<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 1-13576
COX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2112281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Lake Hearn Drive, Atlanta, Georgia 30319
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 843-5000
---------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
---------------
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
There were 257,242,414 shares of Class A Common Stock outstanding as
of November 1, 1997.
There were 13,798,896 shares of Class C Common Stock outstanding as
of November 1, 1997.
<PAGE>
Cox Communications, Inc.
Form 10-Q
For the Quarter Ended September 30, 1997
Table of Contents
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS......................................................... 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION................................. 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 15
SIGNATURES................................................................. 16
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Cox Communications, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ ------------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Cash (including restricted cash of $11,410 as of
September 30, 1997)............................................... $ 43,785 $ 42,349
Accounts and notes receivable, less allowance for doubtful
accounts of $7,347 and $7,778..................................... 129,733 122,574
Net plant and equipment............................................. 1,881,193 1,531,811
Investments......................................................... 1,642,833 1,219,082
Intangible assets................................................... 2,531,741 2,728,955
Other assets........................................................ 110,149 139,819
------------ -----------
Total assets................................................... $ 6,339,434 $ 5,784,590
=========== ===========
Liabilities and shareholders' equity
Accounts payable and accrued expenses............................... $ 222,632 $ 220,859
Deferred income..................................................... 31,287 29,440
Deferred income taxes............................................... 555,168 294,453
Other liabilities................................................... 14,740 97,526
Debt................................................................ 3,148,585 2,823,853
Amounts due to Cox Enterprises, Inc................................. 38,296 57,147
------------ -----------
Total liabilities.............................................. 4,010,708 3,523,278
------------ -----------
Shareholders' equity
Preferred Stock, $1 par value; 5,000,000 shares authorized;
none issued.................................................... -- --
Class A Common Stock, $1 par value; 316,000,000 shares
authorized; shares issued and outstanding: 256,734,181
and 256,463,651................................................ 256,734 256,464
Class C Common Stock, $1 par value; 14,000,000 shares
authorized; shares issued and outstanding: 13,798,896.......... 13,799 13,799
Additional paid-in capital........................................ 1,782,928 1,742,121
Retained earnings................................................. 157,480 216,097
Foreign currency translation adjustment........................... 5,708 23,424
Net unrealized gain on securities................................. 112,077 9,407
------------ -----------
Total shareholders' equity..................................... 2,328,726 2,261,312
------------ -----------
Total liabilities and shareholders' equity..................... $ 6,339,434 $ 5,784,590
============ ===========
See notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cox Communications, Inc.
Consolidated Statements of Operations
Three Months Nine Months
Ended September 30 Ended September 30
------------- ------------- -------------- --------------
1997 1996 1997 1996
------------- ------------- -------------- --------------
(unaudited)
(Thousands of Dollars, excluding per share data)
<S> <C> <C> <C> <C>
Revenues
Complete basic.................................... $ 267,294 $ 245,900 $ 796,209 $ 740,021
New product tier.................................. 4,740 3,547 14,377 10,156
Premium service................................... 46,563 47,278 139,318 142,736
Pay-per-view...................................... 9,467 10,187 36,142 32,967
Advertising....................................... 25,519 25,346 72,607 67,925
Satellite......................................... 32,278 22,043 88,028 58,938
Other............................................. 22,340 9,515 45,728 25,906
----------- ----------- ----------- -----------
Total revenues.................................. 408,201 363,816 1,192,409 1,078,649
Costs and expenses
Programming costs................................. 89,122 81,815 269,854 243,954
Plant operations.................................. 33,234 35,838 109,535 105,116
Marketing......................................... 23,648 19,023 59,457 57,164
General and administrative........................ 82,746 69,732 234,698 209,821
Satellite operating and administrative............ 27,102 19,338 79,714 52,544
Depreciation...................................... 81,424 61,040 239,567 180,122
Amortization...................................... 21,583 17,427 57,610 53,519
----------- ----------- ----------- -----------
Operating income..................................... 49,342 59,603 141,974 176,409
Interest expense..................................... (52,484) (37,037) (149,470) (105,843)
Equity in net losses of affiliated companies......... (107,210) (53,189) (270,318) (101,257)
Gain on exchanges of cable systems................... -- -- 24,642 --
Gain on issuance of stock by affiliated companies.... -- -- -- 50,100
Gain on sale of affiliated companies................. -- -- 193,780 4,640
Other, net........................................... 10 4,062 3,102 13,943
----------- ----------- ----------- -----------
Income (loss) before income taxes.................... (110,342) (26,561) (56,290) 37,992
Income taxes......................................... (28,384) 1,513 2,327 31,745
----------- ----------- ----------- -----------
Net income (loss).................................... $ (81,958) $ (28,074) $ (58,617) $ 6,247
=========== =========== =========== ===========
Per share data
Net income (loss) per share........................ $ (0.30) $ (0.10) $ (0.22) $ 0.02
Weighted-average shares outstanding................ 270,504,264 270,250,069 270,396,146 270,233,224
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Cox Communications, Inc.
