<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, 1998
[ ] 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
[LOGO OF COX COMMUNICATIONS, INC. APPEARS HERE]
COMMUNICATIONS
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 263,402,432 shares of Cox Class A Common Stock outstanding
as of November 1, 1998.
There were 13,798,896 shares of Cox Class C Common Stock outstanding
as of November 1, 1998.
<PAGE>
COX COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS.............................. 2
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 18
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 19
Item 2. CHANGES IN SECURITIES.......................................... 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 21
SIGNATURES............................................................... 22
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
Cox Communications, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Assets
Cash................................................................................... $ 10,277 $ 28,259
Restricted cash........................................................................ - 204,210
Accounts and notes receivable, less allowance for doubtful
accounts of $8,038 and $6,955........................................................ 147,133 144,073
Net plant and equipment................................................................ 2,234,813 1,979,063
Investments............................................................................ 4,088,098 1,598,273
Intangible assets...................................................................... 2,601,568 2,458,717
Amounts due from Cox Enterprises, Inc. ("CEI")......................................... - 50,856
Other assets........................................................................... 97,385 93,150
------------- ------------
Total assets...................................................................... $ 9,179,274 $ 6,556,601
============= ============
Liabilities and shareholders' equity
Accounts payable and accrued expenses.................................................. $ 258,518 $ 217,984
Deferred income........................................................................ 27,646 26,698
Deferred income taxes.................................................................. 1,720,253 721,594
Other liabilities...................................................................... 36,960 84,179
Debt................................................................................... 3,296,242 3,148,834
Amounts due to CEI..................................................................... 42,267 -
------------- ------------
Total liabilities................................................................. 5,381,886 4,199,289
------------- ------------
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: 257,689,188
and 257,276,414................................................................... 257,689 257,276
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........................................................... 1,798,519 1,790,833
Retained earnings.................................................................... 1,032,414 79,605
Foreign currency translation adjustment.............................................. 23,873 13,510
Net unrealized gain on securities.................................................... 671,094 202,289
------------- ------------
Total shareholders' equity........................................................ 3,797,388 2,357,312
------------- ------------
Total liabilities and shareholders' equity........................................ $ 9,179,274 $ 6,556,601
============= ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Cox Communications, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
------------------------------- --------------------------
1998 1997 1998 1997
--------------- --------------- -------------- -----------
(unaudited)
(Thousands of Dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues
Complete basic...................................... $ 302,791 $ 271,964 $ 878,175 $ 810,301
Premium service..................................... 47,864 46,729 140,059 139,764
Pay-per-view........................................ 10,007 9,467 28,357 36,142
Advertising......................................... 32,378 25,515 90,772 72,597
Data................................................ 5,099 948 11,877 1,297
Telephony........................................... 8,723 3,428 20,302 9,189
Satellite........................................... - 32,278 33,492 88,028
Other............................................... 9,103 17,872 27,018 35,091
------------ --------- ------------ ------------
Total revenues.................................... 415,965 408,201 1,230,052 1,192,409
Costs and expenses
Programming costs................................... 99,911 89,122 290,575 269,854
Plant operations.................................... 35,222 33,234 98,762 109,535
Marketing........................................... 25,897 23,657 73,012 59,466
General and administrative.......................... 96,065 82,738 278,323 234,689
Satellite operating and administrative.............. - 27,101 29,404 79,714
Depreciation........................................ 88,731 81,424 256,176 239,567
Amortization........................................ 19,849 21,583 56,200 57,610
------------ --------- ------------ ------------
Operating income....................................... 50,290 49,342 147,600 141,974
Interest expense....................................... (48,673) (52,484) (152,801) (149,470)
Equity in net losses of affiliated companies........... (143,346) (107,210) (414,031) (270,318)
Gain on exchanges of cable television systems.......... - - - 24,642
Gain on sale of affiliated companies................... - - 77,150 193,780
Gain on sale of businesses............................. - - 37,274 -
Gain on exchange of stock of affiliated company........ 1,719,295 - 1,719,295 -
Gain on issuance of stock by affiliated company........ 150,386 - 150,386 -
Other, net............................................. (4,434) 10 350 3,102
------------ --------- ------------ ------------
Income (loss) before income taxes...................... 1,723,518 (110,342) 1,565,223 (56,290)
Income taxes........................................... 656,544 (28,384) 612,414 2,327
------------ --------- ------------ ------------
Net income (loss)...................................... $ 1,066,974 $ (81,958) $ 952,809 $ (58,617)
============ ========= ============ ============
Per share data
Basic net income (loss) per share................... $ 3.93 $ (0.30) $ 3.51 $ (0.22)
Diluted net income (loss) per share................. 3.90 (0.30) 3.49 (0.22)
Basic weighted-average shares outstanding........... 271,389,369 270,504,264 271,309,002 270,396,146
Diluted weighted-average shares outstanding......... 273,516,712 271,343,694 273,289,009 270,919,226
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Cox Communications, Inc.
Consolidated Statement of Shareholders' Equity
Net
Foreign unrealized
Common Stock Additional currency gain
Preferred ----------------- paid-in Retained translation on
Stock Class A Class C capital earnings adjustment securities Total
--------- ------- ------- ---------- ---------- ----------- ----------- -----
(unaudited)
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997.... - $257,276 $13,799 $1,790,833 $ 79,605 $13,510 $202,289 $2,357,312
Net income.................... 952,809 952,809
Issuance of stock related to
stock compensation plans... 413 7,686 8,099
Foreign currency translation
adjustment.................. 10,363 10,363
Change in net unrealized gain
on securities............... 468,805 468,805
--------- -------- ------- ---------- ---------- ------- -------- ----------
Balance at September 30, 1998... - $257,689 $13,799 $1,798,519 $1,032,414 $23,873 $671,094 $3,797,388
========= ======== ======= ========== ========== ======= ======== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cox Communications, Inc.
