Mum's the Word at Cablevision

When it comes time to chat up Cablevision to Wall Street, it's what company executives don't say that's most interesting.

During last Tuesday's conference call to discuss a pretty underwhelming second quarter financial performance, Cablevision President Jim Dolan and other executives didn't touch on one significant event—the refusal of auditors KPMG to clear the company's financial report—until an analyst asked them.

Their reticence extended to Cablevision's newly launched direct-broadcast satellite, Rainbow 1. Despite having committed more than $800 million to the widely criticized satellite venture, Cablevision still hasn't detailed its business plan. Shareholders looking at skies crowded with offerings from DirecTV and EchoStar don't know what the venture is supposed to be after Cablevision spins the unit off to them later this year.

"Don't say anything about the elephant in the living room," wisecracked one analyst who was on the call.

The problem with auditors stems from the scandal at Cablevision's networks unit. KPMG is awaiting the outcome of an investigation into accounting games at Cablevision's Rainbow programming unit, which, of course, includes a review of the auditor's own work. Cablevision in July purged Rainbow's AMC Networks operation of 14 executives including President Kate McEnroe, accusing them of misstating the operation's results by about $20 million over three years.

Cablevision said AMC was understating its profits, with the effect of making it easier to reach the following year's profit targets set by corporate.

New forensic accountants have now identified an additional $3.4 million in improperly allocated production costs. But KPMG last week abruptly balked at signing off on Cablevision's quarterly numbers while other accountants were still reviewing its old work.

On the company's conference call, Cablevision executives were silent about the auditing snag until asked by Bear Stearns analyst Ray Katz. "We just were informed by KPMG in the last 24 hours, and we're in active discussions with them on it," said Vice Chairman Bill Bell.

The company acknowledged that uncertainty over quarterly financial statements could delay a planned refinancing of preferred stock.

"If we don't have comfort at some point in time, we're going to have to delay our financing until we do," Bell said. "But we're actively trying to resolve that situation."

Analysts generally believe the amount of money involved in the Rainbow scandal was too small to be worried about. But they believe the continuing investigation threatens to sidetrack the planned December spinoff of Rainbow DBS. Undeterred, Dolan asserted the separation would proceed on schedule. "There's no change in our intention to do the spin."

Financially speaking, the second quarter was not impressive. Total company cash flow rose just 5%, and Oppenheimer & Co. media analyst Tom Eagan says that filtering out some unusual items, it actually fell 0.4%. Operating cash flow from the consumer video business alone only increased 5.6% despite a 10% increase in revenues. Ignoring some one-time costs from its fight over the New York Yankees' YES network, cash flow growth would have been 9.2%, middling by cable standards.