Consolidated Statements of Shareholders' Equity
Foreign Net
Common Stock Additional currency unrealized
---------------------- paid-in Retained translation gain on
Class A Class C capital earnings adjustment securities Total
----------- ---------- ---------- --------- ----------- ----------- -----------
(unaudited)
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........$256,464 $13,799 $1,742,121 $216,097 $ 23,424 $ 9,407 $2,261,312
Net loss.......................... (58,617) (58,617)
Issuance of stock related to
stock compensation plans....... 270 4,283 4,553
Capital contribution by CEI....... 36,524 36,524
Foreign currency translation
adjustment...................... (17,716) (17,716)
Change in net unrealized gain
on securities................... 102,670 102,670
-------- ------- ---------- -------- -------- -------- ----------
Balance at September 30, 1997.......$256,734 $13,799 $1,782,928 $157,480 $ 5,708 $112,077 $2,328,726
======== ======= ========== ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Cox Communications, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended September 30
-----------------------------
1997 1996
----------- -----------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................... $ (58,617) $ 6,247
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation....................................................... 239,567 180,122
Amortization....................................................... 57,610 53,519
Equity in net losses of affiliated companies....................... 270,318 101,257
Deferred income taxes.............................................. 86,281 (75,529)
Gain on issuance of stock by affiliated companies.................. -- (50,100)
Gain on exchange of cable systems.................................. (24,642) --
Gain on sale of affiliated companies............................... (193,780) (4,640)
(Increase) decrease in accounts and notes receivable................. (8,486) 15,597
(Increase) decrease in inventory..................................... 2,514 (20,399)
Decrease in taxes payable............................................ (50,863) (35,842)
Other, net........................................................... (4,340) (18,011)
--------- ---------
Net cash provided by operating activities..................... 315,562 152,221
--------- ---------
Cash flows from investing activities
Capital expenditures................................................. (530,551) (392,671)
Investments in affiliated companies.................................. (326,598) (241,984)
Proceeds from sale of affiliated companies........................... 6,983 --
Payments for exchanges of cable systems.............................. (53,442) --
Restricted proceeds from sale of business............................ 11,410 --
Proceeds from sale of business....................................... -- 201,791
Other, net........................................................... (9,289) (1,796)
--------- ---------
Net cash used in investing activities......................... (901,487) (434,660)
--------- ---------
Cash flows from financing activities
Revolving credit borrowings, net..................................... 350,000 366,291
Repayments of commercial paper, net.................................. (21,739) --
Proceeds from issuance of debt....................................... 249,400 5,000
Repayment of debt.................................................... (11,083) (5,080)
Proceeds from exercise of stock options.............................. 4,553 1,158
Payment to reacquire subsidiary preferred stock...................... (10,000) --
Increase (decrease) in amounts due to Cox Enterprises, Inc........... 18,937 (52,898)
Increase (decrease) in book overdrafts............................... 7,293 (17,480)
--------- ---------
Net cash provided by financing activities..................... 587,361 296,991
--------- ---------
Net increase in cash................................................. 1,436 14,552
Cash at beginning of period.......................................... 42,349 39,166
--------- ---------
Cash (including restricted cash of $11,410 as of
September 30, 1997) at end of period.............................. $ 43,785 $ 53,718
========= =========
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Cox Communications, Inc.
