SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 3
Current Report
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (date of earliest event reported) June 9, 2002
ARAHOVA COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-16899 23-1844576
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
One North Main Street - Coudersport, PA 16915-1141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 274-9830
This Form 8-K/A amends and restates the Registrant's response to Item 4 of
Amendment 2 to the Registrant's Form 8-K, filed with the Securities and Exchange
Commission (the "Commission") on July 18, 2002, in order to provide a more
complete description of the events disclosed in the Deloitte & Touche LLP
("Deloitte") Letter regarding change in certifying accountant filed as Exhibit
16.1 to Adelphia Communication Corporation's Form 8-K filed with the Commission
on July 2, 2002 (the "Initial Exhibit 16.1 Letter").
Item 4
Arahova Communications, Inc. is a wholly-owned subsidiary of Adelphia
Communications Corporation ("Adelphia").
As used herein, the term the "Registrant" refers to Arahova Communications,
Inc. and the term the "Company" refers to Adelphia and its subsidiaries,
including the Registrant.
On June 9, 2002, Adelphia dismissed Deloitte, its former independent
accountants. On June 10, 2002, Deloitte confirmed in writing to Adelphia that
the client-auditor relationship between Deloitte and Adelphia, the Registrant
and certain other subsidiaries of Adelphia had ceased. On June 13, 2002,
Adelphia retained PricewaterhouseCoopers LLP ("PwC") as its new independent
accountants. Under this engagement PwC will serve as independent accountants of
the Registrant and certain other subsidiaries of Adelphia. The Board of
Directors of Adelphia and the Audit Committee of the Board of Directors of
Adelphia (the "Audit Committee") approved the decision to change independent
accountants. On June 14, 2002, Deloitte notified Adelphia that it was
withdrawing its reports on the financial statements of Adelphia, the Registrant
and certain other subsidiaries and affiliates of Adelphia.
The Registrant has not yet completed its financial statements or filed its
Annual Report on Form 10-K for the year ended December 31, 2001, nor has the
Registrant filed its Quarterly Report on Form 10-Q for the quarter ended March
31, 2002. As of the date on which Deloitte was dismissed as the Registrant's
independent public accountants, Deloitte had not completed its audit nor had it
issued its report with respect to the Registrant's financial statements for the
year ended December 31, 2001.
The report of Deloitte on the financial statements of the Registrant for
the years ended December 31, 2000 and December 31, 1999 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. During the years ended
December 31, 2001 and December 31, 2000, and through the date of this Form 8-K,
there were no disagreements with Deloitte on any matter of accounting principles
or practices, financial statement disclosure or audit scope or procedure that,
if not resolved to the satisfaction of Deloitte, would have caused it to make
reference to the subject matter of such disagreement in its reports on the
financial statements.
The events described under the heading "Reportable Events" below are
Reportable Events within the meaning of Item 304(a)(1)(v) of Regulation S-K.
Deloitte advised the Registrant in the Initial Exhibit 16.1 Letter that (i) the
following "Reportable Events" caused
Deloitte to believe that the scope of its audit needed to be significantly
expanded and (ii) such events, if investigated further, may (a) materially
impact the fairness or reliability of Deloitte's previously issued audit reports
or the underlying financial statements or (b) lead Deloitte to no longer be able
to rely on management. At the time of Deloitte's dismissal, the composition of
Adelphia's Board of Directors, Audit Committee, and management had changed from
the composition at the time the matters discussed below under the heading
"Reportable Events" occurred.
The Audit Committee discussed the Reportable Events referred to below with
Deloitte and the Registrant authorized Deloitte to respond fully to inquiries of
PwC concerning the Reportable Events.
