<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6590
Cox Communications, 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, 30319
Georgia
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (404) 843-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Class A Common Stock, $1.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of March 10, 1999, the aggregate market value of the Class A Common Stock
held by non-affiliates of the registrant was $5,839,163,300 based on the
closing price on the New York Stock Exchange on such date.
There were 263,687,181 shares of Class A Common Stock outstanding as of March
10, 1999.
There were 13,798,896 shares of Class C Common Stock outstanding as of March
10, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders are incorporated by
reference into Part II. Portions of the Proxy Statement for the 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III.
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COX COMMUNICATIONS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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Page
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<C> <S> <C>
PART I
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 35
Item 3. Legal Proceedings.............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders............ 36
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................ 36
Item 6. Selected Consolidated Financial Data........................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 38
Item 7a. Quantitative and Qualitative Disclosure about Market Risk...... 49
Item 8. Consolidated Financial Statements and Supplementary Data....... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 80
PART III
Item 10. Directors and Executive Officers of the Registrant............. 80
Item 11. Executive Compensation......................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management. 80
Item 13. Certain Relationships and Related Transactions................. 80
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................ 80
SIGNATURES............................................................... 84
</TABLE>
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PART I
ITEM 1. BUSINESS
Cox Communications, Inc. is among the nation's largest broadband
communications companies with U.S broadband network operations and investments
in cable television programming, telecommunications and technology, and
broadband networks.
Cox's business strategy includes the development of new and advanced
communications services for its customers by capitalizing on its highly
clustered cable television systems, its industry leading position in upgrading
the technological capabilities of its broadband networks, and its commitment
to customer service. Cox believes that an integrated package of existing
multichannel video, new services such as digital video, high-speed Internet
access, local and long-distance telephone, and commercial competitive local
exchange carrier operations, will enhance its ability to acquire and retain
customers while increasing revenues per customer.
In addition, Cox has sought to utilize its expertise and position as one of
the nation's premier cable television companies to invest in programming,
telecommunications and technology companies which are complementary to Cox's
business strategy. Cox believes that these investments have contributed
substantially to the growth of its core broadband communications business and
that its leadership position in broadband communications has facilitated the
growth of these investments. Cox seeks to utilize insights gained from the
integrated operations of its cable television systems and related programming,
telecommunications and technology investments to continue its leadership in
the broadband communications industry by anticipating and capitalizing upon
long-term industry trends.
Cox is an indirect 73.3% owned subsidiary of Cox Enterprises, Inc. (CEI).
CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of
the largest media companies in the United States with consolidated revenues in
1998 of approximately $5.4 billion. CEI, which has a 101-year history in the
media and communications industry, publishes 15 daily newspapers and owns or
operates 11 television stations in addition to its interest in Cox. Through
its indirect majority-owned subsidiary, Cox Radio, Inc., CEI owns or operates
57 radio broadcast stations pending closing of previously announced
transactions. Through Manheim Auctions, CEI is also the world's largest
operator of auto auctions.
U.S. Broadband Networks
Business Strategy
Cox's strategy for its U.S. broadband networks is to capitalize on the
capabilities of its advanced broadband platform and the strength of its
current cable television business to provide its residential and commercial
customers with an integrated package of existing multichannel video and new
services, including digital video, high-speed Internet access, and local and
long-distance telephone services. Cox believes that the long-term competitive
advantages of clustering, aggressive investment in the technological
capabilities of its broadband network and commitment to customer service will
enhance its ability to continue to grow its core cable television operations
and offer new services to existing and new customers.
Clustering. As an integral part of its broadband communications strategy,
Cox has continually sought the advantages and efficiencies of operating large
cable television clusters. As of December 31, 1998, approximately 85% of Cox's
customers were served by Cox's ten largest clusters which averaged over
300,000 customers each. See "--Cable Television Business--Operating Data."
Large cable television clusters enable Cox to reduce expenses through the
consolidation of marketing and support functions and to place more experienced
management teams at the system level who are better equipped to meet the new
competitive and regulatory challenges of today's telecommunications industry.
Large operating clusters will also increase the speed and effectiveness of
Cox's new product and services deployment, enhancing its ability to increase
both customers and revenues.
In addition to strategic acquisitions of contiguous cable television systems
which expand existing operations, Cox will pursue other cable acquisitions
that are value accretive.
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Technology and Capital Improvements. Cox emphasizes high technical
standards for its cable television clusters. Cox continues to deploy fiber
optic cable and to upgrade the technical quality of its hybrid fiber-coaxial
broadband network. The result is a significant increase in network capacity,
quality and reliability, facilitating the delivery of additional programming
and services such as digital video, high-speed Internet access, and local and
long-distance telephone services. Cox's aggressive investment in its broadband
network upgrade will allow it to offer these services quickly.
Cox strives to maintain the highest technological standards in the industry.
Cox's U.S. cable television systems have bandwidth capacities ranging from 400
MHz to 750 MHz, which permits carriage of 54 to 112 analog channels. At the
end of 1998, approximately 77% of Cox's networks had bandwidth capacity of
550 MHz or 750 MHz. Cox anticipates that approximately 86% of its networks
will have bandwidth capacity of 550 MHz or 750 MHz by the end of 1999. In
Cox's ten largest systems, by the end of 1999, Cox anticipates that
approximately 80% of its customers will have access to 750 MHz capacity and
approximately 2.5 million customers will be able to receive two-way services.
In addition to increasing channel capacity, Cox's aggressive investment in
technology has improved the reliability of its service. Cox's hybrid fiber-
coaxial broadband networks had a 99.992% reliability rate in 1998, as measured
by average customer minutes of outage per year, which exceeds the BellCore
standard of 99.989% utilized by the Regional Bell Operating Companies. Cox's
fiber optic network design of ring-in-ring architecture provides significant
improvements over existing non-ring network architecture in capability,
flexibility, and reliability, without creating additional cost.
Customer and Community Service. Strong customer service is a key element of
Cox's business strategy to deliver new advanced communications services for
its customers. Cox has always been committed to customer service and has been
recognized by several industry groups as a leader in providing quality
customer service. In 1996, Cox was distinguished by J.D. Power & Associates
for achieving highest overall customer satisfaction among cable television
users in the first study on the cable industry. Cox systems have won the
"Customer is Key Award" nine times, more than all other cable companies
combined. CTAM, the marketing society of the cable and telecommunications
industries, presents this award to recognize outstanding customer service. Cox
believes that its high level of customer satisfaction will help it compete
more effectively as it has begun delivering new services such as digital
video, high-speed Internet access, and local and long-distance telephone. Cox
places special emphasis on training its customer contact employees and has
developed customer service standards and programs that exceed national
customer service standards developed by the National Cable Television
Association and the FCC.
A key element of Cox's community service is enhancing education through the
use of cable technology and programming. Cox currently participates in four
education initiatives:
1. "Cox Cable in the Classroom," which provides schools with free basic
cable service and more than 540 hours of commercial-free educational
television programming each month;
2. "Cable's High Speed Connection," branded "Cox Line to Learning" program,
a National Cable Television Association nationwide initiative in which
major cable companies are providing high-speed Internet access, free of
charge, to each accredited public and private school in their respective
communities where digital services are available;
3. Cox Model Technology Schools established by Cox in Chula Vista,
California, Omaha, Nebraska, Norfolk, Virginia, and Warwick, Rhode
Island where it is testing future broadband services, such as
interactive fiber optic links to local colleges, to determine their
value in the classroom; and
4. The Multimedia Academy established by Cox to train educators, students,
parents, and community leaders about the use of multimedia technology as
an educational tool.
Alternative Revenue Sources. Implementation of Cox's business strategy will
allow Cox to develop revenue sources ancillary to its core cable television,
telephony and high-speed Internet access businesses. In recent years, Cox has
increasingly generated revenues from additional sources such as advertising,
pay-per-view and home shopping.
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Cox derives revenues from the sale of advertising time on satellite-
delivered networks such as ESPN, MTV and CNN. Currently, Cox inserts
advertising on 20 channels in each of its cable television systems. Local
cable television advertising is often more effective and less expensive than
alternative local advertising sources. As such, Cox expects continued growth
of this revenue source. In addition, Cox participates in the national and
regional cable television advertising market through its investment in
National Cable Communications, L.L.C., a partnership which represents cable
television companies to advertisers. National Cable Communications is the
largest representation firm in spot cable advertising sales.
Cable Television Business
Cox's cable television operations represent the core element of its
integrated broadband communications strategy. Cox owns and operates 18 cable
television systems in 14 states. These clusters pass approximately 5.9 million
homes and provide service to approximately 3.7 million customers.
Cox's cable television systems offer customers packages of basic and cable
programming services consisting of television signals available off-air, a
limited number of television signals from so-called "superstations," numerous
satellite-delivered non-broadcast channels (such as Cable News Network, MTV:
Music Television, USA Network, ESPN, Arts and Entertainment Channel, The
Discovery Channel, The Learning Channel, Turner Network Television and
Nickelodeon), displays of information featuring news, weather, stock and
financial market reports and public, governmental and educational access
channels. In some systems, some of these satellite-delivered non-broadcast
services are offered at a per channel charge or are packaged together to form
a tier of services offered at a discount from the combined per channel rate.
Cox's cable television systems also provide premium television services to
their customers for an extra monthly charge. Such services (including Home Box
Office, Showtime, Starz and Cinemax) are satellite-delivered channels that
consist principally of feature motion pictures presented without commercial
interruption, sports events, concerts and other entertainment programming.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium television services, which constitute the
principal sources of revenues to Cox.
