[DELOITTE & TOUCHE LETTERHEAD]
June 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 FrontierVision Operating
Partners, L.P. (the "Company") and FrontierVision Capital Corporation dated July
2, 2002, which amends the Company's original filing on June 25, 2002, and have
the following comments.
FIRST PARAGRAPH
We agree with the comments made in this paragraph.
SECOND PARAGRAPH
We have no comments with respect to the matters discussed in this paragraph.
THIRD PARAGRAPH
We agree with the comments made in the first, second and sixth sentences of this
paragraph.
We have no basis upon which to agree or disagree with the comments made in the
third, fourth and fifth sentences of this paragraph.
FOURTH PARAGRAPH
We agree with the comments made in this paragraph.
FIFTH PARAGRAPH
We agree with the comments made in the first, second and fourth sentences of
this paragraph. However, certain of the matters discussed below under the
caption "Reportable Events" include matters which, if we had not been dismissed
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.
1
We disagree with the comments made in the third sentence of this paragraph that
there were no reportable events other than to the extent discussed in the sixth
paragraph. We have set forth our views below under the caption "Reportable
Events."
SIXTH PARAGRAPH
We agree with the comments made in the first sentence of this paragraph
that in March 2002, Adelphia Communications Corporation's ("Adelphia") Board of
Directors appointed a Special Committee of Independent Directors (the "Special
Committee"). We disagree with the comments made in the first sentence that, at
the time it was appointed, the Special Committee's Charter included authority to
review business relationships between Adelphia and affiliates of the Rigas
family. Copies of the minutes of the meetings of Adelphia's Board of Directors
held on March 6, and April 14, 2002, that were furnished to us in connection
with our audits of Adelphia and the Company reflect that the Special Committee
was appointed on March 6, 2002 only to review certain matters relating to a
proposed debtor-in-possession financing arrangement between Adelphia and
Adelphia Business Solutions, Inc., and that it was not until April 14, 2002 that
Adelphia's Board adopted a resolution to expand the responsibilities of the
Special Committee to include dealings, relationships, transactions and other
arrangements between Adelphia and members and affiliates of the Rigas family and
to adopt a Charter to govern the Special Committee's purpose, authority and
responsibility.
We have no basis upon which to agree or disagree with the comments made in the
second sentence of this paragraph.
We agree with the comments made in the 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.
We agree with the comments (which condense the actual communication) made in the
sixth and seventh sentences of this paragraph. For purposes of clarity and
completeness, a copy of our June 9, 2002 letter is appended hereto.
We agree with the comments made in the eighth, ninth, tenth, eleventh and
twelfth sentences of this paragraph that Adelphia sent a letter to us dated June
13, 2002 that contains the assertions referred to by the Company; however, we
have no basis upon which to agree or disagree with the assertions made by
Adelphia in the letter that it sent to us. It should be noted, however, that at
meetings held on May 31, and June 3, 2002 among ourselves, the Special Committee
and the Chairman and Interim Chief Executive Officer of Adelphia, we were
advised that the individuals of concern to us had not been removed from their
duties. It should also be noted that in previous communications to us on May
14, May 30, and May 31, 2002, the Chairman and Interim Chief Executive Officer
of Adelphia expressed reservations about whether current management of Adelphia
would be in a position to provide us with management representations that we
2
had advised Adelphia we would need to obtain under auditing standards generally
accepted in the United States of America.
SEVENTH PARAGRAPH
We agree with the comments made in the first sentence of this paragraph.
We have no basis upon which to agree or disagree with the comments made in the
second sentence of this paragraph.
REPORTABLE EVENTS
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 financial statements of Adelphia or
those of its subsidiaries, including the Company, or those of its co-borrowing
groups. We discussed these matters with the Audit Committee and management of
Adelphia, including on the dates described below.
On May 14,2002, we suspended our audit of Adelphia, including the Company and
various of Adelphia's subsidiaries, including the Company and co-borrowing
groups. At that time, we informed Adelphia and Adelphia's Audit Committee (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
Adelphia 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 Adelphia 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 Adelphia consult its counsel regarding its obligations under
Section 10A of the Securities Exchange Act of 1934 ("Section l0A").
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
Adelphia's or 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.