In March 2002, Adelphia's Board of Directors appointed a Special Committee
of Independent Directors (the "Special Committee") whose charter was later
expanded to include authority to review business relationships between Adelphia
and affiliates of the Rigas family. The Special Committee is investigating,
among other things, transactions between Adelphia and its subsidiaries on the
one hand, and the Rigas family and their affiliates on the other hand, including
the facts underlying the "Reportable Events" described below. The Special
Committee's investigation is proceeding, and information developed by the
Special Committee has formed part of the basis of: (1) a criminal indictment of
five former members of management, (2) a civil suit by the Commission, (3)
Adelphia's civil suit against, among others, the former controlling family of
Adelphia, and (4) action taken against certain employees, including dismissal,
mandatory leave, and job reassignment. Adelphia anticipates that the internal
investigation by the Special Committee may continue to disclose improper action
by prior management and others that may require further changes to or
supplements of previously filed financial statements. In addition, the
Reportable Events described below and in the Initial Exhibit 16.1 Letter arose
out of events that occurred during prior management's tenure.
Reportable Events
- -----------------
As part of its review the Special Committee identified accounting and
disclosure issues, some of which raised questions about whether Adelphia's
management had engaged in improper activities. On May 14, 2002, Deloitte advised
Adelphia that it had suspended its audit of the financial statements of Adelphia
and the Registrant for the year ended December 31, 2001 and provided Adelphia
with a list of issues that, according to Deloitte, needed to be resolved before
the issuance of Adelphia's and the Registrant's Annual Reports on Form 10-K.
Included in this list were circumstances that raised questions about whether
employees of Adelphia had falsified accounting records and/or engaged in other
conduct in violation of law. On May 15, 2002, the Board of Directors authorized
a formal investigation by counsel to the Special Committee into the nature and
propriety of transactions between Adelphia and affiliates of the Rigas family,
the integrity of Adelphia's books and records, the accuracy and completeness of
Adelphia's financial accounting, Adelphia's compliance with its obligations
under credit agreements and other debt instruments, and any other matters
related to Adelphia that the Special Committee decides should be investigated.
On June 9, 2002, following the transmission of (and without acknowledging
receipt of) Adelphia's letter dismissing Deloitte, Adelphia received a letter
from Deloitte in which Deloitte stated that it was still not prepared to resume
its audit. In that letter Deloitte noted
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that Adelphia continued to employ executives who might have been involved in
inappropriate conduct related to Adelphia's financial reporting and stated: "To
the extent that any of those persons have been involved in illegal activities,
there is no way that we would be willing to rely on their representations, and
indeed the mere fact that they remain in their positions raises additional
concerns." In a letter dated June 13, 2002 to Deloitte, Adelphia responded by
noting that since May 25 Adelphia's accounting and finance staff have been
headed by Christopher Dunstan, Chief Financial Officer and Treasurer, and Steven
B. Teuscher, Chief Accounting Officer. In addition, Adelphia has retained
Conway, Del Genio, Gries & Co. LLC ("Conway Del Genio") for restructuring
advice. Neither Messrs. Dunstan or Teuscher, nor Conway Del Genio, had any
connection with Adelphia during the time that the potentially improper
activities may have occurred. The members of Adelphia's accounting, finance and
bank and investor relations staff referred to in Deloitte's letter, who may have
known about or been directly implicated in inappropriate conduct, have been
discharged, placed on leave, or have been transferred to other duties pending
completion of the investigation being conducted by counsel to the Special
Committee. In the letter, Adelphia noted that: "The management representations
required in connection with the audit of Adelphia's financial statements will be
provided by officers who had no involvement in prior management's improper
activities and who will be adequately informed about the issues relating to the
company's financial statements by the findings of the Special Committee
counsel."
Co- Borrowing Agreements
------------------------
As reported in Adelphia's Form 8-K filed with the Commission on May 24,
2002, various subsidiaries of Adelphia have entered into co-borrowing facilities
with certain entities owned by the Rigas family and managed by Adelphia (the
"Rigas Entities"). Historically, Deloitte had issued an unqualified audit
opinion with respect to Adelphia financial statements that only reported the
borrowings attributable to Adelphia and its subsidiaries under such co-borrowing
agreements on such financial statements, and provided footnote disclosure as to
the total amount of borrowings permitted under such facilities without
disclosing the amount of such borrowings attributable to the Rigas Entities then
outstanding and without stating that the outstanding borrowings attributable to
the Rigas Entities were not included in the borrowings reflected as indebtedness
on Adelphia financial statements.
