<PAGE> 1
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 MARCH 31, 1999
[ ] 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]
COX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2112281
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF 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 263,729,688 shares of Cox Class A Common Stock outstanding
as of May 3, 1999.
There were 13,798,896 shares of Cox Class C Common Stock outstanding as
of May 3, 1999.
<PAGE> 2
COX COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS..................................................... 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................... 19
SIGNATURES.............................................................................................. 20
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
COX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Cash ............................................................. $ 90,429 $ 30,604
Accounts and notes receivable, less allowance for doubtful
accounts of $8,077 and $7,872 .................................. 174,142 166,052
Net plant and equipment .......................................... 2,782,407 2,652,212
Investments ...................................................... 7,659,277 5,981,057
Intangible assets ................................................ 3,944,157 3,959,906
Other assets ..................................................... 76,577 88,273
----------- -----------
Total assets ................................................ $14,726,989 $12,878,104
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ............................ $ 287,516 $ 296,950
Deferred income .................................................. 46,330 39,147
Deferred income taxes ............................................ 3,668,345 2,886,636
Other liabilities ................................................ 372,367 188,050
Debt ............................................................. 3,383,116 3,920,159
Amounts due to Cox Enterprises, Inc. ("CEI") ..................... 112,685 170,596
----------- -----------
Total liabilities ........................................... 7,870,359 7,501,538
----------- -----------
Commitments and Contingencies (Note 8)
Shareholders' equity
Series A Preferred Stock - liquidation preference of $44.275 per
share, $1 par value; 5,000,000 shares authorized; shares
issued and outstanding: 2,418,186 ........................... 2,418 2,418
Class A Common Stock, $1 par value; 316,000,000 shares
authorized; shares issued and outstanding: 263,726,960
and 263,555,756 ............................................. 263,727 263,556
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 ..................................... 2,159,758 2,152,250
Retained earnings .............................................. 1,601,456 1,350,277
Accumulated other comprehensive income ......................... 2,815,472 1,594,266
----------- -----------
Total shareholders' equity .................................. 6,856,630 5,376,566
----------- -----------
Total liabilities and shareholders' equity .................. $14,726,989 $12,878,104
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
----------------------------------
1999 1998
------------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
REVENUES
Complete Basic ........................... $ 351,315 $ 284,368
Premium service .......................... 52,072 45,647
Pay-per-view ............................. 24,392 10,360
Advertising .............................. 36,400 24,962
Data ..................................... 9,809 2,775
Telephony ................................ 16,220 4,972
Satellite ................................ -- 33,492
Other .................................... 8,338 9,216
------------- -------------
Total revenues ......................... 498,546 415,792
COSTS AND EXPENSES
Programming costs ........................ 128,761 94,972
Plant operations ......................... 39,133 32,751
Marketing ................................ 26,630 22,110
General and administrative ............... 115,492 87,411
Satellite operating and administrative ... -- 29,403
Depreciation ............................. 96,646 87,040
Amortization ............................. 26,654 18,557
------------- -------------
OPERATING INCOME ............................ 65,230 43,548
Interest expense ............................ (53,964) (53,124)
Equity in net losses of affiliated companies (46,453) (141,778)
Gain on investments, net .................... 419,452 --
Dividend income ............................. 11,073 --
Other, net .................................. (102) 1,283
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES ........... 395,236 (150,071)
Income tax expense (benefit) ................ 144,057 (48,152)
------------- -------------
NET INCOME (LOSS) ........................... $ 251,179 $ (101,919)
============= =============
PER SHARE DATA
Basic net income (loss) per share ......... $ 0.91 $ (0.38)
Diluted net income (loss) per share ....... 0.89 (0.38)
Basic weighted-average shares outstanding . 277,448,177 271,189,960
Diluted weighted-average shares outstanding 281,418,976 271,189,960
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A ADDITIONAL OTHER
PREFERRED COMMON STOCK PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK CLASS A CLASS C CAPITAL EARNINGS INCOME TOTAL INCOME
