Exhibit 16.1
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Deloitte & Touche LLP
Suite 250
Key Bank Tower
50 Fountain Plaza
Buffalo, New York 14202
Tel: (716) 843-7200
Fax: (716) 856-7760
www.us.deloitte.com
July 15, 2002
Securities and Exchange Commission
Mail Stop 11-3
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madam:
We have read the comments in Item 4 of Form 8-K/A of Adelphia Business
Solutions, Inc. (the "Company") dated July 3, 2002, which amends the Company's
original filing on July 1, 2002, and have the following comments.
First Paragraph
We agree with the comments made in the first sentence that on June 14, 2002, we
sent the Company a letter, as required by Section 1000 08m of the SEC Practice
Section, confirming our previous oral communication that the client-auditor
relationship between the Company and us had ceased.
We have no comments with respect to the matter discussed in the second sentence
of this paragraph.
Second Paragraph
We disagree with the comments made in the first sentence of this paragraph that
"Deloitte declined to provide further clarification." On June 14, 2002, prior to
sending the letter referred to in the First Paragraph, we informed the Vice
President, Finance of the Company that, due to our dismissal by Adelphia
Communications Corporation ("Adelphia"), we would not be in a position to
determine whether the resolution of certain matters being investigated by
Adelphia's Special Committee of Independent Directors appointed by Adelphia's
Board of Directors (the "Special Committee"), at our request, would lead us to
believe that the scope of our audit of the Company's consolidated financial
statements for the year ended December 31, 2001 needed to be significantly
expanded. These circumstances are more fully described under the caption
"Reportable Events" below.
We agree with the comments made in the second sentence of this paragraph.
We have no basis upon which to agree or disagree with the comments made in the
third sentence of this paragraph.
Third Paragraph
We agree with the comments made in the first, second, third and fourth sentences
of this paragraph.
We have no basis upon which to agree or disagree with the comments made in the
fifth sentence of this paragraph.
Fourth Paragraph
We agree with the comments made in this paragraph. However, the matters
discussed below under the caption "Reportable Events" and in the appendix to
this letter include certain matters, which if we had not resigned and the
matters had not been resolved to our satisfaction, would have been referred to
in our report on the Company's consolidated financial statements.
Fifth Paragraph
We disagree with the comments made in this paragraph that there were no
reportable events. We have set forth our views below under the caption
"Reportable Events" and in the appendix to this letter.
Sixth Paragraph
We have no basis upon which to agree or disagree with the comments made in this
paragraph.
Seventh Paragraph
We agree with the comments made in the first and second sentences of this
paragraph.
We have no basis upon which to agree or disagree with the comments made in the
third sentence of this paragraph.
Reportable Events
During 2001 and up to January 11, 2002, the Company was a majority owned
subsidiary of Adelphia. On January 11, 2002, Adelphia distributed all of the
shares of common stock of the Company owned by Adelphia to holders of Adelphia's
Class A and Class B common stock (the "Spin-off"). Prior to the Spin-off, and
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subsequently through June 4, 2002, certain officers and directors of Adelphia
were also officers and directors of the Company. In addition, the Company was a
parry to certain transactions and arrangements with Adelphia and certain of its
subsidiaries.
During 2002 and continuing through the date of our resignation, certain matters
came to our attention in connection with our audits of Adelphia and its
subsidiaries and co-borrowing groups that led us to believe that the scope of
our audits of Adelphia and its subsidiaries, including the Company, and
co-borrowing groups may need to be significantly expanded. In addition, we
determined that these matters, if further investigated, may (i) materially
impact the fairness or reliability of our previously issued audit reports or the
underlying financial statements; or the financial statements to be issued for
the year ended December 31, 2001, or (ii) cause us to be unwilling to rely on
management's representations or be associated with the financial statements of
Adelphia or those of its subsidiaries, including the Company, or co-borrowing
groups. In a letter addressed to the Securities and Exchange Commission ("SEC")
dated June 27, 2002 (the "Deloitte Letter"), responding to Adelphia's Current
Report on Form 8-K filed with the SEC on June 14, 2002 (the "Adelphia 8-K"), we
set forth our views in response to the Adelphia 8-K. The Deloitte Letter
discussed specific reportable events pertaining to Adelphia that either required
an expansion of the scope of our audit of Adelphia and its subsidiaries and
co-borrowing groups, or raised questions about our willingness to rely on the
representations of management. The reportable events were followed by a
description of certain other events that occurred during the period May 1, 2002
through the date of our dismissal. Our views, as set forth in the Deloitte
Letter are included as an appendix to this letter. As stated above, the Company
was a majority owned subsidiary of Adelphia up to January 11, 2002, and although
the matters discussed in the appendix to this letter did not appear to have a
direct effect on the consolidated financial statements of the Company, the
matters raised questions about our willingness to rely on the representations of
management of Adelphia, including certain of its officers and directors, who
were also officers and directors of the Company through June 4, 2002.