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
-----------------------
1997 1996
----------- -----------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Significant noncash transactions
Transfer of PCS license......................................... $ 251,918 $ --
Flextech merger stock exchange.................................. 203,119 --
Gemstar merger stock exchange................................... 19,373 --
Net gain on @Home stock offering................................ 329,051 --
Net gain on Teleport offering................................... -- 50,100
Additional cash flow information
Interest paid................................................... $ 130,624 $ 78,888
Income taxes paid (refunded).................................... (33,092) 143,095
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
Cox Communications, Inc.
Notes to Consolidated Financial Statements (Unaudited)
SEPTEMBER 30, 1997
1. Basis of Presentation and Other Information
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair statement of
the results of operations and financial position for the interim periods
presented. All such adjustments are of a normal recurring nature. These
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in Cox
Communications, Inc.'s ("Cox") Annual Report on Form 10-K for the year ended
December 31, 1996.
The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the year ended
December 31, 1997 or any interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS"). It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15, "Earnings per Share" ("Opinion 15"),
which is superseded by this Statement. This Statement requires restatement of
all prior-period EPS data presented. Upon adoption of this Statement in December
1997, the EPS amounts presented will not be materially different than those
previously presented in accordance with Opinion 15.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was
issued. This Statement requires that Cox (a) classify, by nature, items of other
comprehensive income in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. This
Statement will also require Cox to report other comprehensive income, a measure
of performance that includes all non-owner sources of changes in equity, in
addition to net income reported in the financial statements. Reclassification of
financial statements for earlier periods provided for comparative purposes will
be required. There will be no effect on Cox's financial position upon adoption
in the first quarter of 1998.
7
<PAGE>
Effective July 1, 1997, Cox revised the cost component factor used to
capitalize indirect costs relating to network construction activity. This change
in estimate resulted in a reduction of the net loss of approximately $4.1
million during the third quarter, or $0.02 per share for the three months and
year ended September 30, 1997.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified for
comparative purposes.
3. EXCHANGES AND DISPOSITIONS OF BUSINESSES
In September 1997, Cox sold its Sun City California cable television
system, serving approximately 10,000 customers, for $11.4 million. An
insignificant loss was recognized in conjunction with the sale. For tax
purposes, Cox accounted for the disposition as a like-kind exchange. Tax rules
allow Cox to defer a substantial portion of the related tax gain on this
transaction upon the reinvestment of the net proceeds in qualifying future
acquisitions. Cox is presently pursuing additional qualifying reinvestment
properties. At September 30, 1997, restricted cash of $11.4 million was held in
escrow pending reinvestment and has been reported in the Consolidated Balance
Sheet as part of cash.
In October 1997, Cox signed a definitive agreement to sell its Central Ohio
cable television system to FrontierVision Partners, L.P. The Central Ohio
system, which serves approximately 85,000 customers, was acquired by Cox during
its 1995 acquisition of Times Mirror Cable Television. Cox anticipates this
transaction will be consummated during the fourth quarter 1997. In addition, Cox
anticipates that it will recognize a book gain on this transaction.
In August 1997, Cox and Insight Communications Company, L.P.
("Insight") signed a letter of intent whereby Cox agreed to exchange its
Lafayette, Indiana cable television system, serving approximately 38,000
customers, for Insight's suburban Phoenix cable system, serving approximately
36,000 customers. Cox anticipates this transaction will be consummated during
the fourth quarter 1997. No gain or loss is expected on this transaction.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,230 customers for Time Warner
Entertainment/Advance-Newhouse's ("Time Warner") Hampton and Williamsburg,
Virginia cable television systems serving approximately 45,300 customers. The
transaction included a Texas cable television system serving approximately 7,000
customers which was purchased by Cox and then immediately traded to Time Warner.
Cox recognized a book gain of $27.8 million in conjunction with the exchange.