--------- ------- ------- ---------- -------- ------------- ----- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1998 ........................ $ 2,418 $ 263,556 $ 13,799 $ 2,152,250 $1,350,277 $1,594,266 $5,376,566
Net income .................. 251,179 251,179 $ 251,179
----------
Issuance of stock related
to stock compensation
plans .................... 171 7,508 7,679
Foreign currency
translation adjustment .... (10,198)
Change in net unrealized
gain on securities, net
of reclassification
adjustment................. 1,231,404
----------
Other comprehensive income .. 1,221,206 1,221,206 1,221,206
----------
Comprehensive income ........ $1,472,385
-------- --------- -------- ----------- ---------- ---------- ---------- ==========
BALANCE AT MARCH 31, 1999 ..... $ 2,418 $ 263,727 $ 13,799 $ 2,159,758 $1,601,456 $2,815,472 $6,856,630
======== ========= ======== =========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
------------------------
1999 1998
--------- ---------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................ $ 251,179 $ (101,919)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation ................................................... 96,646 87,040
Amortization ................................................... 26,654 18,557
Equity in net losses of affiliated companies ................... 46,453 141,778
Deferred income taxes .......................................... 25,939 14,127
Gain on investments, net ....................................... (419,452) --
Increase (decrease) in accounts payable and accrued expenses ..... (16,741) 36,051
Increase (decrease) in other current liabilities ................. 21,898 (8,144)
Increase in taxes payable ........................................ 107,125 1,204
Other, net ....................................................... 36,200 2,772
--------- ----------
Net cash provided by operating activities ................. 175,901 191,466
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................................. (224,752) (156,827)
Investments in affiliated companies .............................. (6,225) (12,782)
Proceeds from sale of investments ................................ 742,611 --
Restricted cash invested ......................................... -- 6,400
Decrease in amounts due from CEI, net ............................ -- 36,814
Other, net ....................................................... 3,225 1,467
--------- ----------
Net cash provided by (used in) investing activities ....... 514,859 (124,928)
========= ==========
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayments, net ................................. (349,998) (799,999)
Commercial paper (repayments) borrowings, net..................... (205,948) 532,929
Proceeds from issuance of debt ................................... -- 199,337
Repayment of debt ................................................ (7,913) (2,031)
Proceeds from exercise of stock options .......................... 5,262 3,858
Decrease in amounts due to CEI, net .............................. (57,911) --
Increase (decrease) in book overdrafts ........................... (14,427) 1,563
--------- ----------
Net cash used in financing activities ..................... (630,935) (64,343)
--------- ----------
Net increase in cash ............................................. 59,825 2,195
Cash at beginning of period ...................................... 30,604 28,259
--------- ----------
Cash at end of period ............................................ $ 90,429 $ 30,454
========= ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
----------------------
1999 1998
------- --------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ADDITIONAL CASH FLOW INFORMATION
Interest paid $48,089 $ 25,485
Income taxes paid (refunded) 10,994 (63,483)
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
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, 1998.
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 ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31, 1999
or any interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Investments in affiliates are accounted for under the equity method or
cost basis depending upon the level of ownership in the investment and/or Cox's
ability to exercise significant influence over the operating and financial
policies of the investee. Equity method investments are recorded at cost and
adjusted periodically to recognize Cox's proportionate share of the investees'
undistributed income or losses.
Unrestricted publicly traded investments are classified as
available-for-sale under Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
are recorded at their fair value, with unrealized gains and losses resulting
from changes in fair value between measurement dates recorded as a component of
accumulated other comprehensive income. Cox recognizes realized losses for any
decline in market value considered to be other than temporary. Investments in
privately held companies are stated at cost, adjusted for any known diminution
in value determined to be other than temporary in nature.
Derivative Financial Instruments
Cox uses derivative financial instruments, costless collar agreements,
to manage its exposure to fluctuations in the price of Cox's investment in
certain publicly traded stock. Such instruments are included in the financial
statements at fair market value, with unrealized gains and losses resulting from
changes in fair value between measurement dates recorded as a component of
accumulated other comprehensive income.