The matters described in the Deloitte Letter were discussed with officers and
directors of Adelphia at various times, including those officers and directors
who were also officers and directors of the Company through June 4, 2002. Those
matters specific to the Company were also discussed with the Chairman of the
Audit Committee of the Company and the Vice President, Finance of the Company as
summarized below.
Initially, the expanded scope of our audit procedures related to our audit of
Adelphia pertained to accounting and auditing issues regarding co-borrowing
agreements in which certain of Adelphia's subsidiaries were co-borrowers with
certain other entities under common control and management of the Rigas family
(the "Managed Entities"). The Company, through another subsidiary of Adelphia,
received proceeds from one of the co-borrowing agreements. The issues arose
because of certain disclosures regarding the use of certain of the funds
borrowed pursuant to the co-borrowing agreements and whether the use of funds
and other credit worthiness issues suggested that some or all of the borrowings
previously recorded on the books of the Managed Entities should now be reflected
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in the financial statements of Adelphia and Adelphia's subsidiaries that are
parties to the co-borrowing agreements. On April 5, 2002, we informed the Vice
President, Finance of the Company that these issues would need to be resolved
before we would be in a position to issue a report on the Company's 2001
consolidated financial statements.
On May 16, 2002 we informed the Vice President, Finance of the Company that,
because we had suspended our audit of Adelphia and various of its subsidiaries
and co-borrowing groups, we were also suspending our audit of the Company.
On May 28, 2002, we informed the Vice President, Finance of the Company that the
resolution of certain matters being investigated by the Special Committee at our
request could lead us to believe that the scope of our audit of the Company's
consolidated financial statements for the year ended December 31, 2001 needed to
be significantly expanded and that the Company should inquire of the Special
Committee to obtain an understanding of the matters being investigated by the
Special Committee. Later that day, we reiterated these concerns with the
Chairman of the Audit Committee of the Company and recommended that the Audit
Committee of the Company perform its own investigation with respect to related
party transactions and agreements between the Company and Adelphia or the Rigas
family.
Yours truly,
/s/ Deloitte & Touche LLP
Appendix -- "Reportable Events" discussion as disclosed in Deloitte & Touche
LLP's letter addressed to the Securities and Exchange Commission, dated June 27,
2002. (Note: references to the "Company", the "Special Committee", the "Audit
Committee", and management refer to Adelphia Communications Corporation, the
Special Committee of Independent Directors appointed by Adelphia Communications
Corporation's Board of Directors, the Audit Committee of the Board of Directors
of Adelphia Communications Corporation and management of Adelphia Communications
Corporation, respectively.)
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APPENDIX
Reportable Events Discussion as Disclosed in Deloitte & Touche LLP's Letter
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Addressed to the Securities and Exchange Commission, dated June 27, 2002
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During 2002 and continuing through the date of our dismissal, certain matters
came to our attention that led us to believe that the scope of our audit needed
to be significantly expanded. In addition, we determined that these matters, if
further investigated, may (i) materially impact the fairness or reliability of
our previously issued audit reports or the underlying financial statements; or
the financial statements issued or to be issued for the year ended December 31,
2001, or (ii) cause us to be unwilling to rely on management's representations
or be associated with the Company's financial statements. We discussed these
matters with the Audit Committee and management of the Company, including on the
dates described below.
On May 14, 2002, we suspended our audit of the Company and various of the
Company's subsidiaries and co-borrowing groups. At that time, we informed the
Company and the Audit Committee both in writing and orally that a long series of
open items -- many of which raised serious questions regarding whether persons
employed by the Company had engaged in conduct that contravened applicable laws
- -- had to be investigated and satisfactorily resolved. We requested that an
investigation be conducted by the Audit Committee using independent counsel and
appropriate professionals. We also advised the Company and the Audit Committee
at that time that the investigation's scope, procedures, findings, conclusions
and any remedial actions would need to be reported to us, and that the items
identified by us had to be resolved prior to the issuance of our audit reports.