Operating Data. The following table indicates the growth of Cox's cable
television systems by summarizing basic customers, new services, the number of
homes passed by cable, premium service units and penetration levels as of
December 31 for each of the five years set forth below:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Basic customers(a)...... 3,741,608 3,235,338 3,259,384 3,248,759 1,851,726
New services(b)......... 169,731 18,941 -- -- --
--------- --------- --------- --------- ---------
Revenue Generating Units
(c).................... 3,911,339 3,254,279 3,259,384 3,248,759 1,851,726
Homes passed(d)......... 5,923,428 5,023,870 5,016,749 5,005,858 2,878,857
Basic penetration(e).... 63.2% 64.4% 65.0% 64.9% 64.3%
Premium service
units(f)............... 2,206,833 1,865,184 2,000,673 1,827,068 1,203,606
</TABLE>
- --------
(a) A home with one or more television sets connected to a cable television
system is counted as one basic service customer.
(b) New services include Cox Digital Television, Cox@Home and Cox Digital
Telephone.
(c) Each basic customer and each new service is a Revenue Generating Unit. In
certain locations, a household may purchase more than one new service,
each of which is counted as a separate Revenue Generating Unit.
(d) A home is deemed to be "passed" if it can be connected to the distribution
system without any further extension of the distribution plant.
(e) Basic customers as a percentage of homes passed by cable.
(f) Premium service units include single or multi-channel services offered for
a monthly fee per service.
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The following table is a summary of certain operating data as of December
31, 1998 for Cox's cable television clusters:
<TABLE>
<CAPTION>
Homes Basic
Passed Customers
--------- ---------
Top Ten Clusters:
<S> <C> <C>
Phoenix, AZ.......................................... 1,118,795 601,126
San Diego, CA........................................ 709,817 501,174
New England.......................................... 609,664 428,018
Hampton Roads, VA.................................... 600,984 393,693
Las Vegas, NV........................................ 509,439 298,432
New Orleans, LA...................................... 457,867 268,323
Orange County, CA.................................... 333,913 255,223
Omaha, NE............................................ 271,193 171,080
Oklahoma City, OK.................................... 208,323 121,668
Pensacola/Ft. Walton Beach, FL (a)................... 207,249 153,592
--------- ---------
Subtotal Top Ten................................... 5,027,244 3,192,329
Other Systems:
Tucson, AZ (b)....................................... 256,551 124,722
Lubbock/Midland, TX.................................. 138,064 80,111
Santa Barbara/Bakersfield, CA........................ 134,455 92,858
Gainesville/Ocala, FL................................ 121,135 88,157
Middle Georgia....................................... 107,650 71,529
Cleveland, OH........................................ 103,431 73,989
Roanoke, VA.......................................... 79,292 57,385
Humboldt, CA......................................... 43,735 31,741
--------- ---------
Subtotal Other Systems............................. 984,313 620,492
--------- ---------
Total (including Ft. Walton Beach) (a)................. 6,011,557 3,812,821
========= =========
Total (excluding Ft. Walton Beach) (a)................. 5,923,428 3,741,608
========= =========
</TABLE>
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(a) The Ft. Walton Beach cable television system (with 88,129 homes passed and
71,213 customers) is owned by TWC Cable Partners, which is 50.0% owned by
Cox and 50.0% owned by Time Warner. Cox manages the Ft. Walton Beach cable
television system as part of its Pensacola cluster. The partnership also
owns a cable television system in Staten Island, NY, that is managed by
Time Warner.
(b) Includes 31,896 homes passed and 25,517 customers for the Sierra Vista, AZ
cable television system, which is currently being marketed for sale.
Franchises. Cable television systems are constructed and operated under non-
exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of system construction, service standards
including number of channels, types of programming and the provision of free
service to schools and certain other public institutions, and the maintenance
of insurance and indemnity bonds. The provisions of local franchises are
subject to federal regulation under the Cable Communications Policy Act of
1984, as amended by the Cable Television Consumer Protection and Competition
Act of 1992 and the Telecommunications Act of 1996.
As of March 1999, Cox held approximately 189 franchises. These franchises
provide for the payment of fees to the issuing authority. The 1984 Cable Act
prohibits franchising authorities from imposing annual franchise fees in
excess of 5% of gross revenues and also permits the cable television system
operator to seek renegotiation and modification of franchise requirements if
warranted by changed circumstances. For both 1998 and 1997, franchise fee
payments made by Cox averaged approximately 4% of gross revenues.
Cox has never had a franchise revoked. The 1984 Cable Act provides for an
orderly franchise renewal process, and it establishes comprehensive renewal
procedures which require that an incumbent franchisee's
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renewal application be assessed on its own merit and not as part of a
comparative process with competing applications. A franchising authority may
not unreasonably withhold the renewal of a franchise. If a franchise renewal
is denied and the system is acquired by the franchise authority or a third
party, then the franchise authority must pay the operator the "fair market
value" for the system covered by the franchise, but with no value allocated to
the franchise itself. Cox believes that it has satisfactory relationships with
its franchising authorities.
Programming Suppliers. Cox has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of Cox's gross receipts for the
particular service. Some program suppliers provide volume discount pricing
structures or offer marketing support to Cox. Cox's programming contracts are
generally for a fixed period of time and are subject to negotiated renewal.
Cox's programming costs have increased in recent years and are expected to
continue to increase due to additional programming being provided to Cox's
customers, increased costs to produce or purchase programming, inflationary
increases and other factors. Increases in the cost of programming services
have been offset in part by additional volume discounts as a result of the
growth of Cox and its success in selling such services to its customers. Cox
believes that it will continue to have access to programming services at
reasonable cost levels.
Digital Television
Digital compression technology currently allows up to 12 digital channels to
be inserted into the space of only one traditional analog channel. Digital
compression enables Cox to increase the channel capacity of its cable
television systems by approximately 200 channels. Cox believes that the cable
television system upgrades, along with the implementation of digital
compression technology, will provide its customers with greater programming
diversity, better picture quality, improved reliability, and enhanced service.
A Cox Digital Television customer can currently receive up to 200 channels
including enhanced pay-per-view service, digital music channels, new networks
grouped by genre and an interactive program guide. Below is a summary of Cox
Digital Television operating statistics as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
--------- -------
<S> <C> <C>
Markets launched...................................... 7 1
"Digital Television Ready" homes passed............... 2,028,307 172,019
Digital customers..................................... 74,843 1,513
Digital penetration................................... 3.7% 0.9%
</TABLE>
High-Speed Internet Access
The use of computers, online services and the Internet has increased
significantly over the last few years. Cox believes in the revenue
opportunities of Internet related services and is taking advantage of these
opportunities by providing high-speed Internet access and work-at-home
services to residential customers through its residential data service,
"Cox@Home." Cox@Home delivers access to the Internet at speeds that can be up
to 100 times faster than traditional phone modems and provides unique online
content that capitalizes on the immense capacity of Cox's broadband network.
In 1997, Cox launched "Cox@Work" to provide high-speed Internet access and
work-at-home services to businesses. To enhance Cox's entry into the cable
based high-speed Internet access market, Cox acquired an interest in @Home
Corporation in August 1996. See "--Investments--Telecommunications and
Technology Investments--@Home Network." Below is a summary of Cox@Home
operating statistics as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31
------------------
1998 1997
--------- -------
<S> <C> <C>
Markets launched...................................... 8 6
"Data Ready" homes passed............................. 2,634,515 954,271
Customers............................................. 67,069 15,896
Penetration........................................... 2.5% 1.7%
</TABLE>
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Local and Long Distance Telephony
Cox utilizes the capacity and reliability of its advanced broadband network,
which will pass virtually all homes and most businesses in its markets, by
providing local telephone services and reselling long distance services. Cox
can thereby access a portion of a revenue market of approximately $180.0
billion for telephony services. In 1997, "Cox Digital Telephone" was
introduced to residential customers in Orange County, California and Omaha,
Nebraska. Below is a summary of Cox Digital Telephone operating statistics as
of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31
--------------
1998 1997
------- ------
<S> <C> <C>
Markets launched........................................... 6 2
"Telephone Ready" homes passed............................. 611,253 56,312
Customers.................................................. 27,819 1,532
Lines...................................................... 42,668 2,335
</TABLE>
Commercial Telephony and Data
Cox delivers telecommunications services to businesses through its
competitive local exchange carrier operation. Through its dedicated fiber
optic networks, Cox's competitive local exchange carrier operations provide
business customers video, telephony and high-speed Internet access services.
Below is a summary of Cox's competitive local exchange carrier operation as of
December 1998 and 1997:
<TABLE>
<CAPTION>
December 31
---------------
1998 1997
------- -------
<S> <C> <C>
Cities in operation....................................... 7 4
Buildings connected on-net................................ 530 433
Fiber route miles......................................... 3,905 2,889
Circuit switches installed................................ 8 7
Voice grade equivalent circuits........................... 322,615 251,086
</TABLE>
Investments
Cable Television Programming Investments
Cox has made substantial investments in cable television networks as a means
of generating additional interest among consumers in cable television. The
following table summarizes our significant programming investments as of
December 31, 1998:
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<TABLE>
<CAPTION>
Cox
Percentage
Ownership
Investment Description Interest
- ---------- ----------- ----------
<S> <C> <C>
Digital Cable Radio Digital audio services, including Music Choice
Associates.............. 13.6%
Discovery Communications, Owns Discovery Channel, Learning Channel,
Inc. ................... Animal Planet Network, retail and other
ancillary businesses 24.6
Flextech plc............. Cable and satellite television programming based
in the United Kingdom 12.6
GEMS Television.......... Spanish-language service targeted at women 50.0
Hits-at-Home............. Pay-per-view programming, including Viewer's
Choice 11.1
Outdoor Life Network..... Outdoor recreation-related programming 33.0
Product Information Infomercial distribution
Network................. 45.0
Speedvision Network...... Automotive, marine and aviation-related
programming 32.7
The Sunshine Network, Regional sports (Florida)
Inc. ................... 5.3
</TABLE>
Digital Cable Radio Associates. Digital Cable Radio Associates distributes
audio programming, under the brand name Music Choice, in a digital format via
coaxial cable to more than one million customers in the United States. This
service allows cable television customers to receive compact disc quality
sound in diverse music formats. Cox currently holds a 13.6% interest, with the
remaining interests held in varying proportions by General Instruments, Sony
Music Entertainment, MediaOne, Comcast, Time Warner, Adelphia Communications
and EMI Music. Cox accounts for its investment in Digital Cable Radio
Associates under the cost method.
