<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 SEPTEMBER 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 LOGO]
COMMUNICATIONS
COX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2112281
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 572,046,060 shares of Class A Common Stock and 27,597,792
shares of Class C Common Stock outstanding as of October 31, 2000.
<PAGE> 2
COX COMMUNICATIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <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.................................................... 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................... 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................... 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................ 25
SIGNATURES............................................................................... 27
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
COX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Cash ................................................................................ $ 83,988 $ 33,313
Accounts and notes receivable, less allowance for doubtful
accounts of $23,848 and $14,783 ................................................... 310,931 260,518
Net plant and equipment ............................................................. 5,497,832 4,038,236
Investments ......................................................................... 5,755,869 11,769,610
Intangible assets ................................................................... 13,945,751 10,174,034
Amounts due from Cox Enterprises, Inc. (CEI) ........................................ -- 114,821
Other assets ........................................................................ 426,898 223,965
------------ ------------
Total assets ................................................................... $ 26,021,269 $ 26,614,497
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ............................................... $ 607,980 $ 477,134
Deferred income taxes ............................................................... 5,225,671 6,670,521
Other liabilities ................................................................... 275,494 209,211
Debt ................................................................................ 7,695,918 6,375,795
Amounts due to CEI .................................................................. 527,100 --
------------ ------------
Total liabilities .............................................................. 14,332,163 13,732,661
------------ ------------
Commitments and contingencies (Note 9)
Minority interest in equity of consolidated subsidiaries ............................ 127,810 195,616
Cox-obligated capital and preferred securities of subsidiary trusts ................. 1,153,986 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: 577,532,607 and 576,168,914; shares
outstanding: 572,034,207 and 576,168,914 ....................................... 577,533 576,169
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 ........................................................ 3,867,422 3,835,639
Retained earnings ................................................................. 4,229,096 2,232,205
Accumulated other comprehensive income ............................................ 1,912,714 4,859,137
Class A common stock in treasury, at cost: 5,498,400 shares ....................... (211,889) --
------------ ------------
Total shareholders' equity ..................................................... 10,407,310 11,535,584
------------ ------------
Total liabilities and shareholders' equity ..................................... $ 26,021,269 $ 26,614,497
============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES ......................................... $ 902,212 $ 587,914 $ 2,561,035 $ 1,596,339
COSTS AND EXPENSES
Programming costs ............................. 216,810 141,016 630,026 392,107
Plant operations .............................. 67,111 45,084 192,244 120,405
Marketing ..................................... 48,974 40,563 149,728 98,088
General and administrative .................... 215,217 135,523 598,165 375,625
Depreciation .................................. 227,358 148,395 617,588 378,374
Amortization .................................. 91,977 45,440 263,395 98,078
Gain on sale and exchange of cable
systems, net................................. -- (77,361) -- (77,361)
------------- ------------- ------------- -------------
OPERATING INCOME ................................. 34,765 109,254 109,889 211,023
Interest expense ................................. (136,167) (71,152) (400,872) (193,824)
Income related to indexed debentures ............. 249,886 -- -- --
Equity in net losses of affiliated companies ..... (650) (11,568) (6,538) (87,609)
Gain (loss) on investments, net .................. 1,246,434 (17,863) 3,189,998 1,310,093
Dividend income .................................. 415 11,073 12,318 33,219
Other, net ....................................... (4,701) 796 (5,152) 829
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST ....................... 1,389,982 20,540 2,899,643 1,273,731
Income tax expense ............................... 534,796 1,740 847,903 497,919
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST .................. 855,186 18,800 2,051,740 775,812
Minority interest, net of tax .................... (17,040) (6,940) (54,849) (6,940)
------------- ------------- ------------- -------------
NET INCOME ....................................... $ 838,146 $ 11,860 $ 1,996,891 $ 768,872
============= ============= ============= =============
PER SHARE DATA
Basic net income per share ..................... $ 1.39 $ 0.02 $ 3.31 $ 1.37
Diluted net income per share ................... 1.37 0.02 3.25 1.35
Basic weighted-average shares outstanding ...... 600,997,165 576,103,113 602,782,252 562,111,772
Diluted weighted-average shares outstanding .... 610,538,345 585,053,264 615,295,885 571,029,610
</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........................................... 1,996,891
Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised)................. 1,364 25,409
Purchase of 5,498,400 shares of Class A
common stock for treasury, at cost..................
Proceeds from issuance of put options................. 6,374
Change in net accumulated unrealized gain
on securities.......................................
Other comprehensive loss.............................. (2,946,423)
Comprehensive loss....................................