We also suggested that the Company consult its counsel regarding its obligations
under Section 10A of the Securities Exchange Act of 1934 ("Section 10A").
As of the date of our dismissal on June 9, 2002, we had been apprised that the
Special Committee's investigation had not reached preliminary conclusions on
many issues and that the Special Committee had obtained additional significant
information that it would not share with us. We were therefore unable to
conclude whether the Special Committee's findings would materially impact the
fairness or reliability of our previously issued audit reports; whether the
Company's previously issued financial statements would require revision; or
whether the Special Committee's findings would cause us to be unwilling to rely
on management's representations or to be associated with the financial
statements prepared by management.
On June 10, 2002, the Company filed a Current Report on Form 8-K disclosing that
"current management of the Company had determined that it will make certain
adjustments to its results of operations for 2000 and 2001." The Company did not
consult with us prior to the filing of this Form 8-K. We have not been provided
with sufficient information or authoritative support with respect to the matters
referred to in the Form 8-K to enable us to make a determination about whether
the proposed restatement of the Company's financial statements is appropriate,
or to conclude on the propriety of the proposed restatement entries. On June 14,
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2002, we withdrew our reports on the financial statements of the Company and
certain of its subsidiaries and co-borrowing groups.
For discussion purposes, specific reportable events have been grouped below into
three categories that either required an expansion of the scope of our audit or
raised questions about our willingness to rely on the representations of
management. The reportable events are followed by a description of certain other
events that occurred during the period May 1, 2002 through the date of our
dismissal. The three categories of reportable events are Co-borrowing
Agreements, Digital Cable Converter Boxes and Debt Compliance Issues including
Required Financial Statements.
Co-borrowing Agreements
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Initially, the expanded scope of our audit procedures related to accounting and
auditing issues regarding the co-borrowing agreements in which certain of the
Company's subsidiaries were co-borrowers with certain other entities under
common control and management of the Rigas family (the "Managed Entities").
These issues arose because of certain disclosures regarding the use of certain
of the funds borrowed pursuant to the co-borrowing agreements and whether the
use of funds and other credit worthiness issues suggested that some or all of
the borrowings previously recorded on the books of the Managed Entities should
now be reflected in the financial statements of the Company. The issues included
legal theories regarding the obligations of various parties when joint and
several liabilities exist and guarantor accounting theory and practice. These
issues were discussed with the staff of the Securities and Exchange Commission
(the "SEC") at a meeting on May 10, 2002 as described in the following
paragraph.
On May 9, 2002, we met with the Chief Financial Officer and the Vice President
of Finance of the Company, the Company's outside counsel, and outside counsel
for the Rigas family to prepare for a May 10, 2002 meeting with the SEC to
discuss the Company's tentative conclusions regarding the accounting treatment
for the Company's co-borrowing agreements. During this meeting we advised the
Company that it should be prepared to provide certain materials to the SEC, all
of which had previously been provided to us, and upon which we had relied in
assisting the Company with reaching its tentative conclusion. Among these
materials were two letters dated May 6, 2002, from the Company's outside
counsel, Buchanan Ingersoll ("Buchanan Ingersoll"), that provided an opinion and
legal analysis (i) comparing the obligations under the co-borrowing agreements
with the obligations of a hypothetical guarantor under an agreement of guaranty
and suretyship of a form customarily used by banks in large commercial lending
transactions and (ii) discussing a series of examples related to joint and
several liabilities and guarantor accounting.
Subsequent to the May 10, 2002 meeting with the SEC, the Company, in
consultation with its outside counsel and outside counsel for the Rigas family,
informed us that the Company would not provide the SEC with the letter prepared
by Buchanan Ingersoll that included the series of examples related to joint and
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several liabilities and guarantor accounting (the "second Buchanan Ingersoll
letter"). We told the Company that we did not agree with the Company's position.
On May 11, 2002, we informed the Company that if it chose not to provide the
second Buchanan Ingersoll letter to the SEC, we would not be willing to issue a
report on the Company's consolidated financial statements.