On May 9, 2002, Deloitte met with Timothy Rigas, former Chief Financial
Officer, James Brown, former Vice President of Finance, (both of whom have been
arrested and named as defendants in a criminal action by the United States
Attorney's Office and a civil action brought by the Commission), counsel for
Adelphia and counsel for Timothy Rigas to prepare for a May 10, 2002 meeting
with the Commission to discuss Adelphia's tentative conclusions regarding the
accounting treatment for Adelphia's co-borrowing agreements. At the May 9
meeting, Deloitte took the position that all debt under the co-borrowing
agreements, except the amounts directly used by the Rigas Entities for
acquisitions and operating expenses, should be recorded as debt on Adelphia's
consolidated financial statements. Deloitte supported the position that the
Rigas Entities are the primary obligors for those amounts directly used in their
business, and therefore, this debt need not be recorded by Adelphia. This
position was presented by prior management and Deloitte at the meeting with the
Commission on May 10, 2002.
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At the May 10, 2002 meeting, the Commission requested that Deloitte and
Adelphia provide the Commission with copies of two letters from Adelphia's
outside counsel at that time, Buchanan Ingersoll, which contained a legal
analysis that Deloitte relied upon in reaching its position concerning the
amount of the co-borrowings to carry on Adelphia's balance sheet. Immediately
following the May 10, 2002 meeting with the Commission, Deloitte urged Adelphia
to provide the Commission with both the first and the second Buchanan Ingersoll
letter. Timothy Rigas and his counsel were initially opposed to providing the
Commission with the second Buchanan Ingersoll letter; however, Adelphia
subsequently authorized Deloitte to provide the letter to the Commission.
Subsequent to the May 10, 2002 meeting with the Commission and based on the
input and discussion with the Commission, Adelphia changed its preliminary
conclusion concerning the accounting treatment of the co-borrowing agreements.
Through the date of Deloitte's dismissal, Deloitte and Adelphia were in
continued discussions over what portion, if not all, of the borrowings under the
co-borrowing agreements attributable to the Rigas Entities under the
co-borrowing agreements should be reported on Adelphia's consolidated financial
statements. This issue had not been resolved at the time of Deloitte's
dismissal, and if Deloitte had not been dismissed and the issue had remained
unresolved it would have constituted a "disagreement" within the meaning of
Section 303(a)(1)(iv) of Regulation S-K.
Adelphia announced on May 23, 2002 that it has tentatively concluded that
it would increase to approximately $2.6 billion the amount of indebtedness to be
included in its consolidated financial statements, as of December 31, 2001, to
reflect the full amount of principal borrowings by the Rigas Entities under the
co-borrowing arrangements for which subsidiaries of Adelphia are jointly and
severally liable. Adelphia and PwC are continuing to evaluate this position.
Digital Cable Converter Boxes
-----------------------------
A post-closing journal entry was made by Adelphia, effective as of December
31, 2001, to record approximately $102 million in digital cable converter boxes
as an asset on the books of a Rigas Entity that was party to one of the
co-borrowing agreements but that was not a subsidiary of Adelphia. In a related
transaction, $102 million in borrowings under a co-borrowing agreement were
removed from Adelphia's books and recorded on the books of another Rigas Entity.
On April 29, 2002, Deloitte advised the Audit Committee of its concerns
regarding the transactions including, prior management's initial inability to
explain the basis for the transactions and the inability of prior management to
provide proper evidence for such transactions. Deloitte was also concerned with
the following: (i) the cable converter boxes had originally been transferred by
Adelphia in October 2001 to a Rigas Entity that did not engage in cable
operations, (ii) the debt assumed was recorded on the books of a different
entity than the one on whose books the cable converter boxes were recorded,
(iii) the quantity of cable converter boxes was substantially in excess of the
quantities that could be used by the Rigas Entity and (iv) the transfer of the
cable converter boxes to a Rigas Entity had the effect of reducing the capital
expenditures of Adelphia without a readily apparent justification. The Audit
Committee immediately conducted an investigation, and during interviews with
prior management (including persons who have subsequently been arrested and
named as defendants in criminal and civil actions brought by the United States),
was given information, the accuracy of which is in question due to recent events
and the Special
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Committee's investigation, indicating that there was a business purpose for the
transactions. However, as a result of the Audit Committee's investigation, the
Audit Committee concluded that the accounting for the transaction was improper
and the entries should be reversed so that the $102 million in cable converter
boxes and the related indebtedness under the co-borrowing agreement would be
recorded on the financial statements of Adelphia.