-------- -------- ------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 2000........................... $ 4,836 $577,533 $27,598 $3,867,422 $4,229,096 $1,912,714
======== ======== ======= ========== ========== ==========
<CAPTION>
CLASS A
COMMON
STOCK IN
TREASURY, COMPREHENSIVE
AT COST TOTAL LOSS
--------- ---------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
BALANCE AT DECEMBER 31, 1999........................... -- 11,535,584
Net income........................................... 1,996,891 $ 1,996,891
-----------
Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised)................. 26,773
Purchase of 5,498,400 shares of Class A
common stock for treasury, at cost.................. (211,889) (211,889)
Proceeds from issuance of put options................. 6,374
Change in net accumulated unrealized gain
on securities....................................... (2,946,423)
-----------
Other comprehensive loss.............................. (2,946,423) (2,946,423)
--------- ----------- -----------
Comprehensive loss.................................... $ (949,532)
===========
BALANCE AT SEPTEMBER 30, 2000........................... $(211,889) $10,407,310
========= ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 6
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------------------
2000 1999
------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 1,996,891 $ 768,872
Adjustments to reconcile net income to net cash provided by
operating activities, net of effects of acquisitions:
Depreciation ...................................................................... 617,588 378,374
Amortization ...................................................................... 263,395 98,078
Equity in net losses of affiliated companies ...................................... 6,538 87,609
Deferred income taxes ............................................................. 379,535 423,549
Gain on sale and exchange of cable systems, net ................................... -- (77,361)
Gain on investments, net .......................................................... (3,189,998) (1,310,093)
Minority interest, net of dividends paid .......................................... 49,899 5,840
Increase in accounts and notes receivable ........................................... (103,266) (21,152)
(Increase) decrease in prepaid expenses ............................................. 4,581 (81,233)
Increase in accounts payable and accrued expenses ................................... 99,008 58,011
Increase (decrease) in other liabilities ............................................ 50,138 (35,303)
Decrease in income taxes payable .................................................... (140,444) (76,071)
Other, net .......................................................................... (4,506) (79)
------------ ------------
Net cash provided by operating activities .................................... 29,359 219,041
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................................ (1,506,031) (798,237)
Investments in affiliated companies ................................................. (61,910) (28,166)
Proceeds from the sale of investments ............................................... 1,890,442 742,611
Proceeds from the exchange of investments ........................................... 812,291 9,750
Payments for purchases of cable systems ............................................. (2,767,445) (2,079,483)
Other, net .......................................................................... (2,867) (8,494)
------------ ------------
Net cash used in investing activities ........................................ (1,635,520) (2,162,019)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit repayments, net .................................................... -- (350,000)
Commercial paper borrowings (repayments), net ....................................... 1,197,265 (308,578)
Proceeds from issuance of debt ...................................................... 1,568,089 1,997,164
Repayment of debt ................................................................... (1,490,946) (193,838)
Payment of debt issuance costs ...................................................... (27,159) (9,380)
Proceeds from exercise of stock options ............................................. 18,737 7,724
Increase (decrease) in amounts due to CEI ........................................... 641,921 (143,575)
Proceeds from the issuance of common stock, net of offering costs ................... -- 337,884
Proceeds from the issuance of Cox-obligated capital securities of
subsidiary trusts ................................................................... -- 650,000
Increase (decrease) in book overdrafts .............................................. 15,871 (15,508)
Repurchase of Class A common stock .................................................. (211,889) --
Distributions paid on capital and preferred securities of
subsidiary trusts .............................................................. (61,428) --
Other, net .......................................................................... 6,375 (1,100)
------------ ------------
Net cash provided by financing activities .................................... 1,656,836 1,970,793
------------ ------------
Net increase in cash ................................................................ 50,675 27,815
Cash at beginning of period ......................................................... 33,313 30,604
------------ ------------
Cash at end of period ............................................................... $ 83,988 $ 58,419
============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------------------
2000 1999
------------ ------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C>
SIGNIFICANT NONCASH TRANSACTIONS
AT&T cable system exchange .......................................................... $ 2,658,233 $ --
Excite@Home put option .............................................................. 990,456 --
MediaOne cable system exchange ...................................................... -- 93,050
TCA merger stock issuance ........................................................... -- 1,645,373
Assumed TCA indebtedness ............................................................ -- 540,000
Cox PCS stock exchange .............................................................. -- 794,546
ADDITIONAL CASH FLOW INFORMATION
Cash paid for interest ......................................................... $ 409,189 $ 159,510
Cash paid for income taxes ..................................................... 608,811 157,557
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION AND OTHER INFORMATION
The accompanying unaudited consolidated financial statements of Cox
Communications, Inc. (Cox), a 67.8% 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 nine months ended September 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 June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. 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 Nos. 137 and 138, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. Accordingly, Cox will be required to adopt SFAS
No. 133 on January 1, 2001.