8
<PAGE>
4. Investments
The summarized unaudited financial information presented below for
significant equity method investments served as the basis for which Cox recorded
its share of equity in net losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ----------------------
(Thousands of Dollars)
GEMS
SPRINT PCS PIONEERCO TCGI OUTDOOR LIFE SPEEDVISION TELEVISION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sept. 30, 1997
- --------------
REVENUES $ 72,534 $ 2,760 $131,400 $ 3,386 $ 3,304 $ 2,593
OPERATING LOSS (382,712) (33,771) (28,600) (5,361) (8,266) (1,586)
NET LOSS (457,179) (46,737) (53,700) (5,628) (8,643) (2,456)
Sept. 30, 1996
- --------------
REVENUES -- -- $ 72,749 $ 710 $ 905 $ 2,255
OPERATING LOSS $ (87,136) $(10,422) (21,963) (6,297) (9,151) (2,323)
NET LOSS (94,552) (15,990) (33,704) (6,376) (9,230) (3,207)
<CAPTION>
NINE MONTHS ENDED
- --------------------------------------
(Thousands of Dollars)
GEMS
SPRINT PCS PIONEERCO TCGI OUTDOOR LIFE SPEEDVISION TELEVISION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sept. 30, 1997
- --------------
REVENUES $ 107,387 $ 5,632 $ 343,900 $ 8,744 $ 6,664 $ 7,612
OPERATING LOSS (851,238) (106,259) (80,800) (14,871) (23,452) (5,249)
NET LOSS (1,004,014) (149,894) (150,100) (15,547) (24,375) (8,139)
Sept. 30, 1996
- --------------
REVENUES -- -- $ 180,271 $ 1,334 $ 1,427 $ 6,573
OPERATING LOSS $ (165,011) $ (23,471) (33,116) (16,071) (21,837) (6,365)
NET LOSS (252,682) (29,636) (72,139) (16,225) (21,991) (8,913)
</TABLE>
In July 1997, At Home Corporation ("At Home") conducted an initial public
offering. As a result, the value of the At Home share price became readily
determinable, thereby causing Cox to account for its investment in At Home as an
available-for-sale investment under FASB No. 115, "Accounting for certain
Investments in Debt and Equity Securities," which resulted in the recording of
an unrealized gain on its investment in At Home of $329.1 million.
In June 1997, PrimeStar Partners L.P. ("PrimeStar Partners"), in which Cox
holds a 10.4% interest, agreed to merge with TCI Satellite Entertainment, Inc.
and create a new company, PrimeStar, Inc. As part of this transaction Cox will
roll-up, along with the other owners of PrimeStar Partners, its ownership
interest in PrimeStar Partners and its PrimeStar distribution businesses into
PrimeStar, Inc. in exchange for (i) cash (or the assumption of debt), (ii)
shares of Series A Common Stock of PrimeStar, Inc., and (iii) shares of Series C
Common Stock of PrimeStar, Inc. It is expected that upon consummation of the
roll-up, shares of the Series A Common Stock of PrimeStar, Inc. will be publicly
traded on the NASDAQ Stock Market. Subsequent to the roll-up, Cox will own 9% of
the common equity ownership of PrimeStar, Inc. Cox anticipates that it will
recognize a book gain on this transaction.
In May 1997, Starsight Telecast, Inc. merged with Gemstar International
Group Limited, a public company that develops and markets proprietary
technologies aimed at making technology more user friendly to consumers. Cox, as
a holder of Starsight shares, received 1,313,421 shares of Gemstar as a result
of the merger, representing a 2.8% interest in Gemstar and recognized a gain of
approximately $11.0 million related to this transaction in the second quarter of
1997.
In April 1997, Cox exchanged its 37.9% interest in UK Gold and 49.6%
interest in UK Living for 20,701,084 shares, or a 12.6% interest, in Flextech
plc, a United Kingdom publicly held programming company. Cox recognized a gain
related to this transaction of $179.8 million during the second quarter of 1997.
9
<PAGE>
In December 1996, pursuant to previous agreements, Cox, CEI, Tele-
Communications, Inc. ("TCI"), Comcast Corporation ("Comcast") and Sprint
Corporation ("Sprint") formed Cox Communications PCS, L.P. ("PioneerCo") to
operate the PCS system in the Los Angeles-San Diego Major Trading Area ("MTA").
PioneerCo is owned 49% by Sprint Spectrum Holding Company L.P. ("Sprint PCS") as
limited partner and 51% by Cox Pioneer Partnership ("CPP") as general partner.
