<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 JUNE 30, 2000
[ ] 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 1-6590
[COX COMMUNICATIONS LOGO]
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 [ ]
---------------
There were 573,845,482 shares of Class A Common Stock and 27,597,792
shares of Class C Common Stock outstanding as of August 7, 2000.
<PAGE> 2
COX COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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.......................................................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................ 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 23
SIGNATURES............................................................................................... 25
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
COX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Cash ...................................................................... $ 81,464 $ 33,313
Accounts and notes receivable, less allowance for doubtful
accounts of $19,992 and $14,783 ......................................... 324,971 260,518
Net plant and equipment ................................................... 5,247,998 4,038,236
Investments ............................................................... 8,090,192 11,769,610
Intangible assets ......................................................... 13,902,601 10,174,034
Amounts due from Cox Enterprises, Inc. (CEI) .............................. -- 114,821
Other assets .............................................................. 304,529 223,965
------------ ------------
Total assets ......................................................... $ 27,951,755 $ 26,614,497
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ..................................... $ 619,233 $ 477,134
Deferred income taxes ..................................................... 5,993,362 6,670,521
Other liabilities ......................................................... 263,756 209,211
Debt ...................................................................... 8,081,578 6,375,795
Amounts due to CEI ........................................................ 5,501 --
------------ ------------
Total liabilities .................................................... 14,963,430 13,732,661
------------ ------------
Commitments and contingencies (Note 9)
Minority interest in equity of consolidated subsidiaries .................. 127,082 195,616
Cox-obligated capital and preferred securities of subsidiary trusts ....... 1,152,158 1,150,636
Shareholders' equity
Series A preferred stock - liquidation preference of $22.1375 per
share, $1 par value; 10,000,000 shares authorized; shares
issued and outstanding: 4,836,372 .................................... 4,836 4,836
Class A common stock, $1 par value; 671,000,000 shares
authorized; shares issued: 577,342,269 and 576,168,914; shares
outstanding: 574,631,169 and 576,168,914 ............................. 577,342 576,169
Class C common stock, $1 par value; 62,000,000 shares
authorized; shares issued and outstanding: 27,597,792 ................ 27,598 27,598
Additional paid-in capital .............................................. 3,859,268 3,835,639
Retained earnings ....................................................... 3,390,950 2,232,205
Accumulated other comprehensive income .................................. 3,959,219 4,859,137
Class A common stock in treasury, at cost: 2,711,100 shares ............. (110,128) --
------------ ------------
Total shareholders' equity ........................................... 11,709,085 11,535,584
------------ ------------
Total liabilities and shareholders' equity ........................... $ 27,951,755 $ 26,614,497
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES ................................................... $ 878,972 $ 509,879 $ 1,658,823 $ 1,008,425
COSTS AND EXPENSES
Programming costs ....................................... 217,624 122,330 413,216 251,091
Plant operations ........................................ 62,250 36,188 125,133 75,321
Marketing ............................................... 56,441 30,895 100,754 57,525
General and administrative .............................. 205,634 124,610 382,948 240,102
Depreciation ............................................ 211,415 133,333 390,230 229,979
Amortization ............................................ 92,465 25,984 171,418 52,638
------------- ------------- ------------- -------------
OPERATING INCOME ........................................... 33,143 36,539 75,124 101,769
Interest expense ........................................... (131,453) (68,708) (264,705) (122,672)
Income (expense) related to indexed debentures ............. 119,611 -- (249,887) --
Equity in net income (losses) of affiliated companies ...... 605 (29,588) (5,888) (76,041)
Gain on investments, net ................................... 173,725 908,504 1,943,564 1,327,956
Dividend income ............................................ 415 11,073 11,903 22,146
Other, net ................................................. (643) 135 (450) 33
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST ................................. 195,403 857,955 1,509,661 1,253,191
Income tax expense ......................................... 87,703 352,122 313,107 496,179
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST ............................ 107,700 505,833 1,196,554 757,012
Minority interest, net of tax .............................. (16,471) -- (37,809) --
------------- ------------- ------------- -------------
NET INCOME ................................................. $ 91,229 $ 505,833 $ 1,158,745 $ 757,012
============= ============= ============= =============
PER SHARE DATA
Basic net income per share ............................... $ 0.15 $ 0.91 $ 1.92 $ 1.36
Diluted net income per share ............................. 0.15 0.90 1.89 1.34
Basic weighted-average shares outstanding ................ 603,318,667 555,102,807 603,767,496 555,000,151
Diluted weighted-average shares outstanding .............. 611,453,833 564,223,150 612,934,723 564,070,955
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A COMMON STOCK ADDITIONAL OTHER
PREFERRED ---------------------- PAID-IN RETAINED COMPREHENSIVE
STOCK CLASS A CLASS C CAPITAL EARNINGS INCOME
---------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ..................... $ 4,836 $ 576,169 $ 27,598 $ 3,835,639 $ 2,232,205 $ 4,859,137
Net income ....................................... 1,158,745
Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised) ........... 1,173 19,824
Purchase of 2,711,100 shares of Class A
common stock for treasury, at cost ............
Proceeds from issuance of put options ............ 3,805
Change in net accumulated unrealized gain
on securities .................................
Other comprehensive loss ......................... (899,918)
Comprehensive income .............................
