-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IUxEQnG9heAQaljiJQKjT3Lo2D2nescs4IA/IWhFHt/gVMftjEjGSAXRveSFJpYK xEMD5aQDgQWX+U1ikxIscg== 0000931763-98-002932.txt : 19981116 0000931763-98-002932.hdr.sgml : 19981116 ACCESSION NUMBER: 0000931763-98-002932 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COX COMMUNICATIONS INC /DE/ CENTRAL INDEX KEY: 0000025305 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 582112288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06590 FILM NUMBER: 98747917 BUSINESS ADDRESS: STREET 1: 1400 LAKE HEARN DR NE CITY: ATLANTA STATE: GA ZIP: 30319 BUSINESS PHONE: 4048435000 MAIL ADDRESS: STREET 1: 1400 LAKE HEARN DRIVE CITY: ATLANTA STATE: GA ZIP: 30319 FORMER COMPANY: FORMER CONFORMED NAME: COX COMMUNICATIONS INC/DE DATE OF NAME CHANGE: 19941123 FORMER COMPANY: FORMER CONFORMED NAME: COX CABLE COMMUNICATIONS INC DATE OF NAME CHANGE: 19940614 10-Q 1 COX COMMUNICATIONS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission File Number 1-13576 [LOGO OF COX COMMUNICATIONS, INC. APPEARS HERE] COMMUNICATIONS COX COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 58-2112281 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1400 Lake Hearn Drive, Atlanta, Georgia 30319 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (404) 843-5000 _______________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] _______________ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. There were 263,402,432 shares of Cox Class A Common Stock outstanding as of November 1, 1998. There were 13,798,896 shares of Cox Class C Common Stock outstanding as of November 1, 1998. COX COMMUNICATIONS, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS.............................. 2 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 12 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 18 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.............................................. 19 Item 2. CHANGES IN SECURITIES.......................................... 19 Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 21 SIGNATURES............................................................... 22 Part I - Financial Information Item 1. Consolidated Financial Statements Cox Communications, Inc. Consolidated Balance Sheets
September 30, December 31, 1998 1997 ------------- ------------ (unaudited) (Thousands of Dollars) Assets Cash................................................................................... $ 10,277 $ 28,259 Restricted cash........................................................................ - 204,210 Accounts and notes receivable, less allowance for doubtful accounts of $8,038 and $6,955........................................................ 147,133 144,073 Net plant and equipment................................................................ 2,234,813 1,979,063 Investments............................................................................ 4,088,098 1,598,273 Intangible assets...................................................................... 2,601,568 2,458,717 Amounts due from Cox Enterprises, Inc. ("CEI")......................................... - 50,856 Other assets........................................................................... 97,385 93,150 ------------- ------------ Total assets...................................................................... $ 9,179,274 $ 6,556,601 ============= ============ Liabilities and shareholders' equity Accounts payable and accrued expenses.................................................. $ 258,518 $ 217,984 Deferred income........................................................................ 27,646 26,698 Deferred income taxes.................................................................. 1,720,253 721,594 Other liabilities...................................................................... 36,960 84,179 Debt................................................................................... 3,296,242 3,148,834 Amounts due to CEI..................................................................... 42,267 - ------------- ------------ Total liabilities................................................................. 5,381,886 4,199,289 ------------- ------------ Shareholders' equity Preferred Stock, $1 par value; 5,000,000 shares authorized; none issued....................................................................... - - Class A Common Stock, $1 par value; 316,000,000 shares authorized; shares issued and outstanding: 257,689,188 and 257,276,414................................................................... 257,689 257,276 Class C Common Stock, $1 par value; 14,000,000 shares authorized; shares issued and outstanding: 13,798,896............................. 13,799 13,799 Additional paid-in capital........................................................... 1,798,519 1,790,833 Retained earnings.................................................................... 1,032,414 79,605 Foreign currency translation adjustment.............................................. 23,873 13,510 Net unrealized gain on securities.................................................... 671,094 202,289 ------------- ------------ Total shareholders' equity........................................................ 3,797,388 2,357,312 ------------- ------------ Total liabilities and shareholders' equity........................................ $ 9,179,274 $ 6,556,601 ============= ============
See notes to consolidated financial statements. 2 Cox Communications, Inc. Consolidated Statements of Operations
Three Months Nine Months Ended September 30 Ended September 30 ------------------------------- -------------------------- 1998 1997 1998 1997 --------------- --------------- -------------- ----------- (unaudited) (Thousands of Dollars, except per share data) Revenues Complete basic...................................... $ 302,791 $ 271,964 $ 878,175 $ 810,301 Premium service..................................... 47,864 46,729 140,059 139,764 Pay-per-view........................................ 10,007 9,467 28,357 36,142 Advertising......................................... 32,378 25,515 90,772 72,597 Data................................................ 5,099 948 11,877 1,297 Telephony........................................... 8,723 3,428 20,302 9,189 Satellite........................................... - 32,278 33,492 88,028 Other............................................... 9,103 17,872 27,018 35,091 ------------ --------- ------------ ------------ Total revenues.................................... 415,965 408,201 1,230,052 1,192,409 Costs and expenses Programming costs................................... 99,911 89,122 290,575 269,854 Plant operations.................................... 35,222 33,234 98,762 109,535 Marketing........................................... 25,897 23,657 73,012 59,466 General and administrative.......................... 96,065 82,738 278,323 234,689 Satellite operating and administrative.............. - 27,101 29,404 79,714 Depreciation........................................ 88,731 81,424 256,176 239,567 Amortization........................................ 19,849 21,583 56,200 57,610 ------------ --------- ------------ ------------ Operating income....................................... 50,290 49,342 147,600 141,974 Interest expense....................................... (48,673) (52,484) (152,801) (149,470) Equity in net losses of affiliated companies........... (143,346) (107,210) (414,031) (270,318) Gain on exchanges of cable television systems.......... - - - 24,642 Gain on sale of affiliated companies................... - - 77,150 193,780 Gain on sale of businesses............................. - - 37,274 - Gain on exchange of stock of affiliated company........ 1,719,295 - 1,719,295 - Gain on issuance of stock by affiliated company........ 150,386 - 150,386 - Other, net............................................. (4,434) 10 350 3,102 ------------ --------- ------------ ------------ Income (loss) before income taxes...................... 1,723,518 (110,342) 1,565,223 (56,290) Income taxes........................................... 656,544 (28,384) 612,414 2,327 ------------ --------- ------------ ------------ Net income (loss)...................................... $ 1,066,974 $ (81,958) $ 952,809 $ (58,617) ============ ========= ============ ============ Per share data Basic net income (loss) per share................... $ 3.93 $ (0.30) $ 3.51 $ (0.22) Diluted net income (loss) per share................. 3.90 (0.30) 3.49 (0.22) Basic weighted-average shares outstanding........... 271,389,369 270,504,264 271,309,002 270,396,146 Diluted weighted-average shares outstanding......... 273,516,712 271,343,694 273,289,009 270,919,226
See notes to consolidated financial statements.