CPP is a jointly controlled partnership owned approximately 78% by Cox and
approximately 22% by CEI. In March 1997, upon approval from the Federal
Communication Commission ("FCC"), Cox transferred the PCS license for the Los
Angeles-San Diego MTA and the related obligation to the FCC of $251.9 million to
PioneerCo. The December 1996 formation of PioneerCo and the March 1997 transfer
of the license and obligation resulted in Cox recording $36.5 million as a
capital contribution from CEI.
5. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1997 1996
--------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving Credit Facilities..................................... $ 799,999 $ 449,999
Commercial Paper, net of unamortized discount of $4,355
and $3,296.................................................... 695,906 718,704
Medium Term Notes, net of unamortized discount of
$647 and $721................................................. 263,307 166,082
Floating Rate Reset Notes, due June 15, 2009, net
of unamortized discount of $18................................ 149,982 --
6.375% Notes, due June 15, 2000, net of unamortized
discount of $643 and $821..................................... 424,357 424,179
6.5% Notes, due November 15, 2002, net of unamortized
discount of $453 and $517..................................... 199,547 199,483
6.875% Notes, due June 15, 2005, net of unamortized
discount and hedging of $12,797 and $13,661................... 362,203 361,339
7.25% Debentures, due November 15, 2015, net of
unamortized discount of $845 and $880......................... 99,155 99,120
7.625% Debentures, due June 15, 2025, net of unamortized
discount and hedging of $18,001 and $18,128................... 131,999 131,872
Obligation to the FCC........................................... -- 251,918
Capitalized Lease Obligations................................... 22,130 21,157
-------------------------------
Total Debt.................................................. $3,148,585 $2,823,853
===============================
</TABLE>
In June 1997, Cox issued $150 million principal amount of Floating
Rate Reset Notes due June 15, 2009 (the "Notes"). The Notes bear interest at a
floating rate equal to 0.8975% per annum below LIBOR until June 15, 1999, at
which time the interest rate will be reset at a fixed annual rate equal to 6.62%
plus Cox's spread to the ten year Treasury rate. The Notes are redeemable at the
election of the holder, in whole but not in part, at 100% of the principal
amount on June 15, 1999.
In September 1997, Cox amended and restated its $1,200 million
revolving credit facility and its $800 million revolving credit facility to
extend the maturities to October 9, 2002 and October 8, 1998, respectively.
Minimal changes were also made to the commitment and utilization fees.
10
<PAGE>
6. TRANSACTIONS WITH AFFILIATED COMPANIES
Cash requirements are funded by internally generated funds, by various
external financing transactions and, as needed, through intercompany loans from
CEI. CEI performs day-to-day cash management services for Cox, with settlements
of credit or debit balances between Cox and CEI occurring periodically with
interest at market rates (6.32% at September 30, 1997). Included in the amounts
due to/(from) CEI are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C>
Balance, December 31, 1966................................ $ 57,147
Cash transferred from CEI................................. 58,660
Capital contribution by CEI............................... (36,524)
Net operating expense allocations and reimbursement....... (40,987)
----------
Balance, September 30, 1997............................... $ 38,296
=========
</TABLE>
7. SHAREHOLDERS' EQUITY
In April 1997, Cox amended its Certificate of Incorporation thereby
increasing authorized Class A Common Stock from 286,000,000 shares to
316,000,000 shares.
8. COMMITMENTS AND CONTINGENCIES
On October 9, 1997, a putative class action suit was filed against Cox and
its cable system subsidiaries in California (the "Cox California Systems")
arising out of the manner in which the Cox California Systems sell premium
channel cable services. The suit seeks injunctive relief as well as an order
awarding the class members compensatory damages, plus statutory damages,
punitive damages, interest and attorney's fees. The outcome of this matter
cannot be predicted at this time.
Cox is a party to other various legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending will have a material adverse impact on Cox's
consolidated financial position or consolidated results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying historical Consolidated Statements of Income for the nine-month
period ended September 30, 1997 and 1996.
