SUB-COUNT INFLATION?

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The Adelphia Communications Corp. controversy plumbed new depths last week, when a report published on Friday claimed that the company inflated its subscriber numbers by nearly 10 percent, and that the founding Rigas family kept two separate sets of accounting books outlining capital expenditures.

Adelphia, which has been teetering on the brink of bankruptcy for weeks, now faces claims that it had inflated its customer rolls by between 400,000 and 500,000 homes — nearly 10 percent of its 5.8-million subscriber base.

The Wall Street Journal
report, which cited unnamed sources, said Adelphia counted customers who subscribed only to high-speed data service as cable customers, and counted connections to multiple-dwelling units (MDUs) as multiple connections, even though only one customer was paying the bill.

Adelphia director of investor relations Karen Chrosniak said the company would have no comment on the Journal
article.

While the speculation that Adelphia had inflated its subscriber numbers was not new, the amount reported was far higher than the 60,000 previously expected. Also, previous reports hinted that the inflated subscribers were merely customers that were contained in outside partnerships that Adelphia managed, but did not own. This latest revelation accuses the company of manufacturing customers out of thin air.

If the allegations are correct, it could be a devastating blow to Adelphia, and the Rigases, who have had more than their share of bad news in the past three months.

"If that's true [inflating subscribers by 400,000 to 500,000 customers]," said one holder of Adelphia bonds, "then they had to be misstating everything else. Were they overstating revenue, too? It's just a mess."

MITIGATING FACTORS?

In a research report issued last Friday morning, one bond analyst said the subscriber disparity might not be as insidious as had been portrayed.

UBS Warburg high-yield cable analyst Aryeh Bourkoff said the inflated subscriber numbers might be the result of the MSO's cable partnerships. Bourkoff wrote that Adelphia owns 75 percent of 800,000 subscribers in Los Angeles (AT&T Corp. owns the other 25 percent), as well as 67 percent of another partnership with AT&T in Buffalo, with about 475,000 subscribers. Bourkoff said Adelphia counts 100 percent of the subscribers in those partnerships as its own.

Those AT&T interests work out to roughly 358,000 subscribers, said Bourkoff, acknowledging that the subscriber discrepancies reported in the Journal
might be separate from those partnership interests.

With respect to the MDU subscribers, Bourkoff said it was common practice for cable operators to receive only one payment from an MDU — usually from a landlord or owner.

"However, the bill for this one subscriber would be based on a fee per unit of the MDU that subscribes to the cable service, which would roughly equate to the [average revenue per unit] for a stand-alone customer," Bourkoff wrote. "At this point, there is not enough adequate information to tell what actually occurred with respect to the subscriber numbers."

TWO CAP-EX BOOKS?

The Journal
also reported that securities investigators found that Adelphia kept two sets of books regarding its capital expenditures. One set that was shown to Wall Street analysts reflected a higher amount of spending on plant upgrades.

While Adelphia was telling analysts that it had upgraded about 50 percent of its plant, in reality it had only rebuilt about 40 percent, the Journal
reported.

"Most detrimental to this sector is leverage," SunTrust Robinson Humphrey cable analyst Gary Farber said last Friday. "If you have rising debt, and it is questionable where the money is being spent, that's a big problem."

The news has already affected cable stocks, which hit new 52-week lows for the second day in a row on Friday.

All nine publicly traded cable operators showed declines in morning trading last Friday, with Adelphia leading the pack. Its shares fell 69.7 percent, or 46 cents, to 20 cents apiece in early Friday trading.

Other cable issues dropped to record lows. Charter Communications Inc. — pummeled over the past few months because of its heavy debt load — fell to $5.02 on Friday, its lowest point since the company went public in November 1999.

Mediacom Communications Corp. fell to $9.65, its lowest point since June 2000, and Insight Communications Co. dropped to $13.35 on Friday, its lowest point since November 2000.

Cablevision Systems Corp. ($14.62 per share) reached its lowest point since 1997.

Stocks in Comcast Corp. ($25.10), AOL Time Warner Inc. ($15.80) and Cox Communications Inc. ($29.79) were at their lowest points since 1998.

AT&T Corp. ($11.33) hit its lowest point in more than a decade.