Cox Communications, Inc. Consolidated Statement of Shareholders' Equity Net Foreign unrealized Common Stock Additional currency gain Preferred ----------------- paid-in Retained translation on Stock Class A Class C capital earnings adjustment securities Total --------- ------- ------- ---------- ---------- ----------- ----------- ----- (unaudited) (Thousands of Dollars) Balance at December 31, 1997.... - $257,276 $13,799 $1,790,833 $ 79,605 $13,510 $202,289 $2,357,312 Net income.................... 952,809 952,809 Issuance of stock related to stock compensation plans... 413 7,686 8,099 Foreign currency translation adjustment.................. 10,363 10,363 Change in net unrealized gain on securities............... 468,805 468,805 --------- -------- ------- ---------- ---------- ------- -------- ---------- Balance at September 30, 1998... - $257,689 $13,799 $1,798,519 $1,032,414 $23,873 $671,094 $3,797,388 ========= ======== ======= ========== ========== ======= ======== ========== See notes to consolidated financial statements.
Cox Communications, Inc. Consolidated Statements of Cash Flows Nine Months Ended September 30 ------------------------- 1998 1997 ------------ ------------ (unaudited) (Thousands of Dollars) Cash flows from operating activities Net income (loss)................................................................. $ 952,809 $ (58,617) Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of effects of acquisitions: Depreciation.................................................................... 256,176 239,567 Amortization.................................................................... 56,200 57,610 Equity in net losses of affiliated companies.................................... 414,031 270,318 Deferred income taxes........................................................... 719,940 86,281 Gain on exchanges of cable television systems................................... - (24,642) Gain on sale of affiliated companies............................................ (77,150) (193,780) Gain on sale of businesses...................................................... (37,274) - Gain on exchange of stock of affiliated company................................. (1,719,295) - Gain on issuance of stock by affiliated company................................. (150,386) - Increase in accounts and notes receivable......................................... (2,288) (8,486) Increase in accounts payable and accrued expenses................................. 7,309 160 Decrease in taxes payable......................................................... (51,258) (50,863) Other, net........................................................................ 1,376 (1,986) ------------- --------- Net cash provided by operating activities.................................. 370,190 315,562 ------------- --------- Cash flows from investing activities Capital expenditures.............................................................. (549,157) (530,551) Investments in affiliated companies............................................... (160,806) (326,598) Proceeds from sale of affiliated companies........................................ 63,183 6,983 Proceeds from sale of businesses.................................................. 73,957 11,410 Restricted cash invested.......................................................... 204,210 - Payments for purchases of cable television systems................................ (258,067) - Payments for exchanges of cable television systems................................ - (53,442) Decrease in amounts due from CEI.................................................. 50,856 - Other, net........................................................................ (4,082) (9,289) ------------- --------- Net cash used in investing activities...................................... (579,906) (901,487) ------------- --------- Cash flows from financing activities Revolving credit borrowings (repayments), net..................................... (800,000) 350,000 Commercial paper borrowings (repayments), net..................................... 86,009 (21,739) Proceeds from issuance of debt.................................................... 843,531 249,400 Repayment of debt................................................................. (13,564) (11,083) Proceeds from exercise of stock options........................................... 8,099 4,553 Payments to reacquire nonvoting redeemable preferred stock outstanding............ - (10,000) Increase in amounts due to CEI.................................................... 42,267 18,937 Increase in book overdrafts....................................................... 25,392 7,293 ------------- --------- Net cash provided by financing activities.................................. 191,734 587,361 ------------- --------- Net increase (decrease) in cash................................................... (17,982) 1,436 Cash at beginning of period....................................................... 28,259 42,349 ------------- --------- Cash at end of period............................................................. $ 10,277 $ 43,785 ============ ========= See notes to consolidated financial statements.
Cox Communications, Inc. Consolidated Statements of Cash Flows (Continued) Nine Months Ended September 30 ---------------------- 1998 1997 ---------- -------- (unaudited) (Thousands of Dollars) Significant noncash transactions PrimeStar merger stock exchange............................................. $ 94,696 $ - Teleport stock issuance..................................................... 150,386 - Teleport merger stock exchange.............................................. 2,076,861 - Transfer of PCS license..................................................... - 251,918 Flextech merger stock exchange.............................................. - 203,119 Gemstar merger stock exchange............................................... - 19,373 @Home stock issuance........................................................ - 329,051 Additional cash flow information Interest paid............................................................... $ 123,935 $130,624 Income taxes refunded....................................................... (56,268) (33,092) See notes to consolidated financial statements.
COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 1. BASIS OF PRESENTATION AND OTHER INFORMATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair statement of the results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Cox Communications, Inc.'s ("Cox") Annual Report on Form 10-K for the year ended December 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998 or any interim period. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Comprehensive Income During the first quarter of 1998, Cox adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires prominent disclosure of comprehensive income. Total comprehensive income was $1,191.1 million and $72.0 million for the three months ended September 30, 1998 and 1997, respectively, and $1,432.0 million and $26.3 million for the nine months ended September 30, 1998 and 1997, respectively. The components of total comprehensive income include consolidated net income (loss) and the change in the foreign currency translation adjustment and net unrealized gain (loss) on securities for the periods presented. Recently Issued Accounting Pronouncements In June 1997, SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information," was issued. This Statement requires that a public company report segment profit or loss, certain specific revenue and expense items, segment assets and certain descriptive information about the determination of business segments. SFAS No. 131 is effective for Cox's annual 1998 financial statements and interim 1999 financial statements. Management is in the process of determining the effect on Cox's financial statements as a result of the adoption of SFAS No. 131. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," was issued. This Statement requires that all derivatives be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. This Statement is effective for fiscal years beginning after June 15, 1999. The effect on Cox's financial statements upon adoption of SFAS No. 133 has not been determined. 7 Reclassifications Certain amounts in the 1997 financial statements have been reclassified for comparative purposes. 3. ACQUISITION AND DISPOSAL OF BUSINESSES In October 1998, Cox completed the acquisition of a cable television system located in Las Vegas, Nevada, and certain related businesses owned by Prime South Diversified, Inc. ("PSDI") for a combination of cash and Cox stock with an aggregate value of approximately $1,325.0 million, including the refinancing of certain PSDI indebtedness. PSDI operated a cable television system serving 319,000 residential cable television customers, 105,000 hotel units and interests in various other non-consolidated operations in the greater Las Vegas area. The following unaudited selected pro forma information for the nine months ended September 30, 1998 and 1997 presents the consolidated results of operations as if the acquisition had occurred on January 1, 1997. The pro forma information presented is preliminary and may be adjusted once completed information of the fair value of PSDI assets and liabilities is developed. The pro forma information is not necessarily indicative of the combined results of future operations, and do not reflect any synergies and other cost reductions that may result from the integration of PSDI operations with Cox. PRO FORMA NINE MONTHS ENDED SEPTEMBER 30 ---------------------------- 1998 1997 ------------- ------------- (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Revenues.................................... $ 1,369,407 $ 1,313,381 Operating income............................ 157,652 139,273 Net income.................................. 935,748 (91,710) Basic net income (loss) per share........... $ 3.38 $ (0.33) Diluted net income (loss) per share......... 3.35 (0.33) In June 1998, Cox acquired a cable television system serving approximately 115,000 customers in Tucson, Sierra Vista and portions of Pima County, Arizona from TCI Communications, Inc. ("TCIC"), part of Tele-Communications, Inc.'s TCI Group, for approximately $250.0 million. In May 1998, Cox acquired a cable television system serving approximately 14,000 customers in Douglas County, Nebraska from Advance/Newhouse Partnership for approximately $8.0 million. Cox operates this system as part of its cluster of systems in the Omaha area. In April 1998, Cox contributed its partnership interests and net assets in and operations of PrimeStar Partners, L.P. to a new subsidiary of TCI Satellite Entertainment, Inc., PrimeStar, Inc., in exchange for $74.0 million and 18,939,217 shares of common stock of PrimeStar, Inc. The transaction resulted in recording a 9.43% equity interest in PrimeStar, Inc. and a pre-tax gain of $37.3 million. In April 1998, Cox and TCIC signed a non-binding agreement to form a joint venture serving approximately 270,000 customers in several key Oklahoma communities. The partnership would operate TCIC's system serving approximately 150,000 customers in Tulsa and surrounding communities, along with Cox's system in the Oklahoma City area, which serves approximately 120,000 customers. The partnership would be managed by Cox. As of September 30, 1998, Cox and TCIC are continuing to negotiate with respect to this transaction, which would be further subject to the signing of a definitive agreement and the receipt of all appropriate regulatory and other approvals. There is no assurance that a definitive agreement will be reached between the parties or that transaction will be consummated. 8 4. Investments The summarized unaudited financial information presented below for significant equity method investments served as the basis for which Cox recorded its share of equity in net losses:
THREE MONTHS ENDED --------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) OUTDOOR GEMS SPRINT PCS COX PCS TELEPORT LIFE SPEEDVISION TELEVISION --------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1998 - ----------------------- REVENUES $ 428,881 $ 28,373 $ 295,300 $ 6,247 $ 7,322 $ 4,338 OPERATING LOSS (660,298) (45,624) (28,300) (3,633) (6,632) (1,490) NET LOSS (599,471) (73,581) (55,900) (2,948) (6,711) (2,695) SEPTEMBER 30, 1997 - ----------------------- REVENUES $ 72,534 $ 2,760 $ 115,700 $ 3,386 $ 3,304 $ 2,593 OPERATING LOSS (382,712) (33,771) (28,600) (5,361) (8,266) (1,586) NET LOSS (457,179) (46,737) (51,400) (5,628) (8,643) (2,456) NINE MONTHS ENDED -------------------------------------------------------------------------------------------------- (THOUSANDS OF DOLLARS) OUTDOOR GEMS SPRINT PCS COX PCS TELEPORT LIFE SPEEDVISION TELEVISION -------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1998 - ----------------------- REVENUES $ 764,985 $ 74,021 $ 605,800 $ 16,518 $ 18,952 $ 9,357 OPERATING LOSS (1,413,197) (142,309) (116,300) (10,485) (20,520) (3,451) NET LOSS (1,640,339) (225,972) (190,700) (12,867) (22,645) (6,636) SEPTEMBER 30, 1997 - ----------------------- REVENUES $ 107,387 $ 5,632 $ 315,629 $ 8,744 $ 6,664 $ 7,612 OPERATING LOSS (851,238) (106,259) (102,684) (14,871) (23,452) (5,249) NET LOSS (1,004,014) (149,894) (150,861) (15,547) (24,375) (8,139)
Cox's equity ownership in Teleport Communications Group, Inc. ("Teleport") was accounted for using a quarter lag. In April 1998, Teleport completed the acquisition of another entity for a combination of stock and cash consideration. As a result of Teleport's stock issuance, Cox recognized a pre-tax gain of $150.4 million in the quarter ended September 30, 1998. In July 1998, Cox's equity ownership in Teleport was exchanged for shares of AT&T Corp. ("AT&T") common stock as a result of the consummation of the merger between AT&T and Teleport. Under the terms of the Merger agreement, Teleport shareholders exchanged each share of Teleport for 0.943 of a share of AT&T common stock. As a result of the exchange, Cox recognized a pre-tax gain of $1,719.3 million during the quarter ended September 30, 1998 and has accounted for the AT&T common stock as "available-for-sale" securities pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In June 1998, Cox exercised its option to put 20% of its interest in Cox PCS to Sprint PCS, which resulted in a pre-tax gain of $62.2 million. During March 1998, FOX/Liberty Networks acquired a one-third ownership interest in Speedvision and in Outdoor Life Networks. Cox, whose ownership interest was 51.4% and 49.3% as of December 31, 1997, respectively, retained a one-third ownership stake in each network. Cox recognized a minimal gain on this transaction during the second quarter of 1998. 9 5. DEBT