Discovery Communications, Inc. The principal businesses of Discovery
Communications, Inc. are the advertiser-supported basic cable networks The
Discovery Channel, The Learning Channel, Animal Planet Network, Discovery
Europe, and its retail division consisting primarily of over 100 stores of The
Nature Company. The Discovery Channel provides nature, science and technology,
history, exploration and adventure programming and is distributed to customers
in virtually all U.S. cable homes. The Learning Channel broadcasts a variety
of educational and nonfiction programming. In addition, through internally
generated funding, significant investments are being made by Discovery in
building a documentary programming library. Cox holds a 24.6% interest in
Discovery, with the remaining interest held in varying proportions by Liberty
Media, NewChannels Corp. and Discovery's management. Cox accounts for its
investment in Discovery under the equity method.
Flextech plc. Cox holds a 12.6% interest, in Flextech plc, an English
publicly-held programming company. Cox accounts for its investment in Flextech
under the fair value method.
GEMS Television. GEMS Television provides Spanish language television
programming for distribution in the United States, South America and other
Spanish and Portuguese-speaking regions. The programming of GEMS Television is
produced in Venezuela, consists largely of telenovelas (soap operas) and is
targeted primarily to women in Latin America and to Spanish-speaking women in
the United States. Cox and International Television, Inc., a subsidiary of
Empresas 1-BC, Venezuela's largest media company, are equal partners in GEMS
Television. Cox accounts for its investment in GEMS Television under the
equity method.
Hits-at-Home. Hits-at-Home, which operates under the brand-name Viewer's
Choice, is a cable operator-controlled buying cooperative for pay-per-view
programming. Cox holds an 11.1% interest in Hits-at-Home, with the remaining
equity interests held in varying proportions by Time Warner, Liberty Media,
Comcast Corporation and MediaOne. Cox accounts for its investment in Hits-at-
Home under the cost method.
8
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Outdoor Life Network. Outdoor Life's programming consists primarily of
outdoor recreation, adventure and wildlife themes. Cox recognized a minimal
gain in connection with FOX/Liberty Networks' acquisition of a one-third
equity interest in Outdoor Life during May 1998. Cox accounts for its
investment in Outdoor Life under the equity method.
Product Information Network. Product Information Network is a network for
the distribution of multiple direct response television commercials or
"infomercials" through cable television systems and other television
programming outlets. Product Information Network is a joint venture between
Cox and Jones International, Ltd. Cox accounts for its investment in Product
Information Network under the equity method.
Speedvision Network. Speedvision's programming consists of a broad variety
of material for automobile, boat and airplane enthusiasts. Cox recognized a
minimal gain in connection with FOX/Liberty Networks' acquisition of a one-
third equity ownership interest during May 1998. Cox accounts for its
investment in Speedvision under the equity method.
Telecommunications and Technology Investments
Cox has made substantial investments in telecommunications and technology. A
summary of Cox's significant telecommunications and technology investments as
of December 31, 1998 is set forth below:
<TABLE>
<CAPTION>
Cox
Percentage
Ownership
Investment Description Interest
- ---------- ----------- ----------
<S> <C> <C>
@Home Network........... Nationwide network providing high-speed
internet access and unique online content via
cable modems 12.3%
AT&T Corp. ............. Long-distance telephone and other
telecommunications services 1.9
Cox Communications PCS, Offers Sprint PCS wireless phone service in
L.P. .................. Southern California and parts of Nevada and
Arizona 32.0
National Cable
Communications......... Cable television advertising sales 16.7
NextLink Nevada......... Telecommunications services in Las Vegas and
other areas of Nevada 35.0
PrimeStar, Inc. ........ DBS services 9.4
Sprint PCS.............. Wireless telecommunications 11.9(a)
Syntellect, Inc. ....... Pay-per-view ordering technology 8.6
</TABLE>
(a) In addition, Cox also owns warrants and convertible preferred stock
approximating 5.2 million common shares.
@Home Network. @Home is a national Internet "backbone" service that allows
customers access to the Internet at speeds that can be up to one hundred times
faster than traditional phone modems by using a cable modem and the cable
television broadband network. Cox holds approximately 12.3% of @Home (11.3% on
a fully diluted basis after giving effect to the exercise of certain warrants
issued to Cablevision Systems Corporation). Cox accounts for its investment in
@Home as a fair value method investment.
On January 19, 1999, Excite Inc. and @Home entered into a merger agreement
pursuant to which Excite would be merged with and into @Home. The merger is
subject to approval by Excite's and @Home's stockholders. If this merger is
consummated, Cox's percentage ownership interest in @Home will be reduced as a
result of the issuance of @Home common stock to the stockholders of Excite.
AT&T Corp./Teleport. Prior to April 1998, Cox owned 34.4% of the Class B
Common Stock of Teleport Communications Group, Inc. (Teleport), which
represented 22.4% of total shares outstanding and 32.7% of the voting power of
Teleport.
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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 July 1998, Cox exchanged its interest in Teleport for 36.9 million shares
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 a fair value method investment. In
addition, Cox recognized a pre-tax gain of $30.4 million as a result of the
sale of 3.3 million shares of AT&T common stock during the quarter ended
December 31, 1998. Cox received gross proceeds of $215.6 million related to
the sale of these shares.
Cox recorded $46.6 million, $48.6 million and $28.5 million of equity in net
losses in affiliated companies for the years ended December 31, 1998, 1997 and
1996, respectively, for its ownership in Teleport.
Also during December 1998, Cox entered into four costless collar agreements
to minimize the impact of potential adverse market risk on 10.0 million shares
of AT&T common stock. These costless collar agreements mature at various dates
through January 2003. Cox has recorded the costless collar agreements at their
estimated fair market value, with unrealized losses resulting from changes in
fair value between measurement dates of $4.3 million at December 31, 1998
recorded as a component of accumulated other comprehensive income.
Cox Communications PCS, L.P. Cox and CEI, through subsidiaries, formed a
partnership, Cox Pioneer Partnership, which is owned approximately 78.0% by
Cox and approximately 22.0% by CEI. On December 31, 1996, Cox Pioneer
Partnership and Sprint Spectrum Holdings Company, L.P. (a partnership of Cox,
TCI, Comcast and Sprint Corporation) formed Cox Communications PCS, L.P. to
operate a personal communications services system in the Los Angeles-San Diego
MTA. In February 1998, Cox Pioneer Partnership exercised its right under the
Cox PCS partnership agreement to sell a portion of its interest in Cox PCS to
Sprint Spectrum Holdings Company, L.P. This sale occurred in June 1998 and, as
of December 31, 1998, Sprint Spectrum Holdings Company, L.P., as general
partner and limited partner, owned 59.2% of Cox PCS, and Cox Pioneer
Partnership, as general partner, owned 40.8% of Cox PCS. The net proceeds from
this sale were allocated between Cox and CEI in accordance with the
partnership agreement of Cox Pioneer Partnership. Cox's share of the proceeds
was $63.2 million. In addition, Cox recognized a $62.2 million pre-tax gain as
a result of this transaction.
Cox recorded $107.8 million and $85.0 million of equity in net losses in
affiliated companies for the years ended December 31, 1998 and 1997,
respectively, related to the operations of Cox PCS. Cox also recorded $60.7
million of equity in net losses of affiliated companies for the year ended
December 31, 1996 related to the operations of the personal communications
services system prior to the formation of Cox PCS. Cox accounts for its
investment in Cox PCS under the equity method.
National Cable Communications. Cox has a 16.7% interest in National Cable
Communications, which represents cable television companies to advertisers.
National Cable Communications is the largest representation firm in spot cable
advertising sales. It enables advertisers to place advertising with selected
multiple systems on a regional or national single-source basis, and enhances
the ability of affiliated cable television systems to attract advertisers
other than purely local advertisers. The other members in National Cable
Communications are MediaOne, Time Warner, Comcast, Liberty Media and Katz
Cable Corporation. Katz Cable Corporation is also the manager of National
Cable Communications pursuant to a management agreement. Cox accounts for its
investment in National Cable Communications under the cost method.
NextLink Nevada. On October 1, 1998, Cox acquired a 35.0% interest in
NextLink Nevada in connection with the acquisition of Prime South Diversified,
Inc. In February 1999, Cox purchased an additional 5.0% interest in NextLink
Nevada. The business of NextLink Nevada consists of marketing, offering and
providing telephony services in the Las Vegas metropolitan area and elsewhere
in the state of Nevada through telephone networks owned or leased by NextLink
Nevada. In addition, Cox acquired notes receivable from NextLink Nevada
amounting to approximately $12.4 million at December 31, 1998. Principal and
interest are due quarterly. Cox accounts for its investment in NextLink Nevada
under the equity method.
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PrimeStar Partners, L.P. Prior to April 1998, Cox owned a 10.4% interest in
the PrimeStar Partners, L.P., a provider of direct broadcast satellite
services. In April 1998, Cox contributed its 10.4% partnership interest and
net assets in and operations of PrimeStar Partners, L.P. to a newly formed
entity, PrimeStar, Inc., in exchange for a 9.43% interest and $74.0 million in
cash. As a result of this transaction, Cox recorded a $37.3 million pre-tax
gain on the estimated fair market value of the common stock received and has
accounted for its investment in PrimeStar, Inc. using the cost method.