In November 1999, Cox developed a SFAS No. 133 implementation plan and
appointed a team to implement SFAS No. 133 on a company-wide basis. The
implementation plan includes, among other things, the education of both
financial and non-financial personnel, the conducting of an inventory of all
free-
7
<PAGE> 9
standing and embedded derivatives, the development of a SFAS No. 133 compliant
risk management policy, the development of controls and processes to identify
and account for derivatives on an ongoing basis, and the designation and
assessment of Cox's hedging strategies. Cox is currently assessing the impact of
the adoption of SFAS No. 133 on its consolidated financial statements and
expects to complete its implementation plan during the fourth quarter of 2000.
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, was issued in 1999. 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.
Accordingly, Cox adopted SAB No. 101 on October 1, 2000. There was no
significant impact on Cox's consolidated financial statements upon adoption of
SAB No. 101.
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 nine months ended September 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 nine months ended September 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 as independent appraisals of the tangible and
intangible assets acquired are received. 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.
8
<PAGE> 10
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------------------
2000 1999
-------------- ---------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenues................................. $ 2,627,443 $ 2,329,142
Operating income......................... 111,078 128,605
Net income............................... 1,224,986 642,109
Earnings per share:
Basic net income per share........... $ 2.03 $ 1.06
Diluted net income per share......... 1.99 1.05
</TABLE>
4. INVESTMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Equity method investments................ $ 71,624 $ 77,945
Fair value method investments............ 5,652,722 11,685,786
Cost method investments.................. 31,523 5,879
----------- -----------
Total investments........................ $ 5,755,869 $ 11,769,610
=========== ============
</TABLE>
FAIR VALUE METHOD INVESTMENTS
The aggregate cost of fair value method investments in unrestricted
publicly traded entities at September 30, 2000 and December 31, 1999 was
$2,542.0 million and $3,784.8 million, respectively. Gross unrealized gains and
losses on fair value method investments were $3,132.6 million and $21.9 million,
respectively, at September 30, 2000 and were $7,901.0 million and zero,
respectively, at December 31, 1999.
Sprint PCS. At September 30, 2000, Cox's investment in Sprint PCS was
comprised of 108.9 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. The aggregate
fair value of Cox's investment in Sprint PCS and the unrealized gain on this
investment, net of tax, was $4.1 billion and $1.7 billion, respectively, at
September 30, 2000. 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 to
certain cable television companies.
During the nine months ended September 30, 2000, Cox sold a total of
23.9 million shares of Sprint PCS common stock - Series 2 and recognized an
aggregate pre-tax gain of $1,078.2 million. Cox sold an additional 3.7 million
shares of its Sprint PCS common stock - Series 2 in October 2000 for
approximately $130.9 million and expects to recognize a gain in the fourth
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.
9
<PAGE> 11
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. At September 30, 2000, Cox's investment in Excite@Home was
comprised of 29.1 million shares of Excite@Home Series A common stock and
certain other rights, including the right to sell its shares to AT&T, as
described below. The aggregate fair value of Cox's investment in Excite@Home and
the unrealized gain on this investment, net of tax, was $1.4 billion and $248.3
million, respectively, at September 30, 2000.
In March 2000, Excite@Home and its principal cable partners, including
Cox, entered into an agreement pursuant to which Excite@Home and its principal
cable partners agreed to enter into certain transactions, which became effective
in August 2000. Pursuant to this agreement, Cox agreed to extend its
distribution of certain Excite@Home services through June 2006, subject to
certain mutual exclusivity commitments and termination rights that Cox may
exercise at any time on or after June 4, 2001. 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. Cox also agreed to relinquish its
veto rights under the Excite@Home charter and representation on the Excite@Home
board of directors. Cox received certain other rights, including the right to
sell its shares of Excite@Home to AT&T. This right is exercisable at any time
between January 1, 2001 and June 4, 2002 at a price per share equal to the
higher of $48 or a certain 30-day average trading price of Excite@Home Series A
common stock prior to exercise of this right, as defined, subject to a maximum
payment by AT&T of $1.4 billion. The exercise of this right is not dependent on
Cox's continuation or termination of its extended distribution agreement with
Excite@Home. Cox may elect payment in the form of cash or in shares of AT&T
common stock upon exercise of its right to sell the Excite@Home shares. In
connection with this transaction, Cox recognized a pre-tax gain of $990.5
million in August 2000.
5. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving credit facilities................ $ -- $ --
Commercial paper........................... 1,704,806 514,516
Medium-term notes.......................... 451,261 445,014
Reset put securities....................... 248,243 248,203
Notes and debentures....................... 2,856,811 3,804,698
Indexed debentures......................... 2,343,872 1,272,188
Capitalized lease obligations.............. 90,925 91,176
---------- ----------
Total debt................................. $7,695,918 $6,375,795
========== ==========
</TABLE>
Revolving Credit Facilities
In September 2000, Cox entered into a new 364-day credit agreement and
5-year credit agreement to replace its existing credit agreements. The new
agreements provide for borrowings of up to $1.5 billion and $0.9 billion,
respectively, and mature on September 25, 2001 and September 26, 2005,
respectively. As of September 30, 2000, Cox had no borrowings outstanding under
either credit agreement.
Indexed Debentures
Indexed debentures at September 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
10
<PAGE> 12
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 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 $202.5 million during the
three months ended September 30, 2000 due to a decrease in the market value of
the Sprint PCS common stock - Series 1. On a net basis, there was no change in
the carrying value of the PRIZES during the nine months ended September 30,
2000. There was no change in the carrying value of the Premium PHONES during the
three or nine months ended September 30, 2000. The carrying value of the
Discount Debentures decreased by $47.3 million during the three months ended
September 30, 2000 and, on a net basis, there was no change in the carrying
value of the Discount Debentures during the nine months ended September 30,
2000. The changes in carrying value are presented as income related to indexed
debentures in Cox's consolidated statement of operations for the three and nine
month periods ended September 30, 2000.
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 (LIBOR). 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 September 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 6.70%, 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 6.33%. As a
11
<PAGE> 13
result of the settlements under these agreements, interest expense was reduced
by $0.9 million and $2.2 million for the three and nine months ended September
30, 2000, respectively.
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.
In November 2000, Cox issued two series of senior debt securities under
the July 1999 shelf registration with an aggregate principal amount of $1.0
billion. Cox issued $800.0 million of 7.75% Notes due November 1, 2010, referred
to as the 7.75% Notes, and $200.0 million of Floating Rate MOPPRS/CHEERS due
November 7, 2012, referred to as MOPPRS/CHEERS. Both securities are unsecured
and rank equally with Cox's other unsecured senior indebtedness.
Cox may redeem all or a portion of the 7.75% Notes at any time prior to
maturity at 100% of the principal amount plus a make-whole premium, if any, as
defined. Interest on the 7.75% Notes is payable May 1 and November 1 of each
year, beginning May 1, 2001.
The MOPPRS/CHEERS are subject to mandatory tender to the remarketing
dealers on November 7, 2002 at 100% of the principal amount, if the remarketing
dealers elect to remarket the MOPPRS/CHEERS. Alternatively, Cox will be required
to repurchase the MOPPRS/CHEERS from the beneficial owners at 100% of the
principal amount plus accrued interest, if any, if the remarketing dealers do
not purchase the tendered MOPPRS/CHEERS or do not elect to remarket all or a
portion of the MOPPRS/CHEERS. Unless maturity is extended under certain
circumstances, as defined, prior to and in connection with a remarketing the
MOPPRS/CHEERS will mature on November 7, 2012. In addition, Cox may not redeem
the MOPPRS/CHEERS prior to November 7, 2002. Interest on the MOPPRS/CHEERS is
payable and reset quarterly at a floating rate of three month LIBOR plus 70
basis points. Thereafter, in the event the MOPPRS/CHEERS are remarketed, the
interest rate on the MOPPRS/CHEERS will be reset in accordance with the terms of
the remarketing.
The above description of certain material terms of the MOPPRS/CHEERS
are summaries and not intended to be comprehensive descriptions of these
securities. Additional terms of the MOPPRS/CHEERS can be found in Cox's
prospectus supplement dated November 2, 2000.