On May 13, 2002, we reiterated our position and informed the Company and the
Chairman of the Audit Committee that if the second Buchanan Ingersoll letter was
not provided to the SEC, we would reassess our relationship with the Company,
and would not be willing to continue to participate with the Company in its
discussions with the SEC. The Company subsequently authorized us to provide the
second Buchanan Ingersoll letter to the SEC.
Subsequent to the May 10, 2002 meeting with the SEC, the Company informed us
that it had changed its tentative conclusion concerning the accounting treatment
for the co-borrowing agreements from the position that it had presented to the
SEC on May 10, 2002. We advised the Chairman and Interim Chief Executive Officer
of the Company that we had concerns with the Company's revised position and did
not believe that it was consistent with current accounting literature.
On May 23, 2002, the Company issued a press release announcing its revised
tentative conclusion about accounting for the co-borrowing agreements.
The Company's revised position was inconsistent with the position presented to
the SEC at the May 10, 2002 meeting.
This matter was not resolved prior to our dismissal.
Digital Cable Converter Boxes
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On April 23, 2002, we became aware that, in April 2002, the Company had made a
post-closing journal entry, 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 Family cable entity that was a party to one of the Company's
co-borrowing agreements but that was not a subsidiary of the Company. We
subsequently learned that, in a related transaction, $102 million in borrowings
under a co-borrowing agreement had previously been removed from the Company's
books and recorded on the books of another Rigas Family cable entity in October
2001.
We made inquiries concerning the nature and support for the April 2002
post-closing journal entry and were advised that the cable converter boxes had
previously been purchased by the Company in 2001, and that the actual cable
converter boxes had not been physically transferred from the locations where
they had originally been received by the Company. Management of the Company was
initially unable to provide us with an explanation of the business purpose for
the transactions or to specifically identify the individual that had approved
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the journal entries other than to indicate that it was a member of the Rigas
family. In subsequent discussions with management of the Company, we were
advised that the Company had entered into a transaction to acquire cable
converted boxes from one of its suppliers to avoid a penalty under its previous
agreement with the supplier and to take advantage of favorable pricing on the
cable converter boxes acquired. Management indicated that it was the Company's
intent to transfer the cable converter boxes to the Rigas Family cable entity to
enable it to benefit from the favorable pricing that had been obtained, which
would offset the carrying costs of the co-borrowing debt that was assumed by
that entity.
The explanation provided by the Company raised concerns on our part because
information subsequently provided to us as support of the amount of the journal
entry included purchases from another supplier, and the Company was unable to
provide any evidence that usage of the cable converter boxes was being tracked
or that the Rigas Family cable entity had been able to realize the benefits of
favorable pricing. There were also other aspects of the transaction that raised
concerns, including the following:
o The cable converter boxes had originally been transferred by
the Company in October 2001 to a Rigas Family entity that did
not engage in any cable operations and was not a party to any
co-borrowing agreements, and the cable converter boxes were
not necessary for use in its operations
o The debt assumed was recorded on the books of a different
entity than the one on whose books the cable converter boxes
were recorded
o The quantity of cable converter boxes was substantially in
excess of the quantities that could be used by the Rigas
Family cable entity
On April 28, 2002, we expressed our concerns to the Audit Committee regarding
the apparent lack of support for these transactions and their effect on
previously reported capital expenditures and debt of the Company, and we
requested that the Audit Committee conduct an investigation into the
circumstances surrounding the transactions. On April 30, 2002, the Audit
Committee advised us that it had concluded its investigation into the matter,
and that it believed that there was an adequate business purpose for the
transactions. The Audit Committee indicated that although management of the
Company had used "poor judgment" in making the entries, the Audit Committee did
not believe the entries to be "manipulative."
As a result of the concerns we raised with respect to the accounting treatment
that had been afforded to the transactions, management of the Company agreed to
reverse the entries so that the $102 million in cable converter boxes and the
related indebtedness under the co-borrowing agreement would be recorded in the
financial statements of the Company.
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Debt Compliance Issues including Required Financial Statements
- --------------------------------------------------------------
As discussed above under the caption "Co-borrowing Agreements," certain of the
Company's subsidiaries participate in co-borrowing agreements with Managed
Entities. These agreements require that the Company provide audited combined
financial statements of each of the co-borrowing groups annually to the lenders.
These financial statements combine the financial condition and results of
operations of each of the companies who are parties to the respective
co-borrowing agreements (regardless of who owns each entity) and therefore were
not affected by the accounting issues relating to the co-borrowing agreements
that were being addressed by the Company in preparing its consolidated financial
statements.