SEPTEMBER 30 DECEMBER 31 1998 1997 ----------------------------------------- (THOUSANDS OF DOLLARS) Revolving credit facilities, effective interest rate 6.1%............................................................. $ -- $ 799,999 Commercial Paper, net of unamortized discount of $5,561 and $2,191, effective interest rate 5.8% and 6.0%................ 765,939 683,300 Medium-term notes, net of unamortized discount of $1,220 and $1,201, interest ranging from 6.9% to 8.9%................... 463,334 263,352 Floating Rate Reset Notes, due June 15, 2009, net of unamortized discount of $2,636 and $2,820, effective interest rate 4.6% and 4.9%...................................... 147,364 147,180 6.15% Reset Put Securities, due August 1, 2033, net of unamortized discount and hedging of $1,865....................... 248,135 -- 6.375% Notes, due June 15, 2000, net of unamortized discount of $411 and $567........................................ 424,589 424,414 6.5% Notes, due November 15, 2002, net of unamortized discount of $364 and $430........................................ 199,636 199,570 6.875% Notes, due June 15, 2005, net of unamortized discount and hedging of $11,510 and $12,462...................... 363,490 362,538 6.4% Notes, due August 1, 2008, net of unamortized discount and hedging of $1,724................................... 198,276 -- 7.25% Debentures, due November 15, 2015, net of unamortized discount of $805 and $840............................ 99,195 99,160 7.625% Debentures, due June 15, 2025, net of unamortized discount and hedging of $17,814 and $17,953...................... 132,186 132,047 6.8% Debentures, due August 1, 2028, net of unamortized discount and hedging of $2,751................................... 197,249 -- Capitalized Lease Obligations...................................... 56,849 37,274 ------------------------------- Total Debt..................................................... $3,296,242 $3,148,834 ===============================
In July 1998, Cox filed a Form S-3 Registration Statement (the "1998 Shelf Registration") with the Securities and Exchange Commission under which Cox may from time to time offer and issue debentures, notes, bonds or other evidence of indebtedness for a maximum aggregate amount of $1,000 million. During July 1998, Cox issued $200 million of 6.4% Notes maturing August 1, 2008 and $200 million of 6.8% Debentures maturing August 1, 2028 under the 1998 Shelf Registration. The net proceeds to Cox were approximately $395.4 million. In addition, during July 1998, Cox issued $250 million of 6.15% Reset Put Securities due August 1, 2033 ("REPS") under the 1998 Shelf Registration. The REPS are subject to mandatory redemption from the existing holders on August 1, 2003 through either (i) the exercise by the Remarketing Dealer of its right to purchase the REPS for remarketing, or (ii) the repurchase of the REPS by Cox. If remarketed, the Remarketing Dealer will, based on Cox's then current credit spreads, determine the interest to be paid on the REPS. Upon issuance of the REPS, the Remarketing Dealer paid Cox a premium of $11.4 million for the right to serve as the Remarketing Dealer. Amortization of the premium will be reflected as adjustments to interest expense. The net proceeds to Cox were approximately $259.4 million. In anticipation of the issuance of these debt securities, during June 1998 Cox entered into a series of transactions under a forward treasury lock agreement in order to hedge its interest rate exposure. Such hedging transactions totaled a notional amount of $50 million for the Notes due August 1, 2008, $50 million for the Debentures due August 1, 2028 and $50 million for the REPS due August 1, 2033. The 10 hedging transactions were settled at a minimal cost which are being reflected as adjustments to interest expense over the life of the debt securities. During January 1998, Cox issued $100 million of Medium Term Notes under a Form S-3 Registration Statement filed April 1996 (the "1996 Shelf Registration"). The Notes are due January 15, 2018 and bear interest at a fixed rate of 6.85%. The net proceeds to Cox were approximately $98.8 million. In addition, during January 1998 Cox issued a second series of $100 million Medium Term Notes under the 1996 Shelf Registration. These Notes are due January 15, 2028 and bear interest at a fixed rate of 6.95%. The net proceeds to Cox from the second series of Notes were approximately $98.8 million. 6. TRANSACTIONS WITH AFFILIATED COMPANIES Cash requirements are funded by internally generated funds, by various external financing transactions and, as needed, through intercompany loans from CEI. CEI performs day-to-day cash management services for Cox, with settlements of credit or debit balances between Cox and CEI occurring periodically with interest at market rates (6.29% at September 30, 1998). Included in the amounts due (to)/from CEI are the following transactions: (THOUSANDS OF DOLLARS) Balance, December 31, 1997.................... $ 50,856 Cash transferred from CEI..................... (182,658) Net operating expense allocations and reimbursement............................. 89,535 ------------ Balance, September 30, 1998................... $ (42,267) ============= 7. SHAREHOLDERS EQUITY The following table reconciles the numerator and the denominator of the basic and diluted per-share computations for income (loss) from operations for the three and nine month periods ended September 31, 1998 and 1997:
THREE MONTHS ENDED SEPTEMBER 30, 1998 ----------------------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT --------------- --------------- -------------- Net income $1,066,974,000 -------------- BASIC EPS 1,066,974,000 271,389,369 $3.93 ======== EFFECT OF DILUTIVE SECURITIES Options -- 1,757,422 Employee Stock Purchase Plan ("ESPP") -- 369,921 -------------- ------------- DILUTED EPS $1,066,974,000 273,516,712 $3.90 ============== ============= ========
THREE MONTHS ENDED SEPTEMBER 30, 1997 ---------------------------------------------------------- LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------------- ----------------- -------------- Net loss $(81,958,000) -------------- BASIC EPS (81,958,000) 270,504,264 $(0.30) ======== EFFECT OF DILUTIVE SECURITIES Options -- 839,430 DILUTED EPS $(81,958,000) 271,343,694 $(0.30) ============== ============= ========
11
NINE MONTHS ENDED SEPTEMBER 30, 1998 ---------------------------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT --------------- ----------------- -------------- Net income $952,809,000 ------------ BASIC EPS 952,809,000 271,309,002 $3.51 ========== EFFECT OF DILUTIVE SECURITIES Options -- 1,631,256 ESPP -- 348,751 ------------ ------------- DILUTED EPS $952,809,000 273,289,009 $3.49 ============ ============= ==========
NINE MONTHS ENDED SEPTEMBER 30, 1997 ---------------------------------------------------------- LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------------- ----------------- -------------- Net loss $(58,617,000) ------------ BASIC EPS (58,617,000) 270,396,146 $(0.22) ========== EFFECT OF DILUTIVE SECURITIES Options -- 523,080 ------------ ------------- DILUTED EPS $(58,617,000) 270,919,226 $(0.22) ============ ============= ==========