3
On June 10, 2002, Adelphia 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." Adelphia 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 Adelphia's financial statements is appropriate, or
to conclude on the propriety of the proposed restatement entries. On June
14,2002, we withdrew our reports on the financial statements of Adelphia and
certain of its subsidiaries, including the Company, 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. The Company is a wholly owned subsidiary of
Adelphia and certain officers and directors of Adelphia were also officers and
directors of the Company's general partner, and although certain of the matters
discussed in the remainder of this letter may not have directly affected 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, directors, accounting and treasury personnel
who were also officers, directors, accounting and treasury personnel of the
Company's general partner. In addition, the Company was a party to certain
transactions and arrangements with Adelphia and certain of its subsidiaries.
Co-borrowing Agreements
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 borrowing previously recorded on the books of the Managed Entities should
now be reflected in the financial statements of Adelphia and Adelphia's
subsidiaries that are parties to the co-borrowing agreements. 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.
4
On May 9,2002, we met with the Chief Financial Officer and the Vice President of
Finance of Adelphia, Adelphia's outside counsel, and outside counsel for the
Rigas family to prepare for a May 10,2002 meeting with the SEC to discuss
Adelphia's tentative conclusions regarding the accounting treatment for the
Company's co-borrowing agreements. During this meeting we advised Adelphia 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
Adelphia with reaching its tentative conclusion. Among these materials were two
letters dated May 6,2002, from Adelphia'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, Adelphia, in consultation
with its outside counsel and outside counsel for the Rigas family, informed us
that Adelphia would not provide the SEC with the letter prepared by Buchanan
Ingersoll that included the series of examples related to joint and several
liabilities and guarantor accounting (the "second Buchanan Ingersoll letter").
We told Adelphia that we did not agree with Adelphia's position.
On May 11, 2002, we informed Adelphia 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 Adelphia consolidated financial statements.
On May 13, 2002, we reiterated our position and informed Adelphia 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 Adelphia,
and would not be willing to continue to participate with Adelphia in its
discussions with the SEC. Adelphia subsequently authorized us to provide the
second Buchanan Ingersoll letter to the SEC.
Subsequent to the May l0, 2002 meeting with the SEC, Adelphia 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 Adelphia that we had concerns with Adelphia revised position and did
not believe that it was consistent with current accounting literature.
On May 23, 2002, Adelphia issued a press release announcing its revised
tentative conclusion about accounting for the co-borrowing agreements.
Adelphia 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.
5
Digital Cable Converter Boxes
On April 23, 2002, we became aware that, in April 2002, Adelphia 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 co-borrowing
agreements but that was not a subsidiary of Adelphia. We subsequently learned
that, in a related transaction, $102 million in borrowings under a co-borrowing
agreement had previously been removed from Adelphia 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 Adelphia in 2001, and that the actual cable
converter boxes had not been physically transferred from the locations where
they had originally been received by Adelphia. 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
the journal entries other than to indicate that it was a member of the Rigas
Family. In subsequent discussions with management of Adelphia, we were advised
that Adelphia had entered into a transaction to acquire cable converter 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 Adelphia 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 Adelphia 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 Adelphia 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:
- The cable converter boxes had originally been
transferred by Adelphia 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
- The debt assumed was recorded on the books of a
different entity than the one on whose books the
cable converter boxes were recorded
- The quantity of cable converter boxes was
substantially in excess of the quantities that could
be used by the Rigas Family cable entity.
6
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 Adelphia, 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 Adelphia 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 Adelphia 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
consolidated financial statements of Adelphia.
Debt Compliance Issues including Required Financial Statements
As discussed above under the caption "Co-borrowing Agreements," certain of
Adelphia's subsidiaries participate in co-borrowing agreements with Managed
Entities. These agreements require that Adelphia 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 been 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.
7
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, Adelphia
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 Adelphia would be providing us. In
addition, in-house and outside counsel for Adelphia 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 Adelphia was in the process of obtaining a waiver of compliance
from the lenders or that during the April 30, 2002 Board of Directors 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 Adelphia 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 Adelphia had in fact received a waiver of compliance from the lenders of
the April 30, 2002 filing deadline. At that time, Adelphia'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 Adelphia, we were
informed that Adelphia'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 Adelphia's and certain of Adelphia's subsidiaries' compliance
with their respective public indenture and other credit agreements, Adelphia
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 Adelphia's calculations were based upon
interpretations of certain of the terms, definitions and covenants of Adelphia
various debt and credit agreements that did not appear to be
8
supported by the terms of the agreements. As a result, we requested that
Adelphia obtain either (1) a legal opinion addressing the interpretative
positions taken by Adelphia or (2) a confirmation from the applicable trustee or
administrative agent confirming that the trustee or the administrative agent was
in agreement with Adelphia's interpretations and related calculations. Adelphia
informed us that its counsel was not willing to provide a legal opinion to
Adelphia addressing the appropriateness of certain of the interpretative
positions taken by Adelphia. Adelphia'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 Adelphia 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 Adelphia's in-house counsel to discuss our concerns related
to Adelphia's debt compliance calculations. During the period May 7, through May
12, 2002, we became aware of a number of other matters related to Adelphia'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:
- An employee of Adelphia advised us that in certain instances,
certifications of debt compliance prepared by Adelphia and
sent to the respective trustees were not supported by
underlying calculations.