Failure to Advise Us of Waiver
The Credit Agreement for the UCA/HHC co-borrowing agreement contains a covenant
which requires audited financial statements of the Borrowing Group to be
provided to the lenders not later than April 30, 2002. As of April 27, 2002, we
had not been provided with all of the information necessary to enable us to
issue our report on the combined financial statements of this Borrowing Group,
including, but not limited to, copies of minutes of the meetings of the
Company's Board of Directors, the Audit Committee and the Special Committee for
meetings that had been held subsequent to January 12, 2002 or drafts or
summaries of meetings for which minutes had not been prepared, and signed
management representation letters. We also had not bean provided with an
explanation from management of the circumstances surrounding the Digital Cable
Converter Boxes, which had a direct effect on the financial statements of the
UCA/HHC Borrowing Group. We inquired of management about whether the Company had
considered the consequences of not meeting the April 30, 2002 deadline.
Management advised us that it was having conversations with the lenders.
Management continued to stress the importance of issuing the report required by
the UCA/HHC lender group while continuing to provide assurances that all of the
unresolved matters would be resolved to our satisfaction in time to allow for
the issuance of the required report on April 30, 2002.
On April 30, 2002 through to the early morning hours of May 1, 2002, the
Company's management continued to press us for the issuance of these financial
statements even though they had not provided us with the information necessary
to resolve the open issues. During this time period, we met with management to
discuss the management representation letter that the Company would be providing
us. In addition, in-house and outside counsel for the Company provided us with a
brief summary of the matters discussed at the Board of Directors meetings held
on March 30, April 14, April 21, and April 29, 2002. We were not provided with a
summary of the April 30, 2002 Board of Directors meeting. During these
discussions, neither management nor counsel informed us that during the April
29, 2002 Board of Directors meeting, management had advised the Board of
Directors that the Company was in the process of obtaining a waiver of
compliance from the lenders or that during the April 30, 2002 Board of Directors
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meeting, management had advised the Board of Directors that a waiver had been
obtained. At approximately 1:00 a.m. on May 1, 2002, in response to our inquiry
about whether the Company was in default under the co-borrowing agreement
because the April 30, 2002 filing deadline had passed, we were advised, for the
first time, that the Company had in fact received a waiver of compliance from
the lenders of the April 30, 2002 filing deadline. At that time, the Company's
management was continuing to press us to issue our report on the combined
financial statements of the UCA/HHC Borrowing Group even though the financial
statements, as then drafted, did not contain the required disclosure that the
Company would have been in default under the co-borrowing agreement absent the
waiver of compliance.
In discussing this matter further with management of the Company, we were
informed that the Company's Board of Directors, at the recommendation of outside
counsel, had determined not to disclose to us that a waiver of compliance had
been obtained. As a result of this information, we requested the Audit Committee
to perform an investigation to determine whether the comments made by management
were accurate. The Audit Committee concluded that while the Board may have
discussed whether to inform us that a waiver of compliance had been obtained, no
Board member specifically recalled making a decision to deliberately withhold
information from us.
Certification and Calculation Issues
In connection with the Company's and certain of the Company's subsidiaries'
compliance with their respective public indenture and other credit agreements,
the Company prepared and provided to us, debt compliance calculations reflecting
in the financial statements additional amounts of indebtedness under the
co-borrowing agreements. In connection with our review of the debt covenant
compliance calculations, we noted that the Company's calculations were based
upon interpretations of certain of the terms, definitions and covenants of the
Company's various debt and credit agreements that did not appear to be supported
by the terms of the agreements. As a result, we requested that the Company
obtain either (1) a legal opinion addressing the interpretative positions taken
by the Company or (2) a confirmation from the applicable trustee or
administrative agent confirming that the trustee or the administrative agent was
in agreement with the Company's interpretations and related calculations. The
Company informed us that its counsel was not willing to provide a legal opinion
to the Company addressing the appropriateness of certain of the interpretative
positions taken by the Company. The Company's management asserted to us that it
believed its interpretations of the items in question were appropriate, and that
a legal opinion or a confirmation from the trustee or the administrative agent
was not necessary. The elimination of the items in question from the debt
compliance calculations would have resulted in the Company not being in
compliance with certain of its debt covenants.