Consolidated Statements of Cash Flows
Nine Months
Ended September 30
-------------------------
1998 1997
------------ ------------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................................. $ 952,809 $ (58,617)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities, net of effects of acquisitions:
Depreciation.................................................................... 256,176 239,567
Amortization.................................................................... 56,200 57,610
Equity in net losses of affiliated companies.................................... 414,031 270,318
Deferred income taxes........................................................... 719,940 86,281
Gain on exchanges of cable television systems................................... - (24,642)
Gain on sale of affiliated companies............................................ (77,150) (193,780)
Gain on sale of businesses...................................................... (37,274) -
Gain on exchange of stock of affiliated company................................. (1,719,295) -
Gain on issuance of stock by affiliated company................................. (150,386) -
Increase in accounts and notes receivable......................................... (2,288) (8,486)
Increase in accounts payable and accrued expenses................................. 7,309 160
Decrease in taxes payable......................................................... (51,258) (50,863)
Other, net........................................................................ 1,376 (1,986)
------------- ---------
Net cash provided by operating activities.................................. 370,190 315,562
------------- ---------
Cash flows from investing activities
Capital expenditures.............................................................. (549,157) (530,551)
Investments in affiliated companies............................................... (160,806) (326,598)
Proceeds from sale of affiliated companies........................................ 63,183 6,983
Proceeds from sale of businesses.................................................. 73,957 11,410
Restricted cash invested.......................................................... 204,210 -
Payments for purchases of cable television systems................................ (258,067) -
Payments for exchanges of cable television systems................................ - (53,442)
Decrease in amounts due from CEI.................................................. 50,856 -
Other, net........................................................................ (4,082) (9,289)
------------- ---------
Net cash used in investing activities...................................... (579,906) (901,487)
------------- ---------
Cash flows from financing activities
Revolving credit borrowings (repayments), net..................................... (800,000) 350,000
Commercial paper borrowings (repayments), net..................................... 86,009 (21,739)
Proceeds from issuance of debt.................................................... 843,531 249,400
Repayment of debt................................................................. (13,564) (11,083)
Proceeds from exercise of stock options........................................... 8,099 4,553
Payments to reacquire nonvoting redeemable preferred stock outstanding............ - (10,000)
Increase in amounts due to CEI.................................................... 42,267 18,937
Increase in book overdrafts....................................................... 25,392 7,293
------------- ---------
Net cash provided by financing activities.................................. 191,734 587,361
------------- ---------
Net increase (decrease) in cash................................................... (17,982) 1,436
Cash at beginning of period....................................................... 28,259 42,349
------------- ---------
Cash at end of period............................................................. $ 10,277 $ 43,785
============ =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cox Communications, Inc.
Consolidated Statements of Cash Flows
(Continued)
Nine Months
Ended September 30
----------------------
1998 1997
---------- --------
(unaudited)
(Thousands of Dollars)
<S> <C> <C>
Significant noncash transactions
PrimeStar merger stock exchange............................................. $ 94,696 $ -
Teleport stock issuance..................................................... 150,386 -
Teleport merger stock exchange.............................................. 2,076,861 -
Transfer of PCS license..................................................... - 251,918
Flextech merger stock exchange.............................................. - 203,119
Gemstar merger stock exchange............................................... - 19,373
@Home stock issuance........................................................ - 329,051
Additional cash flow information
Interest paid............................................................... $ 123,935 $130,624
Income taxes refunded....................................................... (56,268) (33,092)
See notes to consolidated financial statements.
</TABLE>
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
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, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the three months and nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998 or any interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Income
During the first quarter of 1998, Cox adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires prominent disclosure of comprehensive income. Total comprehensive
income was $1,191.1 million and $72.0 million for the three months ended
September 30, 1998 and 1997, respectively, and $1,432.0 million and $26.3
million for the nine months ended September 30, 1998 and 1997, respectively. The
components of total comprehensive income include consolidated net income (loss)
and the change in the foreign currency translation adjustment and net unrealized
gain (loss) on securities for the periods presented.
Recently Issued Accounting Pronouncements
In June 1997, SFAS No. 131 "Disclosure about Segments of an Enterprise
and Related Information," was issued. This Statement requires that a public
company report segment profit or loss, certain specific revenue and expense
items, segment assets and certain descriptive information about the
determination of business segments. SFAS No. 131 is effective for Cox's annual
1998 financial statements and interim 1999 financial statements. Management is
in the process of determining the effect on Cox's financial statements as a
result of the adoption of SFAS No. 131.
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities," was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. This Statement is effective for fiscal years beginning after June 15,
1999. The effect on Cox's financial statements upon adoption of SFAS No. 133 has
not been determined.
7
<PAGE>
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified for
comparative purposes.
3. ACQUISITION AND DISPOSAL OF BUSINESSES
In October 1998, Cox completed the acquisition of a cable television system
located in Las Vegas, Nevada, and certain related businesses owned by Prime
South Diversified, Inc. ("PSDI") for a combination of cash and Cox stock with an
aggregate value of approximately $1,325.0 million, including the refinancing of
certain PSDI indebtedness. PSDI operated a cable television system serving
319,000 residential cable television customers, 105,000 hotel units and
interests in various other non-consolidated operations in the greater Las Vegas
area. The following unaudited selected pro forma information for the nine months
ended September 30, 1998 and 1997 presents the consolidated results of
operations as if the acquisition had occurred on January 1, 1997. The pro forma
information presented is preliminary and may be adjusted once completed
information of the fair value of PSDI assets and liabilities is developed. The
pro forma information is not necessarily indicative of the combined results of
future operations, and do not reflect any synergies and other cost reductions
that may result from the integration of PSDI operations with Cox.
PRO FORMA
NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
1998 1997
------------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Revenues.................................... $ 1,369,407 $ 1,313,381
Operating income............................ 157,652 139,273
Net income.................................. 935,748 (91,710)
Basic net income (loss) per share........... $ 3.38 $ (0.33)
Diluted net income (loss) per share......... 3.35 (0.33)
In June 1998, Cox acquired a cable television system serving approximately
115,000 customers in Tucson, Sierra Vista and portions of Pima County, Arizona
from TCI Communications, Inc. ("TCIC"), part of Tele-Communications, Inc.'s TCI
Group, for approximately $250.0 million.
In May 1998, Cox acquired a cable television system serving approximately
14,000 customers in Douglas County, Nebraska from Advance/Newhouse Partnership
for approximately $8.0 million. Cox operates this system as part of its cluster
of systems in the Omaha area.
In April 1998, Cox contributed its partnership interests and net assets in
and operations of PrimeStar Partners, L.P. to a new subsidiary of TCI Satellite
Entertainment, Inc., PrimeStar, Inc., in exchange for $74.0 million and
18,939,217 shares of common stock of PrimeStar, Inc. The transaction resulted in
recording a 9.43% equity interest in PrimeStar, Inc. and a pre-tax gain of $37.3
million.