---------- ---------- ---------- ------------ ------------ ------------
BALANCE AT JUNE 30, 2000 ......................... $ 4,836 $ 577,342 $ 27,598 $ 3,859,268 $ 3,390,950 $ 3,959,219
========== ========== ========== ============ ============ ============
<CAPTION>
CLASS A
COMMON
STOCK IN
TREASURY, COMPREHENSIVE
AT COST TOTAL INCOME
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 ..................... $ -- $ 11,535,584
Net income........................................ 1,158,745 $ 1,158,745
Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised) ........... 20,997
Purchase of 2,711,100 shares of Class A
common stock for treasury, at cost ............ (110,128) (110,128)
Proceeds from issuance of put options ............ 3,805
Change in net accumulated unrealized gain
on securities ................................. (899,918)
------------
Other comprehensive loss ......................... (899,918) (899,918)
------------
Comprehensive income ............................. $ 258,827
------------ ------------ ============
BALANCE AT JUNE 30, 2000 ......................... $ (110,128) $ 11,709,085
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
-----------------------------
2000 1999
------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................ $ 1,158,745 $ 757,012
Adjustments to reconcile net income to net cash provided by
(used in) operating activities, net of effects of acquisitions:
Depreciation ............................................................ 390,230 229,979
Amortization ............................................................ 171,418 52,638
Expense related to indexed debentures ................................... 249,887 --
Equity in net losses of affiliated companies ............................ 5,888 76,041
Deferred income taxes ................................................... (114,279) 344,098
Gain on investments, net ................................................ (1,943,564) (1,327,956)
Minority interest, net of dividends paid ................................ 34,509 --
Increase in accounts and notes receivable ................................. (46,447) (20,032)
(Increase) decrease in prepaid expenses ................................... (50,162) 4,402
Increase in accounts payable and accrued expenses ......................... 60,738 14,677
Increase (decrease) in other liabilities .................................. 51,673 (15,235)
Increase (decrease) in taxes payable ...................................... (38,289) 76,384
Other, net ................................................................ (15,471) 1,722
------------ ------------
Net cash provided by (used in) operating activities ................ (85,124) 193,730
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ...................................................... (914,384) (501,511)
Investments in affiliated companies ....................................... (28,378) (22,980)
Proceeds from the sale of investments ..................................... 1,531,054 742,611
Proceeds from the exchange of investments ................................. 812,291 --
Payments for purchases of cable systems ................................... (2,730,148) --
Decrease in amounts due from CEI .......................................... 114,821 --
Other, net ................................................................ (3,834) 5,029
------------ ------------
Net cash provided by (used in) investing activities ................ (1,218,578) 223,149
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayments, net .......................................... -- (350,000)
Commercial paper borrowings, net .......................................... 1,355,180 180,977
Proceeds from issuance of debt ............................................ 1,568,086 --
Repayment of debt ......................................................... (1,484,620) (184,740)
Payment of debt issuance costs ............................................ (21,921) --
Proceeds from exercise of stock options ................................... 16,130 6,744
Increase (decrease) in amounts due to CEI ................................. 5,501 (59,920)
Increase (decrease) in book overdrafts .................................... 60,985 (17,187)
Repurchase of Class A common stock ........................................ (110,128) --
Distributions paid on capital and preferred securities of
subsidiary trusts .................................................... (41,165) --
Other, net ................................................................ 3,805 --
------------ ------------
Net cash provided by (used in) financing activities ................ 1,351,853 (424,126)
------------ ------------
Net increase (decrease) in cash ........................................... 48,151 (7,247)
Cash at beginning of period ............................................... 33,313 30,604
------------ ------------
Cash at end of period ..................................................... $ 81,464 $ 23,357
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
------------------------
2000 1999
---------- ----------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
SIGNIFICANT NONCASH TRANSACTIONS
AT&T cable system exchange ............. $2,658,233 $ --
Cox PCS stock exchange ................. -- 794,546
ADDITIONAL CASH FLOW INFORMATION
Cash paid for interest ................. $ 275,741 $ 125,885
Cash paid for income taxes ............. 465,152 75,697
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION AND OTHER INFORMATION
The accompanying unaudited consolidated financial statements of Cox
Communications, Inc. (Cox), a 67.5% majority-owned subsidiary of Cox
Enterprises, Inc. (CEI), 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 consolidated financial statements reflect all
adjustments considered necessary for a fair statement of the consolidated
results of operations and financial position for the interim periods presented.
All such adjustments are of a normal recurring nature. These unaudited interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in Cox's Annual
Report on Form 10-K for the year ended December 31, 1999.
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 six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the year ending December 31, 2000
or any other interim period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Investments in publicly traded entities 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. The historical cost of investments in
publicly traded entities sold are determined using the first in, first out
method. Cox recognizes realized losses for a decline in the market value of
investments considered to be other than temporary. Investments in privately held
entities are stated at cost, adjusted for any known diminution in value
determined to be other than temporary in nature.
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, as amended by SFAS No. 137, is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. Management is in the
process of assessing the impact of SFAS No. 133 on the consolidated financial
statements.
In 1999, Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition
in Financial Statements, was issued. The SAB provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101, as amended by SAB No. 101B, is effective for
the fourth quarter of fiscal years beginning after December 15, 1999. Management
is in the process of assessing the impact of SAB No. 101 on the consolidated
financial statements.
7
<PAGE> 9
Reclassifications
Certain amounts in the 1999 quarterly consolidated financial statements
have been reclassified for comparative purposes.
3. ACQUISITIONS AND EXCHANGES OF BUSINESSES
In January 2000, Cox completed its acquisition of cable systems serving
522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia
Cablevision, Inc. (Multimedia), a subsidiary of Gannett Co., Inc., in a cash
transaction valued at $2.7 billion, and has accounted for this acquisition as a
purchase in accordance with Accounting Principles Board Opinion No. 16 (APB 16),
Business Combinations.
In March 2000, Cox and AT&T Corp. (AT&T) exchanged Cox's 50.3 million
shares of AT&T common stock valued at approximately $2.7 billion for the stock
of AT&T subsidiaries that own cable systems serving approximately 495,000
customers and certain other assets and liabilities, including cash. Cox
received: cable systems serving Tulsa, Oklahoma (160,000 customers) and Baton
Rouge, Louisiana (156,000 customers); the remaining 20% ownership interest in a
partnership in which Cox acquired an 80% interest through its merger with TCA
Cable TV, Inc.; Peak Cablevision LLC, which has 117,000 customers in Oklahoma,
Arkansas, Utah and Nevada; and approximately $798.0 million in other assets and
liabilities, including cash. Cox recognized a pre-tax gain of $775.9 million in
connection with this transaction and has accounted for this acquisition as a
purchase in accordance with APB 16.
The following summarized unaudited pro forma consolidated financial
information for the six months ended June 30, 2000 and 1999 assumes the
acquisitions of cable systems from Multimedia and AT&T occurred on January 1 of
each year. In addition, the following summarized unaudited pro forma
consolidated financial information for the six months ended June 30, 1999
assumes the TCA merger, which was completed in August 1999, and the acquisition
of cable systems from Media General, Inc., which was completed in October 1999,
occurred on January 1, 1999.
The purchase price of each of the above acquisitions was allocated to
the assets purchased and liabilities assumed based on their estimated fair
market value at the date of acquisition. The purchase price allocations are
expected to be finalized upon receipt of independent appraisals of the tangible
and intangible assets acquired. No material adjustments to the initial purchase
price allocations are expected. The excess of purchase price over the fair value
of net assets acquired has been recorded as franchise and license acquisition
costs and is being amortized on a straight-line basis over 40 years.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED
JUNE 30
--------------------------------
2000 1999
------------ ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues ......................................... $ 1,725,231 $ 1,530,993
Operating income ................................. 76,312 100,436
Net income ....................................... 386,840 674,312
Earnings per share
Basic net income per share .................... $ 0.64 $ 1.12
Diluted net income per share .................. 0.63 1.10
</TABLE>
8
<PAGE> 10
4. INVESTMENTS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Equity method investments ........................ $ 71,158 $ 77,945
Fair value method investments .................... 8,000,840 11,685,786
Cost method investments .......................... 18,194 5,879
------------ ------------
Total investments ................................ $ 8,090,192 $ 11,769,610
============ ============
</TABLE>
FAIR VALUE METHOD INVESTMENTS
The aggregate cost of fair value method investments in unrestricted
publicly traded entities at June 30, 2000 and December 31, 1999 was $1,563.1
million and $3,784.8 million, respectively. Gross unrealized gains and losses on
fair value method investments were $6,458.1 million and $20.4 million,
respectively, at June 30, 2000 and were $7,899.9 million and zero, respectively,
at December 31, 1999.
Sprint PCS. At June 30, 2000, Cox's investment in Sprint PCS was
comprised of 113.5 million shares of Sprint PCS common stock - Series 2, and
warrants and convertible preferred stock which are exercisable or convertible
into 10.3 million shares of Sprint PCS common stock - Series 2. Cox's investment
in Sprint PCS had an aggregate fair value of $7.3 billion at June 30, 2000.
Unrealized gains of $3.6 billion, net of deferred income taxes, have been
reported in Cox's consolidated balance sheet at June 30, 2000 as a component of
accumulated other comprehensive income.