RECENT SALES AND EXCHANGES
In September 1997, Cox sold its Sun City California cable television
system, serving approximately 10,000 customers, for $11.4 million. An
insignificant loss was recognized in conjunction with the sale. For tax
purposes, Cox accounted for the disposition as a like-kind exchange. Tax rules
allow Cox to defer a substantial portion of the related tax gain on this
transaction upon the reinvestment of the net proceeds in qualifying future
acquisitions. Cox is presently pursuing additional qualifying reinvestment
properties. At September 30, 1997, restricted cash of $11.4 million was held in
escrow pending reinvestment and has been reported in the Consolidated Balance
Sheet as part of cash.
In October 1997, Cox signed a definitive agreement to sell its Central Ohio
cable television system to FrontierVision Partners, L.P. The Central Ohio
system, which serves approximately 85,000 customers, was acquired by Cox during
its 1995 acquisition of Times Mirror Cable Television.
11
<PAGE>
Cox anticipates this transaction will be consummated during the fourth quarter
1997. In addition, Cox anticipates that it will recognize a book gain on this
transaction.
In August 1997, Cox and Insight Communications Company, L.P. ("Insight")
signed a letter of intent whereby Cox agreed to exchange its Lafayette, Indiana
cable television system, serving approximately 38,000 customers, for Insight's
suburban Phoenix cable system, serving approximately 36,000 customers. Cox
anticipates this transaction will be consummated during the fourth quarter 1997.
No gain or loss is expected on this transaction.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,230 customers for Time Warner
Entertainment/Advance-Newhouse's ("Time Warner") Hampton and Williamsburg,
Virginia cable television systems serving approximately 45,300 customers. The
transaction included a Texas cable television system serving approximately 7,000
customers which was purchased by Cox and then immediately traded to Time Warner.
Cox recognized a book gain of $27.8 million in conjunction with the exchange.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 were $408.2 million,
a 12% increase over revenues of $363.8 million for the three months ended
September 30, 1996. Basic customers were 3,296,830, a 2.7% increase over
customers at September 30, 1996 after adjusting for the trades and sale of cable
systems during 1997.
Complete basic revenues for the third quarter of 1997 increased 9% over the
same period in 1996 to $267.3 million due to customer growth and average rate
increases implemented generally in the fourth quarter of 1996. These increases
are the result of new channel additions, increased programming costs and pass-
through of inflation adjustments. New product tier revenues grew 34% to $4.7
million as a result of launching these channel offerings in additional systems.
Premium service revenues for the three months ended September 30, 1997 were
$46.6 million, down $0.7 million compared to comparable period of 1996 as
premium units decreased to 1,913,028 due to the completion of the spring 1996
three-for-one promotion. Pay-per-view revenues for the third quarter of 1997
were $9.5 million, down 7% from the same period in 1996; however, excluding
revenues from a 1996 Tyson boxing event, pay-per-view revenues increased 20%.
Advertising revenues increased slightly to $25.5 million; however, excluding
revenues from a non-recurring 1996 Sprint campaign, advertising revenues
increased 15%.
Revenues from satellite operations were $32.3 million for the current
quarter, a 46% increase over revenues of $22.0 million for the same quarter in
1996 as PrimeStar customers increased to 157,193 at September 30, 1997 from
103,004 at September 30, 1996. Other revenues increased to $22.3 million due to
strong growth in Fibernet operations, the launch of high-speed data services and
consideration received for preferential placement on Cox's digital television
offering.
Programming costs were $89.1 million for the third quarter of 1997, an
increase of 9% over the same period in 1996 due primarily to Cox's customer
growth, January 1997 programming rate increases and new channel additions. Plant
operations expenses decreased 7% to $33.2 million and included the effect of a
revised cost component factor used to capitalize indirect costs relating to
network construction activity. Marketing costs increased 24% to $23.6 million
for the third quarter due in part to costs associated with roll-out of
residential high-speed data and telephony services. General and administrative
expenses for the third quarter of 1997 increased 19% to $82.7 million due
primarily to the increase in direct costs associated with residential and
commercial high-speed data and telephony services.
Operating income before depreciation and amortization ("EBITDA") is a
commonly used financial analysis tool for measuring and comparing cable
television compaineis in several areas, such as
12
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liquidity, operating performance and leverage. EBITDA increased 10% to $152.3
million for the third quarter of 1997. EBITDA for the core video business, which
excludes satellite and Fibernet operations and $8.3 million of direct costs
associated with residential and commercial high-speed data and telephony
services, grew 12% to $153.2 million compared to the third quarter of 1996.