In April 1998, Cox and TCIC signed a non-binding agreement to form a joint
venture serving approximately 270,000 customers in several key Oklahoma
communities. The partnership would operate TCIC's system serving approximately
150,000 customers in Tulsa and surrounding communities, along with Cox's system
in the Oklahoma City area, which serves approximately 120,000 customers. The
partnership would be managed by Cox. As of September 30, 1998, Cox and TCIC are
continuing to negotiate with respect to this transaction, which would be further
subject to the signing of a definitive agreement and the receipt of all
appropriate regulatory and other approvals. There is no assurance that a
definitive agreement will be reached between the parties or that transaction
will be consummated.
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)
OUTDOOR GEMS
SPRINT PCS COX PCS TELEPORT LIFE SPEEDVISION TELEVISION
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1998
- -----------------------
REVENUES $ 428,881 $ 28,373 $ 295,300 $ 6,247 $ 7,322 $ 4,338
OPERATING LOSS (660,298) (45,624) (28,300) (3,633) (6,632) (1,490)
NET LOSS (599,471) (73,581) (55,900) (2,948) (6,711) (2,695)
SEPTEMBER 30, 1997
- -----------------------
REVENUES $ 72,534 $ 2,760 $ 115,700 $ 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) (51,400) (5,628) (8,643) (2,456)
NINE MONTHS ENDED
--------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
OUTDOOR GEMS
SPRINT PCS COX PCS TELEPORT LIFE SPEEDVISION TELEVISION
--------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
- -----------------------
REVENUES $ 764,985 $ 74,021 $ 605,800 $ 16,518 $ 18,952 $ 9,357
OPERATING LOSS (1,413,197) (142,309) (116,300) (10,485) (20,520) (3,451)
NET LOSS (1,640,339) (225,972) (190,700) (12,867) (22,645) (6,636)
SEPTEMBER 30, 1997
- -----------------------
REVENUES $ 107,387 $ 5,632 $ 315,629 $ 8,744 $ 6,664 $ 7,612
OPERATING LOSS (851,238) (106,259) (102,684) (14,871) (23,452) (5,249)
NET LOSS (1,004,014) (149,894) (150,861) (15,547) (24,375) (8,139)
</TABLE>
Cox's equity ownership in Teleport Communications Group, Inc. ("Teleport")
was accounted for using a quarter lag. In April 1998, Teleport completed the
acquisition of another entity for a combination of stock and cash consideration.
As a result of Teleport's stock issuance, Cox recognized a pre-tax gain of
$150.4 million in the quarter ended September 30, 1998. In July 1998, Cox's
equity ownership in Teleport was exchanged for shares of AT&T Corp. ("AT&T")
common stock as a result of the consummation of the merger between AT&T and
Teleport. Under the terms of the Merger agreement, Teleport shareholders
exchanged each share of Teleport for 0.943 of a share of AT&T common stock. As a
result of the exchange, Cox recognized a pre-tax gain of $1,719.3 million during
the quarter ended September 30, 1998 and has accounted for the AT&T common stock
as "available-for-sale" securities pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
In June 1998, Cox exercised its option to put 20% of its interest in Cox
PCS to Sprint PCS, which resulted in a pre-tax gain of $62.2 million.
During March 1998, FOX/Liberty Networks acquired a one-third ownership
interest in Speedvision and in Outdoor Life Networks. Cox, whose ownership
interest was 51.4% and 49.3% as of December 31, 1997, respectively, retained a
one-third ownership stake in each network. Cox recognized a minimal gain on this
transaction during the second quarter of 1998.
9
<PAGE>
5. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
-----------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving credit facilities, effective interest rate
6.1%............................................................. $ -- $ 799,999
Commercial Paper, net of unamortized discount of $5,561
and $2,191, effective interest rate 5.8% and 6.0%................ 765,939 683,300
Medium-term notes, net of unamortized discount of $1,220
and $1,201, interest ranging from 6.9% to 8.9%................... 463,334 263,352
Floating Rate Reset Notes, due June 15, 2009, net
of unamortized discount of $2,636 and $2,820, effective
interest rate 4.6% and 4.9%...................................... 147,364 147,180
6.15% Reset Put Securities, due August 1, 2033, net of
unamortized discount and hedging of $1,865....................... 248,135 --
6.375% Notes, due June 15, 2000, net of unamortized
discount of $411 and $567........................................ 424,589 424,414
6.5% Notes, due November 15, 2002, net of unamortized
discount of $364 and $430........................................ 199,636 199,570
6.875% Notes, due June 15, 2005, net of unamortized
discount and hedging of $11,510 and $12,462...................... 363,490 362,538
6.4% Notes, due August 1, 2008, net of unamortized
discount and hedging of $1,724................................... 198,276 --
7.25% Debentures, due November 15, 2015, net of
unamortized discount of $805 and $840............................ 99,195 99,160
7.625% Debentures, due June 15, 2025, net of unamortized
discount and hedging of $17,814 and $17,953...................... 132,186 132,047
6.8% Debentures, due August 1, 2028, net of unamortized
discount and hedging of $2,751................................... 197,249 --
Capitalized Lease Obligations...................................... 56,849 37,274
-------------------------------
Total Debt..................................................... $3,296,242 $3,148,834
===============================
</TABLE>
In July 1998, Cox filed a Form S-3 Registration Statement (the "1998
Shelf Registration") with the Securities and Exchange Commission under which Cox
may from time to time offer and issue debentures, notes, bonds or other evidence
of indebtedness for a maximum aggregate amount of $1,000 million. During July
1998, Cox issued $200 million of 6.4% Notes maturing August 1, 2008 and $200
million of 6.8% Debentures maturing August 1, 2028 under the 1998 Shelf
Registration. The net proceeds to Cox were approximately $395.4 million.
In addition, during July 1998, Cox issued $250 million of 6.15% Reset Put
Securities due August 1, 2033 ("REPS") under the 1998 Shelf Registration. The
REPS are subject to mandatory redemption from the existing holders on August 1,
2003 through either (i) the exercise by the Remarketing Dealer of its right to
purchase the REPS for remarketing, or (ii) the repurchase of the REPS by Cox. If
remarketed, the Remarketing Dealer will, based on Cox's then current credit
spreads, determine the interest to be paid on the REPS. Upon issuance of the
REPS, the Remarketing Dealer paid Cox a premium of $11.4 million for the right
to serve as the Remarketing Dealer. Amortization of the premium will be
reflected as adjustments to interest expense. The net proceeds to Cox were
approximately $259.4 million.