8. COMMITMENTS AND CONTINGENCIES Cox is a party to various legal proceedings that are ordinary and incidental to its business. Management does not expect that any legal proceedings currently pending will have a material adverse impact on Cox's consolidated financial position or consolidated results of operations. See "-- Part II - Other Information -- Item 1. Legal Proceedings." ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying historical consolidated financial statements for the three- and nine-month periods ended September 30, 1998 and 1997. The forward looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report, which reflect management's best judgement based on factors currently known, involve risks, uncertainties and other factors which may cause the actual performance of Cox Communications, Inc. ("Cox") to be materially different from the performance indicated or implied by such statements. Such factors include, among others: competitive pressures within the broadband communications industry; terms and availability of capital; the level of success of Cox's operating initiatives; changes in business strategy and development plans; the ability of Cox to mitigate the impact of the Year 2000 Issue; and other factors included in the discussion below. Cox claims the protection of the safe harbor for forward looking statements contained in Section 21E of the Securities Exchange Act of 1934, as amended, for all forward looking statements included in this report. RECENT ACQUISITIONS AND EXCHANGES In October 1998, Cox completed the acquisition of a cable television system located in Las Vegas, Nevada, and certain related businesses owned by Prime South Diversified, Inc. ("PSDI") for a combination of stock and cash with an aggregate value of approximately $1,325.0 million, including the refinancing of certain PSDI indebtedness. PSDI operated a cable television system serving 319,000 residential cable 12 television customers, 105,000 hotel units and interests in various other non- consolidated operations in the greater Las Vegas area. In July 1998, Cox's equity ownership in Teleport Communications Group Inc. ("Teleport") was exchanged for shares of AT&T Corp. ("AT&T") common stock as a result of the consummation of the merger between AT&T and Teleport. Under the terms of the merger agreement, Teleport shareholders exchanged each share of Teleport for 0.943 of a share of AT&T common stock. As a result of the exchange, Cox recognized a pre-tax gain of $1,719.3 million during the quarter ended September 30, 1998. THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997 Consolidated revenues for the three months ended September 30, 1998 were $416.0 million, a 2% increase over revenues of $408.2 million for the three months ended September 30, 1997. Basic customers were 3,406,678, a 2.2% increase over customers at September 30, 1997 after adjusting for the cable television system transactions consummated during 1997 and 1998. Complete basic revenues for the third quarter of 1998 increased 11% over the comparable period in 1997 to $302.8 million primarily due to basic and digital customer growth and rate increases implemented primarily during the fourth quarter of 1997. Digital television had launched in seven markets with 54,609 customers as of September 30, 1998. The rate increases are the result of new channel additions, increased programming costs and the pass-through of inflation adjustments. Pay-per-view revenues for the third quarter of 1998 increased 6% to $10.0 million due to the increase in digital customers. Advertising revenues increased 27% to $32.4 million due to growth in local and national advertising sales during 1998. Data revenues for the third quarter of 1998 were $5.1 million primarily as a result of Cox's residential data service, Cox@Home, which as of September 30, 1998, had launched in eight markets with 46,777 customers. Telephony revenues for the third quarter of 1998 increased to $8.7 million from $3.4 million primarily due to growth in the commercial telephony business. Telephony revenues also included revenues from Cox's residential telephone offering, which had launched in five markets with 18,200 customers as of September 30, 1998. Programming costs were $99.9 million for the third quarter of 1998, an increase of 12% over the same period in 1997 due to basic and digital customer growth, programming rate increases and new channel additions. Plant operations expenses increased 6% to $35.2 million. Marketing costs increased by 9% to $25.9 million for the current quarter due in part to costs associated with the rollout of digital video, high-speed data and telephony services. General and administrative expenses for the third quarter of 1998 increased 16% to $96.1 million due primarily to costs associated with digital video, high-speed data and telephony services. Operating income before depreciation and amortization ("EBITDA") is a commonly used financial analysis tool for measuring and comparing cable television companies in several areas, such as liquidity, operating performance and leverage. EBITDA increased 4% to $158.9 million for the third quarter of 1998. The EBITDA margin (EBITDA as a percentage of revenues) for the current quarter was 38.2%, an increase from 37.3% for the third quarter of 1997. Depreciation was $88.7 million for the third quarter of 1998, a 9% increase compared to the same period in 1997 due to the continued upgrade and rebuild of the broadband network. Operating income for the third quarter of 1998 was $50.3 million, an increase of 2% compared to the same period in 1997. Interest expense decreased $3.8 million to $48.7 million for the third quarter of 1998 due to the decrease in Cox's average borrowing rates. Equity in net losses of affiliated companies was $143.3 13 million primarily due to losses of $82.5 million, $28.8 million and $12.5 million associated with Sprint PCS, Cox PCS and Teleport, respectively. A pre-tax gain $150.4 million was recognized in the third quarter as a result of an equity investee's (Teleport) issuance of common stock to consummate its acquisition of another entity. In addition, Cox's equity ownership in Teleport was exchanged for shares of AT&T common stock as a result of the consummation of the merger between AT&T and Teleport in July resulting in a pre- tax gain of $1,719.3 million. Net income for the current quarter was $1,067.0 million as compared to net loss of $82.0 million for the third quarter of 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1997 Consolidated revenues for the nine months ended September 30, 1998 were $1,230.1 million, a 3% increase over revenues of $1,192.4 million for the nine months ended September 30, 1997. Basic customers were 3,406,678, a 2.2% increase over customers at September 30, 1997 after adjusting for the cable television system transactions consummated during 1997 and 1998. Complete basic revenues for the nine months ended September 30, 1998 increased 8% over the same period in 1997 to $878.2 million due primarily to basic and digital customer growth and rate increases implemented primarily during the fourth quarter of 1997. Digital television had launched in seven markets with 54,609 customers as of September 30, 1998. The rate increases are the result of new channel additions, increased programming costs and the pass- through of inflation adjustments. Pay-per-view revenues for the nine months ended September 30, 1998 were $28.4 million, down 22% from the same period in 1997 primarily as a result of the Tyson/Holyfield boxing event in 1997. Advertising revenues increased 25% to $90.8 million due to growth in local and national advertising sales during 1998. Data revenues for the first nine months of 1998 were $11.9 million primarily as a result of Cox's residential data service, Cox@Home, which as of September 30, 1998, had launched in eight markets with 46,777 customers. Telephony revenues for the first nine months of 1998 increased to $20.3 million from $9.2 million primarily due to growth in the commercial telephony business. Telephony revenues also included revenues from Cox's residential telephone offering, which had launched in five markets with 18,200 customers as of September 30, 1998. Programming costs were $290.6 million for the nine months ended September 30, 1998, an increase of 8% over the same period in 1997 due to basic and digital customer growth, programming rate increases and new channel additions. Plant operations expenses decreased 10% to $98.8 million and included the effect of a revised cost component factor used to capitalize indirect costs relating to network construction activity beginning in the third quarter of 1997. Marketing costs increased by 23% to $73.0 million for the nine months ended September 30, 1998 due in part to costs associated with the rollout of digital video, high- speed data and telephony services. General and administrative expenses for the first nine months of 1998 increased 19% to $278.3 million due primarily to costs associated with digital video, high-speed data and telephony services. EBITDA increased 5% to $460.0 million for the nine months ended September 30, 1998. The EBITDA margin for the nine months ended September 30, 1998 was 37.4%, an increase from 36.8% for the comparable period of 1997. Depreciation was $256.2 million for the first nine months of 1998, a 7% increase compared to the same period in 1997 due to the continued upgrade and rebuild of the broadband network. Operating 14 income for the nine months ended September 30, 1998 was $147.6 million, an increase of 4% compared to the same period in 1997. Interest expense increased $3.3 million to $152.8 million for the first nine months of 1998 