Lining Up 'Dip' Dough

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Adelphia Communications Corp. inched closer to bankruptcy last week, seeking out a deal with a number of banks for $1.5 billion in financing to help it through a Chapter 11 bankruptcy filing, according to several published reports.

While no deal has been secured yet, reports in The Wall Street Journal
and the Financial Times
said that the company was seeking debtor-in-possession financing from a series of banks including JP Morgan Chase & Co., Salomon Smith Barney Inc., Bank of America and General Electric Capital Corp. as part of a pre-packaged Chapter 11 bankruptcy filing.

Adelphia's board of directors was slated to meet last Saturday, where they were expected to discuss a possible bankruptcy filing.

Most industry observers had expected Adelphia to file for bankruptcy protection before June 15, its deadline to pay off $50 million in bond interest. The MSO had already missed a $45 million interest payment on debt securities and preferred shares.

Adelphia also named PriceWaterhouseCoopers as its new auditor, replacing Deloitte & Touche, which the MSO dismissed on June 9.

The Coudersport, Pa.-based MSO has been scrambling to right its sinking ship since March 27, when the company revealed in its fourth-quarter conference call with analysts that it had $2.3 billion in off-balance-sheet debt. Since then, that debt has ballooned to $3.1 billion.

A bankruptcy filing would be another sad chapter for what has snowballed into a scandal of epic proportions for the Rigas family, Adelphia's founders and controlling shareholders.

Since March, Adelphia's woes have grown to include a series of self-dealing transactions with the Rigases that revealed the founding family was using the MSO like a personal bank account.

The ensuing scandal forced founder and chairman John Rigas to resign from the company, along with his sons Michael, Timothy and James. Another Rigas family member — son-in-law Peter Venetis — had been the lone holdout, clinging to his board seat while the rest of the family was forced overboard.

Venetis resigned his board seat June 11.

L.A. BREAKDOWN

As more information about murky family relationships with the company trickles out, Adelphia's options have become more limited. It had been in negotiations to sell its Los Angeles systems to Charter Communications Inc. chairman Paul Allen last month.

But those talks broke down when the parties could not agree on price and, one informed source said, could not determine whether Adelphia or its competitive local-exchange carrier unit, Adelphia Business Solutions, owned key local fiber assets.

The biggest blow yet to Adelphia came on June 10, when it revealed in a filing with the Securities and Exchange Commission that it would restate revenue and cash flow for 2000 and 2001 as a result of questionable accounting practices.

In the filing, Adelphia reduced its 2000 consolidated revenue by $60 million, to $2.548 billion from $2.608 billion; and its 2001 revenue by $70 million, to $3.51 billion from $3.58 billion. Earnings before interest, taxes depreciation and amortization (EBITDA), also known as cash flow, were reduced by $160 million in 2000, to $1.042 billion from $1.202 billion; and by $210 million in 2001, to $1.199 billion from $1.409 billion.

Also in the statement, Adelphia reduced its number of total subscribers to 5.763 million from 5.81 million, a reduction of 47,000 customers, because of new estimates regarding bulk subscribers.

Earlier published reports had put that subscriber discrepancy at between 400,000 and 500,000.

In the SEC filing, Adelphia said the subscriber numbers include joint ventures. Were it to back out of those partnerships, Adelphia's subscriber rolls would reduce by an additional 358,000 subscribers, by some analysts' estimates.

Perhaps the most surprising revelation was that Adelphia had entered into agreements with its two set-top box vendors — Scientific-Atlanta Inc. and Motorola Inc. — to raise the price of the equipment by $26 apiece, and to separately receive the same amount from vendors in marketing support.

According to the 8-K filing, Adelphia did not provide a material amount of marketing support for such payment. As a result, the company reduced cash flow by $54 million in 2001 and by $37 million in 2000.

Scientific-Atlanta Inc. last week issued a statement that claimed all of its dealings with Adelphia over the years "have been legal in all respects, and were properly accounted for by us in the financial statements.

"Marketing payments or credits we provided to Adelphia were deducted from, or netted against, gross sales. Therefore, these amounts do not appear as sales in our financial statements. Beyond that, we cannot comment on specific transactions with customers."

Among the other culprits in Adelphia's reduction of revenue and cash flow include:

  • Certain interactive cable-service providers paid Adelphia with their financial instruments, which have been impaired. That impairment was not reflected in EBITDA. The result: a reduction in revenue and EBITDA of $52 million in 2001 and $28 million in 2000.
  • An EBITDA reduction of $42 million for 2001 and $23 million for 2000, resulting from accounting changes to its programming agreements.
  • A $40 million EBITDA reduction for both 2000 and 2001, stemming from capitalization of labor expenses for subscriber disconnections and call-center operations. Adelphia's board said the labor costs should have been expensed.
  • A reduction in EBITDA of $18 million in 2001 and $19 million in 2000 stemming from transactions between CLEC Adelphia Business, Adelphia, various Rigas family entities and other third parties regarding management fees paid by Adelphia.
  • A $4 million reduction in revenue and EBITDA in 2001 and a $13 million reduction in 2000, regarding the past practices of reporting revenue from new services ratably over the expected period of service—even though Adelphia did not charge for the service during the first few months.

In the filing, Adelphia's board of directors added that the percentage of company plant that had been reported as rebuilt was "unreliable," and that company management plans to correct the information.

Earlier reports had raised questions of whether the Rigases kept two sets of books: one for Wall Street that showed its plant was 50 percent rebuilt, and another which said only 40 percent of the plant had been upgraded.

TOW BOWS OUT

The June 10 SEC filing appeared to be the last straw for Adelphia's largest individual shareholder outside of the Rigas family, Leonard Tow, who resigned his seat on the company's board of directors just two weeks after he was appointed.

Tow, who owns 12 percent of Adelphia's outstanding stock through various personal and family partnerships, had fought for weeks to gain the board seats he claimed he was entitled to ever since he sold his Century Communications Corp. to Adelphia in 1999 for $5.2 billion in stock and assumed debt.

But after two weeks on the board, Tow and his associate Scott Schneider, vice chairman of Citizens Communications Inc., threw in the towel. Tow is chairman of Citizens.

In a letter to Adelphia's board dated June 10, Tow said that he and Schneider joined the board with the intention of restoring Adelphia's credibility and stabilizing its finances.

"However, subsequent revelations of the unreliability of corporate data, as well as the ongoing serial disclosures of wrongdoing, have made it impossible to contribute meaningfully to the process," Tow wrote. "Accordingly, Scott Schneider and I herewith tender our resignations from the board, effective immediately."

In the letter Tow said that he reserves his rights as a shareholder of Adelphia.

Tow's letter was followed by the bankruptcy filing of an Adelphia subsidiary — Century Communications — which contained Adelphia's Puerto Rico assets. In a statement, Adelphia said it was forced to file after its 50 percent partner, ML Media Partners, demanded the MSO buy out its interest in the partnership for $275 million in cash.

The Century systems have about 135,000 subscribers in a handful of cities in Puerto Rico, including San Juan. Adelphia has been trying to sell the systems for more than a year.

Century and ML Media purchased the properties in 1989 for about $7.8 million.

Adelphia became 50 percent owner of the joint venture after it purchased Tow's Century Communications Corp., with about 1.5 million subscribers in Los Angeles and several other smaller cities. The non-Puerto Rico assets were placed in a separate partnership, called Arahova Communications Inc.

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