In anticipation of the issuance of these debt securities, during June 1998
Cox entered into a series of transactions under a forward treasury lock
agreement in order to hedge its interest rate exposure. Such hedging
transactions totaled a notional amount of $50 million for the Notes due August
1, 2008, $50 million for the Debentures due August 1, 2028 and $50 million for
the REPS due August 1, 2033. The
10
<PAGE>
hedging transactions were settled at a minimal cost which are being reflected as
adjustments to interest expense over the life of the debt securities.
During January 1998, Cox issued $100 million of Medium Term Notes under a
Form S-3 Registration Statement filed April 1996 (the "1996 Shelf
Registration"). The Notes are due January 15, 2018 and bear interest at a fixed
rate of 6.85%. The net proceeds to Cox were approximately $98.8 million. In
addition, during January 1998 Cox issued a second series of $100 million Medium
Term Notes under the 1996 Shelf Registration. These Notes are due January 15,
2028 and bear interest at a fixed rate of 6.95%. The net proceeds to Cox from
the second series of Notes were approximately $98.8 million.
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 (6.29% at September 30, 1998). Included in the amounts
due (to)/from CEI are the following transactions:
(THOUSANDS OF DOLLARS)
Balance, December 31, 1997.................... $ 50,856
Cash transferred from CEI..................... (182,658)
Net operating expense allocations and
reimbursement............................. 89,535
------------
Balance, September 30, 1998................... $ (42,267)
=============
7. SHAREHOLDERS EQUITY
The following table reconciles the numerator and the denominator of the
basic and diluted per-share computations for income (loss) from operations for
the three and nine month periods ended September 31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- --------------
<S> <C> <C> <C>
Net income $1,066,974,000
--------------
BASIC EPS 1,066,974,000 271,389,369 $3.93
========
EFFECT OF DILUTIVE SECURITIES
Options -- 1,757,422
Employee Stock Purchase
Plan ("ESPP") -- 369,921
-------------- -------------
DILUTED EPS $1,066,974,000 273,516,712 $3.90
============== ============= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------- ----------------- --------------
<S> <C> <C> <C>
Net loss $(81,958,000)
--------------
BASIC EPS (81,958,000) 270,504,264 $(0.30)
========
EFFECT OF DILUTIVE SECURITIES
Options -- 839,430
DILUTED EPS $(81,958,000) 271,343,694 $(0.30)
============== ============= ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ----------------- --------------
<S> <C> <C> <C>
Net income $952,809,000
------------
BASIC EPS 952,809,000 271,309,002 $3.51
==========
EFFECT OF DILUTIVE SECURITIES
Options -- 1,631,256
ESPP -- 348,751
------------ -------------
DILUTED EPS $952,809,000 273,289,009 $3.49
============ ============= ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------- ----------------- --------------
<S> <C> <C> <C>
Net loss $(58,617,000)
------------
BASIC EPS (58,617,000) 270,396,146 $(0.22)
==========
EFFECT OF DILUTIVE SECURITIES
Options -- 523,080
------------ -------------
DILUTED EPS $(58,617,000) 270,919,226 $(0.22)
============ ============= ==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Cox is a party to 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. See
"-- Part II - Other Information -- Item 1. Legal Proceedings."
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 financial statements for the three- and
nine-month periods ended September 30, 1998 and 1997.
The forward looking statements included in Management's Discussion and
Analysis of Financial Condition and Results of Operations and other parts of
this report, which reflect management's best judgement based on factors
currently known, involve risks, uncertainties and other factors which may cause
the actual performance of Cox Communications, Inc. ("Cox") to be materially
different from the performance indicated or implied by such statements. Such
factors include, among others: competitive pressures within the broadband
communications industry; terms and availability of capital; the level of success
of Cox's operating initiatives; changes in business strategy and development
plans; the ability of Cox to mitigate the impact of the Year 2000 Issue; and
other factors included in the discussion below. Cox claims the protection of the
safe harbor for forward looking statements contained in Section 21E of the
Securities Exchange Act of 1934, as amended, for all forward looking statements
included in this report.
RECENT ACQUISITIONS AND EXCHANGES
In October 1998, Cox completed the acquisition of a cable television
system located in Las Vegas, Nevada, and certain related businesses owned by
Prime South Diversified, Inc. ("PSDI") for a combination of stock and cash with
an aggregate value of approximately $1,325.0 million, including the refinancing
of certain PSDI indebtedness. PSDI operated a cable television system serving
319,000 residential cable
12
<PAGE>
television customers, 105,000 hotel units and interests in various other non-
consolidated operations in the greater Las Vegas area.
In July 1998, Cox's equity ownership in Teleport Communications Group Inc.
("Teleport") was exchanged for shares of AT&T Corp. ("AT&T") common stock as a
result of the consummation of the merger between AT&T and Teleport. Under the
terms of the merger agreement, Teleport shareholders exchanged each share of
Teleport for 0.943 of a share of AT&T common stock. As a result of the exchange,
Cox recognized a pre-tax gain of $1,719.3 million during the quarter ended
September 30, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
Consolidated revenues for the three months ended September 30, 1998 were
$416.0 million, a 2% increase over revenues of $408.2 million for the three
months ended September 30, 1997. Basic customers were 3,406,678, a 2.2% increase
over customers at September 30, 1997 after adjusting for the cable television
system transactions consummated during 1997 and 1998.
Complete basic revenues for the third quarter of 1998 increased 11% over
the comparable period in 1997 to $302.8 million primarily due to basic and
digital customer growth and rate increases implemented primarily during the
fourth quarter of 1997. Digital television had launched in seven markets with
54,609 customers as of September 30, 1998. The rate increases are the result of
new channel additions, increased programming costs and the pass-through of
inflation adjustments.
Pay-per-view revenues for the third quarter of 1998 increased 6% to $10.0
million due to the increase in digital customers. Advertising revenues increased
27% to $32.4 million due to growth in local and national advertising sales
during 1998.