primarily due to the increase in total debt outstanding offset by the decrease in Cox's average borrowing rates. Equity in net losses of affiliated companies was $414.0 million primarily due to losses of $238.4 million, $87.6 million and $43.9 million associated with Sprint PCS, Cox PCS and Teleport, respectively. In the second quarter of 1998, Cox exercised its option to put 20% of its interest in Cox PCS to Sprint PCS, which resulted in a pre-tax gain of $62.2 million. Also in the second quarter of 1998, Cox contributed its partnership interests, net assets and operations in PrimeStar Partners, L.P. to PrimeStar, Inc. in exchange for $74.0 million and 18,939,217 shares of common stock of PrimeStar, Inc. The transaction resulted in recording a 9.43% equity interest in PrimeStar, Inc. and a pre-tax gain of $37.3 million. In the third quarter, a pre-tax gain of $150.4 million was recognized as a result of an equity investee's (Teleport) issuance of common stock to consummate its acquisition of another entity. In addition, Cox's equity ownership in Teleport was exchanged for shares of AT&T common stock as a result of the consummation of the merger between AT&T and Teleport in July resulting in a pre-tax gain of $1,719.3 million. Net income for the nine months ended September 30, 1998 was $952.8 million as compared to net loss of $58.6 million for the nine months ended September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES Uses of Cash As part of Cox's ongoing strategic plan, Cox has invested, and will continue to invest, significant amounts of capital to enhance the reliability and capacity of its broadband cable network in preparation for the offering of new services and to make investments in affiliated companies primarily focused on telephony, programming and communications-related activities. Capital expenditures are primarily directed at upgrading and rebuilding broadband cable networks in preparation for the delivery of additional services. Capital expenditures for 1998 are expected to range between $725 million and $775 million. Capital expenditures during the nine months ended September 30, 1998 were $549.2 million. Funding requirements in 1998 for investments in affiliated companies are expected to be approximately $170 million. Investments in affiliated companies during the nine months ended September 30, 1998 of $160.8 million included (i) $72.6 million of additional equity funding to Sprint PCS and (ii) the purchase of 46,373,264 shares of Telewest Communications plc. ("Telewest") stock for $71.7 million in connection with the Telewest acquisition of another UK company. As a result of this acquisition, Cox's ownership interest was diluted from 14.6% to 11.9%. During the nine months ended September 30, 1998, net repayments of $800.0 million were made for the revolving credit borrowings. In addition, payments for the purchase of cable television systems of $258.1 million were made using proceeds from restricted cash during the second quarter of 1998. At September 30, 1998, Cox had $2,000 million of borrowing capacity under its revolving credit facilities. Sources of Cash Cox generated $370.2 million from operating activities during the nine months ended September 30, 1998. Proceeds from the issuance of debt of $843.5 million include $199.3 million of Medium Term Notes under the 1996 Shelf Registration program and $644.2 million of Notes, Debentures and Reset Put Securities under the 1998 Shelf Registration. The proceeds were used to refinance revolving credit borrowings mentioned above and to pay down outstanding commercial paper. 15 Cox Enterprises, Inc. ("CEI") continues to perform day-to-day cash management services for Cox with settlements of balances between Cox and CEI occurring periodically at market interest rates. At September 30, 1998, an intercompany payable of $42.3 million was due from Cox to CEI. OTHER MATTERS Year 2000 Readiness Disclosure General - ------- The Year 2000 Issue is the result of computer programs and embedded computer microprocessors being unable to properly process dates or date- sensitive calculations beyond December 31, 1999. Cox recognizes the importance of this issue and is taking a proactive approach in order to facilitate an appropriate transition into the year 2000. Any of Cox's computer systems that process dates or date-sensitive calculations are exposed to the Year 2000 Issue as these systems may recognize only the last two digits to identify the year in a date, or identify digits as an instruction. Accordingly, the year "00" may be recognized as the year 1900 rather than the year 2000, which may result in miscalculations or system failures. A computer system is deemed to be year 2000 compliant when it continues to produce understandable, accurate and predictable results which conform to the original functional specifications, regardless of the millennium change. State of Readiness - ------------------ In June 1997, Cox appointed a project team, comprised of both internal and external resources, to develop its Year 2000 initiative (the "Initiative"). The Initiative will involve, as necessary, the upgrade and replacement of affected computer systems and software applications ("IT Systems") and equipment with embedded microprocessors ("Non-IT Systems"), as well as the design and implementation of a contingency and business continuation plan. The project team has developed a plan to assess, remediate, and test its IT and Non-IT systems sufficiently in advance of the year 2000 in order to reduce the risk of an interruption in critical services as a result of the millennium date change. The scope of the Initiative includes the following systems: (1) both custom and packaged software applications (the "Applications"); (2) local- and wide-area networks, hardware, processors and operating systems (the "Infrastructure"); (3) the Cox plant, distribution network and programming components (the "Plant"); and (4) business-critical third party vendors ("External Agents"). The general phases of the Initiative common to all systems are as follows: (1) inventory of all business processes to document the Year 2000 status for each product and service; (2) assign priorities to identified items; (3) assess the Year 2000 compliance of items determined to be material to Cox; (4) repair or replace material items that are determined not to be Year 2000 compliant; (5) test material items; (6) integration testing of multiple IT and Non-IT assets, both custom and vendor-provided, to determine correct manipulation of dates and date-related data; and (7) design and implement contingency and business continuation plans for each organization and Cox location. As of September 30, 1998, the project team has completed Phases 1 through 3 for substantially all of the Applications, Infrastructure, Plant and External Agents. Applications. Applications consist of custom and packaged software. In 1995, Cox began a Company-wide business systems replacement project to meet the growth in the cable business and to meet emerging business needs. Accordingly, Cox is in the process of replacing or upgrading substantially all of its applications irrespective of the Year 2000 Issue. Cox's two most critical Applications are its common financial system and the cable operation support system. The financial system is based on packaged software from JDEdwards. This software will be upgraded to version 7.5 by the end of November 1998. Cox has made appropriate inquiries and JDEdwards has provided certification that Version 7.5 is Year 2000 compliant. Cox operates all of its cable 16 properties using the ICOMS subscriber management system licensed from Convergys, Inc. Cox has made appropriate inquiries and Convergys, Inc. has provided opinions indicating that ICOMS is Year 2000 compliant. Cox expects to have substantially all of the Applications completed through Phase 4 by December 1998. In addition, Cox is currently planning to implement Phase 5 and 6 testing procedures for the Applications in early 1999 and Phase 7 contingency and business continuation planning in mid-1999. Cox has a very limited inventory of custom or in-house developed software and anticipates that all such software will be repaired or replaced by the end of 1998, with testing procedures to begin in December 1998. Infrastructure. Infrastructure consists of local- and wide-area networks, hardware, processors and operating systems. Substantially all Infrastructure activities have been completed through Phase 3 including