During fourth quarter 1998, Cox concluded, after careful analysis, that it
would not recover its investment and recognized $131.4 million in charges
related to its investment in PrimeStar, Inc. In January 1999, PrimeStar, Inc.
announced the sale of its direct broadcast satellite service to Hughes
Electronics Corporation (a division of General Motors Corporation and the
parent company of DirecTV, a direct broadcast satellite service competing with
Cox's cable television systems) for $1.8 billion in cash and stock. PrimeStar,
Inc. will use the $1.8 billion proceeds to extinguish outstanding obligations
and wind-down its remaining operations. The pending sale is subject to consent
of certain PrimeStar, Inc. lenders and the receipt of necessary regulatory and
other approvals.
Sprint PCS. Prior to November 1998, Cox, TCI, Comcast and Sprint engaged in
the wireless communications business, primarily personal communications
services, through a limited partnership, Sprint Spectrum L.P. in which Cox
owned a 15.0% interest. Sprint Spectrum was the holder of 29 broadband
personal communications services licenses.
Cox recorded $330.0 million, $225.2 million and $56.5 million of equity in
net losses in affiliated companies for the years ended December 31, 1998, 1997
and 1996, respectively, for its ownership interest in Sprint Spectrum.
Subsidiaries of Cox, TCI and Sprint also formed a partnership, PhillieCo
L.P. PhillieCo held a broadband personal communications services license for
the Philadelphia MTA. Prior to November 1998, Cox owned a 17.6% interest in
PhillieCo. PhillieCo was affiliated with the Sprint PCS nationwide network and
used the "Sprint PCS" trademark.
In November 1998, as a result of a reorganization by Sprint Corporation,
both the Sprint Spectrum and PhillieCo partnerships were combined into a new
publicly traded tracking stock of Sprint Corporation, Sprint PCS. Cox's equity
ownership in both Sprint Spectrum and PhillieCo was converted into common
shares, convertible preferred stock and warrants of Sprint PCS. Cox recognized
a $769.5 million pre-tax gain in connection with this reorganization in fourth
quarter 1998 based on the estimated fair market value of the common stock,
convertible preferred stock and warrants received and has accounted for these
instruments as fair value method investments.
Syntellect, Inc. Cox holds 1,150,000 shares of Syntellect, Inc. common
stock, representing approximately 8.6% of the equity of Syntellect as of
December 31, 1998. Syntellect designs, manufactures and markets a full line of
cable-specific voice and data products and services. Applications include
inbound and outbound call processing, pay-per-view ordering, information
management and voice production services. Cox accounts for its investment in
Syntellect as a fair value method investment.
Broadband Network Investments
Telewest Communications plc. At December 31, 1998, Cox had an 11.9%
ownership interest in Telewest Communications plc, a company that is currently
operating and constructing cable television and telephony systems in the
United Kingdom. In December 1997, Cox recognized a $183.9 million charge due
to the decline in the fair market value of Telewest considered to be other-
than-temporary. In January 1999, Cox sold its entire interest in Telewest and
received $727.9 million in proceeds resulting in a pre-tax gain of $400.8
million.
TWC Cable Partners. Cox and Time Warner each have a 50.0% ownership interest
in a joint venture which owns two cable television systems in Fort Walton
Beach, Florida and Staten Island, New York. As of December 31, 1998, these
systems passed approximately 207,000 homes and provided service to
approximately 154,000 customers. The Ft. Walton Beach system is managed as
part of Cox's Pensacola cluster
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and the Staten Island system is managed by Time Warner. Cox accounts for its
investment in TWC Cable Partners under the equity method.
Competition
Each of Cox's major business segments faces competition in varying forms.
Cable television faces competition from other providers of video and
entertainment. Telephone services face competition from incumbent and new
entrant providers of landline and wireless communications services. Wireless
services face competition from incumbent and recently-authorized cellular,
personal communications services and specialized mobile radio providers
commonly known as SMR systems.
Cable Television Competition
Cable television service was first offered as a means of improving
television reception in markets where terrain factors or remoteness from major
cities limited the availability of off-air television. In some of the areas
served by Cox's systems, a substantial variety of television programming can
be received off-air or otherwise. The extent to which cable television service
is competitive depends upon the cable television system's ability to provide a
greater variety of programming than is available off-air. The cable television
systems owned by Cox compete with a number of different sources of news,
information and entertainment, including:
. local television broadcast stations that provide free off-air programming
which can be received in many communities by using a roof-top antenna and
television set;
. satellite program distributors that transmit satellite signals containing
video programming, data and other information to receiving dishes of
varying sizes located on the customer's property;
. satellite master antenna television systems, commonly known as SMATV or
satellite TV systems, which serve condominiums, apartment and office
complexes and private residential developments, but do not use or cross
public rights-of-way;
. multichannel, multipoint distribution service operators, commonly known as
MMDS or wireless cable operators, which use low-power microwave frequencies
to transmit video programming and other information over-the-air to
subscribers;
. interactive online computer services;
. newspapers, magazines and book stores;
. movie theaters;
. live concerts and sporting events; and
. home video products, including videotape cassette recorders.
Since Cox's U.S. cable television systems operate under non-exclusive
franchises, other companies commonly known as overbuilders may obtain
permission to build cable television systems in areas where Cox operates. To
date, the extent of actual overbuilding in these areas has been relatively
slight, and fewer than 2% of Cox's total homes passed are overbuilt at this
time. While Cox believes that the current level of overbuilding has not had a
material impact on its operations, it is unable to predict the extent to which
adverse effects may occur in the future as a result of overbuilds.
Satellite TV systems transmit signals by satellite to receiving facilities
located on customers' premises such as condominiums, apartment and office
complexes and other private residential developments. A private cable
television system normally is free of the regulatory burdens imposed on
franchised cable television systems. The Telecommunications Act of 1996
broadens the definition of satellite TV systems not subject to regulation as a
franchised cable communications service. The operators of these private
systems often enter into exclusive agreements with apartment building owners
or homeowners' associations that may preclude operators of franchised cable
television systems from serving residents of such private complexes, although
some states have enacted laws to provide franchised cable systems access to
such private complexes. Courts have reviewed challenges to these laws and have
reached varying results. Cox is unable to predict the extent to which
additional competition from these services will materialize in the future or
the impact such competition would have on
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Cox's operations. However, Cox is continuing to develop competitive packages
of services (Cox Digital Television, Cox@Home and Cox Digital Telephone) to
offer these residential and commercial developments.
In recent years, Congress enacted legislation and the FCC has initiated new
policies and authorized new technologies to provide a more favorable operating
environment for new and existing technologies that provide, or have the
potential to provide, substantial additional competition to cable television
systems. These technologies include, among others, direct broadcast satellite
service, commonly known as DBS service, whereby signals are transmitted by
satellite directly to small receiving dishes located on the customer's
property. High-powered direct-to-home satellites have made possible the wide-
scale delivery of programming to individuals throughout the United States
using roof-top or wall-mounted antennas. According to the FCCs Fifth Annual
Report regarding the status of competition in the video programming market,
medium and high-power satellites provided video programming to over 7.2
million subscribers as of June 1998 DBS providers typically offer to their
subscribers more than 200 channels of programming including:
. news channels;
. movies;
. broadcast stations;
. live concerts and sporting events; and
. other program services similar to those program services provided by cable
television systems.
DBS systems use:
. video compression technology to increase significantly the channel capacity
of their systems; and
. digital technology to improve significantly the technical quality of the
signals transmitted to subscribers.
DBS service currently has certain competitive advantages and disadvantages
compared to cable service. The advantages of DBS include more programming and
greater channel capacity
The disadvantages of DBS service compared to cable service include:
. a lack of local programming and local service; and
. higher additional outlet costs.
Currently, satellite program providers are only authorized to provide the
signals of television network stations to subscribers who live in areas where
over-the-air reception cannot be received. Congress is presently considering
proposals that will enhance the ability of DBS providers to transmit local
broadcast signals to local markets which, if adopted, will likely improve the
competitive position of DBS providers against cable operators.
The availability of reasonably-priced home satellite dish earth stations,
commonly called HSDs, enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. Furthermore, the Cable Television Consumer Protection Act of 1992
contains provisions, which the FCC has implemented with regulations, to
enhance the ability of cable competitors to purchase and make available to HSD
owners certain satellite-delivered cable programming at competitive costs. The
1996 Act and FCC regulations implementing that law preempt certain local
restrictions on the use of home satellite dish earth stations and roof-top
antennae to receive satellite programming and over-the-air broadcasting
services. Recently, the FCC revised its rules to extend the prohibition on
local restrictions that hamper consumer use of television antennas, small
satellite dishes, and wireless cable antennas to include viewers who rent
property and desire to use antennas in areas where they have "exclusive use,"
including balconies, patios, gardens, and yards exclusively used by the
renter.
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Programming is currently available to the owners of home satellite dish
earth stations through conventional, medium and high-powered satellites.
PrimeStar, a consortium comprised of cable operators including Cox and a
satellite company, commenced operation in 1990 of a medium-power DBS satellite
system using the Ku portion of the satellite frequency spectrum and currently
provides service consisting of approximately 160 channels of programming,
including broadcast signals and pay-per-view services. Two major companies,
DirecTV and EchoStar Communications Corporation, are currently offering
nationwide high-power DBS services. DirecTV and Primestar recently reported
that DirecTV and its parent company are acquiring Primestar's medium-power DBS
business and the high-power DBS business of Tempo, a subsidiary of Primestar.
EchoStar recently announced that it is acquiring a high-power DBS license from
MCI Telecommunications Corporation and two DBS satellites currently under
construction from News Corp. Various agencies of the federal government must
still approve these transactions; however, if they are completed, DirecTV and
EchoStar will significantly enhance the number of channels on which they can
provide programming to subscribers and will improve significantly their
competitive positions against cable operators. Cox is unable to predict the
impact DirecTV's and EchoStar's enhanced operations may have on its business
and operations as a result of these transactions. The FCC has initiated a DBS
rulemaking proceeding, which, among other issues, requests comments on whether
the FCC should implement cross-ownership restrictions between DBS and cable
television operators.