Data revenues for the third quarter of 1998 were $5.1 million primarily as
a result of Cox's residential data service, Cox@Home, which as of September 30,
1998, had launched in eight markets with 46,777 customers. Telephony revenues
for the third quarter of 1998 increased to $8.7 million from $3.4 million
primarily due to growth in the commercial telephony business. Telephony revenues
also included revenues from Cox's residential telephone offering, which had
launched in five markets with 18,200 customers as of September 30, 1998.
Programming costs were $99.9 million for the third quarter of 1998, an
increase of 12% over the same period in 1997 due to basic and digital customer
growth, programming rate increases and new channel additions. Plant operations
expenses increased 6% to $35.2 million. Marketing costs increased by 9% to $25.9
million for the current quarter due in part to costs associated with the rollout
of digital video, high-speed data and telephony services. General and
administrative expenses for the third quarter of 1998 increased 16% to $96.1
million due primarily to costs associated with digital video, 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 companies in several areas, such as liquidity, operating performance
and leverage. EBITDA increased 4% to $158.9 million for the third quarter of
1998. The EBITDA margin (EBITDA as a percentage of revenues) for the current
quarter was 38.2%, an increase from 37.3% for the third quarter of 1997.
Depreciation was $88.7 million for the third quarter of 1998, a 9% increase
compared to the same period in 1997 due to the continued upgrade and rebuild of
the broadband network. Operating income for the third quarter of 1998 was $50.3
million, an increase of 2% compared to the same period in 1997.
Interest expense decreased $3.8 million to $48.7 million for the third
quarter of 1998 due to the decrease in Cox's average borrowing rates. Equity in
net losses of affiliated companies was $143.3
13
<PAGE>
million primarily due to losses of $82.5 million, $28.8 million and $12.5
million associated with Sprint PCS, Cox PCS and Teleport, respectively.
A pre-tax gain $150.4 million was recognized in the third quarter as a
result of an equity investee's (Teleport) issuance of common stock to consummate
its acquisition of another entity. In addition, Cox's equity ownership in
Teleport was exchanged for shares of AT&T common stock as a result of the
consummation of the merger between AT&T and Teleport in July resulting in a pre-
tax gain of $1,719.3 million.
Net income for the current quarter was $1,067.0 million as compared to net
loss of $82.0 million for the third quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
Consolidated revenues for the nine months ended September 30, 1998 were
$1,230.1 million, a 3% increase over revenues of $1,192.4 million for the nine
months ended September 30, 1997. Basic customers were 3,406,678, a 2.2% increase
over customers at September 30, 1997 after adjusting for the cable television
system transactions consummated during 1997 and 1998.
Complete basic revenues for the nine months ended September 30, 1998
increased 8% over the same period in 1997 to $878.2 million due primarily to
basic and digital customer growth and rate increases implemented primarily
during the fourth quarter of 1997. Digital television had launched in seven
markets with 54,609 customers as of September 30, 1998. The rate increases are
the result of new channel additions, increased programming costs and the pass-
through of inflation adjustments.
Pay-per-view revenues for the nine months ended September 30, 1998 were
$28.4 million, down 22% from the same period in 1997 primarily as a result of
the Tyson/Holyfield boxing event in 1997. Advertising revenues increased 25% to
$90.8 million due to growth in local and national advertising sales during 1998.
Data revenues for the first nine months of 1998 were $11.9 million
primarily as a result of Cox's residential data service, Cox@Home, which as of
September 30, 1998, had launched in eight markets with 46,777 customers.
Telephony revenues for the first nine months of 1998 increased to $20.3 million
from $9.2 million primarily due to growth in the commercial telephony business.
Telephony revenues also included revenues from Cox's residential telephone
offering, which had launched in five markets with 18,200 customers as of
September 30, 1998.
Programming costs were $290.6 million for the nine months ended September
30, 1998, an increase of 8% over the same period in 1997 due to basic and
digital customer growth, programming rate increases and new channel additions.
Plant operations expenses decreased 10% to $98.8 million and included the effect
of a revised cost component factor used to capitalize indirect costs relating to
network construction activity beginning in the third quarter of 1997. Marketing
costs increased by 23% to $73.0 million for the nine months ended September 30,
1998 due in part to costs associated with the rollout of digital video, high-
speed data and telephony services. General and administrative expenses for the
first nine months of 1998 increased 19% to $278.3 million due primarily to costs
associated with digital video, high-speed data and telephony services.
EBITDA increased 5% to $460.0 million for the nine months ended September
30, 1998. The EBITDA margin for the nine months ended September 30, 1998 was
37.4%, an increase from 36.8% for the comparable period of 1997.
Depreciation was $256.2 million for the first nine months of 1998, a 7%
increase compared to the same period in 1997 due to the continued upgrade and
rebuild of the broadband network. Operating
14
<PAGE>
income for the nine months ended September 30, 1998 was $147.6 million, an
increase of 4% compared to the same period in 1997.
Interest expense increased $3.3 million to $152.8 million for the first
nine months of 1998 primarily due to the increase in total debt outstanding
offset by the decrease in Cox's average borrowing rates. Equity in net losses of
affiliated companies was $414.0 million primarily due to losses of $238.4
million, $87.6 million and $43.9 million associated with Sprint PCS, Cox PCS and
Teleport, respectively.
In the second quarter of 1998, Cox exercised its option to put 20% of its
interest in Cox PCS to Sprint PCS, which resulted in a pre-tax gain of $62.2
million. Also in the second quarter of 1998, Cox contributed its partnership
interests, net assets and operations in PrimeStar Partners, L.P. to PrimeStar,
Inc. in exchange for $74.0 million and 18,939,217 shares of common stock of
PrimeStar, Inc. The transaction resulted in recording a 9.43% equity interest in
PrimeStar, Inc. and a pre-tax gain of $37.3 million. In the third quarter, a
pre-tax gain of $150.4 million was recognized as a result of an equity
investee's (Teleport) issuance of common stock to consummate its acquisition of
another entity. In addition, Cox's equity ownership in Teleport was exchanged
for shares of AT&T common stock as a result of the consummation of the merger
between AT&T and Teleport in July resulting in a pre-tax gain of $1,719.3
million.
Net income for the nine months ended September 30, 1998 was $952.8 million
as compared to net loss of $58.6 million for the nine months ended September 30,
1997.
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 1998 are expected to range between $725 million and
$775 million. Capital expenditures during the nine months ended September 30,
1998 were $549.2 million.