7
<PAGE> 9
Recently Issued Accounting Pronouncements
In 1998, SFAS No. 133, "Accounting for Derivative Financial 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. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Management is in the process of assessing the impact of
SFAS No. 133 on the consolidated financial statements.
Reclassifications
Certain amounts in the 1998 quarterly financial statements have been
reclassified for comparative purposes.
3. ACQUISITIONS AND EXCHANGES OF BUSINESSES
In March 1999, Cox signed a definitive agreement to purchase from First
Commonwealth Communications, Inc. cable television systems serving communities
near Gloucester, New Kent, West Point and King and Queen County, Virginia. The
cable television systems, serving more than 11,000 customers, are contiguous to
Cox's Hampton Roads, Virginia cable operation. The transaction is expected to
close during third quarter 1999, pending legal and regulatory review.
Also in March 1999, Cox and MediaOne signed a definitive agreement to
trade selected cable television systems in Massachusetts, Rhode Island and
Connecticut representing a total of 105,000 customers. Under the terms of the
agreement, Cox would trade its cable television systems in Massachusetts,
serving approximately 54,000 customers for MediaOne properties in Enfield,
Connecticut and Westerly, Rhode Island, serving 51,000 customers, and cash. The
trade is expected to close during third quarter 1999, pending legal and
regulatory review.
In April 1999, Cox signed a definitive agreement to purchase from Media
General, Inc., cable television systems serving more than 260,000 customers in
Fairfax County and Fredericksburg, Virginia. The transaction, expected to close
later this year pending legal and regulatory review, is valued at approximately
$1.4 billion.
4. INVESTMENTS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Equity method investments ....................... $ 49,870 $ 90,700
Fair value method investments ................... 7,605,552 5,886,502
Cost method investments ......................... 3,855 3,855
---------- ----------
Total investments ............................... $7,659,277 $5,981,057
========== ==========
</TABLE>
Cox has classified its fair value method investments in publicly traded
companies as available-for-sale securities under SFAS No. 115, which have an
aggregate cost at March 31, 1999 and December 31, 1998 of $2,986.4 million and
$3,281.2 million, respectively.
In December 1998, Cox entered into four costless collar agreements to
hedge its position in 10.0 million shares of AT&T common stock. The agreements
contain a notional amount of $78.00 per share and mature at various dates
through January 2003. Cox has recorded the costless collar agreements at their
estimated fair market value, with unrealized losses resulting from changes in
fair value between
8
<PAGE> 10
measurement dates of $36.3 and $4.3 million at March 31, 1999 and December 31,
1998, respectively, recorded as a component of accumulated other comprehensive
income.
During January 1999, Cox sold its entire equity interest in Telewest
Communications plc and received $727.9 million in cash proceeds which resulted
in a pre-tax gain of $433.1 million.
Cox owns a 9.43% interest in PrimeStar, Inc., a provider of direct
broadcast satellite services, as of March 31, 1999. In January 1999 PrimeStar,
Inc. announced the sale of its direct broadcast satellite service to Hughes
Electronics Corporation (a division of General Motors Corporation and the parent
company of DirecTV, a direct broadcast satellite service) for $1.8 billion in
cash and stock. PrimeStar, Inc. will use the $1.8 billion proceeds to extinguish
outstanding obligations and wind-down its remaining operations. In April 1999,
Hughes Electronics Corporation completed the acquisition of PrimeStar, Inc.'s
medium-power direct broadcast satellite service. The sale of PrimeStar, Inc.'s
remaining satellites and frequencies to Hughes Electronics Corporation is
pending the receipt of regulatory and other approvals.
In April 1999, Cox exercised its right under the Cox Communication PCS,
L.P. partnership agreement to transfer its remaining 32% interest in Cox PCS to
Sprint in return for approximately 19 million shares of Sprint PCS common stock.
This transaction is expected to be completed during the second quarter 1999.