Generally, Sprint PCS common stock - Series 2 automatically converts
into Sprint PCS common stock - Series 1 (the series which is traded on the New
York Stock Exchange) when it is transferred to any third party other than
certain cable television companies.
In January and February 2000, Cox sold a total of 16.1 million shares
of its Sprint PCS common stock Series 2 and recognized a pre-tax gain of $667.6
million. In June 2000, Cox sold 3.2 million shares of its Sprint PCS common
stock - Series 2 and recognized a pre-tax gain of $173.2 million. In July 2000,
Cox sold 4.6 million shares of its Sprint PCS common stock - Series 2 and
expects to recognize a gain in the third quarter of 2000.
Flextech plc. In March 2000, Cox sold its entire equity interest in
Flextech plc, a publicly held satellite television programming company based in
the United Kingdom, for proceeds of $522.3 million and recognized a pre-tax gain
of $318.9 million.
AT&T Corp. In March 2000, Cox and AT&T completed the exchange of Cox's
50.3 million shares of AT&T common stock for certain cable systems; see Note 3.
Excite@Home. In March 2000, Excite@Home and its principal cable
partners, including Cox, entered into an agreement pursuant to which Cox agreed
to extend its distribution of certain Excite@Home services through June 2006,
subject to its right to terminate its current distribution arrangements at any
time on or after June 4, 2004. In addition, Cox agreed to relinquish its veto
rights and representation on the Excite@Home board. Pursuant to this agreement,
Cox will receive warrants to purchase two shares of Excite@Home Series A common
stock for each home its cable systems pass. These warrants will vest in
installments every six months beginning in June 2001, and will be fully vested
in June 2006, subject to certain adjustment and forfeiture provisions. Also as
part of this agreement, AT&T has agreed to give Cox the right to sell its shares
in Excite@Home to AT&T with a maximum value not to exceed approximately
9
<PAGE> 11
$1.4 billion for a price equal to the higher of $48 per share or the 30-day
average trading price of Excite@Home Series A common stock at any time between
January 1, 2001 and June 4, 2002. The charter amendments required by this
agreement were approved by Excite@Home shareholders in June 2000; however,
closing of this transaction, including filing the charter amendments and
resignation of any directors, has been suspended pending the outcome of certain
litigation. For a description of certain litigation in respect of Cox's
investment in Excite@Home, see Note 9, "Commitments and Contingencies."
Unrealized gains of $366.9 million, net of deferred income taxes, have been
reported in Cox's consolidated balance sheet at June 30, 2000 as a component of
accumulated other comprehensive income.
5. DEBT
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving credit facilities ...................... $ -- $ --
Commercial paper ................................. 1,861,728 514,516
Medium-term notes ................................ 451,273 445,014
Reset put securities ............................. 248,230 248,203
Notes and debentures ............................. 2,856,138 3,804,698
Indexed debentures ............................... 2,585,936 1,272,188
Capitalized lease obligations .................... 78,273 91,176
------------ ------------
Total debt ....................................... $ 8,081,578 $ 6,375,795
============ ============
</TABLE>
Revolving Credit Facilities
In May 2000, Cox amended its 364-day credit agreement and its 5-year
credit agreement to exclude expense related to Cox's indexed debentures, as well
as any contingent principal recorded with respect to these debentures, from the
calculation of certain financial covenant ratios as long as Cox is the
beneficial owner of certain shares of Sprint PCS common stock - Series 2.
Indexed Debentures
Indexed debentures at June 30, 2000 are comprised of $1.3 billion
aggregate original principal amount of exchangeable subordinated debentures,
referred to as PRIZES, which were issued in November 1999 and are due November
2029; $275.0 million aggregate original principal amount of exchangeable
subordinated debentures, referred to as Premium PHONES, which were issued in
March 2000 and are due March 2030; and $1.8 billion aggregate original principal
amount of exchangeable subordinated discount debentures, referred to as Discount
Debentures, which were issued in April 2000 and are due April 2020. The Discount
Debentures had an aggregate original issue discount of $1,055.1 million.
The PRIZES, Premium PHONES and Discount Debentures are unsecured,
subordinated obligations, ranking junior in right of payment to all of Cox's
existing and future senior indebtedness. The PRIZES pay interest at a rate of
7.75% per year through November 15, 2002, and thereafter at a rate of 2.0% per
year. The Premium PHONES pay interest at a rate of 3% per year and the Discount
Debentures pay interest at a rate of 1% per year. The accretion of the original
issue discount on the Discount Debentures plus the 1% interest payments result
in an annualized yield to maturity of 5%, computed using an effective interest
method.
The original principal amount of the PRIZES, Premium PHONES and
Discount Debentures are indexed to the trading price of Sprint PCS common stock
- Series 1. Accordingly, if the market value of the Sprint PCS common stock -
Series 1 increases, Cox may be obligated to pay an additional amount of
contingent principal at maturity or upon the holders' exchange of the PRIZES,
Premium PHONES and Discount Debentures. With respect to the Discount Debentures,
the holders may also require Cox to repurchase these
10
<PAGE> 12
securities on certain dates prior to maturity at a purchase price equal to the
adjusted principal amount plus any accrued and unpaid interest.
The PRIZES, Premium PHONES and Discount Debentures have been accounted
for as indexed debt instruments in accordance with Emerging Issues Task Force
Issue No. 86-28, Accounting Implications of Indexed Debt Instruments, since the
payment obligation at maturity or on exchange of the PRIZES, Premium PHONES and
Discount Debentures is dependent upon the market value of the Sprint PCS common
stock - Series 1.
The carrying value of the PRIZES decreased by $148.7 million and
increased by $202.5 million during the three and six months ended June 30, 2000,
respectively. The carrying value of the Premium PHONES decreased by $18.2
million and zero during the three and six months ended June 30, 2000,
respectively. The carrying value of the Discount Debentures increased by $47.3
million during the three and six months ended June 30, 2000. These changes are
presented as (income) expense related to indexed debentures in Cox's
consolidated statement of operations for the three and six month periods ended
June 30, 2000.
The above description of certain material terms of the PRIZES, Premium
PHONES and Discount Debentures are summaries and not intended to be
comprehensive descriptions of these securities. Additional terms of the PRIZES,
Premium PHONES can be found in Cox's audited consolidated financial statements
as of and for the year ended December 31, 1999, included in the 1999 Annual
Report filed on Form 10-K. Alternatively, a complete description of the material
terms of each series of indexed debentures can be found in Cox's prospectus
supplement dated November 22, 1999 with respect to the PRIZES, Cox's prospectus
supplement dated March 8, 2000 with respect to the Premium PHONES and Cox's
prospectus supplement dated April 13, 2000 with respect to the Discount
Debentures.
Interest Rate Swaps
In March 2000, Cox entered into an interest rate swap agreement
expiring on August 15, 2004 with a notional principal amount of $375.0 million
to convert the 7.5% fixed rate on certain senior debt securities due August 15,
2004 with an aggregate principal amount of $375.0 million to a variable rate.
Additionally, in May 2000, Cox entered into an interest rate swap agreement
expiring on June 15, 2005 with a notional principal amount of $375.0 million to
convert the 6.875% fixed rate on certain senior debt securities due June 15,
2005 with an aggregate principal amount of $375.0 million to a variable rate.