Funding requirements in 1998 for investments in affiliated companies are
expected to be approximately $170 million. Investments in affiliated companies
during the nine months ended September 30, 1998 of $160.8 million included (i)
$72.6 million of additional equity funding to Sprint PCS and (ii) the purchase
of 46,373,264 shares of Telewest Communications plc. ("Telewest") stock for
$71.7 million in connection with the Telewest acquisition of another UK company.
As a result of this acquisition, Cox's ownership interest was diluted from 14.6%
to 11.9%.
During the nine months ended September 30, 1998, net repayments of $800.0
million were made for the revolving credit borrowings. In addition, payments for
the purchase of cable television systems of $258.1 million were made using
proceeds from restricted cash during the second quarter of 1998. At September
30, 1998, Cox had $2,000 million of borrowing capacity under its revolving
credit facilities.
Sources of Cash
Cox generated $370.2 million from operating activities during the nine
months ended September 30, 1998. Proceeds from the issuance of debt of $843.5
million include $199.3 million of Medium Term Notes under the 1996 Shelf
Registration program and $644.2 million of Notes, Debentures and Reset Put
Securities under the 1998 Shelf Registration. The proceeds were used to
refinance revolving credit borrowings mentioned above and to pay down
outstanding commercial paper.
15
<PAGE>
Cox Enterprises, Inc. ("CEI") continues to perform day-to-day cash
management services for Cox with settlements of balances between Cox and CEI
occurring periodically at market interest rates. At September 30, 1998, an
intercompany payable of $42.3 million was due from Cox to CEI.
OTHER MATTERS
Year 2000 Readiness Disclosure
General
- -------
The Year 2000 Issue is the result of computer programs and embedded
computer microprocessors being unable to properly process dates or date-
sensitive calculations beyond December 31, 1999. Cox recognizes the importance
of this issue and is taking a proactive approach in order to facilitate an
appropriate transition into the year 2000. Any of Cox's computer systems that
process dates or date-sensitive calculations are exposed to the Year 2000 Issue
as these systems may recognize only the last two digits to identify the year in
a date, or identify digits as an instruction. Accordingly, the year "00" may be
recognized as the year 1900 rather than the year 2000, which may result in
miscalculations or system failures. A computer system is deemed to be year 2000
compliant when it continues to produce understandable, accurate and predictable
results which conform to the original functional specifications, regardless of
the millennium change.
State of Readiness
- ------------------
In June 1997, Cox appointed a project team, comprised of both internal and
external resources, to develop its Year 2000 initiative (the "Initiative"). The
Initiative will involve, as necessary, the upgrade and replacement of affected
computer systems and software applications ("IT Systems") and equipment with
embedded microprocessors ("Non-IT Systems"), as well as the design and
implementation of a contingency and business continuation plan.
The project team has developed a plan to assess, remediate, and test its IT
and Non-IT systems sufficiently in advance of the year 2000 in order to reduce
the risk of an interruption in critical services as a result of the millennium
date change. The scope of the Initiative includes the following systems: (1)
both custom and packaged software applications (the "Applications"); (2) local-
and wide-area networks, hardware, processors and operating systems (the
"Infrastructure"); (3) the Cox plant, distribution network and programming
components (the "Plant"); and (4) business-critical third party vendors
("External Agents").
The general phases of the Initiative common to all systems are as follows:
(1) inventory of all business processes to document the Year 2000 status for
each product and service; (2) assign priorities to identified items; (3) assess
the Year 2000 compliance of items determined to be material to Cox; (4) repair
or replace material items that are determined not to be Year 2000 compliant; (5)
test material items; (6) integration testing of multiple IT and Non-IT assets,
both custom and vendor-provided, to determine correct manipulation of dates and
date-related data; and (7) design and implement contingency and business
continuation plans for each organization and Cox location. As of September 30,
1998, the project team has completed Phases 1 through 3 for substantially all of
the Applications, Infrastructure, Plant and External Agents.
Applications. Applications consist of custom and packaged software. In
1995, Cox began a Company-wide business systems replacement project to meet the
growth in the cable business and to meet emerging business needs. Accordingly,
Cox is in the process of replacing or upgrading substantially all of its
applications irrespective of the Year 2000 Issue.
Cox's two most critical Applications are its common financial system and the
cable operation support system. The financial system is based on packaged
software from JDEdwards. This software will be upgraded to version 7.5 by the
end of November 1998. Cox has made appropriate inquiries and JDEdwards has
provided certification that Version 7.5 is Year 2000 compliant. Cox operates all
of its cable
16
<PAGE>
properties using the ICOMS subscriber management system licensed from Convergys,
Inc. Cox has made appropriate inquiries and Convergys, Inc. has provided
opinions indicating that ICOMS is Year 2000 compliant. Cox expects to have
substantially all of the Applications completed through Phase 4 by December
1998. In addition, Cox is currently planning to implement Phase 5 and 6 testing
procedures for the Applications in early 1999 and Phase 7 contingency and
business continuation planning in mid-1999.
Cox has a very limited inventory of custom or in-house developed software
and anticipates that all such software will be repaired or replaced by the end
of 1998, with testing procedures to begin in December 1998.
Infrastructure. Infrastructure consists of local- and wide-area networks,
hardware, processors and operating systems. Substantially all Infrastructure
activities have been completed through Phase 3 including activities relating to
hardware, operating systems and networking equipment. Cox has received
recommendations from significant vendors as to the appropriate version of
software needed to be Year 2000 compliant. Cox intends to remain current with
all Year 2000 compliant software versions where available and expects to be
completed through Phase 4 for the Infrastructure by the end of 1998. In
addition, Cox is currently planning to implement Phase 5 and 6 testing
procedures, as necessary, for the Infrastructure in early 1999 and Phase 7
contingency and business continuation planning in mid-1999. The project team has
also conducted reviews of the Infrastructure Year 2000 exposure to Non-IT
systems (i.e., elevator, automated lighting, etc.). Based upon the project
team's review, Cox has concluded that exposure from Non-IT systems failing to be
Year 2000 compliant is limited and does not pose a material financial risk to
the Company.