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 nine months ended September 30, 2000 and 1999:
12
<PAGE> 14
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income.............................. $838,146,000
------------
Basic EPS............................... 838,146,000 600,997,165 $ 1.39
=======
Effect of dilutive securities:
Employee stock options............... -- 1,184,510
Employee stock purchase plan......... -- 94,323
Convertible preferred stock.......... -- 6,571,344
Put options under the stock
repurchase program................. -- 76,091
Forward purchase contracts
forming a part of the FELINE
PRIDES............................. -- 1,614,912
------------ -----------
Diluted EPS............................. $838,146,000 610,538,345 $ 1.37
============ =========== =======
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income............................... $11,860,000
-----------
Basic EPS................................ 11,860,000 576,103,113 $ 0.02
=======
Effect of dilutive securities:
Employee stock options................ -- 2,921,194
Employee stock purchase plan.......... -- 991,974
Convertible preferred stock........... -- 5,036,983
----------- ------------
Diluted EPS.............................. $11,860,000 585,053,264 $ 0.02
=========== =========== =======
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- -------------- ---------
<S> <C> <C> <C>
Net income.............................. $1,996,891,000
--------------
Basic EPS............................... 1,996,891,000 602,782,252 $ 3.31
=======
Effect of dilutive securities:
Employee stock options............... -- 1,821,410
Employee stock purchase plan......... -- 210,053
Convertible preferred stock.......... -- 6,571,344
Put options under the stock
repurchase program................. -- 76,091
Forward purchase contracts
forming a part of the FELINE
PRIDES............................. -- 3,780,197
RHINOS............................... -- 54,538
-------------- -----------
Diluted EPS............................. $1,996,891,000 615,295,885 $ 3.25
============== =========== =======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income............................... $768,872,000
------------
Basic EPS................................ 768,872,000 562,111,772 $ 1.37
=======
Effect of dilutive securities:
Employee stock options................ -- 2,889,684
Employee stock purchase plan.......... -- 991,171
Convertible preferred stock........... -- 5,036,983
------------ -----------
Diluted EPS.............................. $768,872,000 571,029,610 $ 1.35
============ =========== =======
</TABLE>
Diluted earnings per share for the three months ended September 30,
2000 excludes the effect of 11.6 million shares of common stock that may be
issued upon redemption of the RHINOS because such effect would be antidilutive.
Stock Repurchase Program
In April 2000, Cox approved a stock repurchase program whereby Cox is
authorized to purchase up to $500.0 million of its outstanding Class A common
stock on the open market or through private transactions. During the three and
nine months ended September 30, 2000, Cox repurchased 2.8 million and 5.5
million shares, respectively, of its Class A common stock on the open market for
an aggregate cost of $101.8 million and $211.9 million, respectively.
During the three months ended September 30, 2000, Cox issued put
options on 1.3 million shares of its Class A common stock in connection with the
stock repurchase program. These put options replace put options on 1.1 million
shares of Class A common stock which expired unexercised in August 2000. The put
options give the holder the right to require Cox to repurchase such shares at
specified prices ranging from $37.00 to $38.38 per share on specified dates. Cox
received net proceeds of $2.6 million and $6.4 million, respectively, upon
issuance of the put options during the three and nine months ended September 30,
2000. The put options expire at various dates through December 15, 2000.
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<PAGE> 16
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 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 LIBOR
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 total amount recorded as minority interest expense with respect to
the FELINE PRIDES and RHINOS for the three and nine months ended September 30,
2000 was $14.6 million and $42.8 million, respectively.
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 of fifty basis points above CEI's
current commercial paper borrowing rate. This rate was 7.82% at September 30,
2000.
15
<PAGE> 17
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.......................... (551,732)
Net operating expense reimbursements............... (90,189)
-----------
Intercompany due to CEI, September 30, 2000......... $ (527,100)
===========
</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
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. Upon
the suit's return to state court the court granted Cox and the plaintiffs an
extension of time to explore the possibility of a resolution of the suit. The
parties have settled the matter, and the suit was dismissed with prejudice on
September 20, 2000.
Cox and certain subsidiaries are defendants in two putative subscriber
class action suits in state courts in Louisiana and Texas initiated between
October 17, 1997 and December 17, 1998. The suits 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. The actions are being
defended vigorously. The outcome of these matters cannot be predicted at this
time. Five similar suits that had been pending in Nevada, Indiana, Arizona and
Florida have been settled and dismissed; one similar suit that had been pending
in Nebraska was dismissed with prejudice.
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, also referred to as Excite@Home, 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
16
<PAGE> 18
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 Section (c) 17-200 and
violation of California Public Utilities Code Section (c) 2891 and 2891.1. The
suits seek damages and injunctive relief. CoxTelcom, along with PacBell, has
commenced reclaiming tainted PacBell White Pages and reprinting and
redistributing corrected books. The parties to two of the lawsuits have entered
into a stipulation of settlement, which they intend to file with the court
shortly. Cox intends to defend the remaining 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 @Home Corporation as of March 28, 2000
except for the defendants, seek to enjoin the consummation of a March 28, 2000
letter agreement among Excite@Home's principal cable partners, including Cox.
Cox and David Woodrow, Cox's former Executive Vice President, Business
Development, among others, are named defendants in both lawsuits. Mr. Woodrow
formerly served 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 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 to
vigorously defend this matter.