The variable rates with respect to these interest rate swaps are adjusted
quarterly based on London Interbank Offered Rates. The notional amounts with
respect to both interest rate swaps do not quantify risk or represent assets or
liabilities of Cox, but are used in the determination of cash settlements under
the interest rate swap agreements. Cox is exposed to a credit loss in the event
of nonperformance by the counterparties. However, Cox does not anticipate
nonperformance by the counterparties, and no material loss would be expected in
the event of the counterparties' nonperformance.
At June 30, 2000, Cox was receiving a fixed interest rate of 7.16% for
the $375.0 million notional amount on the senior debt securities due August 15,
2004 and paying a weighted-average variable interest rate of 6.433%, and was
receiving a fixed interest rate of 6.875% for the $375.0 million notional amount
on the senior debt securities due June 15, 2005 and paying a variable interest
rate of 5.783%. As a result of the settlements under these agreements, interest
expense was reduced by $1.3 million for the three and six months ended June 30,
2000.
Other
In March 2000, Cox called and redeemed all $525.0 million aggregate
principal amount of its Floating Rate Notes due August 15, 2000, and repaid
$500.0 million borrowed under a floating rate bridge loan.
In June 2000, Cox repaid $425.0 million of its 6.375% notes upon their
maturity.
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<PAGE> 13
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 and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Net income .................................. $ 91,229,000
------------
Basic EPS ................................... 91,229,000 603,318,667 $ 0.15
===========
Effect of dilutive securities:
Options .................................. -- 2,693,392
Employee stock purchase plan ............. -- 108,672
Preferred common stock equivalent ........ -- 4,521,731
Forward purchase contracts
forming a part of the FELINE
PRIDES .............................. -- 811,371
------------ ------------
Diluted EPS ................................. $ 91,229,000 611,453,833 $ 0.15
============ ============ ===========
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income .................................. $505,833,000
------------
Basic EPS ................................... 505,833,000 555,102,807 $ 0.91
=========
Effect of dilutive securities:
Options .................................. -- 2,931,863
Employee stock purchase plan ............. 965,485
Preferred common stock equivalent ........ -- 5,222,995
------------ ------------
Diluted EPS ................................. $505,833,000 564,223,150 $ 0.90
============ ============ =========
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------ ---------
<S> <C> <C> <C>
Net income .................................. $1,158,745,000
--------------
Basic EPS ................................... 1,158,745,000 603,767,496 $ 1.92
=======
Effect of dilutive securities:
Options .................................. -- 2,870,357
Employee stock purchase plan ............. -- 137,027
Preferred common stock equivalent ........ -- 4,521,731
Forward purchase contracts
forming a part of the FELINE
PRIDES ................................. -- 1,482,249
RHINOS ................................... -- 155,863
-------------- ------------
Diluted EPS ................................. $1,158,745,000 612,934,723 $ 1.89
============== ============ =======
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income .................................. $757,012,000
------------
Basic EPS ................................... 757,012,000 555,000,151 $ 1.36
=========
Effect of dilutive securities:
Options .................................. -- 2,884,717
Employee stock purchase plan ............. -- 963,092
Preferred common stock equivalent ........ -- 5,222,995
------------ ------------
Diluted EPS ................................. $757,012,000 564,070,955 $ 1.34
============ ============ =========
</TABLE>
Stock Repurchase Program
In the second quarter of 2000, Cox began acquiring shares of its Class
A common stock in connection with a stock repurchase program announced in April
2000. This program authorizes Cox to purchase up to $500.0 million of its
outstanding Class A common stock on the open market or through private
transactions. Cox purchased 2.7 million shares of its Class A common stock
during the second quarter of 2000 at an aggregate cost of $110.1 million.
As part of the stock repurchase program, Cox issued put options on 1.1
million shares of its Class A common stock during the three months ended June
30, 2000 and received an aggregate premium of $3.8 million. The put options give
the holder the right to require Cox to repurchase such shares at specified
prices on specified dates. The put options issued during the second quarter
expired in August, and Cox issued new put options on 1.3 million of its Class A
common shares for net proceeds of $2.5 million.
Diluted earnings per share for the three months ended June 30, 2000
excludes the effect of common stock that may be issued upon redemption of the
RHINOS because such effect would be antidilutive. Diluted earnings per share for
the three and six months ended June 30, 2000 also excludes the effect of common
stock that may be issued upon exercise of the put options because such effect
would be antidilutive.
7. COX-OBLIGATED CAPITAL AND PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
Cox-obligated capital and preferred securities of subsidiary trusts are
comprised of 13 million FELINE PRIDES and 1.3 million trust capital securities
with an aggregate principal amount of $650.0 million and 500,000 RHINOS with an
aggregate principal amount of $500.0 million.
The FELINE PRIDES and trust capital securities were issued by Cox Trust
II, a wholly-owned consolidated subsidiary of Cox, in August 1999. The sole
assets of Cox Trust II are senior debentures issued by Cox and the obligations
of the trust are guaranteed by Cox. The guarantee, when taken together with
Cox's other obligations with respect to the FELINE PRIDES, provides a full and
unconditional guarantee of the trust's obligations.
Upon issuance, the FELINE PRIDES consisted of 11.7 million Income
PRIDES and 1.3 million Growth PRIDES. Each Income PRIDES consists of a capital
security of the trust and a forward purchase contract under which the holder is
required to purchase common stock from Cox on August 16, 2002. The capital
security forming a part of the Income PRIDES and the stand alone trust capital
securities bear interest, in the form of distributions, at an annual rate of 7%
per $50 payable in cash on a quarterly basis. Each Growth PRIDES consists of a
5% undivided beneficial ownership in a zero-coupon U.S. Treasury security,
having a principal amount at maturity equal to $1,000, and a forward purchase
contract under
13
<PAGE> 15
which the holder is required to purchase common stock from Cox on August 16,
2002. The forward contract forming a part of the Growth PRIDES entitles the
holders to a contract adjustment payment of .25% of $50 per year payable in cash
on a quarterly basis.
The RHINOS were issued by Cox RHINOS Trust, a wholly-owned consolidated
subsidiary of Cox, in October 1999. The obligations of the RHINOS trust are
unconditionally guaranteed by Cox. The RHINOS are long-term auction rate reset
preferred securities, representing undivided beneficial interests in the assets
of the RHINOS trust, and pay distributions at a floating rate based on the
London Interbank Offered Rates plus 75 basis points per year payable in cash on
a quarterly basis.
The FELINE PRIDES and the RHINOS are presented as mezzanine equity in
Cox's consolidated balance sheet and the distributions paid by the trusts, as
well as the contract adjustment payments on the Growth PRIDES described above,
are presented as minority interest in Cox's consolidated statement of
operations.
The above description of certain material terms of the FELINE PRIDES
and RHINOS are summaries and not intended to be comprehensive descriptions of
these securities. Additional terms of the FELINE PRIDES and RHINOS can be found
in Cox's audited consolidated financial statements for the year ended December
31, 1999, included in the 1999 Annual Report filed on Form 10-K, and a complete
description of the FELINE PRIDES can be found in Cox's prospectus supplement
dated August 9, 1999.
8. 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. Outstanding
amounts due to CEI bear interest at a rate at fifty basis points above CEI's
current commercial paper borrowing rate. This rate was 7.45% at June 30, 2000.