Plant. The Plant is comprised of an integrated distribution network providing
video, voice, and data services to its customers. In 1995, Cox began to deploy
fiber optic cable and to upgrade the technical quality of its hybrid fiber-
coaxial broadband network facilitating the delivery of additional programming
and services. As a result, substantially all of Cox's Plant equipment and
software is state-of-the-art, which has helped to reduce the level of Plant Year
2000 Issues. As of September 30, 1998, Cox is substantially complete through
Phase 3 for all Plant equipment and software. Certain equipment is known to
require upgrades or replacement to operate properly. Some of these upgrades are
not yet available from their respective vendors. Cox expects substantially all
Plant activities will be completed through Phase 4 by mid-1999. Cox is currently
developing testing and integration testing procedures, and will implement Phase
5 and 6 testing activity in mid-1999. Due to the nature of the Plant network,
testing procedures are dependent on vendor and Cox testing performed in a non-
production environment. Phase 7 contingency and business continuation planning
is scheduled to commence in mid-1999.
External Agents. Cox's assessment of External Agents includes a formal
communication program with the Company's significant vendors to determine the
extent to which Cox is vulnerable to those third parties who fail to remediate
their own Year 2000 non-compliance. As of September 30, 1998, Cox had
substantially completed through Phase 3 for External Agents. Cox expects to be
substantially completed through Phase 4 for External Agents by early 1999. In
addition, Cox is currently developing testing and integration testing
procedures, including the purchase of testing programs, and will implement Phase
5 and 6 testing activity early 1999. Phase 7 contingency and business
continuation planning is scheduled to commence mid-1999. With respect to
customers, most of Cox's customer base consists of individual subscribers, thus,
vulnerability to a few key customers is not a significant risk to Cox. Cox is
not aware of any anticipated Year 2000 non-compliance by its vendors or
customers that could materially affect Cox's business operations; however, Cox
does not control the systems of other companies and cannot assure that such
systems will be converted in a timely fashion and, if not converted, would not
have an adverse effect on Cox's business operations.
Like most other companies, Cox is dependent upon a variety of external
suppliers including vendors providing electrical power, telephony, water, fuel
for vehicles and other necessary commodities. Cox also relies upon the
interstate banking system and related electronic communications for such
functions as transmitting financial data from field locations to the home office
and sweeping cash into
17
<PAGE>
lockboxes. Cox is currently not aware of any material non-compliance by these
vendors that will materially affect Cox's business operations; however, Cox does
not control these systems and can not assure that they will be converted in a
timely fashion and, if not converted, would not have an adverse effect on Cox's
business operations.
Costs
- -----
Total costs associated with Year 2000 compliance are not expected to be
material to Cox's financial position. Most of the costs associated with Cox's
Applications systems upgrades and replacements are being incurred irrespective
of the Year 2000 Initiative. In addition, the timing of these upgrades and
replacements has not been accelerated in order to become Year 2000 compliant. As
of September 30, 1998, the total incremental costs expended on the Initiative is
approximately $.8 million. Cox expects that the total incremental costs of the
Initiative upon completion will be approximately $3.3 million.
Risks and Reasonably Likely Worst Case Scenarios
- ------------------------------------------------
The failure to correct a material Year 2000 problem could result in system
failures leading to a disruption in, or failure of certain normal business
activities or operations. Such failures could materially and adversely affect
Cox's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, Cox is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on Cox's results of operations,
liquidity or financial condition. The Initiative is expected to significantly
reduce Cox's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its material
External Agents. Cox believes that, with the implementation of new business
systems and completion of the Initiative as scheduled, the possibility of
significant disruptions to normal operations should be reduced.
Contingency and Business Continuation Plan
- ------------------------------------------
The Initiative calls for the development of suitable contingency planning
for Cox's at-risk business functions. It is a function of Cox's normal business
practices to address contingency issues related to the integrated distribution
network in order to avoid, wherever feasible, interrupted service providing
video, voice and data products to Cox's customers. The contingency planning will
be revised to specifically address Year 2000 exposure with respect to product
offerings in mid-1999.
All statements relating to the Year 2000 made in Forms 10-K, 10-Q or
Registration Statements filed by Cox with the Securities and Exchange Commission
after January 1, 1996 are hereby incorporated by reference and designated as
Year 2000 Readiness Disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cox is exposed to interest rate risk due to its various debt instruments.
In accordance with the requirements of SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," Cox estimated the fair value of its debt
instruments based on discounted cash flow analyses using Cox's incremental
borrowing rate for similar types of borrowing arrangements and dealer
quotations. At September 30, 1998, the revolving credit facilities, commercial
paper and Floating Rate Reset Notes bear interest at current market rates and,
thus, approximate fair value. The effect of a hypothetical one percentage point
increase in interest rates would decrease the estimated fair value of remaining
debt with a carrying amount of $2,382.9 million to $2,339.7 million.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 9, 1997, three individual subscribers 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.
On February 13, 1998, the Court granted Cox's motion to stay the suit and
referred it on grounds of Primary Jurisdiction to the Federal Communications
Commission for consideration of issues best addressed by the FCC's expertise
should the plaintiffs elect to file a complaint with the FCC. On April 14, 1998,
plaintiffs filed a petition for a peremptory writ of mandate with the California
Court of Appeals. The petition was denied on May 6, 1998. On May 18, 1998, the
plaintiffs filed a petition for review in the Supreme Court of California which
was denied on July 8, 1998. On October 1, 1988, the plaintiffs filed a Petition
for Order to Show Cause with the Federal Communications Commission requesting
that the Commission issue an order finding Cox to be in violation of its rules
and requiring that Cox forfeit the sum of no more than $250,000 for the
violation. Cox's response to the Petition is due November 16, 1998. The outcome
of this matter cannot be predicted at this time.
Cox and its subsidiaries in Arizona, Oklahoma, Louisiana, Florida and Las
Vegas are defendants in eight putative subscriber class action suits in the
respective state courts initiated between October 17, 1997 and October 26, 1998.
In addition, on November 2, 1998, a ninth such suit was filed against Cox with
regard to its former Indiana cable system. The suits all challenge the propriety
of late fees charged by the subsidiaries to customers who fail to pay for
services in a timely manner. The suits seek injunctive relief and various
formulations of damages under various claimed causes of action under various
bodies of state law. The actions are being defended vigorously. The outcome of
these matters cannot be predicted at this time.