5. DEBT
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving credit facilities ..................... $ -- $ 349,998
Commercial paper ................................ 837,625 1,026,164
Medium-term notes ............................... 463,427 463,363
Reset put securities ............................ 248,163 248,150
Floating rate reset notes ....................... 147,486 147,425
Notes and debentures ............................ 1,615,704 1,615,161
Capitalized lease obligations ................... 70,711 69,898
---------- ----------
Total debt ...................................... $3,383,116 $3,920,159
========== ==========
</TABLE>
In April 1999, Cox filed a Form S-3 Registration Statement with the
Securities and Exchange Commission under which Cox may from time to time offer
and issue debentures, notes, bonds or other evidences of indebtedness, shares of
preferred stock and shares of Class A common stock for a maximum aggregate
amount of $2.0 billion.
6. SHAREHOLDERS' EQUITY
The following table reconciles the numerator and the denominator of the
basic and diluted per-share computations for income from operations for the
three months ended March 31, 1999:
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income ................................. $251,179,000
------------
Basic EPS .................................. 251,179,000 277,448,177 $ 0.91
============
Effect of Dilutive Securities:
Options ................................. -- 1,446,561
ESPP .................................... -- 463,141
Preferred common stock equivalent ....... -- 2,061,097
------------ -----------
Diluted EPS ................................ $251,179,000 281,418,976 $ 0.89
============ =========== ============
</TABLE>
As Cox was in a net loss position for the three months ended March 31,
1998, all potentially dilutive securities were anti-dilutive and were not
included in the diluted earnings per share calculations.
On March 18, 1999, Cox announced that its Board of Directors had
approved a two-for-one stock split. The stock split requires a separate approval
by shareholders to amend Cox's articles of incorporation to increase the
authorized Series A Preferred Stock from 5,000,000 to 10,000,000 shares, Class A
Common Stock from 316,000,000 to 650,000,000 shares, and the Class C Common
Stock from 14,000,000 to 60,000,000 shares. If approval is received, the stock
split will be effective for share owners of record on May 14, 1999. Because
shareholder approval is pending until May 13, 1999, financial information
contained in this quarterly report has not been adjusted to reflect the impact
of the proposed stock split.
Earnings per common share amounts, after giving retroactive effect to
the two-for-one stock split, are presented below for all of the per share
amounts disclosed in the financial statements and the notes to the financial
statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
SHARES OUTSTANDING
Series A Preferred Stock ........... 4,836,372 --
Class A Common Stock ............... 527,453,920 514,958,458
Class C Common Stock ............... 27,597,792 27,597,792
PER SHARE DATA
Basic net income (loss) per share .. $ 0.45 $ (0.19)
Diluted net income (loss) per share 0.45 (0.19)
Basic weighted-average shares
outstanding ...................... 554,896,354 542,379,920
Diluted weighted-average shares
outstanding ...................... 562,837,952 542,379,920
</TABLE>
7. 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 (5.6% at March 31, 1999).
10
<PAGE> 12
Included in the amounts due to CEI are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS OF
DOLLARS)
--------------
<S> <C>
Balance, December 31, 1998 ......... $ 170,596
Cash transferred from CEI .......... 80,641
Net operating expense reimbursements (138,552)
---------
Balance, March 31, 1999 ............ $ 112,685
=========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Cox has unused letters of credit outstanding totaling $99.9 million at
March 31, 1999.
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, including the putative class actions, will have a
material adverse impact on Cox's consolidated financial position, consolidated
results of operations or consolidated cash flows. 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 consolidated financial statements for the three-month period ended
March 31, 1999 and 1998.
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. 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 March 1999, Cox signed a definitive agreement to purchase from First
Commonwealth Communications, Inc. cable television systems serving communities
near Gloucester, New Kent, West Point and King and Queen County, Virginia. The
cable television systems, serving more than 11,000 customers, are contiguous to
Cox's Hampton Roads, Virginia cable operation. The transaction is expected to
close during third quarter 1999, pending legal and regulatory review.