"Cable is basically the opposite of the Visa card — it's everywhere you don't want to be in the market," said Banc of America Securities LLC analyst Doug Shapiro. "It's highly leveraged, and people are scared of leverage; it's a long-duration asset, meaning the residual benefits to equity holders are years out; and it's loosely associated with telecom.

"On top of all that, you have to lump the Adelphia problems. It's a pretty insidious combination, and the irony is that the fundamentals of the business are probably as good as they've ever been."

Cash needed

Adelphia is frantically trying to raise cash to avoid bankruptcy. The company has a June 15 deadline to pay $50 million in interest on its bond debt, and it's already missed $45 million in interest payments on debt securities and preferred stock.

While sources said Adelphia's board of directors was in intense negotiations to raise about $1 billion from its banks and several private-equity firms, observers said it was highly unlikely it will be able to raise the needed money.

Moody's Investors Service vice president and senior analyst Russell Solomon — who downgraded all of Adelphia's debt last week, and said a bankruptcy filing was "imminent" — said Adelphia is concentrating on conserving cash.

"We know they're delaying payments on programming and other operating expense items," Solomon said. "They're in cash-preservation mode right now, that's why they've lasted as long as they have."

Also last week, it was revealed that Adelphia had to make an unprecedented $1 million upfront cash payment to the distributors of the June 8 Lennox Lewis-Mike Tyson pay-per-view boxing match.

Sources close to the situation said Adelphia paid fight co-distributors Home Box Office Pay-Per-View and Showtime Event Television more than $1 million to secure distribution rights to the fight. Both companies had expressed concern that the financially strapped MSO would not be able to pay its revenue split.

In a filing with the Securities and Exchange Commission late last Thursday, Adelphia said it refused to pay the legal fees of five company executives last week — including four members of the Rigas family — using its strongest language to date against the founders of the Coudersport, Pa.-based MSO.

In an 8-K securities filing late last Thursday, Adelphia's board said John, Timothy and Michael Rigas — as well as John Rigas's son-in-law and board member Peter Venetis and former vice president of finance James Brown — "deliberately breached their fiduciary duties to the company and/or its shareholders.

"As a result, under the company's bylaws, these individuals are no longer entitled to have the expenses (including the fees and expenses of their counsel) incurred in defending actions against them advanced to them by the company."

The board said it could reconsider its determination on Venetis if he presents "appropriate information."

The 8-K filing was the harshest public statement the board has made against the Rigas family since Adelphia's troubles first surfaced on March 27. It was at that time the company revealed that it had $2.3 billion in off-balance sheet debt the MSO could be liable for. That figure has since ballooned to $3.1 billion.

Since that time, Adelphia has revealed a series of self-dealing transactions by the Rigases that show the family used the MSO as a personal bank account.

The Rigases and Brown had already resigned as officers of the company; the Rigases also resigned from Adelphia's board of directors.

Venetis, who is John Rigas's son-in-law, has resisted resigning from the board, but last week sources said he was expected to step down, amid intense pressure from the remaining board members.

Adelphia's independent board members — including interim CEO Erland Kailbourne, Peter Metros, Dennis Coyle, Leslie Gelber, Leonard Tow and Scot Schneider — are essentially running the show at Adelphia now.

Last week, that group made moves that indicate it wants to continue operating the company.

NEW EXECS NAMED

Also in the 8-K filing, Adelphia said it named two new executives on June 1: executive vice president, treasurer and chief financial officer Christopher Dunstan and senior vice president and chief accounting officer Steven Teuscher.

Dunstan and Teucher will assume the duties of Timothy Rigas, who had served as CFO and chief accounting officer.

Teuscher comes from his own independent business consulting firm in Portville, N.Y. Prior to that, he was chief financial officer of Kinley Corp., a Portville general contractor.

Since 1997, Dunstan served as a member and director of The John R. Oishei Foundation, a charitable foundation in Western New York with over $240 million in assets under management. Dunstan also has had his own business consultancy and had served as CFO of Sentry Group, a consumer-products company based in Rochester, and as executive vice president and general manager of Trico Products, a Buffalo-based auto parts supplier.

Bringing on new executives might not help much. Most observers believe Adelphia is perilously close to a bankruptcy filing.

Although the board of directors is said to be engaged in intense meetings with bankers, some observers say it is only a matter of time before the Adelphia thrust into Chapter 11 bankruptcy.

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