Debt Compliance Issues including Required Financial Statements
--------------------------------------------------------------
UCA/HHC Waiver: Adelphia was required to provide audited financials to the
lenders under its UCA/HHC co-borrowing agreement by April 30, 2002. As of April
27, 2002, Deloitte had indicated that it did not yet have the necessary
information to enable them to issue their report on the combined financial
statements of the borrowing group but that it would endeavor to make the April
30, 2002 deadline. Adelphia sought a waiver from the lenders of the requirement
to deliver audited financials by April 30, 2002. Adelphia did not advise
Deloitte that it was seeking a waiver or of the status of its efforts to obtain
such a waiver as they wanted Deloitte to continue working towards issuing its
report on the combined financial statements of the borrowing group to be issued
prior to the date, May 1, 2002, that would trigger a default under the
agreement. Adelphia received the waiver on the afternoon of April 30, 2002.
Adelphia then prepared a press release announcing, among other events, the
waiver. A draft of this release was discussed via conference call with outside
Adelphia counsel into the evening of April 30, 2002 and the early morning hours
of May 1, 2002. Adelphia and its outside counsel discussed the necessity of
clearing the press release with Deloitte before being issued to the public. The
draft press release announcing the waiver was sent to Deloitte after it had been
approved by Adelphia and its outside counsel early in the morning hours of May
1, 2002, prior to the time the press release was issued.
Certification and Calculation Issues: In the Initial Exhibit 16.1 Letter
Deloitte advised the Audit Committee to investigate certain matters in
connection with debt compliance calculations and certifications required by
Adelphia's and certain of Adelphia's subsidiaries' compliance with their
respective public indenture and other credit agreements including: (i)
certifications of debt compliance prepared by Adelphia and sent to the
respective trustees that were not supported by underlying calculations, (ii)
certifications of debt compliance sent to the respective trustees that did not
contain the appropriate number of signatories or were signed by an unauthorized
person and (iii) a $275 million intercompany dividend that was recorded through
a journal entry made by Adelphia on May 6, 2002, that had been backdated to give
retroactive effect to the transaction as if it had occurred in February 2002.
The Special Committee is continuing to investigate these matters and Adelphia is
working with new management and PwC to properly account for these matters.
At the close of business on Thursday, June 13, 2002, the Registrant faxed a
draft of the disclosures made under Item 4 to the Registrant's Form 8-K filed
with the Commission on June 28, 2002 to Deloitte, which advised the Registrant
that it would not provide comments on such draft, but rather would respond to
the Registrant's filing by transmitting to the Registrant a letter addressed to
the Commission pursuant to Item 304(a)(3) of Regulation S-K. A copy of such
letter is filed as Exhibit 16.1 to the Registrant's form 8-K filed on July 2,
2002. On Thursday, August 8, 2002, the Registrant faxed a draft of this Item 4,
which includes the changes made to Item 4 since July 2, 2002 to Deloitte. On
Tueday, August 13, 2002, Deloitte informally informed Adelphia that it believes
that there are some factual inaccuracies in this Form 8-K, but that it would not
be in a position to provide comments before Friday, August 16, 2002. The
Registrant will file and respond to such comments when and if received.
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The Company believes that Deloitte's refusal to resume its audit was
unreasonable. In light of that unreasonable refusal, the Company determined that
it was not appropriate to share with Deloitte any additional information,
including the information Deloitte claims was withheld.