Also in March 1999, Cox and MediaOne signed a definitive agreement to
trade selected cable television systems in Massachusetts, Rhode Island and
Connecticut representing a total of 105,000 customers. Under the terms of the
agreement, Cox would trade its cable television systems in Massachusetts,
serving approximately 54,000 customers for MediaOne properties in Enfield,
Connecticut and Westerly, Rhode Island, serving 51,000 customers, and cash. The
trade is expected to close during third quarter 1999, pending legal and
regulatory review.
In April 1999, Cox signed a definitive agreement to purchase from Media
General, Inc., cable television systems serving more than 260,000 customers in
Fairfax County and Fredericksburg, Virginia.
11
<PAGE> 13
The transaction, expected to close late this year pending legal and regulatory
review, is valued at approximately $1.4 billion.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
The results of operations discussed below include the June 1998
acquisition of the Tucson and Sierra Vista, Arizona cable television system and
the October 1998 acquisition of the Las Vegas, Nevada cable television system
("the 1998 acquisitions").
Total revenues for the three months ended March 31, 1999 were $498.5
million, a 20% increase over revenues of $415.8 million for the three months
ended March 31, 1998. Basic customers were 3,783,367, a 2.8% increase over
customers at March 31, 1998 after adjusting for the 1998 acquisitions.
Complete basic revenues for the first quarter of 1999 increased 24%
over 1998 to $351.3 million due to basic and digital customer growth at existing
cable television systems, the 1998 acquisitions and rate increases implemented
primarily during the fourth quarter of 1998. As of March 31, 1999, Cox Digital
TV had launched in eight markets and had 99,596 customers. The rate increases
are the result of channel additions, increased programming costs and the
pass-through of inflation adjustments.
Premium service revenues for the first quarter of 1999 increased 14%
over 1998 to $52.1 million due to the 1998 acquisitions. Pay-per-view revenues
were $24.4 million, up from $10.4 million from the same period in 1998 due to
the 1998 acquisitions and the Holyfield/Lewis, Tyson/Botha and De La
Hoya/Quartey national boxing events during the first quarter 1999. Advertising
revenues increased 46% to $36.4 million due to the 1998 acquisitions and growth
in local and national advertising sales during 1999.
Data revenues for the first quarter of 1999 increased to $9.8 million
from $2.8 million primarily as a result of Cox's residential data service,
Cox@Home. As of March 31, 1999, Cox@Home had launched in nine markets with
88,890 customers. Telephony revenues for the first quarter of 1999 increased to
$16.2 million from $5.0 million due to growth in both residential and commercial
telephony. As of March 31, 1999, Cox's residential telephone offering had
launched in six markets with 41,894 customers.
Programming costs were $128.8 million for the first quarter of 1999, an
increase of 36% over the same period in 1998 due to basic and digital customer
growth at existing cable television systems, the 1998 acquisitions, programming
rate increases implemented in January 1999, and the channel additions and
pay-per-view events discussed above. Plant operations expenses increased 19% to
$39.1 million due to the 1998 acquisitions and increased maintenance and costs
related to new services. Marketing costs increased 20% to $26.6 million for the
current quarter due to the 1998 acquisitions and costs associated with the
rollout of digital video, high-speed data and telephony services. General and
administrative expenses for the first quarter of 1999 increased 32% to $115.5
million due to the 1998 acquisitions and costs associated with digital video,
high-speed data and telephony services in newly launched markets.
Operating cash flow (operating income before depreciation and
amortization), a non-GAAP measure of performance, is a commonly used financial
analysis tool for measuring and comparing cable television companies in several
areas of liquidity, operating performance and leverage. Operating cash flow
increased 26% to $188.5 million for the first quarter of 1999. The operating
cash flow margin (operating cash flow as a percentage of revenues) for the
current quarter was 37.8%, an increase from 35.9% for the first quarter of 1998.
