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Adelphia Funds Rebuild Effort

Also, revised accounting cuts subscriber count 6/01/2003 08:00:00 PM Eastern

In new management's continuing journey toward more-normal operations, ailing Adelphia Communications has secured approval to spend $1.5 billion in large part to upgrade low-capacity systems.

At the same time, Adelphia has drastically reduced its count of the number of digital subscribers its systems had secured. When ousted Chairman and CEO John Rigas was running the show, Adelphia used an aggressive definition of what a "subscriber" actually is.

The now-revised accounting practices weren't necessarily fraudulent, just more aggressive interpretations of industry accounting practices. But Rigas and two sons, Michael and Tim, still face a variety of criminal charges for their use of the public company's resources for family business. (The Rigases acknowledge many of the insider deals but dispute prosecutors' characterization of them as illegal.)

The loan approval allows Adelphia to tap financing that has been tied up for almost a year. When the scandal-plagued cable operator filed for Chapter 11 bankruptcy protection last June, it had already lined up "debtor-in-possession" financing with three major banks. DIP financing furthers the primary goal of bankruptcy protection, allowing the debtor to stay in business and hopefully allowing a fuller payout to creditors than simply shutting down and liquidating operations would allow.

But the money was not released until lenders signed off on an operating budget. As of March 30, Adelphia had been able to tap only $330 million of the facility.

Recently hired CEO Bill Schleyer—who previously ran AT&T Broadband—plans to use the money to complete the upgrades. Today, about 70% of the company's systems have been upgraded to capacity of 550 MHz or more. Schleyer aims to take that to 90%.

In the meantime, the financial restatements keep coming. In an SEC filing, Adelphia revised the way it counts subscribers. The Rigas family treated each digital converter deployed as a digital subscriber. Put a digital converter in your living room and another in the bedroom, and you would be counted as two digital subscribers. New management—and other MSOs—take a more conservative approach, counting "second-set" digital homes as just one digital subscriber.

According to the Rigases, Adelphia had secured 2.4 million digital subscribers by last September, a huge 40% penetration of its basic subscribers. By Schleyer's count, Adelphia really had just 1.7 million digital subscribers, 30% fewer.

Schleyer also tweaked Adelphia's method for counting basic subscribers. The difference comes in apartment buildings that have discounted, bulk-rate deals. With most operators, a 100-unit apartment building getting a 20% discount is treated as 80 "equivalent basic units." But Adelphia counted "doors," treating even those discounted subscribers as 100 units.

Adelphia's method is not necessarily fraudulent: Cablevision Systems also "counts doors." It's an aggressive method that allows an MSO to brag about subscriber counts and basic penetration. Schleyer's new method, on the other hand, will make revenues and cash flow per subscriber look better.

Adelphia, Really
New management at the scandal-rocked Adelphia Cable revised its subscriber counts, primarily by counting digital subscribers more conservatively. Below is a look at how Adelphia once reported its subscribers. Under the new management, figures for December '02 and March '03 did not need to be revised.
Basic subs Digital subs High-speed data
Old Revised Diff. Old Revised Diff. Old Revised Diff.
Source: Company report
Mar. 02 5,454,116 5,427,219 -26,897 2,157,369 1,502,564 -654,805 398,782 396,016 -2,766
Jun. '02 5,451,731 5,425,404 -26,327 2,344,171 1,631,970 -712,201 492,451 489,718 -2,733
Sep. '02 5,377,026 5,350,036 -26,990 2,425,570 1,692,482 -733,088 555,515 553,178 -2,337
Dec. '02 5,321,675 1,783,480 627,170
Mar. '03 5,302,533 1,837,871 711,736
September
October