Included in the amounts due from (to) CEI are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS
OF DOLLARS)
----------
<S> <C>
Intercompany due from CEI, December 31, 1999 ..... $ 114,821
Cash transferred from CEI ........................ (69,554)
Net operating expense reimbursements ............. (50,768)
---------
Intercompany due to CEI, June 30, 2000 ........... $ (5,501)
=========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
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 arising out of the
manner in which such systems sell premium channel cable services. The suit
alleges that Cox's 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. Cox moved to dismiss
the suit on dispositive substantive grounds or in the alternative to stay the
suit on primary jurisdiction grounds. On February 13, 1998, the Court stayed the
suit and referred it on grounds of primary jurisdiction to the FCC for
consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. On October 1, 1998, the
plaintiffs filed a Petition with the FCC which alleged that the Cox California
Systems violated the "buy-through" prohibition of the FCC's rules. Under the
"buy-through" prohibition, cable systems may not require subscribers to purchase
14
<PAGE> 16
intermediate tiers of cable service as a prerequisite to receiving per-channel
and per-program cable service unless such systems can demonstrate that they are
not technically capable of complying with the buy-through requirement. In July
1999, the FCC dismissed the Petition. The FCC concluded that Cox's San Diego
system is complying with the buy-through rule and that the named plaintiffs lack
standing to raise this issue with regard to Cox's other California systems. The
suit is now proceeding in state court. The court granted Cox and the plaintiffs
an extension of time during which the parties may explore the possibility of a
resolution to the suit. The parties have reached a tentative settlement of this
matter.
Cox and certain subsidiaries are defendants in four putative subscriber
class action suits in state courts in Louisiana, 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 certain claimed causes of
action under various bodies of state law. These actions are in various stages of
defense. Settlement in Indiana is pending preliminary court approval. Settlement
in Nevada is pending final court approval. The remaining actions are being
defended vigorously. The outcome of these matters cannot be predicted at this
time. Three additional suits that have been pending in Arizona and Florida have
been settled; one additional suit that had been pending in Nebraska was
dismissed.
On November 10, 1999, Fred and Roberta Lipschutz, Arthur Simon and John
Galley III, on behalf of themselves and all persons similarly situated, filed a
putative class action suit against Cox and thirteen other defendants in the
United States District Court for the Central District of California. The action
alleges that a putative class defined as all persons who since November 10,
1995, have purchased broadband Internet data transmission services from a "cable
company defendant" has been injured because alleged agreements among the "cable
company defendants" and/or the "cable company defendants" and defendants @Home
Corporation and RoadRunner have required the putative class to purchase both
Internet data transmission services and interface/content services from @Home or
RoadRunner. The complaint asserts claims under Section 1 of the Sherman
Antitrust Act, the California Cartwright Act, and California unfair competition
law and seeks injunctive relief and compensatory and treble damages. An amended
complaint adding additional named plaintiffs was filed on December 30, 1999 and
Cox filed its answer to the amended complaint on January 19, 2000. Discovery is
pending. Cox intends to defend this action vigorously. The outcome of this
matter cannot be predicted at this time.
Cox's subsidiary Cox California Telcom, L.L.C. is a defendant in three
putative class action lawsuits that were filed in state and federal courts in
California relating to the unauthorized publication of information pertaining to
approximately 11,400 Cox telephone customers in the PacBell 2000 White Pages and
411 directory and in the Cox TelTrust information directory. The lawsuits assert
various causes of action for breach of contract, invasion of privacy,
negligence, commission of fraudulent or unfair business acts and practices in
violation of California Business & Professions Code 17-200 and violation of
California Public Utilities Code 2891-2891.1. The suits seek damages and
injunctive relief. CoxTelcom, along with PacBell, has commenced reclaiming
tainted PacBell White Pages and reprinting and redistributing of corrected
books. Plaintiffs in one case have filed a motion to certify the class, which is
scheduled to be heard October 6, 2000. Cox intends to defend this action
vigorously, though the outcome cannot be predicted at this time.
Jerrold Schaffer and Kevin J. Yourman, on May 26, 2000 and May 30,
2000, respectively, filed class action lawsuits in the Superior Court of the
State of California for the County of San Mateo. Plaintiffs, on behalf of
themselves and all other shareholders of Excite@Home Corporation as of March 28,
2000, except for the defendants, seek to enjoin the consummation of a March 28
letter agreement among Excite@Home's principal cable partners, including Cox
Communications, Inc. Cox and David Woodrow, Cox's Executive Vice President,
Business Development, among others, are named defendants in both lawsuits. Mr.
Woodrow serves as Cox's representative on the Excite@Home board of directors.
For a more detailed description of the letter agreement, refer to Note 4 to
Cox's unaudited consolidated financial statements in Item 1 of this report. The
plaintiffs, who also seek unspecified compensatory damages, assert that the
defendants breached purported fiduciary duties of care, candor and loyalty to
the plaintiffs by entering into the letter agreement and/or taking certain
actions to facilitate the consummation of the transactions
15
<PAGE> 17
contemplated by the letter agreement. Pursuant to an agreement with the
plaintiffs, the defendants have yet to answer or otherwise respond to the
complaint. Cox intends vigorously to defend this matter.
On June 19, 2000, Cablevision Systems Corporation, CSC Holdings, Inc.
and CSC At Home Holding Corporation filed suit against Cox Communications, Inc.,
Cox Enterprises, Inc. and Cox@Home, among others, in the Court of Chancery of
the State of Delaware in and for New Castle County. Cablevision alleges that Cox
and the other defendants breached a provision of Excite@Home's Amended and
Restated Stockholders' Agreement dated July 16, 1997, to which Cablevision
became a party in October 1997. Cablevision, among other forms of injunctive
relief, seeks to enjoin the defendants from taking any actions pursuant to or in
furtherance of the letter agreement discussed above and described in Note 4 to
Cox's unaudited consolidated financial statements in Item 1 of this report.
Discovery has commenced and a two week trial of this matter has been scheduled
for September 11, 2000. Cox intends vigorously to defend this matter.
Cox is a party to various other legal proceedings which are ordinary
and incidental to its business. Management does not expect that any of these
other legal proceedings currently pending will have a material adverse impact on
Cox's consolidated financial position, results of operations or cash flows.
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 unaudited consolidated financial statements for the three and six
month periods ended June 30, 2000 and 1999.
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 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 impact from Cox's
pending acquisitions; and other factors included in the discussion below. Cox
asserts the protection of the safe harbor for forward looking statements
contained in Section 21E of the Securities Exchange Act of 1934, as amended. For
a more detailed discussion of these factors and others, see the Risk Factors
section of Cox's Annual Report on Form 10-K for the year ended December 31,
1999.
RECENT ACQUISITIONS AND EXCHANGES
For a complete description of recent acquisitions and exchanges of
businesses, see Note 3 in the notes to consolidated financial statements in Item
1 of this report.
RESULTS OF OPERATIONS
The results of operations discussed below include the effects of the
following as of their transaction dates:
- the March 2000 exchange of AT&T Corp. common stock for: cable
systems from AT&T serving customers in Tulsa, Oklahoma and
Baton Rouge, Louisiana; Peak Cablevision, LLC; and the
remaining 20% interest in a partnership in which Cox initially
acquired an 80% interest through the TCA Cable TV, Inc.
merger;
- the January 2000 acquisition of cable systems from Multimedia
Cablevision, Inc.;
- the October 1999 acquisition of cable systems from Media
General, Inc.;
16
<PAGE> 18
- the October 1999 reorganization of Cox's partnership with Time
Warner, under which Cox obtained control of the cable system
serving Ft. Walton Beach, Florida;
- the August 1999 TCA merger; and
- the August 1999 exchange of selected cable systems with
MediaOne, Inc.