The degree to which DBS service providers will be able to compete with the
cable television industry will depend on, among other factors, the
availability of reception equipment at reasonable prices and whether DBS
providers will be permitted to offer local broadcast signals in their program
packages. Although it is not possible at this time to predict the likelihood
of success of any DBS services venture, DBS may offer substantial competition
to cable television operators.
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service commonly known
as MMDS or wireless cable systems, which are licensed to serve specific areas
using low-power microwave frequencies to transmit video programming over-the-
air to subscribers. Recent amendments to the FCC's rules will permit reverse
path or two-way transmission over wireless facilities. This development, along
with the use of digital compression technology, will enable wireless cable
systems to deliver more channels and additional services. BellSouth
Entertainment, a Bell South-affiliated company, recently commenced wireless
cable service in the New Orleans market using wireless cable technology and
offering a basic package of over 160 local, cable, satellite and CD music
channels. Cox has initiated the introduction of new programming services in
response to the increasing competitive environment in which the New Orleans
system operates. A wireless cable operator is also authorized or has commenced
to provide service in several California communities where Cox operates. The
FCC also has awarded licenses in the 28 GHz band for a new multichannel
wireless video service similar to MMDS called Local Multipoint Distribution
Service, commonly known as LMDS, which is capable of transmitting voice as
well as video transmissions. The FCC has imposed cross-ownership restrictions
of these frequencies by cable operators and telephone companies which were
upheld by the United States Court of Appeals for the District of Columbia
Circuit. For a three-year period until the year 2000, cable operators and
telephone companies will be precluded from operating on these frequencies in
the same authorized or franchised service areas in which they provide service.
Cox is unable to predict whether wireless video services will have a material
impact on its operations.
The 1996 Act repeals the cable/television cross-ownership ban adopted in the
Cable Communications Policy Act of 1984, and contains restrictions on
telephone companies buying out incumbent cable operators in a telephone
company's service area, especially in suburban and rural markets. The 1996 Act
enables common carriers to provide video programming services as either cable
operators or open video system (OVS) operators (see "--Legislation and
Regulation").
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. The 1996
Act directed the FCC to establish, and the FCC has adopted, regulations and
policies for the issuance of licenses for digital television, commonly known
as DTV, to incumbent television broadcast licensees. DTV is expected to
deliver high definition television pictures, multiple digital-quality
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program streams, as well as CD-quality audio programming and advanced digital
services, such as data transfer or subscription video. The FCC has also
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and to businesses. The FCC also permits
commercial and non-commercial FM stations to use their subcarrier frequencies
to provide non-broadcast services, including data transmissions. The FCC
established an over-the-air Interactive Video and Data Service that will
permit two-way interaction with commercial and educational programming along
with informational and data services. Telephone companies and other common
carriers also provide facilities for the transmission and distribution of data
and other non-video services.
Cox's cable systems offer interactive online computer services. Cox's cable
systems will compete with a number of other companies, many of whom have
substantial resources, such as existing Internet service providers, commonly
known as ISPs, and local and long distance telephone companies. Recently, a
number of ISPs have requested local authorities and the FCC to provide access
rights to cable television systems' broadband infrastructure so that they may
be able to deliver their services directly to cable television subscribers. In
a recent report, the FCC declined to institute a proceeding to examine this
issue, and concluded that alternative means of access are or soon will be made
available to a broad range of ISPs. Because the FCC believes the marketplace
is working and expanding consumer choice for broadband services, it declined
to take action on ISP access to broadband cable facilities, and the FCC
indicated that it would continue to monitor this issue. Several local
jurisdictions also are reviewing this issue.
Telephone companies are accelerating the deployment of Asymmetric Digital
Subscriber Line Technology commonly known as ADSL. These companies report that
ADSL technology will allow Internet access to subscribers at peak data
transmission speeds equal to or greater than that of modems over conventional
telephone lines. Several of the Regional Bell Operating Companies have
requested the FCC to fully deregulate packet-switched networks (a type of data
communications in which small blocks of data are independently transmitted and
reassembled) to allow them to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. Cox cannot predict the likelihood of success of
the online services offered by these competitors, ISP attempts to gain access
to the cable industry's broadband facilities, or the impact of those
developments on Cox's business.
Telephony Competition
Landline Telecommunications Services. While the current switched voice and
data telecommunications market is dominated by local telephone companies, also
known as incumbent LECs, the 1996 Act presents new opportunities for new
entrants into these markets. Incumbent LECs provide a wide range of local
telecommunications services and equipment to customers, as well as providing
originating and terminating access to their local networks to long distance
carriers and mobile radio service providers. Because incumbent LECs
historically have had exclusive state franchises by law to provide telephone
service, they have established long-term, exclusive relationships with their
customers. Under the new law, and subject to certain limitations for rural
LECs, the FCC is directed to preempt any state law or regulation that acts to
prevent new competitive entry into incumbent LEC markets.
The 1996 Act represents the most comprehensive reform of the nation's
telecommunications laws since the Communications Act of 1934. The 1996 Act is
intended to open local exchange markets to competition, which should result in
a substantial increase in Cox's business opportunities to deliver telephony
over its broadband networks. Among its more significant provisions, the 1996
Act:
. removes legal barriers to entry in local telephone markets;
. requires incumbent LECs to "interconnect" with competitors, including the
provision of necessary elements for local competition such as telephone
number portability;
. establishes procedures for incumbent LEC entry into new markets such as
long distance and cable television;
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. allows for the relaxation of regulation of telecommunications services
provided by incumbent LECs and all other telecommunications service
providers; and
. directs the FCC to establish an explicit subsidy mechanism for the
preservation of universally affordable telephone service.
Under the 1996 Act, new landline entrants will become subject to additional
federal regulatory requirements when they provide local exchange service in
any market. The 1996 Act imposes a number of access and interconnection
requirements on all LECs, with additional requirements imposed on incumbent
LECs. Specifically, the 1996 Act required the FCC to implement rules under
which all LECs must provide telephone number portability, dialing parity,
reciprocal compensation for transport and termination of local traffic, resale
and access to rights of way. The 1996 Act also requires state commissions to
review and approve voluntarily negotiated interconnection agreements and to
arbitrate compulsory interconnection negotiations between new entrants and
incumbent LECs. These requirements also place burdens on new entrants that may
benefit other competitors. In particular, the resale requirement means that a
company could seek to resell the facilities of a new entrant without making a
similar investment in facilities.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The
1996 Act also limits the FCC's ability to review incumbent LEC tariff filings.
These changes will increase the speed with which the LECs are able to
introduce new service offerings and new pricing of existing services, thereby
increasing their flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long-
distance carriers, microwave carriers, wireless service providers, re-sellers
and private networks built by large end-users or groups of these entities in
combination.
On August 1, 1996, the FCC adopted a report and order promulgating rules to
implement the 1996 Act's provision that obligates competitive LECs and
incumbent LECs to interconnect their networks. The Local Competition Order
adopts a methodology to establish prices that are consistent with the 1996 Act
for interconnection, compensating carriers for completing local calls,
unbundled elements and resale of incumbent LEC services. The Local Competition
Order adopts a national pro-competitive framework for interconnection but
leaves to the individual state commissions the task of implementing the FCC's
rules as part of their review of interconnection agreements. The states are
required to base rates for interconnection, compensation for completing local
calls and the purchase of incumbent LEC unbundled network elements on an
incremental cost methodology established by the FCC, called Total Element
Long-Run Incremental Cost (TELRIC). Incumbent LECs may present the states with
TELRIC cost studies, while the FCC adopted interim "default" rates which the
states could apply pending state review of TELRIC studies. Additionally, the
FCC interpreted a non-discrimination provision in the 1996 Act to allow
carriers to request that the incumbent LEC make available to them under
identical terms and conditions any interconnection, service or network element
contained in an approved agreement between the incumbent LEC and another
carrier (known as the "pick and choose" rule).
Any petitions for reconsideration of the FCC's Local Competition Order
remain pending at the FCC. The Eighth Circuit Court of Appeals in an opinion
in 1997 overturned many of the interconnection rules affecting LECs, including
most aspects of the FCC's pricing rules, intrastate dialing parity rules,
certain rules governing unbundled elements and the "pick and choose" rule on
the belief that the FCC lacked the authority to impose rules upon state
commissions. The government appealed the Eighth Circuit's opinion and on
January 25, 1999, the Supreme Court upheld the FCC's interconnection rules in
all respects relevant to Cox. The Court:
. upheld the FCC's jurisdiction to set the pricing methodology for the
purchase of unbundled network elements and resale, as well as the FCC's
right to define unbundled network elements broadly;
. affirmed the FCC's power to forbid incumbent LECs from separating network
elements that are normally provisioned together;
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. upheld the FCC's rule which allows carriers to request that the incumbent
LEC make available to them any interconnection, service or network element
contained in an approved agreement to which the LEC was a party under the
same terms and conditions, thereby allowing carriers to adopt provisions
found in other interconnection agreements; and
. overturned the FCC criteria governing when proprietary network elements
must be unbundled by an incumbent LEC.
Significantly, the Court did not overturn any of the FCC's specific
determinations about unbundled network elements, but only the methodology by
which those determinations were made. The FCC has informally announced its
intention to quickly review its original determinations on the availability to
competitors of proprietary network elements. As a primarily facilities-based
provider, Cox relies on very few of the incumbent LEC unbundled network
elements to provide its telecommunications services.
The Local Competition Order was the first part in a "trilogy" of orders that
will reform access pricing and universal service consistent with the 1996
Act's goal of encouraging competition. As described below, the FCC also issued
orders in 1997 that were intended to substantially reduce the prices incumbent
LECs charge for interstate access services in separate proceedings on reform
of the current access charge regime and of current universal service
procedures.