On May 6, 2002, we met with the Chairman of the Audit Committee, the Assistant
Treasurer and one of the Company's in-house counsel to discuss our concerns
related to the Company's debt compliance calculations. During the period May 7,
10
through May 12, 2002, we became aware of a number of other matters related to
the Company's debt compliance that caused us additional concern. These matters,
which consisted of the following, were discussed with the Chairman of the Audit
Committee on May 11, and May 12, 2002 and we suggested that they be
investigated:
o An employee of the Company advised us that in certain
instances, certifications of debt compliance prepared by the
Company and sent to the respective trustees were not supported
by underlying calculations.
o We determined that in certain instances (i) certifications of
debt compliance sent to the respective trustees by the Company
did not contain the appropriate number of signatories and (ii)
the individual that signed the certifications of debt
compliance was not an authorized signatory as specified in the
underlying agreement.
o An employee of the Company provided information to us that
indicated that one of the Company's subsidiaries had
sufficient income during the period in question to alleviate
debt compliance concerns for certain of the Company's public
indentures. Upon further inquiry, we learned that this income
included a $275 million intercompany dividend that was
recorded through a journal entry made by the Company on May 6,
2002, that had been backdated to give retroactive effect to
the transaction as if it had occurred in February 2002.
In addition, on May 12, 2002, the Chief Financial Officer of the Company and
outside counsel to the Company informed us that the OCH Borrowing Group, the
UCA/HHC Borrowing Group, the CCH Borrowing Group and FrontierVision Operating
Partners, L.P. were not in compliance with certain of the collateral and
guarantee documentation covenants contained in their respective credit
agreements, and that the Company and its outside counsel were aware of and had
been working to address these defaults for "a couple of weeks." The Company was
aware of these defaults at the end of April 2002, and the beginning of May 2002,
during which time it was pressing us to issue our report on the combined
financial statements of the UCA/HHC Borrowing Group. These financial statements
did not disclose that the UCA/HHC Borrowing Group was in default under the
co-borrowing agreement and did not have a waiver of compliance.
11
Certain Events Commencing May 1, 2002
- -------------------------------------
On May 1, 2002, we met with the Chairman of the Audit Committee and management
of the Company to reiterate our concerns relating to the Digital Cable Converter
Boxes, the lack of cooperation that we had received from the Company in response
to our request to be provided with drafts or summaries of meetings of the Board
of Directors, the Audit Committee and the Special Committee for which minutes
had not been prepared, certain inaccuracies in the Audit Committee minutes and
our concerns about whether information concerning the waiver of compliance with
the UCA/HHC Credit Agreement had been deliberately withheld from us upon advice
of counsel with the knowledge of management and the Board of Directors. At that
meeting we advised the Chairman of the Audit Committee and the Company that we
were seriously concerned that Company management was not being honest and
forthright.
On May 3, 2002, we met privately with the Chairman of the Audit Committee and
subsequently with the Chairman of the Audit Committee, the Chief Executive
Officer of the Company and the Chief Financial Officer of the Company and
reiterated, among other things, our concerns with respect to the Digital Cable
Converter Boxes, the lack of cooperation with respect to drafts or summaries of
meetings for which minutes had not been prepared, and our concerns about whether
information had been deliberately withheld from us with the knowledge of
management and the Board of Directors. At those meetings, we indicated that our
confidence in management had been seriously shaken and that if the Company was
not able to restore our confidence we would be unable to complete our audit.
On May 11, 2002, we met with the Chairman of the Audit Committee to discuss the
question raised by the SEC staff on May 10, 2002 about the legality of
transferring proceeds from the Company's co-borrowing agreements outside of the
co-borrowing groups for the benefit of the Rigas family, and to advise the Audit
Committee of our concerns about (i) the Company's unwillingness to provide the
SEC a copy of the second Buchanan Ingersoll letter and (ii) the information that
had recently come to our attention with respect to debt compliance. At that
meeting we told the Chairman of the Audit Committee that we believed that it was
essential that a copy of the second Buchanan Ingersoll letter be provided to the
SEC. We requested that the Audit Committee obtain a legal opinion from outside
counsel concerning the legality of the transfers outside of the co-borrowing
groups and investigate the circumstances surrounding the Company's actions
relating to compliance with the restrictive covenants of its debt agreements. We
advised the Company that these issues along with others included in a list of
significant open items provided to the Company on that date needed to be
resolved prior to issuance of a report on the financial statements of the
Company or any of its subsidiaries or co-borrowing groups.