Depreciation was $96.6 million for the first quarter of 1999 compared
to $87.0 million during the same period in 1998 due to the 1998 acquisitions and
the continued upgrade and rebuild of the broadband network. Amortization was
$26.7 million for the first quarter of 1999 compared to $18.6 million during
1998 due to the 1998 acquisitions. Operating income for the first quarter of
1999 was $65.2 million, an increase of 50% compared to the same period in 1998.
12
<PAGE> 14
Interest expense increased to $54.0 million for the first quarter 1999
compared to $53.1 million for the same period in 1998 primarily due to an
increase in the total debt outstanding and offset by more favorable average
interest rates during 1999. Equity in net losses of affiliated companies was
$46.5 million primarily due to losses associated with Cox PCS. Net gain on
investments of $419.5 million was primarily due to the gain of $433.1 million as
a result of the sale of Telewest Communications plc.
Net income for the current quarter was $251.2 million as compared to
net loss of $101.9 million for the first quarter of 1998.
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 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.
During the three months ended March 31, 1999, Cox made capital
expenditures of $224.8 million. These expenditures were primarily directed at
upgrading and rebuilding its broadband network for the delivery of high-speed
data and telephony. Capital expenditures for 1999 are expected to range between
$925.0 million and $975.0 million.
Investments in affiliated companies during the three months ended March
31, 1999 consisted primarily of debt and equity funding to GEMS Television and
NextLink Nevada. Funding requirements for the remainder of 1999 for investments
in affiliated companies are expected to be approximately $11.5 million.
During the three months ended March 31, 1999, net repayments of $350.0
million and $205.9 million were made for the revolving credit borrowings and
commercial paper borrowings, respectively.
SOURCES OF CASH
Cox generated $175.9 million from operating activities during the three
months ended March 31, 1999. Proceeds from the from the sale of investments of
$742.6 million relate primarily to the sale of Telewest.
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 bearing interest at fifty basis points above CEI's
current commercial paper borrowings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, SFAS No. 133, "Accounting for Derivative Financial 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. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Management is in the process of assessing the impact of
SFAS No. 133 on the consolidated financial statements.
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<PAGE> 15
OTHER MATTERS
YEAR 2000 READINESS DISCLOSURE
General
The Year 2000 issue is the potential impact of computer programs and
embedded computer microprocessors being unable to properly process dates or
date-sensitive calculations beyond December 31, 1999. Computer systems that
process dates or date-sensitive calculations 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. Cox recognizes
the importance of this issue and is actively managing an appropriate transition
into the year 2000.
State of Readiness
In June 1997, Cox appointed a project team, using both internal and
external resources, to develop its Year 2000 initiative. Cox is, as necessary,
upgrading and replacing affected information technology systems (such as
computer systems and software applications) and non-information technology
systems (such as equipment with embedded microprocessors). Cox is also designing
a contingency and business continuation plan and will implement these plans as
necessary.
The project team has developed a plan to assess, remediate, and test
its information technology and non-information technology systems sufficiently
in advance of the year 2000 to reduce the risk of an interruption in critical
services as a result of the millennium date change. The Year 2000 initiative
addresses the following systems:
- - Applications: custom and packaged software applications;
- - Infrastructure: local- and wide-area networks, hardware, processors and
operating systems;
- - Plant: the Cox plant, distribution network and programming components;
and
- - Vendors: business-critical third party vendors.
The general phases of the Year 2000 initiative common to all systems
are as follows:
- - Phase 1: inventory of all business processes to document the Year 2000
status for each product and service;
- - Phase 2: assign priorities to identified items;
- - Phase 3: assess the Year 2000 compliance of items determined to be
material to Cox;
- - Phase 4: repair or replace material items that are determined not to be
Year 2000 compliant;
- - Phase 5: test material items;
- - Phase 6: integration testing of multiple information technology and
non-information technology assets, both custom and vendor-provided, to
determine correct manipulation of dates and date-related data; and
- - Phase 7: design and implement contingency and business continuation
plans for each organization and Cox location, where appropriate.