July 1996, the FCC released an Order promulgating rules implementing the
1996 Act's directive for local telephone number portability (the "Number
Portability Order"). Under the Number Portability Order and several subsequent
orders in that proceeding, the FCC:
. ordered all LECs to begin phased development of a long-term service
provider portability method in the 100 largest Metropolitan Statistical
Areas (MSAs) no later than October 1, 1997;
. ordered all LECs to complete deployment in those MSAs by March 31, 1998 in
areas where other carriers have requested the availability of portability;
and
. ordered each LEC after March 31, 1998, to make number portability available
within specified periods, but no longer than six months, after receiving a
specific request by another telecommunications carrier in areas outside the
100 largest area MSAs.
Several LECs have petitioned the FCC for additional time to implement
portability in certain markets due to difficulties in performing required
equipment upgrades and the failure of a vendor to provide necessary database
services. The FCC granted several of these requests for a limited period of
time.
In February 1999, the FCC also granted a request to delay implementation of
service provider local number portability for the broadband commercial mobile
radio service (CMRS) until November 24, 2002. Until long-term service provider
number portability is available, all LECs must provide currently available
number portability measures as soon as reasonably possible after a specific
request from another carrier. Because new carriers are at a competitive
disadvantage without telephone number portability, the Number Portability
Order should enhance Cox's ability to offer service in competition with the
incumbent LECs. It is uncertain how effective these regulations will be in
promoting cost effective and efficient number portability.
On May 12, 1998, the FCC outlined general standards for LECs to use in
determining which costs are carrier specific and directly related to providing
local number portability. The FCC adopted a two-part test that requires
carriers to show the costs:
. would not have been incurred "but for" the implementation of local number
portability; and
. were incurred "for the provision of" number portability services.
These costs may be recovered either from a carrier's customers or other
carriers that use an incumbent LEC's database to route calls to the correct
carrier. The FCC directed incumbent LECs to file local number portability
tariffs, and the FCC is in the process of addressing the type of costs
incumbent LECs may recover from providers as part of the local number
portability tariff review. Many incumbent LECs have asked the FCC to
reconsider its local number portability cost recovery rules which they view as
too limited. The Number Portability Order is subject to appeals pending before
the Tenth Circuit Court of Appeals. The FCC has notified
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carriers that they must report their revenues to the regional number
portability administrator, Lockheed Martin IMS, by April 16, 1999. Currently,
Cox will be required to contribute to the number portability cost recovery
mechanism in the fourth quarter 1999 but the amount of that contribution is
uncertain.
The 1996 Act mandated creation of a Federal-State Joint Board regarding
universal service and subsequent action by the FCC. In the fall of 1996, the
Joint Board proposed a new regime for funding universal telephone service and
for distributing universal service subsidies. The FCC received public comment
on that proposal and adopted a Universal Service Order in the Universal
Service proceeding on May 7, 1997. The recommended decision proposed, and the
Universal Service Order adopted:
. specific explicit subsidy programs to replace the previous subsidies for
high cost carriers and for low income consumers;
. new subsidies for access to telecommunications services; and
. Internet access services and internal connections for schools and libraries
and new subsidies for telecommunications services for rural health care
facilities.
Under the Universal Service Order, any telecommunications carrier that
provides all of the services that fall within the definition of "universal
service" would be eligible to apply to a state commission to receive subsidies
for providing these services in high cost areas. Entities that provide
telecommunications services, internal connections or Internet services used by
eligible schools and libraries are also able to provide these services on a
discounted basis with repayment from a federal schools and libraries fund. The
FCC has not identified subsidies for high cost areas generally or adopted
final rules for subsidies to rural carriers. These topics are the subject of
ongoing proceedings that are expected to continue through 1999. As part of
this process, the FCC is developing a "cost proxy" model intended to identify
those markets and carriers in need of subsidies to maintain universal service.
Funding for the federal universal service subsidies will come from mandatory
payments imposed on all telecommunications carriers (with limited exceptions).
Under the proposed contribution factors for the first quarter of 1999, Cox
will be required to contribute an amount equal to 0.58% of its total
telecommunications revenues and an additional 3.18% of its interstate
telecommunications revenues to the federal universal service fund. In addition
to the federal universal service plan, it is likely that most or all states
will adopt their own universal service support mechanisms.
Although the FCC has acted on many petitions for reconsideration of the
Universal Service Order, many other petitions for reconsideration remain
pending. The Universal Service Order also is the subject of pending appeals by
incumbent LECs, wireless service providers and state regulators in the United
States Court of Appeals for the Fifth Circuit.
Various challenges to the Universal Service Order are before the FCC,
ranging from the legality of the assessment program to the manner in which
telecommunications carrier mandatory funding contributions are assessed. The
Court heard oral argument on December 1, 1998. A judicial determination
adverse to the FCC could result in changes to the structure and composition of
carrier support payments required for federal universal service programs. The
ultimate resolution of the legality of federal universal service rules could
affect carrier contribution obligations to both federal and state universal
service programs. Many states are moving forward developing (or already have
in place) state universal service fund programs under which Cox contributes.
It is not likely there will be major changes in either federal or state
universal service programs until the Fifth Circuit issues a decision.
The FCC submitted a report to Congress in April 1998 stating that some
Internet telephony services previously understood to be exempt from universal
service assessments, because they are classified for regulatory purposes as
information services, should be regulated as telecommunications services and
required to contribute to universal service funds. The FCC also indicated that
for the first time it will be exploring ways to assess universal service
contributions on companies which build their own networks. However, the FCC
has not adopted
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rules to implement these conclusions, preferring instead to apply these
conclusions on a case-by-case basis. Depending upon how these new policies are
applied in particular cases, it could have an impact on the universal service
contributions made by Cox.
The FCC has also initiated a proceeding to consider whether to adopt rules
governing the manner in which carriers disclose end user charges to recover
their mandatory contributions to universal service programs. The FCC's "Truth
in Billing" proceeding may impact the disclosures that all carriers, including
Cox, provide to their customers in their bills whenever they pass through
universal service charges as a bill line item. The FCC has not adopted final
rules in this proceeding.
While not directly required under the 1996 Act, the FCC also adopted an
order intended to reform interstate access charges that are generally
acknowledged to contain subsidy elements (the "Access Reform Order"). The
Access Reform Order modified the previous access charge system by shifting
some costs from per-minute charges to flat charges and through other changes.
The FCC also simultaneously adopted an order that reduced access charges under
the existing rate regulation regime. The Access Reform Order also affirmed the
FCC's previous determination that interstate access charges should not be
imposed on enhanced services traffic such as Internet access traffic. The FCC
is continuing its review in this area and may take additional action to reform
access charges this year.
On February 25, 1999, the FCC adopted an order addressing the jurisdictional
nature of dial-up traffic delivered to ISPs. The Commission announced that
dial-up traffic delivered to ISPs is largely interstate. The Commission
stated, however, that its action was not intended to dislodge previous state
decisions interpreting interconnection agreements between incumbent LECs and
competitive LECs to require reciprocal compensation between two local carriers
jointly delivering dial-up traffic to ISPs. The FCC also adopted a notice of
proposed rulemaking requesting comment on the approach the FCC should take on
a forward-looking basis toward intercarrier compensation for dial-up traffic
delivered to ISPs.
Enforcement of some of Cox's interconnection agreements may be affected by
this decision. Incumbent LECs could refuse to pay Cox reciprocal compensation
for dial-up traffic delivered to ISPs. State commissions may decide to
reconsider their previous decisions in light of the Commission's findings.
Accordingly, there can be no assurance that Cox will recover reciprocal
compensation for traffic delivered to ISPs that it believes it is entitled to
under some of its existing contracts with incumbent LECs.
On February 19, 1998, the FCC adopted new rules concerning the privacy of
customer information maintained by telecommunications providers. These rules
will apply to all telecommunications providers and will permit carriers to use
such information for marketing services within specified categories, such as
local service or long distance service, without specific customer permission.
Use of such information to market services in a different category of service
will require affirmative oral or written customer permission.
The FCC has delayed the implementation of portions of its rules that relate
to how carriers identify the customer information which a customer has
restricted, particularly the portion of the rules that requires all carriers
to develop an electronic auditing and compliance system. This delay will
extend for six months after the date that the rules are reconsidered, which is
currently scheduled for an FCC meeting on February 25, 1999.
Other Personal Communications Service Providers. Sprint PCS and Cox PCS will
face direct competition for personal communications service subscribers from
other licensed personal communications service systems within its markets.
There are potentially six commercial mobile radio service providers (not
counting resellers and marketing agents for licensees) in each personal
communications service service area. Three licensees will each hold 30 MHz of
personal communications service spectrum, one of which is licensed for a basic
trading area, and the remaining three licensees will hold 10 MHz of personal
communications service spectrum. It is likely that some of the 10 MHz licenses
will be used to provide niche services or will be purchased by existing
cellular providers for added spectrum, while the 30 MHz licenses will be used
to offer a broad range of voice, data and related communications services, and
may ultimately develop into services that include a wireless local loop
functionality.
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Sprint PCS may also face competition from other current or developing
technologies. SMR systems, such as those used by taxicabs, as well as other
forms of mobile communications service, may provide competition in certain
markets. SMR systems are permitted by the FCC to be interconnected to the
public switched telephone network and are significantly less expensive to
build and operate than cellular telephone systems. SMR systems, however, are
licensed to operate on substantially fewer channels than personal
communications services systems and generally lack personal communications
services's ability to expand capacity through frequency reuse by using many
low-power transmitters and micro-cells to hand off calls.
Nextel, which holds a considerable number of SMR licenses across the nation,
is implementing its digital system to use available SMR spectrum to provide a
range of mobile radio communications services. This service, commonly known as
Enhanced Specialized Mobile Radio (ESMR) service is regulated in a manner that
reflects its potential interchangeability with cellular and personal
communications services services. In 1994, the FCC decided to license SMR
systems in the 800 MHz bands for wide-area use, thus increasing potential
competition with cellular and personal communications services. In 1997, the
FCC completed the auction of contiguous spectrum blocks for ESMR. This auction
resulted in Nextel winning rights to a significant number of additional SMR
licenses. The FCC is expected to commence a second auction of SMR spectrum on
June 8, 1999.