On May 14, 2002, the Chairman of the Audit Committee and another Audit Committee
member advised us that information had come to their attention that indicated
that the Company's cable subscriber and system "rebuild" numbers might have been
overstated in the Company's published reports.
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On the evening of May 14, 2002, we met with the Chairman of the Audit Committee,
another member of the Audit Committee and a representative of outside counsel to
the Company and the independent directors to discuss our concerns about
information that had come to our attention through May 14, 2002. Earlier that
day we had provided the Chairman of the Audit Committee with a list of open
issues, including those that had previously been communicated, that needed to be
resolved before we would be in a position to issue a report on the financial
statements of the Company or its subsidiaries or co-borrowing groups. At that
meeting, we advised the Chairman of the Audit Committee that we believed that
certain of the matters included in the list of open items represent possible
illegal acts that could be material to the Company's financial statements and
that should be addressed pursuant to Section 10A, and we requested that an
investigation be conducted by the Audit Committee using independent counsel and
appropriate professionals. We also advised the Chairman of the Audit Committee
that the investigation's scope, procedures, findings, conclusions and any
remedial actions would need to be reported to us, and that the items identified
by us had to be resolved prior to the issuance of our audit reports. On that
occasion and others, the Chairman of the Audit Committee urged us to "be
practical" so that we could issue our audit reports quickly. We also advised the
Chairman of the Audit Committee that, based on the information that had come to
our attention, we were no longer willing to rely on the representations of
management. During this meeting, we were informed that the current Chairman of
the Audit Committee had assumed the position of Chairman and Interim Chief
Executive Officer of the Company and that the Special Committee would be
assuming responsibility for the investigation.
Later on the evening of May 14, 2002, we informed the Chairman and Interim Chief
Executive Officer of the Company that we were suspending our audit of the
Company and various of the Company's subsidiaries and co-borrowing groups as
described above.
On May 30, 2002, the Chairman and Interim Chief Executive Officer of the Company
and a member of both the Audit and Special Committees contacted us and requested
that we resume our audit. At that time, the Special Committee's investigation
had not been completed and the findings were not known. We indicated that we
would need to be updated on the progress of the investigation and the findings
to date before we could consider their request.
On May 31, 2002, we were provided with a copy of the First Report To the Special
Committee of the Board of Directors of Adelphia Communications Corporation (the
"First Report"). Later that day, we met with the Chairman and the Interim Chief
Executive Officer of the Company, members of the Special Committee,
representatives of outside counsel responsible for conducting the investigation,
and representatives of outside counsel to the Company and the independent
directors to discuss the status of the investigation and the information
contained in the First Report. The First Report contained information that
raised additional concerns regarding actions taken by certain members of
management of the Company. During this meeting, we were informed that the
Special Committee had obtained additional significant information related to the
Special Committee's investigation but that was not contained in the First
Report. The Special Committee informed us that it would not share such
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information with us unless we agreed to resume our audit. We questioned the
appropriateness of withholding this information from us in view of our
continuing obligations under Section 10A, regardless of whether the audit had
been resumed. In addition, during this meeting, we were informed that certain
executives of the Company, who might have known of or been directly implicated
in inappropriate conduct (and, therefore, upon whose representations we were
unwilling to rely) had not been removed from their positions at the Company.
In a conference call with the Chairman and Interim Chief Executive Officer of
the Company and the Chairman of the Special Committee on June 3, 2002, we were
asked to resume our audit immediately. We responded by indicating that (i) the
additional significant information related to the Special Committee's
investigation, but not contained in the First Report, needed to be shared with
us; (ii) we could not assess whether we would be willing to resume our audit if
the Company or the Special Committee was withholding information from us; (iii)
we have an obligation wider Section 10A to consider the timeliness and
appropriateness of remedial actions taken by the Special Committee or the Board
of Directors; and (iv) if information was being withheld from us, we would be
unable to conclude whether timely and appropriate remedial measures were being
taken, and that this, in turn, could trigger a reporting obligation by us under
Section 10A.
On June 9, 2002, we sent a letter to the Chairman and Interim Chief Executive
Officer of the Company, the Chairman of the Special Committee and the Company in
which we, among other things, responded to the Company's request that we resume
the audit.
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