- We determined that in certain instances (i) certifications of
debt compliance sent to the respective trustees by Adelphia
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.
- An employee of Adelphia provided information to us that
indicated that one of Adelphia's subsidiaries had
sufficient income during the period in question to alleviate
debt compliance concerns for certain of Adelphia'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 Adelphia 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 Adelphia 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 Adelphia and its outside counsel were aware of and had
been working to address these defaults for "a couple of weeks." Adelphia 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
9
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.
Certain Events Commencing May 1, 2002
On May 1, 2002, we met with the Chairman of the Audit Committee and management
of Adelphia to reiterate our concerns relating to the Digital Cable Converter
Boxes, the lack of cooperation that we had received from Adelphia 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 Adelphia that we
were seriously concerned that 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 Adelphia and the Chief Financial Officer of Adelphia 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 Adelphia 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 Adelphia'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) Adelphia'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 Adelphia'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 Adelphia on that date needed to be resolved
prior to issuance of a report on the financial statements of Adelphia or any of
its subsidiaries, including the Company, or co-borrowing groups.
10
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 Adelphia's cable subscriber and system "rebuild" numbers might have been
overstated in Adelphia's published reports.
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
Adelphia 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 items,
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 Adelphia or its subsidiaries, including the Company, 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 Adelphia'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 Adelphia 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 Adelphia that we were suspending our audit of the Company
and various of Adelphia's subsidiaries, including the Company, and co-borrowing
groups as described above.
On May 30, 2002, the Chairman and Interim Chief Executive Officer of Adelphia
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 Adelphia, members of the Special Committee, representatives
of outside counsel responsible for conducting the investigation, and
representatives of
11
outside counsel to Adelphia 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. 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 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 Adelphia, 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
Adelphia.
In a conference call with the Chairman and Interim Chief Executive Officer of
Adelphia 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
Adelphia or the Special Committee was withholding information from us; (iii) we
have an obligation under 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 Adelphia, the Chairman of the Special Committee and Adelphia in
which we, among other things, responded to Adelphia's request that we resume
the audit.
Yours Truly,
/s/ Deloitte & Touche LLP
Appendix -- Letter dated June 9, 2002
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[DELOITTE AND TOUCHE LETTERHEAD]
APPENDIX
--------
June 9,2002
Mr. Erland E. Kailbourne
Chairman and Interim
Chief Executive Officer
and
Mr. Leslie J. Gelber
Chairman of the Special Committee
of Independent Directors
Adelphia Communications Corporation
One North Main Street
Coudersport, PA 16915-l114
Dear Messrs. Kailbourne and Gelber:
As you are aware, on May 14, 2002, we suspended our audit of Adelphia
Communications Corporation (the "Company") and various of the Company's
subsidiaries and co-borrowing groups. At the time that we suspended the audit,
we informed the Company 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 Special Committee using independent counsel
and appropriate professionals and we advised the Company that the Special
Committee had to reach conclusions and take remedial action that were reported
to us and satisfied our concerns before we could resume our audit or issue any
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 lOA").
On several occasions in the last few weeks -- most recently on June
3, 2002 -- you, together with other representatives of the Company, urged us to
resume the audit so that the Company could quickly issue its 2001 financial
statements. The purpose of this letter is to inform you that for the same
reasons that we suspended our audit on May 14, 2002 -- and for additional
reasons as well -- we cannot yet resume the audit.
As you know, the Special Committee has been investigating potential
illegal acts by Company employees. But the Special Committee, by its own
admission, is far from completing its work. According to the First Report of
Covington & Burling to the Special Committee (the "First Report"), dated May
24, 2002 because the Special Committee has been unable to interview "numerous
witnesses", "[t]his situation has inevitably had an impact on Counsel's ability
to discover information critical to our investigation and prevents us from
reaching even preliminary conclusions on many of the issues" (page 1). The First
Report ends by cautioning that "[o]ther issues require investigation that has
only recently begun" (page 29). Based upon the little we have been told, we do
not know whether the Special Committee has yet reached any conclusions or
recommended remedial action with regard to the most troubling conduct or with
respect to a significant number of Company employees. Obviously, our concerns
about the possible existence of illegal activity and the necessity for
appropriate remedial action could not possibly be satisfied until the Special
Committee itself has reached conclusions and recommended appropriate remedial
measures.