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<PAGE> 16
STATUS OF INITIATIVE AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
APPLICATIONS INFRASTRUCTURE PLANT VENDORS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Phase 1-4 Substantially Substantially Substantially Substantially
complete complete complete complete
- --------------------------------------------------------------------------------------------------
Phase 5 In progress In progress In progress In progress
- --------------------------------------------------------------------------------------------------
Phase 6 In progress In progress Development of In progress
procedures in
progress, expect to
implement in
mid-1999
- --------------------------------------------------------------------------------------------------
Phase 7 Expect to commence Expect to commence Expect to commence Expect to commence
mid-1999 mid-1999 mid-1999 mid-1999
- --------------------------------------------------------------------------------------------------
</TABLE>
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 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 was upgraded to version 7.5
during fourth quarter 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 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 has a very limited inventory of custom or in-house developed
software. Cox believes that all such software over 10,000 lines of code has been
made Year 2000 compliant as of December 31, 1998.
Infrastructure. Infrastructure consists of local- and wide-area
networks, hardware, processors and operating systems. 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. The project team has
also conducted reviews of the infrastructure Year 2000 exposure to
non-information technology systems (i.e., elevator, automated lighting, etc.).
Based upon the project team's review, Cox has concluded that exposure from
non-information technology systems failing to be Year 2000 compliant is limited
and does not pose a material financial risk to the Company.
Plant. The cable 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 cable plant
equipment and software is state-of-the-art, which has helped to reduce the level
of plant Year 2000 issues. Certain equipment is known to require upgrades or
replacement to operate properly. Cox expects substantially all plant activities
will be completed through repair and replacement by mid-1999. Cox is currently
developing testing and integration testing procedures, and will implement
testing activity, where appropriate, in mid-1999. Due to the nature of the cable
plant network, testing procedures are dependent on testing performed by vendors
and Cox in a non-production environment.
15
<PAGE> 17
Vendors. Cox's assessment of its vendors includes a formal
communication program with Cox's significant vendors to determine the extent to
which Cox is vulnerable should those third parties fail to remediate their own
Year 2000 non-compliance. In addition, Cox is currently developing testing and
integration testing procedures, including the purchase of testing programs, and
has begun testing. 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 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 cannot 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 March 31, 1999, the total incremental costs expended on the Year 2000
initiative is approximately $1.2 million. Cox expects that the total incremental
costs of the Year 2000 initiative upon completion will not exceed $3.9 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 Year 2000 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
Vendors. Cox believes that the new applications and cable plant business systems
implemented since 1995 and its Year 2000 initiative reduce the possibility of
significant disruptions to normal operations.
Cox is in the process of acquiring certain cable televisions systems,
and has negotiated certain contractual rights in the acquisition agreements
relating to the Year 2000. However, Cox cannot determine at this time the
materiality of information technology and non-information technology issues, if
any, relating to the Year 2000 problem affecting those cable television systems.
Cox intends to include the acquired cable television systems in its Year 2000
initiative to the extent possible and is not currently aware of any likely
material system failures relating to the Year 2000 affecting the acquired
systems.
Contingency and Business Continuation Plan
The Year 2000 initiative calls for suitable contingency planning for
Cox's at-risk business functions. Cox normally makes contingency plans in order
to avoid interrupted service providing video, voice and
16
<PAGE> 18
data products to Cox's customers. The normal contingency planning will be
revised in mid-1999, where appropriate, to specifically address Year 2000
exposure with respect to service to customers.
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 has estimated the fair values of financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment, however, is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that Cox would realize in a
current market exchange.
The carrying amounts of cash, accounts receivable, other assets,
accounts payable, deferred income and amounts due to/from Cox Enterprises, Inc.
are reasonable estimates of their fair value at March 31, 1999 and December 31,
1998.
