information,” said Jeff Rodek, CEO of Hyperion. “At the same time, the fact that 44 percent don’t feel additional reporting is needed points towards a possibly growing desire to move past what many feel is unnecessary witch-hunting.”

Added Rodek: “Complying with new regulations and requirements from GAAP, FASB, the SEC, and others is hard enough to do given most companies’ inability to access accurate data in a timely manner.”

He noted that according to his data, most companies are unable to close their books in 11 days or less.

“Our suspicion is that even the 56 percent who say they should report more than required by GAAP would most likely have a hard time doing so given how widespread the problem of overlong reporting cycles [is],” asserted Rodek.

As reported here yesterday, more than half of senior executives at U.S. and European multinational companies believe their company should improve its level of transparency to investors and other stakeholders, according to a PricewaterhouseCoopers survey.

Although 80 percent of the respondents said their company now provides a high level of disclosure, about 40 percent say they would personally expect more information from their company if they were an outside investor.

Moody’s Says Junk Defaults Plummet

More good news for companies with noninvestment-grade credit ratings.

The default rate for speculative-grade corporate bond issuers in August posted its largest one-month decline since July 2000, falling 0.5 percent to a level of 9.6 percent, according to Moody’s Investors Service.

The default rate has dropped for six out of the eight months in 2002.

This decline comes as junk bond mutual funds have enjoyed four straight weeks of net inflows of cash, according to AMG Data Services.

Moody’s also predicted that the speculative-grade default rate would end 2002 near 9.8 percent—little changed from its current level—but would fall to about 8.5 percent by August 2003.

The rating agency did warn, however, that it expected the decline in the default rate to occur slowly, and that the default rate will likely remain high in the near term.

“Significant hurdles will need to be overcome before we see a material decline in the default rate,” warned David T. Hamilton, director of default research at Moody’s. “A lot of things need to go right for aggregate credit quality to get better, and only one or two things to go wrong to keep things where they are or get worse.”

Hamilton cited an excess of credit-rating downgrades, a widening high yield spread, deteriorating equity values, and macroeconomic weakness as factors preventing a quick drop in the pace of corporate defaults.

Seven issuers defaulted on a total of $10.2 billion of bonds globally in August. Three issuers were based in the United States; one each came from Brazil, the United Kingdom, Argentina, and Sweden.

Year-to-date, the dollar volume of rated and nonrated defaulted debt totals $139.5 billion, already surpassing 2001’s record $135 billion.

August’s largest defaults were Conseco Inc. ($5.1 billion) and Marconi Corp. ($3.3. billion).

Short Take

As expected, Peregrine Systems Inc. on Monday filed suit against Arthur Andersen, Arthur Andersen Germany, Andersen Worldwide SC, and auditor Daniel Stulac, charging they failed to properly audit the company’s books and allowed revenue to be overstated for nearly three years. Peregrine is seeking more than $1 billion for two charges of fraud, professional malpractice, and breach of contract.

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