The EBITDA margin (EBITDA as a percentage of revenues) for the current
quarter was 37.3%, a decrease from 38.0% for the third quarter of 1996 due to
the increased launch costs associated with residential and commercial data and
telephony. The core video business EBITDA margin was 41.2% for the quarter, an
increase from 40.2% for the comparable quarter of 1996.
Depreciation was $81.4 million for the third quarter of 1997, a 33%
increase compared to the same period in 1996 due to the continued upgrade and
rebuild of the broadband network. Amortization increased 24% to $21.6 million
for the current quarter due to additional goodwill resulting from the trades of
cable systems during the first quarter of 1997. Operating income for the third
quarter of 1997 was $49.3 million, a decrease of 17% compared to the same period
in 1996.
Interest expense increased $15.4 million to $52.5 million for the third
quarter of 1997 due to the discontinuance of capitalizing interest resulting
from the launch of services by Cox's PCS investments. Equity in net losses of
affiliated companies was $107.2 million primarily due to losses of $64.2
million, $18.6 million and $13.5 million associated with Sprint PCS, Cox PCS and
Teleport, respectively.
Net loss for the current quarter was $82.0 million as compared to net loss
of $28.1 million for the third quarter of 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the nine months ended September 30, 1997 were $1,192.4
million, an 11% increase over revenues of $1,078.6 million for the nine months
ended September 30, 1996. Basic customers were 3,296,830 at September 30, 1997
compared to 3,210,698 at September 30, 1996.
Complete basic revenues increased 8% to $796.2 million due to customer
growth and average rate increases implemented generally in the fourth quarter of
1996. These rate increases are the result of new channel additions, increased
programming costs and pass-through of inflation adjustments. New product tier
revenues grew 42% to $14.4 million as a result of launching these channel
offerings in additional systems.
Premium service revenues for the nine months ended September 30, 1997 were
$139.3 million, down 2% compared to the comparable period of 1996. Premium units
decreased to 1,913,028 at September 30, 1997 from 2,044,019 at September 30,
1996 due to the completion of the spring 1996 three-for-one channel promotion.
Pay-per-view revenues were $36.1 million, a 10% increase from the nine
months ended September 30, 1996 primarily due to the June 1997 Tyson/Holyfield
boxing event. Advertising revenues increased 7% to $72.6 million as a result of
strong growth in local and national ad sales and Cox's telecasts of the San
Diego Padres major league baseball games.
Revenues from satellite operations were $88.0 million, a 49% increase over
revenues of $58.9 million for the same period in 1996 as PrimeStar customers
increased to 157,193 at September 30, 1997 from 103,004 at September 30, 1996.
Other revenues increased to $45.7 million due to strong growth in Fibernet
operations, the launch of high-speed data services and consideration received
during the third quarter of 1997 for preferential placement on Cox's digital
television offering.
Programming costs increased 11% due primarily to Cox's customer growth,
January 1997 programming rate increases, new channel additions and the June 1997
Tyson/Holyfield boxing event. Plant
13
<PAGE>
operations expenses increased 4% to $109.5 million due to 1997 annual salary
increases and additional repair and maintenance costs related to systems
acquired in the trades during the first quarter of 1997 offset by the third
quarter 1997 effect of a revised cost component factor used to capitalize
indirect costs relating to network construction activity. Marketing costs
increased 4% to $59.5 million due in part to costs associated with roll-out of
residential high-speed data and telephony services. General and administrative
expenses increased 12% to $234.7 million due to annual salary increases and the
increase in direct costs associated with residential and commercial high-speed
data and telephony services.
EBITDA for the nine months ended September 30, 1997 was $439.2 million, a
7% increase over $410.1 million for the same period in 1996. EBITDA for the core
video business, which excludes satellite and Fibernet operations and $15.9
million of direct costs associated with residential and commercial high-speed
data and telephony services, grew 9% to $441.9 million compared to the nine
months ended September 30, 1996.