The estimated fair value of debt instruments are based on discounted
cash flow analyses using Cox's incremental borrowing rate for similar types of
borrowing arrangements and dealer quotations. The revolving credit agreements,
commercial paper and Floating Rate Reset Notes at March 31, 1999 and December
31, 1998 bear interest at current market rates and, thus, approximate fair
value. Cox is exposed to interest rate volatility with respect to the foregoing
variable rate debt instruments.
The estimated fair value of Cox's remaining debt instruments at March
31, 1999 was $2,389.5 million compared to a carrying amount of $2,398.0 million.
The estimated fair value of the remaining debt instruments at December 31, 1998
was $2,385.7 million compared to a carrying amount of $2,393.6 million. In
addition, the effect of a hypothetical one percentage point decrease in interest
rates would increase the estimated fair value of the remaining debt instruments
with a carrying amount of $2,398.0 million to $2,539.4 million at March 31, 1999
and $2,393.6 million to $2,540.6 million at December 31, 1998.
In December 1998, Cox entered into four costless collar agreements to
hedge its position in 10.0 million shares of AT&T common stock. The agreements
contain a notional amount of $78.00 per share and mature at various dates
through January 2003. Cox has recorded the costless collar agreements at their
estimated fair market value, with unrealized losses resulting from changes in
fair value between measurement dates of $36.3 million and $4.3 million at March
31, 1999 and December 31, 1998 respectively, recorded as a component of
accumulated other comprehensive income.
The fair values of some of Cox's investments are estimated based on
quoted market prices for those or similar investments. For cost method
investments for which there are no quoted market prices, a reasonable estimate
of fair value was not practicable as such estimate could not be made without
incurring excessive costs.
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 television system subsidiaries in California (the "Cox
California Systems") arising out of the manner in which the Cox California
Systems
17
<PAGE> 19
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.
The plaintiffs filed a Petition for Order to Show Cause against Cox on October
1, 1998. In addition, they sought to have the stay lifted by the court. On
January 15, 1999, the court denied the plaintiff's motion to lift the stay. This
matter is now before the FCC. Cox intends to defend this action vigorously. The
outcome of this matter cannot be predicted at this time.
Cox and certain subsidiaries are defendants in eight putative
subscriber class action suits in state courts in Arizona, Oklahoma, Louisiana,
Florida, Nebraska, Indiana, Texas and Nevada initiated between October 17, 1997
and December 17, 1998. 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. These actions are in various stages of defense and, in two cases, the
parties have reached settlement agreements, both of which have been approved by
the court. The remaining actions are being defended vigorously. The outcome of
these matters cannot be predicted at this time.
Cox had been named along with Teleport and Teleport's officers and
directors (including some who are officers of Cox), as defendants in three
putative class action suits filed in the chancery Court of New Castle County,
Delaware. The suits challenged the AT&T/Teleport merger and sought injunctive
relief and damages based on various theories alleging that the AT&T/Teleport
merger's terms did not offer appropriate compensation or protection to
Teleport's public shareholders. The actions were voluntarily dismissed without
prejudice on April 1st, 1999.
18
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K filed during the quarter ended March 31, 1999:
Item 5, Form 8-K dated and filed January 8, 1999 to report certain
cautionary statements for consideration in connection with
forward-looking statements made by Cox or its representatives.
19
<PAGE> 21
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: May 10, 1999
---------------------------------- --------------
Jimmy W. Hayes
Senior Vice President,
Finance and Administration
Chief Financial Officer
(Principal Financial Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 90,429
<SECURITIES> 0
<RECEIVABLES> 182,219
<ALLOWANCES> (8,077)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,912,095
<DEPRECIATION> (1,129,688)
<TOTAL-ASSETS> 14,726,989
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
(2,418)
<COMMON> (277,526)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> (14,726,989)
<SALES> 0
<TOTAL-REVENUES> (498,546)
<CGS> 0
<TOTAL-COSTS> 167,894
<OTHER-EXPENSES> 123,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,964
<INCOME-PRETAX> 395,236
<INCOME-TAX> 144,057
<INCOME-CONTINUING> 251,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 251,179
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.89
</TABLE>