activities relating to hardware, operating systems and networking equipment. Cox has received recommendations from significant vendors as to the appropriate version of software needed to be Year 2000 compliant. Cox intends to remain current with all Year 2000 compliant software versions where available and expects to be completed through Phase 4 for the Infrastructure by the end of 1998. In addition, Cox is currently planning to implement Phase 5 and 6 testing procedures, as necessary, for the Infrastructure in early 1999 and Phase 7 contingency and business continuation planning in mid-1999. The project team has also conducted reviews of the Infrastructure Year 2000 exposure to Non-IT systems (i.e., elevator, automated lighting, etc.). Based upon the project team's review, Cox has concluded that exposure from Non-IT systems failing to be Year 2000 compliant is limited and does not pose a material financial risk to the Company. Plant. The Plant is comprised of an integrated distribution network providing video, voice, and data services to its customers. In 1995, Cox began to deploy fiber optic cable and to upgrade the technical quality of its hybrid fiber- coaxial broadband network facilitating the delivery of additional programming and services. As a result, substantially all of Cox's Plant equipment and software is state-of-the-art, which has helped to reduce the level of Plant Year 2000 Issues. As of September 30, 1998, Cox is substantially complete through Phase 3 for all Plant equipment and software. Certain equipment is known to require upgrades or replacement to operate properly. Some of these upgrades are not yet available from their respective vendors. Cox expects substantially all Plant activities will be completed through Phase 4 by mid-1999. Cox is currently developing testing and integration testing procedures, and will implement Phase 5 and 6 testing activity in mid-1999. Due to the nature of the Plant network, testing procedures are dependent on vendor and Cox testing performed in a non- production environment. Phase 7 contingency and business continuation planning is scheduled to commence in mid-1999. External Agents. Cox's assessment of External Agents includes a formal communication program with the Company's significant vendors to determine the extent to which Cox is vulnerable to those third parties who fail to remediate their own Year 2000 non-compliance. As of September 30, 1998, Cox had substantially completed through Phase 3 for External Agents. Cox expects to be substantially completed through Phase 4 for External Agents by early 1999. In addition, Cox is currently developing testing and integration testing procedures, including the purchase of testing programs, and will implement Phase 5 and 6 testing activity early 1999. Phase 7 contingency and business continuation planning is scheduled to commence mid-1999. With respect to customers, most of Cox's customer base consists of individual subscribers, thus, vulnerability to a few key customers is not a significant risk to Cox. Cox is not aware of any anticipated Year 2000 non-compliance by its vendors or customers that could materially affect Cox's business operations; however, Cox does not control the systems of other companies and cannot assure that such systems will be converted in a timely fashion and, if not converted, would not have an adverse effect on Cox's business operations. Like most other companies, Cox is dependent upon a variety of external suppliers including vendors providing electrical power, telephony, water, fuel for vehicles and other necessary commodities. Cox also relies upon the interstate banking system and related electronic communications for such functions as transmitting financial data from field locations to the home office and sweeping cash into 17 lockboxes. Cox is currently not aware of any material non-compliance by these vendors that will materially affect Cox's business operations; however, Cox does not control these systems and can not assure that they will be converted in a timely fashion and, if not converted, would not have an adverse effect on Cox's business operations. Costs - ----- Total costs associated with Year 2000 compliance are not expected to be material to Cox's financial position. Most of the costs associated with Cox's Applications systems upgrades and replacements are being incurred irrespective of the Year 2000 Initiative. In addition, the timing of these upgrades and replacements has not been accelerated in order to become Year 2000 compliant. As of September 30, 1998, the total incremental costs expended on the Initiative is approximately $.8 million. Cox expects that the total incremental costs of the Initiative upon completion will be approximately $3.3 million. Risks and Reasonably Likely Worst Case Scenarios - ------------------------------------------------ The failure to correct a material Year 2000 problem could result in system failures leading to a disruption in, or failure of certain normal business activities or operations. Such failures could materially and adversely affect Cox's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, Cox is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on Cox's results of operations, liquidity or financial condition. The Initiative is expected to significantly reduce Cox's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material External Agents. Cox believes that, with the implementation of new business systems and completion of the Initiative as scheduled, the possibility of significant disruptions to normal operations should be reduced. Contingency and Business Continuation Plan - ------------------------------------------ The Initiative calls for the development of suitable contingency planning for Cox's at-risk business functions. It is a function of Cox's normal business practices to address contingency issues related to the integrated distribution network in order to avoid, wherever feasible, interrupted service providing video, voice and data products to Cox's customers. The contingency planning will be revised to specifically address Year 2000 exposure with respect to product offerings in mid-1999. All statements relating to the Year 2000 made in Forms 10-K, 10-Q or Registration Statements filed by Cox with the Securities and Exchange Commission after January 1, 1996 are hereby incorporated by reference and designated as Year 2000 Readiness Disclosures. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cox is exposed to interest rate risk due to its various debt instruments. In accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," Cox estimated the fair value of its debt instruments based on discounted cash flow analyses using Cox's incremental borrowing rate for similar types of borrowing arrangements and dealer quotations. At September 30, 1998, the revolving credit facilities, commercial paper and Floating Rate Reset Notes bear interest at current market rates and, thus, approximate fair value. The effect of a hypothetical one percentage point increase in interest rates would decrease the estimated fair value of remaining debt with a carrying amount of $2,382.9 million to $2,339.7 million. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 9, 1997, three individual subscribers filed a putative class action suit in Superior Court of the State of California, County of San Diego against Cox and its cable system subsidiaries in California (the "Cox California Systems") arising out of the manner in which the Cox California Systems sell premium channel cable services. The suit alleges that the Cox California Systems unlawfully require limited basic cable customers to purchase the expanded basic services tier in order to purchase premium channels, i.e., channels sold on an a la carte basis such as Home Box Office and Showtime. The suit asserts causes of action under California antitrust and consumer protection laws. The suit seeks injunctive relief as well as an order awarding the class members compensatory damages, plus statutory damages, punitive damages, interest and attorney's fees. On February 13, 1998, the Court granted Cox's motion to stay the suit and referred it on grounds of Primary Jurisdiction to the Federal Communications Commission for consideration of issues best addressed by the FCC's expertise should the plaintiffs elect to file a complaint with the FCC. On April 14, 1998, plaintiffs filed a petition for a peremptory writ of mandate with the California Court of