These transactions are collectively referred to in the discussion below as the
2000 and 1999 transactions.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Total revenues for the three months ended June 30, 2000 were $879.0
million, a 72% increase over revenues of $509.9 million for the three months
ended June 30, 1999. Of this increase, 54% relates to increased revenues from
the 2000 and 1999 transactions. The remaining 18% increase includes the effects
of:
- basic and digital customer growth at existing cable systems;
- rate increases implemented primarily in the fourth quarter of
1999 and first quarter of 2000 resulting from increased
programming costs and inflation, as well as increased channel
availability;
- an increase in pay-per-view revenues due to the national
boxing events during the second quarter of 2000;
- continued growth in local and national advertising sales; and
- growth in data, commercial telephony and residential telephony
product subscriptions.
Programming costs were $217.6 million for the second quarter of 2000,
an increase of 78% over the same period in 1999. Of this increase, 59% relates
to the 2000 and 1999 transactions. The remaining 19% increase is due to basic
and digital customer growth at existing cable systems, January 2000 programming
rate increases and channel additions. Plant operations expenses increased 72% to
$62.3 million. Of this increase, 51% relates to the 2000 and 1999 transactions.
The remaining 21% increase relates to increased plant maintenance and costs
related to non-recurring integration costs and significant growth of new
services at existing cable systems.
Marketing costs increased 83% to $56.4 million. Of this increase, 47%
relates to the 2000 and 1999 transactions. The remaining 36% increase relates to
marketing campaigns during the second quarter of 2000 aimed at enhancing
customer awareness and other costs associated with the continued rollout of
digital video, high-speed data and telephony services. General and
administrative expenses for the three months ended June 30, 2000 increased 65%
to $205.6 million due primarily to:
- increased salaries and other administrative costs associated
with the continued rollout of digital video, high-speed data
and telephony services;
- incremental and non-recurring integration expenses associated
with the 2000 and 1999 transactions; and
- a $2.9 million charge during the second quarter of 2000 for
the reprinting of telephone books in San Diego.
Depreciation and amortization increased to $303.9 million from $159.3
million in the second quarter of 2000 due primarily to the 2000 and 1999
transactions. Interest expense increased to $131.5 million primarily due to an
increase in the total debt outstanding as discussed below in "Liquidity and
Capital Resources."
Income related to indexed debentures of $119.6 million reflects a
reduction in the contingent settlement amount of the exchangeable subordinated
debentures, referred to as PRIZES, Premium PHONES and Discount Debentures, which
are indexed to the market value of Sprint PCS common stock - Series 1.
Net gain on investments includes a $173.2 million pre-tax gain on the
June 2000 sale of 3.2 million shares of its Sprint PCS common stock.
17
<PAGE> 19
Minority interest of $16.5 million primarily represents distributions
on Cox's obligated capital and preferred securities of subsidiary trusts,
referred to as FELINE PRIDES and RHINOS. Net income for the current quarter was
$91.2 million as compared to $505.8 million for the second quarter of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Total revenues for the six months ended June 30, 2000 were $1,658.8
million, a 64% increase over revenues of $1,008.4 million for the six months
ended June 30, 1999. Of this increase, 48% relates to increased revenues from
the 2000 and 1999 transactions. The remaining 16% increase includes the effects
of:
- basic and digital customer growth at existing cable systems;
- rate increases implemented primarily in the fourth quarter of
1999 and first quarter of 2000 resulting from increased
programming costs and inflation, as well as increased channel
availability;
- continued growth in local and national advertising sales; and
- growth in data, commercial telephony and residential telephony
product subscriptions;
- offset by a decrease in pay-per-view revenues as a result of
comparatively fewer national boxing events during 2000.
Programming costs were $413.2 million for the six months ended June 30,
2000, an increase of 65% over the same period in 1999. Of this increase, 50%
relates to the 2000 and 1999 transactions. The remaining 15% increase is due to
basic and digital customer growth at existing cable systems and January 2000
programming rate increases and channel additions. Plant operations expenses
increased 66% to $125.1 million. Of this increase, 47% relates to the 2000 and
1999 transactions. The remaining 19% increase relates to increased plant
maintenance and costs related to significant growth of new services at existing
cable systems.
Marketing costs increased 75% to $100.8 million. Of this increase, 49%
relates to the 2000 and 1999 transactions. The remaining 26% increase relates to
marketing campaigns aimed at enhancing customer awareness and other costs
associated with the continued rollout of digital video, high-speed data and
telephony services. General and administrative expenses for the six months ended
June 30, 2000 increased 59% to $382.9 million due to increased salaries and
other administrative costs associated with the continued rollout of digital
video, high-speed data and telephony services, and incremental and non-recurring
integration expenses associated with the 2000 and 1999 transactions.
Depreciation and amortization increased to $561.6 million from $282.6
million in the six months ended June 30, 1999 due primarily to the 2000 and 1999
transactions. Interest expense increased to $264.7 million primarily due to an
increase in the total debt outstanding as discussed below in "Liquidity and
Capital Resources."
Expense related to indexed debentures of $249.9 million reflects an
increase in the contingent settlement amount of the exchangeable subordinated
debentures which are indexed to the market value of Sprint PCS common stock -
Series 1.
Net gain on investments of $1,943.6 million primarily includes:
- $667.6 million pre-tax gain on the January and February 2000
sale of 16.1 million shares of Sprint PCS common stock;
- $318.9 million pre-tax gain on the sale of Cox's entire equity
interest in Flextech plc in March 2000;
- $775.9 million pre-tax gain in connection with the March 2000
exchange with AT&T; and
- $173.2 million pre-tax gain on the June 2000 sale of 3.2
million shares of its Sprint PCS common stock.
18
<PAGE> 20
Minority interest of $37.8 million primarily represents distributions
on Cox's obligated capital and preferred securities of subsidiary trusts,
referred to as FELINE PRIDES and RHINOS. Net income for the six months ended
June 30, 2000 was $1,158.7 million as compared to $757.0 million for the
comparable period in 1999.
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 companies in affiliated industries primarily
focused on telephony, programming and communications-related activities.
During the six months ended June 30, 2000, net cash used in operating
activities was $85.1 million. In addition, during the six months ended June 30,
2000, Cox had capital expenditures of $914.4 million. These expenditures were
primarily directed at upgrading and rebuilding its broadband network to allow
for the delivery of advanced broadband services, including digital video,
high-speed Internet access, telephony and video-on-demand. Capital expenditures
for 2000 are not expected to exceed $1.8 billion.
In addition to improvements of existing cable systems, Cox made
strategic investments in businesses focused on telephony, programming and
communications-related activities. Investments in affiliated companies are
expected to range between $30.0 million and $35.0 million for 2000. Actual
capital requirements may vary significantly from the amounts stated above and
will depend on numerous factors as many of these affiliates are growing
businesses and specific financing requirements will change depending on the
evolution of these businesses.
Cash paid for purchases of cable systems of $2.7 billion primarily
represents payments in connection with Cox's acquisition of cable systems
serving 522,000 customers from Multimedia.