The results of these auctions may further the potential of digital SMR
services to compete with cellular and personal communications services.
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies may materially affect the cable
television industry. The following is a summary of federal laws and
regulations affecting the growth and operation of the cable television
industry and a description of certain state and local laws.
A federal law known as the Communications Act of 1934, as amended,
establishes a national policy to guide the development and regulation of cable
television systems. This Act, as it relates to the cable television industry,
was amended by the Cable Communications Policy Act of 1984 and the Cable
Television Consumer Protection and Competition Act of 1992. The 1984 Cable Act
established comprehensive national standards and guidelines for the regulation
of cable television systems and identified the boundaries of permissible
federal, state and local government regulation. The 1992 Cable Act permitted a
greater degree of regulation of the cable industry, and in particular
subjected cable television systems to regulation of the rates charged
customers for basic and certain cable programming services.
In 1996, a new law, the Telecommunications Act of 1996, further amended the
Communications Act, including the 1984 and 1992 Cable Acts, and established
the most comprehensive reform of the nation's telecommunications laws since
the adoption of the Communications Act in 1934. The articulated long-term goal
of this 1996 amendment to the Communications Act is to promote competition and
decrease governmental regulation of various communications industries,
including the cable television industry. However, until the desired
competition develops, various federal, state and local governmental units will
have broad regulatory authority and responsibilities over telecommunications
and cable television matters. The courts, especially the federal courts, will
continue to play an important oversight role as the statutory and regulatory
provisions are interpreted and enforced by the various federal, state and
local governmental units.
The 1996 Act is intended, in part, to promote substantial competition in the
marketplace for telephone local exchange service and in the delivery of video
and other services and permits cable television operators to enter the local
telephone exchange market. Cox's ability to competitively offer telephone
services may be adversely affected by the degree and form of regulatory
flexibility afforded to LECs, and in part, will depend upon the final outcome
of the appeals of various FCC orders, including the Universal Service Order
and the Number Portability Order. The 1996 Act also repeals the cable
television/telephone cross-ownership ban adopted in the 1984 Cable Act and
permits local telephone companies commonly known as LECs and other service
providers to provide video programming.
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The most far-reaching changes in communications businesses will result from
the telephony provisions of the 1996 Act. These provisions promote local
exchange competition as a national policy by eliminating legal barriers to
competition in the local telephone business and setting standards to govern
the relationships among telecommunications providers, establishing uniform
requirements and standards for entry, competitive carrier interconnection and
unbundling of LEC monopoly services. The statute expressly preempts any legal
barriers to competition under state and local laws. Many of these barriers had
been lifted by state actions during the early 1990s, but the 1996 Act
completes the task. The 1996 Act also establishes new requirements to maintain
and enhance universal telephone service and subjects telecommunications
providers to new obligations to maintain the privacy of customer information.
Other parts of the 1996 Act also will affect cable operators. The 1996 Act
directs the FCC to revise the current pole attachment rate formula. This will
result in an increase in the rates paid by entities, including cable
operators, that provide telecommunication services. (Cable operators that
provide only cable services are unaffected.) The 1996 Act also contains
provisions regulating the content of video programming and computer services.
Specifically, the new law prohibits the use of computer services to transmit
"indecent" and "obscene" material to minors. The U.S. Supreme Court has held
that these computer-related provisions are unconstitutional to the extent they
regulate the transmission of indecent material. Under the 1996 Act, a
franchising authority may not require a cable operator to provide
telecommunications services or facilities, other than an institutional
network, as a condition to a grant, renewal, or transfer of a cable franchise,
and franchising authorities are preempted from regulating telecommunications
services provided by cable operators and from requiring cable operators to
obtain a franchise to provide such services. The 1996 Act also repeals the
1992 Cable Act's anti-trafficking provision which generally required the
holding of cable television systems for three years.
It is premature to predict the effect of the 1996 Act on the cable industry
in general or Cox in particular. The FCC was required to undertake numerous
rulemaking proceedings to interpret and implement the 1996 Act. Most of these
rulemakings have been completed, but are subject to pending petitions for
reconsideration, appeals, or both. It is not possible at this time to predict
the outcome of those proceedings or their effect on Cox.
The Communications Act allocates principal responsibility for enforcing
federal policies between the FCC, state and local governmental authorities.
The FCC and state regulatory agencies regularly conduct administrative
proceedings to adopt or amend regulations implementing the statutory mandate
of the Communications Act. At various times interested parties to these
administrative proceedings have challenged the new or amended regulations and
policies in the courts with varying levels of success. Cox expects that
further court actions and regulatory proceedings will occur and will refine
the rights and obligations of various parties, including the government, under
the Communications Act. The results of these judicial and administrative
proceedings may materially affect the cable industry and Cox's business and
operations. In the following paragraphs, the federal laws and regulations
materially affecting the growth and operation of the cable industry are
summarized. A brief description of certain state and local laws is also
provided.
Cable Television Regulation. The Communications Act and the regulations and
policies of the FCC affect significant aspects of Cox's cable television
system operations, including:
. subscriber rates;
. the content of the programming Cox offers to subscribers, as well as the
manner in which Cox markets its program packages to subscribers;
. the use of Cox's cable systems' facilities by the local franchising
authorities, the public and other unrelated companies;
. franchise agreements with local governmental authorities;
. cable system ownership limitations and prohibitions;
. the use of utility poles and conduit; and
. compliance with technical standards.
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The federal laws and regulations relating to these and other areas materially
affecting Cox's cable operations are summarized in the paragraphs below.
Rate Regulation. The Communications Act limits the ability of cable
television systems to raise rates for basic services and equipment, as well as
certain non-basic cable programming services. The Communications Act
authorizes rate regulation for certain cable services and customer equipment
in communities that are not subject to "effective competition," as defined by
federal law. The Communications Act and the FCC's regulations prohibit the
regulation of cable television operators' rates where comparable video
programming services, other than DBS, are offered by local telephone
companies, or their affiliates, or by third parties using the local telephone
company's facilities, or where "effective competition" is established as
defined by federal law. Under the effective competition standard implemented
by the 1992 Cable Act, most cable television systems became subject to rate
regulation.
Where there is no effective competition to the cable television operator's
services, the Communications Act gives local franchising authorities the
responsibility to regulate the monthly rates charged by the operator for:
. the lowest level of programming service offered by the cable television
operator, typically called basic service, which includes the local
broadcast channels and any public access or governmental channels that are
required by the operator's franchise; and
. the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control units.
Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first obtain FCC certification to regulate by:
. submitting certain general information to the FCC about the community and
the cable television operator;
. following a simplified FCC certification procedure; and
. agreeing to follow established FCC rules and policies when regulating the
operator's rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines and
rate forms that Cox and the local franchising authority must use in connection
with the regulation of basic service and equipment rates. The FCC adopted a
benchmark methodology as the principal method of regulating rates. However, if
this methodology produces unacceptable rates, Cox may also justify its rates
using a detailed and complicated cost-of-service methodology, which, among
other things, permits the use of an industry-wide 11.25% after tax rate of
return on Cox's allowable rate base. The FCC's rules also require franchising
authorities to regulate equipment rates on the basis of actual cost plus a
reasonable profit, as defined by the FCC.
If the local franchising authority concludes that Cox's rates are too high
under the FCC's rate rules, the local franchising authority may require Cox to
reduce its rates and to refund overcharges to subscribers with interest. Cox
may appeal adverse local rate decisions to the FCC, and the FCC may reverse
any rate decision made by a local franchising authority if the decision is
inconsistent with the FCC's rules and policies. Approximately 124 communities
served by Cox's cable systems representing approximately 42% of the
communities served currently regulate Cox's basic service and equipment rates.
The FCC also adopted several years ago comprehensive and restrictive
regulations that allow cable television systems to modify regulated rates on a
quarterly or annual basis using various methodologies that account for changes
in:
. the number of regulated channels;
. inflation; and
. certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations.
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Cox cannot predict whether the FCC will modify these rate regulations in the
future.
The Communications Act and FCC regulations also permit local franchising
authorities to file complaints with the FCC concerning rates Cox charges for
certain non-basic cable programming service tiers. The Communications Act
requires the FCC:
. to issue a final order within 90 days after receipt of a rate complaint
from a local franchising authority;
. to reduce any rates found to be unreasonable; and
. to order the operator to pay refunds to subscribers for any rate
overcharges.
The 1996 Act prohibits the regulation of non-basic cable programming service
tiers after March 31, 1999, although Congress could consider legislation to
delay, eliminate altogether or reinstitute the regulation of non-basic rates.
The Communications Act also:
. prohibits the regulation of the rates charged by cable operators for
programming offered on a per-channel or per-program basis, and for certain
multi-channel groups of new non-basic programming that operators offered to
subscribers after September 30, 1994;
. requires operators to charge uniform rates throughout each franchise area
that is not subject to effective competition, as defined by federal law;
. prohibits regulation of non-predatory bulk discount rates offered by
operators to subscribers in commercial and residential developments; and
. permits regulated equipment rates to be computed by aggregating costs of
broad categories of equipment at the franchise, system, regional or company
level.
Franchising authorities in a number of communities in which Cox operates
cable television systems initiated basic service rate regulation pursuant to
Section 623 of the Communications Act and corresponding regulations of the FCC
and required Cox to justify its existing basic service rates. In addition,
certain subscribers and franchising authorities filed complaints with the FCC
pursuant to Section 623 of the Communications Act and corresponding FCC
regulations challenging the reasonableness of Cox's rates for cable
programming services. Cox submitted rate justifications to these franchising
authorities and filed responses to the rate complaints with the FCC.
