Adelphia Dissident Throws in the Towel

Updated from 12:44 p.m. EDT

Adelphia Communications said Monday morning it was dismissing longtime auditor Deloitte & Touche and was provisionally restating financial reports for the past two years.

Meanwhile, a major Adelphia shareholder who fought his way on to the troubled cable operator's board of directors two weeks ago said Monday he was quitting, calling it "impossible" for him to make a meaningful contribution to the company's financial stability.

Adelphia, saying the previous management's financials contained errors and were based on policies less conservative than what the company will use going forward, said the company had overstated earnings before interest, taxes, depreciation and amortization -- a common media industry bottom-line yardstick -- by 17.5% in 2001 and 15.3% in 2000.

Adelphia, which until last month was controlled by the Rigas family of Coudersport, Pa., also overstated its revenue in 2000 and 2001 by about 2%, according to a filing Adelphia made Monday at the Securities and Exchange Commission. The company overstated its subscriber count by about 1% when it reported 2001 full-year financials at the end of March, according to the new board, led by Chairman and acting CEO Erkie Kailbourne.

The latest financial disclosures, which Adelphia characterized as preliminary conclusions based on its ongoing effort to untangle the finances of the Rigas family's regime, indicate that cleaning up Adelphia's books and sorting out responsibility for their state will not be simple tasks.

They also grease the slide of other cable stocks, though other cable operators haven't been accused of the financial misstatements and related-party dealings in which Adelphia is alleged to have engaged. Two other highly leveraged cable operators, Charter Communications (CHTR Quote - Cramer on CHTR - Stock Picks) and Cablevision (CVC Quote - Cramer on CVC - Stock Picks), were each down about 9% at midday Monday.

Adelphia's shares, now quoted on the pink sheets, changed hands at 23 cents a share Monday, down 7 cents for the day. The shares are down 99% since the company's late March disclosure of the potential liabilities that precipitated Adelphia's financial crisis.

The company didn't provide any details regarding its weekend dismissal of Deloitte & Touche, but press reports indicate -- not surprisingly under the circumstances of Adelphia's demise -- that Deloitte & Touche and the board now controlling Adelphia are at odds over the extent to which the accounting firm is to blame for the apparent inaccuracy of financial statements previously issued by Adelphia. Deloitte & Touche's audit of Adelphia's 2001 financial statements was suspended earlier this year, and the 2001 results have yet to be released.

In its Monday filing, Adelphia specified several ways in which it alleged previous management inflated EBITDA. Starting in 2000, and possibly earlier, Adelphia increased the price it paid for digital set-top converter boxes by $26, while simultaneously receiving $26 per box from the set-top manufacturers for "marketing support," according to the filing.

Adelphia, however, did not provide a material amount of marketing support for the payments, the company says. The extra payments received from manufacturers were used to reduce operating expenses, while the equivalent payments for the boxes were treated as capital expenditures, says Adelphia. The end result was to increase EBITDA by $54 million in 2001 and $37 million in 2000, says the company.

After the company's SEC filing Monday, Adelphia shareholder Leonard Tow and associate Scott Schneider resigned the board seats that the company had agreed in late May to grant them. Tow, who said his goal had been to restore the company's credibility and stabilize it financially, said in his resignation letter that "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."