During the six months ended June 30, 2000, Cox repaid approximately
$1.5 billion of debt, which primarily consisted of:
- $525.0 million aggregate principal amount of Floating Rate
Notes due August 15, 2000;
- $425.0 million aggregate principal amount paid upon maturity
of the 6.375% notes issued in June 1995; and
- $500.0 million borrowed under a floating rate bridge loan
during January 2000.
Repurchase of Class A common stock represents the aggregate cost of
repurchasing 2.7 million shares of Cox's Class A common stock for $110.1 million
during the second quarter of 2000 in connection with a previously announced
stock repurchase program which authorizes Cox to purchase up to $500.0 million
of its outstanding Class A common stock on the open market or through private
transactions.
Distributions paid on capital and preferred securities of subsidiary
trusts of $41.2 million consists of quarterly payments on the FELINE PRIDES and
RHINOS.
SOURCES OF CASH
Proceeds from the sale of investments of $1,531.1 million primarily
include:
- $799.1 million from the January and February 2000 sale of 16.1
million shares of Sprint PCS common stock;
- $522.3 million from the March 2000 sale of Cox's entire
investment in Flextech plc; and
- $137.6 million from the June 2000 sale of 3.2 million shares
of Sprint PCS common stock.
19
<PAGE> 21
Proceeds from exchange of investments of $812.3 million primarily
consists of $798.0 million received in connection with the AT&T exchange.
Net commercial paper borrowings were $1,355.2 million for the six-month
period. Proceeds from issuance of debt during the six months ended June 30, 2000
of $1,568.1 million primarily consists of the following:
- the January 2000 issuance of a floating rate bridge loan for
aggregate proceeds of $500.0 million;
- the March 2000 issuance of $275.0 million aggregate principal
amount of exchangeable subordinated debentures due 2030,
referred to as Premium PHONES, for proceeds of $269.5 million,
net of underwriting commissions; and
- the second quarter 2000 issuance of exchangeable subordinated
discount debentures due 2020, referred to as Discount
Debentures, for aggregate proceeds of $782.7 million, net of
underwriting commissions.
For a more detailed description of debt financings in the six months
ended June 30, 2000, see Note 5 to the consolidated financial statements in Item
1 of this report.
OTHER
In July 2000, Cox sold an additional 4.6 million shares of its Sprint
PCS common stock for approximately $275.0 million and expects to recognize a
gain during the third quarter of 2000.
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, as amended by SFAS No. 137, is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. Management is in the
process of assessing the impact of SFAS No. 133 on the consolidated financial
statements.
In 1999, Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, was issued. This SAB provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101, as amended by SAB No. 101B, is effective for the fourth
quarter of fiscal years beginning after December 15, 1999. Management is in the
process of assessing the impact of SAB No. 101 on the consolidated financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that Cox will incur losses due to adverse
changes in equity, interest, commodity or currency exchange rate and prices.
Cox's primary market risk exposure pertains to changes in interest rates.
With respect to financial instruments, Cox has estimated the fair
values of such 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, fixed rate debt converted to variable rate
debt through interest rate swap agreements and amounts due to/from CEI are
reasonable estimates of their fair value at June 30, 2000 and December 31, 1999.
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<PAGE> 22
The estimated fair value of debt instruments is based on discounted
cash flow analyses using Cox's incremental borrowing rate for similar types of
borrowing arrangements and dealer quotations. The commercial paper at June 30,
2000 and the commercial paper and the floating rate notes at December 31, 1999
bear interest at current market rates and, thus, approximate fair value. In
addition, the RHINOS at June 30, 2000 and December 31, 1999 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 June
30, 2000 was $3,499.6 million compared to a carrying amount of $3,646.6 million.
The estimated fair value of the remaining debt instruments at December 31, 1999
was $3,858.3 million compared to a carrying amount of $4,064.1 million. In
addition, the effect of a hypothetical one percentage point decrease in interest
rates would change the estimated fair value of the remaining debt instruments
with a carrying amount of $3,646.6 million to $3,696.9 million at June 30, 2000
and $4,064.1 million to $4,065.3 million at December 31, 1999.
The estimated fair value based on quoted market prices of the FELINE
PRIDES at June 30, 2000 was $799.0 million compared to a carrying amount of
$644.8 million. The estimated fair value of the FELINE PRIDES at December 31,
1999 was $884.0 million compared to a carrying amount of $642.3 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 $644.8 million to $801.0 million at June 30, 2000 and
$642.3 million to $886.0 million at December 31, 1999.
The estimated fair value based on quoted market prices of the PRIZES at
June 30, 2000 was $1,578.0 million compared to a carrying amount of $1,474.7
million. The estimated fair value of the PRIZES at December 31, 1999 was
$1,400.0 million compared to a carrying amount of $1,272.2 million. In addition,
the effect of a hypothetical percentage point decrease in interest rates would
increase the estimated fair value of the PRIZES with a carrying amount of
$1,474.7million to $1,622.0 million at June 30, 2000 and $1,272.2 million to
$1,417.0 million at December 31, 1999.
The estimated fair value based on quoted market prices of the Premium
PHONES at June 30, 2000 was $287.0 million compared to a carrying amount of
$275.0 million. In addition, the effect of a hypothetical percentage point
decrease in interest rates would increase the estimated fair value of the
Premium PHONES with a carrying amount of $275.0 million to $302.0 million at
June 30, 2000.
The estimated fair value based on quoted market prices of the Discount
Debentures at June 30, 2000 was $953.0 million compared to a carrying amount of
$836.2 million. In addition, the effect of a hypothetical percentage point
decrease in interest rates would increase the estimated fair value of the
Discount Debentures with a carrying amount of $836.2 million to $991.0 million
at June 30, 2000.
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.
In March 2000, Cox entered into an interest rate swap agreement
expiring on August 15, 2004 with a notional principal amount of $375.0 million
to convert the 7.5% fixed rate on certain senior debt securities due August 15,
2004 with an aggregate principal amount of $375.0 million to a variable rate.
Additionally, in May 2000, Cox entered into an interest rate swap agreement
expiring on June 15, 2005 with a notional principal amount of $375.0 million to
convert the 6.875% fixed rate on certain senior debt securities due June 15,
2005 with an aggregate principal amount of $375.0 million to a variable rate.
The variable rates with respect to these interest rate swaps are adjusted
quarterly based on London Interbank Offered Rates. The notional amounts with
respect to both interest rate swaps do not quantify risk or represent assets or
liabilities of Cox, but are used in the determination of cash settlements under
the interest rate swap agreements. Cox is exposed to a credit loss in the event
of nonperformance by the counterparties.
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However, Cox does not anticipate nonperformance by the counterparties, and no
material loss would be expected in the event of the counterparties'
nonperformance.