Appeals. The petition was denied on May 6, 1998. On May 18, 1998, the plaintiffs filed a petition for review in the Supreme Court of California which was denied on July 8, 1998. On October 1, 1988, the plaintiffs filed a Petition for Order to Show Cause with the Federal Communications Commission requesting that the Commission issue an order finding Cox to be in violation of its rules and requiring that Cox forfeit the sum of no more than $250,000 for the violation. Cox's response to the Petition is due November 16, 1998. The outcome of this matter cannot be predicted at this time. Cox and its subsidiaries in Arizona, Oklahoma, Louisiana, Florida and Las Vegas are defendants in eight putative subscriber class action suits in the respective state courts initiated between October 17, 1997 and October 26, 1998. In addition, on November 2, 1998, a ninth such suit was filed against Cox with regard to its former Indiana cable system. The suits all challenge the propriety of late fees charged by the subsidiaries to customers who fail to pay for services in a timely manner. The suits seek injunctive relief and various formulations of damages under various claimed causes of action under various bodies of state law. The actions are being defended vigorously. The outcome of these matters cannot be predicted at this time. On May 12, 1998, the United States Department of Justice filed a three- count antitrust complaint styled United States v. PrimeStar, Inc., et al., in ------------------------------- the United States District Court for the District of Columbia, naming Cox as one of twelve defendants. The complaint seeks to enjoin the consummation of a June 11, 1997 Asset Acquisition Agreement by which PrimeStar, Inc. would acquire direct broadcast satellite ("DBS") assets owned by defendants MCI Communications Corp., The News Corporation Limited, and K. Rupert Murdoch (the "Acquisition"). On October 15, 1998, PrimeStar, Inc. announced that the Acquisition would not be consummated. The parties have notified the Department of Justice and the United States District Court that the Acquisition has been abandoned. A formal stipulation of dismissal was filed on November 6, 1998. ITEM 2. CHANGES IN SECURITIES On October 1, 1998, Cox acquired a cable television system located in Las Vegas, Nevada, and certain related businesses owned by Prime South Diversified, Inc. ("PSDI") for a combination of cash and Cox stock (the "Las Vegas Acquisition") with an aggregate value of approximately $1,325.0 million, including the refinancing of certain PSDI indebtedness. As part of the consideration, Cox issued 5,667,709 shares of its Class A Common Stock and 2,418,186 shares of its Series A Convertible Preferred Stock. All of such shares were issued to a limited number of sophisticated persons and were exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of such Act. The Las Vegas Acquisition was structured as a merger of PSDI with and into Cox Communications Las Vegas, Inc., a wholly owned subsidiary of Cox ("CCLV"), with CCLV as the 19 surviving corporation. G.C. Investments and Barbara J. Greenspun, as trustee of the Unified Credit Trust created under a Declaration of Trust dated December 6, 1988, (collectively, the "Greenspun Shareholders") owned a majority interest in PSDI, and the remaining PSDI interests were held by Prime Cable of Austin, Texas, and various individual and institutional investors. The Series A Stock is a newly created series of preferred stock issued in accordance with Cox's certificate of incorporation, which authorizes 5,000,000 shares of preferred stock. All of the issued and outstanding shares of Series A Stock are held by the Greenspun Shareholders. Cox has no other issued or outstanding preferred stock. The following summary of the material terms of the Series A Stock is qualified in its entirety by reference to the Certificate of Designations of Powers, Preferences and Rights of the Series A Stock, filed as Exhibit 3.1 to the Form 8-K filed by Cox on October 15, 1998 and incorporated herein by reference. . Dividends. Holders of Series A Stock are entitled to dividends only when, and --------- to the extent that, dividends are declared on the Series A Stock by the board of directors of Cox. . Ranking. In the event that Cox liquidates, holders of Series A Stock are ------- entitled to receive $44.275 per share, plus any accrued and unpaid dividends (the "Liquidation Price"), before holders of Cox's common stock receive any distributions. . Voting. Holders of Series A Stock are entitled to one vote per share, and ------ such holders vote together with the holders of Class A Common Stock on all matters upon which holders of Class A Common Stock are entitled to vote. . Antidilution. The number of outstanding shares of Series A Stock is subject ------------ to adjustment upon the occurrence of certain diluting events which affect the number of outstanding shares of Class A Common Stock. . Pre-emptive Rights. Holders of Series A Stock have the right to purchase ------------------ additional shares of Series A Stock if Cox or its affiliates contribute assets or cash to CCLV. . Conversion. Shares of Series A Stock are convertible into shares of Class A ---------- Common Stock at the option of the holders (an "Optional Conversion") only after October 1, 2003, a change in control of Cox or notification of the liquidation of Cox, whichever first occurs. Shares of Series A Stock representing at least a majority of such shares then outstanding must be converted in any Optional Conversion, and holders of Series A Stock are entitled to a total of two Optional Conversions. Shares of Series A Stock are convertible into shares of Class A Common Stock pursuant to a formula based upon the fair market value of CCLV and the average closing price of the Class A Common Stock over a specified ten-day period (the "Average Closing Price"). Shares of Series A Stock will automatically convert into shares of Class A Common Stock if CCLV makes a distribution on its capital stock. The number of shares of Series A Stock to be automatically converted in the event of such a distribution will be determined by a formula based on the fair market value of the distribution and the Average Closing Price. In addition, upon any sale of all or substantially all of the assets of Cox, all outstanding shares of Series A Stock will automatically convert into shares of Class A Common Stock pursuant to a formula based on the fair market value of CCLV and the Average Closing Price. . Redemption. Any time after October 1, 2028 or in the event that the Greenspun ---------- Shareholders no longer hold the investment power with respect to at least 50% of the then outstanding shares of 20 Series A Stock, Cox may redeem all, but not less than all, of the outstanding shares of Series A Stock at the Liquidation Price. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 -- Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 1998: A Form 8-K dated October 1, 1998 (filed October 15, 1998) reported the closing of the acquisition of Prime South Diversified, Inc. ("PSDI") under Item 2 and included audited financial statements of PSDI as of December 31,1996 and 1997 and for each of the three years in the period ended December 31, 1997, unaudited financial statements of PSDI for the six months ended June 30, 1998 and pro forma financial statements reflecting the acquisition under Item 7. A Form 8-K dated May 5, 1998 (filed May 28, 1998) reported the issuance of a press release announcing the proposed PSDI acquisition in Item 5, and that report was amended on July 6, 1998 to file pro forma financial statements reflecting the acquisition under as Item 7(b). A Form 8-K dated July 27, 1998 (filed August 7, 1998) reported under Item 5 the completion of the sale of $200 million principal amount of its 6.40% Notes due 2008, $200 million principal amount of its 6.80% Debentures due 2028 and $250 million principal amount of its 6.15% Reset Put Securities due 2033. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cox Communications, Inc. /s/ Jimmy W. Hayes Date: November 12, 1998 ---------------------------------- Jimmy W. Hayes Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer) 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 10,277 0 155,171 (8,038) 0 0 2,234,813 0 9,179,274 0 0 0 0 (271,488) 0 (9,170,274) 0 (1,230,052) 0 389,337 312,376 0 (152,801) 1,565,223 612,414 0 0 0 0 952,809 3.51 3.49
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