On June 19, 2000, Cablevision Systems Corporation, CSC Holdings, Inc.
and CSC At Home Holding Corporation filed suit against Cox, Cox Enterprises and
Cox@Home, among others, in the Court of Chancery of the State of Delaware in and
for New Castle County. Cablevision alleged 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, sought 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. The parties entered
into a stipulation of settlement on August 17, 2000, and the case was dismissed
with prejudice on August 21, 2000.
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 currently pending legal proceedings 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 nine
month periods ended September 30, 2000 and 1999.
17
<PAGE> 19
This report contains "forward-looking" statements, which are statements
that relate to Cox's future plans, earnings, objectives, expectations,
performance, and similar projections, as well as any facts or assumptions
underlying these statements or projections. Actual results may differ materially
from the results expressed or implied in these forward-looking statements, due
to various risks, uncertainties or other factors. These factors include
competition within the broadband communications industry, our ability to achieve
anticipated subscriber and revenue growth, our success in implementing new
services and other operating initiatives, and our ability to generate sufficient
cash flow to meet our debt service obligations and finance operations. For a
more detailed discussion of these and other risk factors, see the Risk Factors
section of Cox's Annual Report on Form 10-K for the year ended December 31,
1999. Cox assumes no responsibility to update any forward-looking statements as
a result of new information, future events or otherwise.
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.;
- 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 SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
Total revenues for the three months ended September 30, 2000 were
$902.2 million, a 53% increase over revenues of $587.9 million for the three
months ended September 30, 1999. Of this increase, 38% relates to increased
revenues from the 2000 and 1999 transactions. The remaining 15% 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;
- increased advertising due to the Summer Olympics and 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 the third
quarter of 2000.
18
<PAGE> 20
Programming costs were $216.8 million for the third quarter of 2000, an
increase of 54% over the same period in 1999. Of this increase, 42% relates to
the 2000 and 1999 transactions. The remaining 12% increase is due to basic and
digital customer growth at existing cable systems, channel additions and January
2000 programming rate increases offset by fewer national pay-per-view events
during the third quarter of 2000. Plant operations expenses increased 49% to
$67.1 million. Of this increase, 36% relates to the 2000 and 1999 transactions.
The remaining 13% increase relates to increased plant maintenance and costs
related to integration costs and significant growth of new services at existing
cable systems.
Marketing costs increased 21% to $49.0 million. This increase primarily
relates to the 2000 and 1999 transactions. General and administrative expenses
for the three months ended September 30, 2000 increased 59% to $215.2 million
due primarily to:
- increased employee headcount;
- other administrative costs associated with the continued
rollout of digital video, high-speed data and telephony
services; and
- integration expenses associated with the 2000 and 1999
transactions.
Depreciation and amortization increased to $319.3 million from $193.8
million in the third quarter of 2000 due primarily to the 2000 and 1999
transactions. Interest expense increased to $136.2 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 $249.9 million reflects a
reduction in the contingent principal 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 $237.4 million pre-tax gain on the
July 2000 sale of 4.6 million shares of its Sprint PCS - Series 2 common stock
and a $990.5 million pre-tax gain in connection with the transaction among
Excite@Home and its principal cable partners, including Cox, as further
described in Note 4 to Cox's unaudited consolidated financial statements in Item
1 of this report.
Minority interest of $17.0 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
$838.1 million as compared to $11.9 million for the third quarter of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Total revenues for the nine months ended September 30, 2000 were
$2,561.0 million, a 60% increase over revenues of $1,596.3 million for the nine
months ended September 30, 1999. Of this increase, 44% 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 $630.0 million for the nine months ended
September 30, 2000, an increase of 61% over the same period in 1999. Of this
increase, 47% relates to the 2000 and 1999 transactions. The remaining 14%
increase is due to basic and digital customer growth at existing cable systems
and January
19
<PAGE> 21
2000 programming rate increases and channel additions offset by fewer national
pay-per-view events during the nine months ended September 30, 2000. Plant
operations expenses increased 60% to $192.2 million. Of this increase, 43%
relates to the 2000 and 1999 transactions. The remaining 17% increase relates to
increased plant maintenance and costs related to significant growth of new
services at existing cable systems.
Marketing costs increased 53% to $149.7 million. Of this increase, 39%
relates to the 2000 and 1999 transactions. The remaining 14% increase relates to
marketing campaigns aimed at enhancing customer awareness of new services and
other costs associated with the continued rollout of digital video, high-speed
data and telephony services. General and administrative expenses for the nine
months ended September 30, 2000 increased 59% to $598.2 million due primarily
to:
- increased employee headcount;
- other administrative costs associated with the continued
rollout of digital video, high-speed data and telephony
services; and
- integration expenses associated with the 2000 and 1999
transactions.