The EBITDA margin for the nine months of 1997 was 36.8%, a decrease from
38.0% for the nine months of 1996 due to the increased launch costs associated
with residential and commercial data and telephony. The core video business
EBITDA margin was 40.4% for the nine months ended September 30, 1997, a slight
increase over the same period of 1996.
Depreciation increased 33% to $239.6 million reflecting the continued
upgrade and rebuild of the broadband network. Amortization increased 8% to $57.6
million for the current year due to additional goodwill resulting from the
trades of cable systems during the first quarter of 1997. Operating income for
the nine months ended September 30, 1997 was $142.0 million, a decrease of 20%
compared to the same period in 1996.
Interest expense increased $43.6 million to $149.5 million for the nine
months ended September 30, 1997 due to the discontinuance of capitalizing
interest resulting from the launch of services by Cox's PCS investments. Equity
in net losses of affiliated companies was $270.3 million primarily due to losses
of $145.4 million, $61.6 million and $37.1 million associated with Sprint PCS,
Cox PCS and Teleport, respectively.
A gain of $190.8 was recognized in the second quarter of 1997 primarily as
a result of the exchange of Cox's interest in UK Gold and UK Living to Flextech
plc.
Net loss for the nine months ended September 30, 1997 was $58.6 million as
compared to net income of $6.2 million for the nine months ended September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Uses of Cash
As part of Cox's ongoing strategic plan, Cox has invested, and will
continue to invest, significant amounts of capital to enhance the reliability
and capacity of its broadband cable network in preparation for the offering of
new services and to make investments in affiliated companies primarily focused
on telephony, programming and communications-related activities.
Capital expenditures are primarily directed at upgrading and rebuilding
broadband cable networks in preparation for the delivery of additional services.
Capital expenditures for 1997 are expected to range between $625 million and
$675 million. During the nine months ended September 30, 1997, Cox made capital
expenditures of $530.6 million.
Funding requirements in 1997 for investments in affiliated companies are
expected to be approximately $173 million for Sprint PCS and PhillieCo, $165
million for PioneerCo and $33 million for programming, PrimeStar and other
investments. During the nine months ended September 30, 1997, Cox
14
<PAGE>
funded approximately $316.5 million for Sprint PCS, PioneerCo and other
telephony ventures and $10.1 million for programming, PrimeStar and other
investments.
During the nine months ended September 30, 1997, net repayments of $21.7
million were made for the commercial paper program. In addition, payments for
exchanges of cable systems of $53.4 million were made for the trades which were
closed during the first quarter of 1997.
Sources of Cash
Cox generated $315.6 million from operating activities during the nine
months ended September 30, 1997. Restricted proceeds of $11.4 million were
received by Cox for the sale of its Sun City California cable television system
and will be held in escrow pending reinvestment in a future cable system
acquisition. Cox borrowed $350.0 million of short term debt under the revolving
credit facilities during the first nine months ended September 30, 1997. In
addition, Cox received net proceeds of $249.4 million from the issuance of
Floating Rate Reset Notes due June 15, 2009 and the issuance of medium term
notes. In September 1997, Cox amended and restated its $1,200 million revolving
credit facility and its $800 million revolving credit facility to extend the
maturities to October 9, 2002 and October 8, 1998, respectively. Minimal changes
were also made to the commitment and utilization fees.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 9, 1997, Lynn Putnam, Jerry Williams and Raphael Lewis filed a
putative class action suit in Superior Court of the State of California, County
of San Diego against Cox and its cable system subsidiaries in California (the
"Cox California Systems") arising out of the manner in which the Cox California
Systems sell premium channel cable services. The suit alleges that the Cox
California Systems unlawfully require limited basic cable customers to purchase
the expanded basic services tier in order to purchase premium channels, i.e.,
channels sold on an a la carte basis such as Home Box Office and Showtime. The
suit asserts causes of action under California antitrust and consumer protection
laws. The suit seeks injunctive relief as well as an order awarding the class
members compensatory damages, plus statutory damages, punitive damages, interest
and attorney's fees. The outcome of this matter cannot be predicted at this
time.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997:
None.
15
<PAGE>
SIGNATURES
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 thereunto duly authorized.
Cox Communications, Inc.
/s/ Jimmy W. Hayes Date: November 6, 1997
- ------------------------------------
Jimmy W. Hayes
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
16
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