At June 30, 2000, Cox was receiving a fixed interest rate of 7.16% for
the $375.0 million notional amount on the senior debt securities due August 15,
2004 and paying a weighted-average variable interest rate of 6.433% and Cox was
receiving a fixed interest rate of 6.875% for the $375.0 million notional amount
on the senior debt securities due June 15, 2005 and paying a variable interest
rate of 5.783%. As a result of the settlements under these agreements, interest
expense was reduced by $1.3 million for the three and six months ended June 30,
2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, consolidated results of operations or
consolidated cash flows. For an update on certain legal matters, refer to Note
9, "Commitments and Contingencies" under "-- Part I - Financial Information --
Item 1. Consolidated Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cox held its Annual Meeting of Stockholders on May 16, 2000. Six
matters were voted upon at the meeting: (a) the election of a Board of Directors
of six members to serve until the 2001 Annual Meeting or until their successors
are duly elected and qualified; (b) approval of an amendment to the Certificate
of Incorporation to increase the number of authorized shares of Class A and
Class C Common Stock; (c) adoption of the 2000 Employee Stock Purchase Plan; (d)
amendment of the Long-Term Incentive Plan; (e) amendment and restatement of the
Annual Incentive Plan; and (f) ratification of the appointment by the Board of
Directors of Deloitte & Touche LLP as independent auditors for the fiscal year
ending December 31, 2000.
The following directors were elected, and they received the votes
indicated:
<TABLE>
<CAPTION>
NOMINEE VOTES IN FAVOR VOTES WITHHELD
------- -------------- --------------
<S> <C> <C>
Janet Morrison Clarke 829,533,438 1,278,091
David E. Easterly 829,536,367 1,275,162
James C. Kennedy 829,534,603 1,276,926
Robert C. O'Leary 829,539,708 1,271,821
James O. Robbins 829,530,922 1,280,607
Andrew J. Young 784,919,192 45,892,337
</TABLE>
The amendment to the Certificate of Incorporation to increase the
number of authorized shares of Class A and Class C common stock was approved by
the Class A and Class C stockholders, each voting as a class, and by all classes
of common and preferred stockholders voting in combination, as follows:
<TABLE>
<CAPTION>
CLASS VOTES IN FAVOR VOTES OPPOSED VOTES ABSTAINED
----- -------------- ------------- ---------------
<S> <C> <C> <C>
Class A common 495,976,366 52,006,999 2,011,204
Class C common 275,977,920 -0- -0-
All classes combined 776,793,326 52,006,999 2,011,204
</TABLE>
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The adoption of the 2000 Employee Stock Purchase Plan was approved with
829,927,978 votes in favor, 576,959 votes opposed to, and 306,592 abstentions.
The amendment to the Long-Term Incentive Plan was approved with
804,076,463 votes in favor, 24,609,594 votes opposed to, and 2,125,472
abstentions.
The amendment and restatement to the Annual Incentive Plan was approved
with 826,155,977 votes in favor, 2,471,404 votes opposed to, and 2,184,148
abstentions.
The ratification of the appointment of Deloitte & Touche LLP, as
independent auditors for the fiscal year ending December 31, 2000 was approved
with 830,456,355 votes in favor, 185,391 votes opposed to, and 169,783
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C> <C>
3.1 -- Amended Certificate of Incorporation of Cox Communications, Inc. (incorporated by
reference to exhibit 3.1 to Cox's Annual Report on Form 10-K for the year ended
December 31, 1994).
3.2 -- Certificate of Amendment to the Certificate of Incorporation of Cox Communications,
Inc. (incorporated by reference to exhibit 3.3 to Cox's Form 10-Q filed on May 14,
1997).
3.3 -- Amendment to the Amended Certificate of Incorporation of Cox Communications, Inc.
(incorporated by reference to exhibit 3.3 to Cox's Registration Statement on Form
S-4, file no. 33-82419, filed on July 7, 1999).
3.4 -- Certificate of Amendment to the Certificate of Incorporation of Cox Communications,
Inc.
3.5 -- Bylaws of Cox Communications, Inc. (incorporated by reference to exhibit 3.2 to Cox's
Registration Statement on Form S-4, file no. 33-80152, filed on December 16, 1994).
3.6 -- Certificate of Designations of Powers, Preferences and Rights of the Series A
Convertible Preferred Stock of Cox Communications, Inc. (incorporated by reference to
exhibit 3.1 to Cox's Form 8-K/A filed on October 15, 1998).
4.1 -- Indenture dated as of June 27, 1995 between Cox Communications, Inc. and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 4.1 to Cox's Registration
Statement on Form S-1, File No. 33-99116, filed on November 8, 1995).
4.2 -- First Supplemental Indenture, dated as of August 12, 1999, between Cox
Communications, Inc. and The Bank of New York, as Trustee. (Incorporated by
reference to exhibit 4.4 to Cox's Current Report on Form 8-K filed on August 23,
1999).
4.3 -- Form of Preferred Securities Guarantee Agreement (incorporated by reference to
exhibit 4.5 to Cox's Registration Statement on Form S-3, file no. 33-82575, filed on
July 28, 1999).
4.4 -- Form of Capital Securities Guarantee Agreement (incorporated by reference to exhibit
4.6 to Cox's Registration Statement on Form S-3, file no. 33-82575, filed on August
6, 1999).
4.5 -- Indenture, dated as of January 30, 1998, between TCA Cable TV, Inc. and Chase Bank of
Texas, National Association, as Trustee (incorporated by reference to exhibit 4(a) of
TCA's Registration Statement on Form S-3, file no. 333-32015).
4.6 -- First Supplemental Indenture, dated as of August 12, 1999, among TCA Cable TV, Inc.,
Cox Classic Cable, Inc. and Chase Bank of Texas, National Association, as Trustee
(incorporated by reference to exhibit 4.2 to Cox's Current Report on Form 8-K filed
on August 25, 1999).
</TABLE>
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<TABLE>
<S> <C> <C>
4.7 -- Second Supplemental Indenture, dated as of October 6, 1999, by and between Cox
Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference
to exhibit 4.1 to Cox's Quarterly Report on Form 10-Q filed on November 8, 1999).
4.8 -- Guarantee Agreement, dated as of October 6, 1999, by and between Cox Communications,
Inc., as Guarantor, and The Bank of New York, as Guarantee Trustee (incorporated by
reference to exhibit 4.2 to Cox's Quarterly Report on Form 10-Q filed on November 8,
1999).
4.9 -- Second Supplemental Indenture, dated as of March 14, 2000, between Cox
Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference
to exhibit 4.9 to Cox's Annual Report on Form 10-K for the year ended December 31,
1999).
4.10 -- Third Supplemental Indenture, dated as of April 19, 2000, by and between Cox
Communications, Inc. and The Bank of New York, as Trustee (incorporated by reference
to exhibit 4.2 of Cox's Current Report on Form 8-K filed April 24, 2000).
10.1 -- 2000 Employee Stock Purchase Plan.
10.2 -- Amendment Number 3 to Long Term Incentive Plan.
10.3 -- Annual Incentive Plan (amended and restated as of January 1, 2000).
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
Form 8-K dated April 19, 2000 (filed April 24, 2000 ) reporting the
public offering and sale of $1,643,617,000 aggregate principal amount
at maturity of Exchangeable Subordinated Discount Debentures due 2020
under Item 5 and filing the associated underwriting agreement and
supplemental indenture under Item 7.
Form 8-K dated May 12, 2000 (filed May 18, 2000) reporting the sale of
an additional $194,202,000 of Discount Debentures pursuant to the
exercise of the underwriters over-allotment option under Item 5.
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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.
Date: August 10, 2000 /s/ Jimmy W. Hayes
------------------------------
Jimmy W. Hayes
Executive Vice President,
Finance and Administration
Chief Financial Officer
(principal financial officer)
25