Depreciation and amortization increased to $881.0 million from $476.5
million in the nine months ended September 30, 1999 due primarily to the 2000
and 1999 transactions. Interest expense increased to $400.9 million primarily
due to an increase in the total debt outstanding, as discussed below in
"Liquidity and Capital Resources."
Income related to indexed debt had no impact, on a net basis, during
the nine months ended September 30, 2000 due to the third quarter 2000 reduction
in previously recognized increases in the contingent principal amounts of Cox's
three outstanding series of exchangeable subordinated debentures.
Net gain on investments of $3,190.0 million primarily includes:
- $1,078.2 million pre-tax gain on the sale of 23.9 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
- $990.5 million pre-tax gain in connection with the transaction
among Excite@Home and its principal cable partners, including
Cox, as further described in Note 4 to Cox's unaudited
consolidated financial statements in Item 1 of this report.
Minority interest of $54.9 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 nine months ended
September 30, 2000 was $1,996.9 million as compared to $768.9 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 nine months ended September 30, 2000, Cox had capital
expenditures of $1.5 billion. 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
expected to total approximately $2.0 billion.
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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 $65.0 million and $70.0 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 $2.8 billion primarily
represents payments in connection with Cox's acquisition of cable systems
serving 522,000 customers from Multimedia.
During the nine months ended September 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 5.5 million shares of Cox's Class A common stock for $211.9 million
during the second and third quarters 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 $61.4 million consist of quarterly payments on the FELINE PRIDES and
RHINOS.
SOURCES OF CASH
Cox generated $29.4 million from operating activities during the nine
months ended September 30, 2000. Proceeds from the sale of investments of
$1,890.4 million primarily include a total of $1,273.1 million from the
aggregate sale of 23.9 million shares of Sprint PCS common stock - Series 2
during the nine months ended September 30, 2000 and $522.3 million from the
March 2000 sale of Cox's entire investment in Flextech plc.
Proceeds from exchange of investments of $812.3 million primarily
consist of $798.0 million received in connection with the AT&T exchange.
Net commercial paper borrowings were $1,197.3 million for the nine
months ended September 30, 2000. Proceeds from issuance of debt during the nine
months ended September 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 the Premium PHONES for proceeds of $269.5 million,
net of underwriting commissions; and
- the second quarter 2000 issuance of the Discount Debentures
for aggregate proceeds of $782.7 million, net of underwriting
commissions.
For a more detailed description of debt financings in the nine months
ended September 30, 2000, see Note 5 to the consolidated financial statements in
Item 1 of this report.
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OTHER
In October 2000, Cox sold an additional 3.7 million shares of its
Sprint PCS common stock - Series 2 for approximately $130.9 million and expects
to recognize a gain during the fourth quarter of 2000.
In November 2000, Cox issued two series of senior debt securities under
the July 1999 shelf registration with an aggregate principal amount of $1.0
billion. Cox issued $800.0 million of 7.75% Notes due November 1, 2010, referred
to as the 7.75% Notes, and $200.0 million of Floating Rate MOPPRS/CHEERS due
November 7, 2012, referred to as MOPPRS/CHEERS. Both securities are unsecured
and rank equally with Cox's other unsecured senior indebtedness.
Cox may redeem all or a portion of the 7.75% Notes at any time prior to
maturity at 100% of the principal amount plus a make-whole premium, if any, as
defined. Interest on the 7.75% Notes is payable May 1 and November 1, beginning
May 1, 2001.
The MOPPRS/CHEERS are subject to mandatory tender to the remarketing
dealers on November 7, 2002 at 100% of the principal amount, if the remarketing
dealers elect to remarket the MOPPRS/CHEERS. Alternatively, Cox will be required
to repurchase the MOPPRS/CHEERS from the beneficial owners at 100% of the
principal amount plus accrued interest, if any, if the remarketing dealers do
not purchase the tendered MOPPRS/CHEERS or do to elect to remarket all or a
portion of the MOPPRS/CHEERS. Unless maturity is extended under certain
circumstances pursuant to a remarketing, as defined, the MOPPRS/CHEERS will
mature on November 7, 2012. In addition, Cox may not redeem the MOPPRS/CHEERS
prior to November 7, 2002. Interest on the MOPPRS/CHEERS is payable and reset
quarterly at a floating rate of three month LIBOR plus 70 basis points.