On May 12, 1998, the United States Department of Justice filed a three-
count antitrust complaint styled United States v. PrimeStar, Inc., et al., in
-------------------------------
the United States District Court for the District of Columbia, naming Cox as one
of twelve defendants. The complaint seeks to enjoin the consummation of a June
11, 1997 Asset Acquisition Agreement by which PrimeStar, Inc. would acquire
direct broadcast satellite ("DBS") assets owned by defendants MCI Communications
Corp., The News Corporation Limited, and K. Rupert Murdoch (the "Acquisition").
On October 15, 1998, PrimeStar, Inc. announced that the Acquisition would not be
consummated. The parties have notified the Department of Justice and the United
States District Court that the Acquisition has been abandoned. A formal
stipulation of dismissal was filed on November 6, 1998.
ITEM 2. CHANGES IN SECURITIES
On October 1, 1998, Cox acquired a cable television system located in Las
Vegas, Nevada, and certain related businesses owned by Prime South Diversified,
Inc. ("PSDI") for a combination of cash and Cox stock (the "Las Vegas
Acquisition") with an aggregate value of approximately $1,325.0 million,
including the refinancing of certain PSDI indebtedness. As part of the
consideration, Cox issued 5,667,709 shares of its Class A Common Stock and
2,418,186 shares of its Series A Convertible Preferred Stock. All of such shares
were issued to a limited number of sophisticated persons and were exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of such
Act.
The Las Vegas Acquisition was structured as a merger of PSDI with and into
Cox Communications Las Vegas, Inc., a wholly owned subsidiary of Cox ("CCLV"),
with CCLV as the
19
<PAGE>
surviving corporation. G.C. Investments and Barbara J. Greenspun, as trustee of
the Unified Credit Trust created under a Declaration of Trust dated December 6,
1988, (collectively, the "Greenspun Shareholders") owned a majority interest in
PSDI, and the remaining PSDI interests were held by Prime Cable of Austin,
Texas, and various individual and institutional investors.
The Series A Stock is a newly created series of preferred stock issued in
accordance with Cox's certificate of incorporation, which authorizes 5,000,000
shares of preferred stock. All of the issued and outstanding shares of Series A
Stock are held by the Greenspun Shareholders. Cox has no other issued or
outstanding preferred stock. The following summary of the material terms of the
Series A Stock is qualified in its entirety by reference to the Certificate of
Designations of Powers, Preferences and Rights of the Series A Stock, filed as
Exhibit 3.1 to the Form 8-K filed by Cox on October 15, 1998 and incorporated
herein by reference.
. Dividends. Holders of Series A Stock are entitled to dividends only when, and
---------
to the extent that, dividends are declared on the Series A Stock by the board
of directors of Cox.
. Ranking. In the event that Cox liquidates, holders of Series A Stock are
-------
entitled to receive $44.275 per share, plus any accrued and unpaid dividends
(the "Liquidation Price"), before holders of Cox's common stock receive any
distributions.
. Voting. Holders of Series A Stock are entitled to one vote per share, and
------
such holders vote together with the holders of Class A Common Stock on all
matters upon which holders of Class A Common Stock are entitled to vote.
. Antidilution. The number of outstanding shares of Series A Stock is subject
------------
to adjustment upon the occurrence of certain diluting events which affect the
number of outstanding shares of Class A Common Stock.
. Pre-emptive Rights. Holders of Series A Stock have the right to purchase
------------------
additional shares of Series A Stock if Cox or its affiliates contribute
assets or cash to CCLV.
. Conversion. Shares of Series A Stock are convertible into shares of Class A
----------
Common Stock at the option of the holders (an "Optional Conversion") only
after October 1, 2003, a change in control of Cox or notification of the
liquidation of Cox, whichever first occurs. Shares of Series A Stock
representing at least a majority of such shares then outstanding must be
converted in any Optional Conversion, and holders of Series A Stock are
entitled to a total of two Optional Conversions. Shares of Series A Stock are
convertible into shares of Class A Common Stock pursuant to a formula based
upon the fair market value of CCLV and the average closing price of the Class
A Common Stock over a specified ten-day period (the "Average Closing Price").
Shares of Series A Stock will automatically convert into shares of Class A
Common Stock if CCLV makes a distribution on its capital stock. The number of
shares of Series A Stock to be automatically converted in the event of such a
distribution will be determined by a formula based on the fair market value
of the distribution and the Average Closing Price. In addition, upon any sale
of all or substantially all of the assets of Cox, all outstanding shares of
Series A Stock will automatically convert into shares of Class A Common Stock
pursuant to a formula based on the fair market value of CCLV and the Average
Closing Price.
. Redemption. Any time after October 1, 2028 or in the event that the Greenspun
----------
Shareholders no longer hold the investment power with respect to at least 50%
of the then outstanding shares of
20
<PAGE>
Series A Stock, Cox may redeem all, but not less than all, of the outstanding
shares of Series A Stock at the Liquidation Price.
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,
1998:
A Form 8-K dated October 1, 1998 (filed October 15, 1998) reported
the closing of the acquisition of Prime South Diversified, Inc.
("PSDI") under Item 2 and included audited financial statements of
PSDI as of December 31,1996 and 1997 and for each of the three
years in the period ended December 31, 1997, unaudited financial
statements of PSDI for the six months ended June 30, 1998 and pro
forma financial statements reflecting the acquisition under Item
7.
A Form 8-K dated May 5, 1998 (filed May 28, 1998) reported the
issuance of a press release announcing the proposed PSDI
acquisition in Item 5, and that report was amended on July 6, 1998
to file pro forma financial statements reflecting the acquisition
under as Item 7(b).
A Form 8-K dated July 27, 1998 (filed August 7, 1998) reported
under Item 5 the completion of the sale of $200 million principal
amount of its 6.40% Notes due 2008, $200 million principal amount
of its 6.80% Debentures due 2028 and $250 million principal amount
of its 6.15% Reset Put Securities due 2033.
21
<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 12, 1998
----------------------------------
Jimmy W. Hayes
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,277
<SECURITIES> 0
<RECEIVABLES> 155,171
<ALLOWANCES> (8,038)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,234,813
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,179,274
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> (271,488)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (9,170,274)
<SALES> 0
<TOTAL-REVENUES> (1,230,052)
<CGS> 0
<TOTAL-COSTS> 389,337
<OTHER-EXPENSES> 312,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (152,801)
<INCOME-PRETAX> 1,565,223
<INCOME-TAX> 612,414
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 952,809
<EPS-PRIMARY> 3.51
<EPS-DILUTED> 3.49
</TABLE>