Cautionary Statement Regarding Financial and Operating Data
As previously reported, as a result of actions taken by the former
management of Adelphia: (a) Adelphia has not yet completed its financial
statements as of or for the year ended December 31, 2001, or received its
independent auditors' report thereon or filed with the Commission its Form 10-K
for the year ended December 31, 2001; (b) Adelphia has not yet completed its
financial statements as of and for the three months ended March 31, 2002, or
filed with the Commission its Form 10-Q for the quarter ended March 31, 2002;
and (c) Adelphia expects to restate its financial statements for the years ended
December 31, 1999 and 2000, and its interim financial statements for 2001 and
possibly other periods. Current management took control in May 2002 and has
retained new independent auditors and begun the preparation of new financial
statements for the periods in question; however, Adelphia does not believe that
it will have completed the preparation of the foregoing financial information
prior to the conclusion of the third quarter. In addition, current management
believes that the public information provided by prior management on other
matters of interest to investors, such as Adelphia's rebuild percentage (the
percentage of Adelphia's cable television systems that Adelphia believes have
been upgraded to current standards), was unreliable. As a result, the Registrant
anticipates that it may have to supplement the financial and other information
contained in this Form 8-K and that such supplemental information may be
material.
Cautionary Statement Regarding Forward Looking Statements
This document includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements regarding Adelphia, the Registrant and its subsidiaries'
(collectively, the "the Registrant's") expected future financial position,
results of operations, cash flows, restructuring and financing plans, business
strategy, budgets, projected costs, capital expenditures, competitive positions,
growth opportunities, plans and objectives of management for future operations
and statements that include words such as "anticipate," "if," "believe," "plan,"
"estimate," "expect," "intend," "may," "could," "should," "will," and other
similar expressions are forward-looking statements. Such forward-looking
statements are inherently uncertain, and readers must recognize that actual
results may differ from the Registrant's expectations. the Registrant does not
undertake a duty to update such forward-looking statements.
Actual future results and trends for the Registrant may differ materially
depending on a variety of factors discussed in the Registrant's filings with the
Commission, including its recently filed Current Reports on Form 8-K, the most
recently filed Quarterly Report on Form 10-Q and the Form 10-K for the year
ended December 31, 2000. Factors that may affect the plans or results of the
Registrant include, without limitation: (a) Adelphia's and the Registrant's
6
filing of petitions for relief under Chapter 11 of the United States Bankruptcy
Code; (b) the results of litigation against Adelphia including the recently
filed civil complaint by the Commission and the potential for a criminal
indictment of Adelphia; (c) the lack of substantial cable industry experience
among certain members Adelphia's senior management; (d) the effects of
government regulations and the actions of local cable franchise authorities; (e)
the availability of debtor-in-possession financing and surety bonds to support
Adelphia's operations; (f) the results of Adelphia's internal investigation and
the matters described above under "Cautionary Statement Regarding Financial and
Operating Data"; (g) actions of Adelphia's competitors; (h) the pricing and
availability of equipment, materials, inventories and programming; (i) product
acceptance and customer spending patterns; (j) Adelphia's ability to execute on
its business plans, to provide uninterrupted service to its customers and to
conduct, expand and upgrades its networks; (k) technological developments; (l)
matters relating to or in connection with the recent bankruptcy filing and
proceedings of Adelphia Business Solutions, Inc.; (m) changes in general
economic conditions and/or economic conditions in the markets in which Adelphia
may, from time to time, compete; (n) the movement of interest rates and the
resulting impact on Adelphia's interest obligations with respect to its
pre-petition bank debt; and (o) the delisting of Adelphia Communication
Corporation's common stock by Nasdaq. Many of such factors are beyond the
control of Adelphia and its management.
Item 7(c). Exhibits
16.1 Letter regarding change in certifying accountant. Previously filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 13, 2002 ARAHOVA COMMUNICATIONS, INC. (Registrant)
By: /s/ Christopher T. Dunstan
------------------------------
Christopher T. Dunstan
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
16.1 Letter regarding change in certifying accountant. Previously
filed.
9