Thereafter, in the event the MOPPRS/CHEERS are remarketed, the interest rate on
the MOPPRS/CHEERS will be reset in accordance with the terms of the remarketing.
The above description of certain material terms of the MOPPRS/CHEERS
are summaries and not intended to be comprehensive descriptions of these
securities. Additional terms of the MOPPRS/CHEERS can be found in Cox's
prospectus supplement dated November 2, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. 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 Nos. 137 and 138, is effective for
fiscal quarters of fiscal years beginning after June 15, 2000. Accordingly, Cox
will be required to adopt SFAS No. 133 on January 1, 2001.
In November 1999, Cox developed a SFAS No. 133 implementation plan and
appointed a team to implement SFAS No. 133 on a company-wide basis. The
implementation plan includes, among other things, the education of both
financial and non-financial personnel, the conducting of an inventory of all
free-standing and embedded derivatives, the development of a SFAS No. 133
compliant risk management policy, the development of controls and processes to
identify and account for derivatives on an ongoing basis, and the designation
and assessment of Cox's hedging strategies. Cox is currently assessing the
impact of the adoption of SFAS No. 133 on its consolidated financial statements
and expects to complete its implementation plan during the fourth quarter of
2000.
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, was issued in 1999. 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.
Accordingly, Cox adopted SAB No. 101 on October 1, 2000. There was no
significant impact on Cox's consolidated financial statements upon adoption of
SAB No. 101.
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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 September 30, 2000 and December 31,
1999.
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 September
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 September 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
September 30, 2000 was $3,524.8 million compared to a carrying amount of
$3,647.2 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 $3,647.2 million to $3,704.7 million at
September 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 September 30, 2000 was $696.0 million compared to a carrying amount of
$646.1 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 FELINE PRIDES with a
carrying amount of $646.1 million to $698.0 million at September 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
September 30, 2000 was $1,025.0 million compared to a carrying amount of
$1,272.2 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 one percentage point decrease in interest
rates would decrease the estimated fair value of the PRIZES with a carrying
amount of $1,272.2 million to $1,068.0 million at September 30, 2000, and
increase the estimated fair value of the PRIZES with a carrying amount of
$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 September 30, 2000 was $195.0 million compared to a carrying amount of
$275.0 million. In addition, the effect of a hypothetical one percentage point
decrease in interest rates would decrease the estimated fair value of the
Premium PHONES with a carrying amount of $275.0 million to $208 million at
September 30, 2000.
The estimated fair value based on quoted market prices of the Discount
Debentures at September 30, 2000 was $768.0 million compared to a carrying
amount of $796.7 million. In addition, the effect of a
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hypothetical one percentage point decrease in interest rates would increase the
estimated fair value of the Discount Debentures with a carrying amount of $796.7
million to $801.0 million at September 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. However, Cox does not anticipate
nonperformance by the counterparties, and no material loss would be expected in
the event of the counterparties' nonperformance.
At September 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 6.70% 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 6.33%. As a result of the settlements under these agreements,
interest expense was reduced by $0.9 million and $2.2 million for the three and
nine months ended September 30, 2000, respectively.
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."
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
3.1 -- Amended Certificate of Incorporation of Cox Communications, Inc., as
amended.
3.2 -- 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).
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. 333-82575, 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. 333-82575, 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).
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 -- 364-Day Credit Agreement, dated as of September 26, 2000, by and
among Cox Communications, Inc., The Chase Manhattan Bank, as
Administrative Agent, Bank of America National Trust and Savings
Association, as Syndication Agent, The Bank of New York and Wachovia
Bank, N.A., as Co-Documentation Agents, and Chase Securities, Inc., as
Sole Advisor, Arranger and Book Manager, and the other banks a party
thereto.
</TABLE>
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<TABLE>
<S> <C>
10.2 -- Five Year Credit Agreement, dated as of September 26, 2000, by and
among Cox Communications, Inc., the banks party thereto, The Chase
Manhattan Bank, as Administrative Agent, Bank of America National Trust
and Savings Association, as Syndication Agent, The Bank of New York and
Wachovia Bank, N.A., as Co-Documentation Agents, and Chase Securities,
Inc., as Sole Advisor, Arranger and Book Manager, and the other banks a
party thereto.
27 -- Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
Form 8-K dated July 18, 2000 (filed July 18, 2000) reporting the
election of Rodney W. Schrock to the board of directors of Cox
Communications, Inc. to fill the vacancy created by Robert F. Erburu's
retirement from the board of directors 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: November 14, 2000 /s/ Jimmy W. Hayes
-------------------------------------
Jimmy W. Hayes
Executive Vice President,
Finance and Administration
Chief Financial Officer
(principal financial officer)
27