In addition both of you have informed us -- and this is consistent with
the First Report (see page 3) -- that six financial and investor relations
executives might have known of or
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been directly implicated in inappropriate conduct and are cooperating with the
New York U.S. Attorney's Office. Nevertheless, we have been told, those six
executives retain their positions at the Company. 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. Clearly, we cannot
resume our audit until the questions surrounding those individuals, as well as
the other questions and issues that were raised earlier, are satisfactorily
resolved and, if necessary, timely and appropriate remedial action is taken.
You have also advised us that the Special Committee is in possession of
significant material information about possible illegal conduct by or known by
the above six individuals, but the Special Committee will not share that
information with us unless and until we resume the audit. We reject that
position. There is no way that we could conclude that the Company is taking
timely and appropriate remedial measures to deal with illegal conduct if the
Special Committee has material information about the conduct that it is refusing
to share with us.
Finally, we have been attempting since last Monday, June 3, to meet
with the Special Committee and possibly its counsel to review the above issues
and to discuss certain factual inaccuracies in the First Report that need to be
corrected. We asked for a meeting late in the day on June 3 and were told that
Mr. Gelber would be contacting counsel to the Special Committee and would be in
touch with us promptly thereafter to schedule a meeting, On Tuesday, June 4, Mr.
Kailbourne inquired as to whether Mr. Gelber had contacted us and we said that
he had not. When we still had not heard from Mr. Gelber by the morning of
Friday, June 7, we called him. He declined to have any substantive discussion,
saying that he was not responsible for setting up a meeting with us, that we
were supposed to arrange the meeting
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(which is flatly inconsistent both with the June 3 conversation and with what
Mr. Kailbourne said to us on June 4) and that he had no time to talk to us.
That sort of response is unacceptable. We have identified substantial
outstanding issues that we have a critical need to review with the Special
Committee - issues that arose both before and after May 14,2002, and that relate
not only to prior activities of the Company, but also to the integrity of
current management and to the Special Committee's own conduct of its
investigation. The Special Committee's lack of responsiveness - again, it has
been a week since we first requested a meeting - is very troubling. We cannot
emphasize enough the importance of having that meeting as promptly as possible.
We are sure you appreciate that in the absence of an adequate response by the
Special Committee, we simply will be unable to conclude that the Company is
taking timely and appropriate remedial action.
We should also reiterate that, while we stand ready to resume our audit
if and when the open issues have been adequately resolved, no one should assume
that the audit (even if resumed) will be quickly or easily concluded. You must
understand that the questions that have arisen relating to possible fabrication
of documents and the integrity of accounting records call into doubt the
underlying reliability of much of the financial data upon which satisfactory
completion of any audit necessarily depends. Whether those problems will
ultimately require a complete reconstruction of records and data or some other
corrective action is too early to tell, but it certainly will result in a
substantial amount of additional work that will be both time consuming and
complex.
Let us conclude by reminding you that, as we have discussed with you on
several recent occasions, both we and the Company have certain obligations under
Section 10A. By informing the Company that we had become aware of information
indicating that illegal acts
4
might have occurred, we satisfied our initial Section 10A responsibility. We
believe that the Company properly responded by commencing (or expanding) the
Special Committee investigation and removing various members of the Rigas family
from their positions. However, the Special Committee's more recent lack of
responsiveness to or cooperation with us, its refusal to share material
information with us, its failure to take action regarding the six Company
executives who seem to have known about or been implicated in illegal conduct
but remain in their positions and the factual inaccuracies in the First Report
leave us with insufficient information to reach a conclusion at this time as to
whether, under Section 10A, the Company has taken timely and appropriate
remedial measures.
We have been working extremely hard to resolve the outstanding issues
during this very difficult time for the Company. Although we have given serious
consideration, in light of recent events, to resigning the engagement, we have
decided that we should make a final effort to resolve the issues if we can. We
hope that the Special Committee and the Company has that same commitment. Please
contact me as soon as possible - by telephone (215-246-2502), email
(scoulter@deloitte.com) or fax (215-448-2255)- so that we can arrange a meeting
to discuss and try to deal with the items raised in this letter.
Sincerely,
Deloitte & Touche LLP
by
/s/ Stephen Coulter
----------------------
Stephen J. Coulter
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