Franchising authorities and the FCC issued a number of rate decisions
regarding basic and non-basic cable programming service tier rates, and the
FCC is currently processing several additional rate complaints.
Carriage of Broadcast Television Signals. The Communications Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations:
. to elect once every three years to require a cable system to carry the
station, subject to certain exceptions, or
. to negotiate for "retransmission consent" to carry the station on the cable
system.
The Communications Act also requires a cable operator to devote up to one-
third of its activated channel capacity for the mandatory carriage of local
commercial television stations. The Communications Act also gives local non-
commercial television stations mandatory carriage rights; however, such
stations are not given the option to negotiate retransmission consent for the
carriage of their signals by cable television systems. Additionally, cable
television systems must obtain retransmission consent for:
. all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WGN);
. commercial radio stations; and
. certain low-power television stations.
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The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for mandatory carriage of digital television signals.
Cox cannot predict the ultimate outcome of this proceeding which could have a
material effect on the number of services that Cox will be required to carry
on its cable television systems.
Pole Attachments. The Communications Act requires the FCC to regulate the
rates, terms and conditions imposed by public utilities for cable television
systems' use of utility poles and conduit space unless state authorities have
demonstrated to the FCC that they adequately regulate pole attachment rates,
as is the case in certain states in which Cox operates. In the absence of
state regulation, the FCC administers pole attachment rates on a formula
basis. In some cases, utility companies have increased pole attachment fees
for cable television systems that have installed fiber optic cables and that
are using such cables for the distribution of non-video services. The FCC has
concluded that, in the absence of state regulation, it has jurisdiction to
determine whether utility companies have justified their demand for additional
rental fees and that the Communications Act does not permit disparate rates
based on the type of service provided over the equipment attached to the
utility's poles.
The FCC's existing pole attachment rate formula governs charges assessed by
utilities for attachments made by cable operators providing only cable
services. In a pending administrative rulemaking proceeding, the FCC is
considering whether to modify its existing cable pole attachment rate formula.
The 1996 amendments to the Communications Act modified the FCC's pole
attachment regulatory scheme:
. by requiring the FCC to adopt new regulations that are effective in 2001
and that govern the charges for pole attachments used by companies,
including cable operators, that provide telecommunications services;
. by immediately permitting certain providers of telecommunications services
to rely upon the protections of the current law until the new rate formula
becomes effective in 2001; and
. by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility.
The 1996 Act amendments increase significantly future pole attachment rates
for cable television systems which use pole attachments in connection with the
provision of telecommunications services as a result of a new rate formula
charged to telecommunication carriers for the non-useable space of each pole.
These rates are to be phased in after a five-year period beginning in 2001. In
adopting its new attachment regulations, the FCC concluded, in part, that a
cable operator providing Internet service on its cable system is not providing
a telecommunications service for purposes of the new rules. Several parties
have requested the FCC to reconsider its new regulations and several parties
have challenged the new rules in court. A federal district court recently
upheld the constitutionality of the new statutory provision and the utilities
involved in that litigation have appealed the lower court's decision. Cox is
unable to predict the outcome of this litigation or the ultimate impact of any
revised FCC rate formula or of any new pole attachment rate regulations on its
business and operations.
Ownership. The FCC rules generally prohibit the direct or indirect common
ownership, operation, control or interest in a cable television system, on the
one hand, and a local television broadcast station whose television signal
(predicted grade B contour as defined under FCC regulations) reaches any
portion of the community served by the cable television system, on the other
hand. For purposes of the cross-ownership rules, "control" of licensee
companies is attributed to all 5% or greater stockholders, except for mutual
funds, banks and insurance companies which may own less than 10% without
attribution of control. This rule prohibits Cox from owning or operating a
cable television system in the same area in which CEI or one of CEI's
subsidiaries owns or operates a television broadcast station. The FCC has
requested comment as to whether to raise the attribution criteria from 5% to
10% and for passive investors from 10% to 20%, and whether it should exempt
from attribution certain widely held limited partnership interests where each
individual interest represents an insignificant percentage of total
partnership equity. The 1996 Act eliminated the statutory ban on the cross-
ownership of a cable television system and a television station, and permits
the FCC to amend or revise its own regulations regarding the cross-ownership
ban. The FCC has repealed its broadcast network/cable system cross-ownership
ban, and has initiated a rulemaking proceeding in connection with a review of
its cross-ownership rules to determine whether the cable television/broadcast
cross-ownership ban is necessary and in the public
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interest or whether it should be eliminated. The FCC has eliminated its
regulatory restriction and cross-ownership of cable systems and national
broadcasting networks. The 1992 Cable Act permits states or local franchising
authorities to adopt certain additional restrictions on the transfer of
ownership of cable television systems.
The cross-ownership prohibitions would preclude investors from holding
ownership interests in Cox if they simultaneously served as officers or
directors of, or held an attributable ownership interest in, these other
businesses, and would also preclude Cox from acquiring a cable television
system when Cox's officers or directors served as officers or directors of, or
held an attributable ownership in, these other businesses which were located
within the same area as the cable television system which was to be acquired.
The 1996 Act generally restricts common carriers from holding greater than a
10% financial interest or any management interest in cable operators which
provide cable television service within the carrier's telephone exchange
service area or from entering joint ventures or partnerships with cable
operators in the same market subject to four general exceptions which include
population density and competitive market tests. The FCC may waive the buyout
restrictions if it determines that, because of the nature of the market served
by the cable television system or the telephone exchange facilities:
. the cable operator or LEC would be subject to undue economic distress by
enforcement of the restrictions;
. the cable television system or LEC facilities would not be economically
viable if the provisions were enforced;
. the anticompetitive effects of the proposed transaction clearly would be
outweighed by the public interest in serving the community; and
. the local franchising authority approves the waiver.
General Ownership Limitations. The Communications Act generally prohibits
Cox from owning and/or operating a satellite TV or wireless cable system in
any area where Cox provides franchised cable service. However, federal law
also provides that the cable/satellite TV and the cable/wireless cable cross-
ownership rules do not apply in any franchise area where a cable operator
faces "effective competition," as defined by federal law. The FCC has relaxed
its restrictions on ownership of satellite TV systems to permit a cable
operator to acquire satellite TV systems in the operator's existing franchise
area, so long as the programming services provided through the satellite
system are offered according to the terms and conditions of the cable
operator's local franchise agreement.
The Communications Act required the FCC to adopt rules establishing national
subscriber limits and limits on the number of channels that can be occupied on
a cable television system by a video programmer in which the operator has an
attributable interest. Although the FCC did adopt such rules, several years
ago a federal district court concluded that the statutory limitation is
unconstitutional and it delayed the effectiveness of these FCC horizontal
ownership limits. An appeal of the district court's decision has been
consolidated with appeals challenging the FCC's regulatory ownership
restrictions. Both appeals are pending. In connection with these ownership
limitations, the FCC recently:
. reaffirmed the current 30% horizontal ownership limit, but maintained its
voluntary stay on enforcement of that limit pending further action by the
federal appellate court;
. reaffirmed its horizontal ownership information reporting requirements;
. made effective the requirement that any person holding an attributable
interest (as defined by FCC rules) in cable television systems reaching 20%
or more of homes passed by cable plant nationwide notify the FCC of any
incremental change in that person's cable ownership interests; and
. opened an administrative proceeding to reevaluate its cable television
attribution rules due to recent developments in the cable industry,
including strategic alliances, partnerships, system swaps, mergers and
acquisitions among cable entities.
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Local Telephone Company Ownership of Cable Systems. Federal cross-ownership
restrictions have previously limited entry into the cable television business
by potentially strong competitors such as telephone companies. The 1996
amendments to the Communications Act made far-reaching changes in the
regulation of local telephone companies that provide cable television
services. The 1996 amendments:
. eliminated federal legal barriers to competition in the local telephone and
cable communications businesses, including eliminating the federal
statutory telephone company/cable television cross-ownership prohibition,
thereby allowing local telephone companies to offer video services in their
local telephone service areas;
. preempted legal barriers to competition that previously existed in state
and local laws and regulations;
. set basic standards for relationships between telecommunications providers;
and
. generally limited acquisitions and prohibited certain joint ventures
between local telephone companies and cable operators in the same market.
Local telephone companies may provide service as traditional cable operators
with local franchises or they may opt to provide their programming over "open
video systems," subject to certain conditions. A federal appellate court
recently overturned various parts of the FCC's open video rules, including the
FCC's preemption of local franchising requirements for open video operators.
Cox expects the FCC to modify its open video rules to comply with the federal
court's decision, but Cox is unable to predict the impact any rule
modifications may have on its business and operations.
Common carriers that qualify as OVS operators are exempt from many of the
regulatory obligations that currently apply to cable operators. However,
certain restrictions and requirements that apply to cable operators will still
be applicable to OVS operations. Common carriers that elect to provide video
services over an OVS may do so upon obtaining certification by the FCC. Among
other requirements, the 1996 Act:
. prohibits OVS operators from discriminating in the provision of video
programming services; and
. requires OVS operators to limit carriage of video services selected by the
OVS operator to one-third of the OVS' capacity.
. OVS operators must also comply with the FCC's sports exclusivity, network
nonduplication and syndicated exclusivity restrictions, public,
educational, and government channel use requirements, the "must-carry"
requirements of the 1992 Cable Act, and regulations that prohibit
anticompetitive behavior or discrimination in the prices, terms and
conditions of providing vertically integrated satellite-delivered
programming.
The manner in which OVS operators will be treated as cable operators for
purposes of copyright liability has not yet been determined by the Copyright
Office. Upon compliance with such requirements and FCC rules that mirror
statutory requirements, an OVS operator will be exempt from various statutory
restrictions which apply to cable operators, such as broadcast-cable ownership
restrictions, commercial leased access requirements, rate regulation, and
consumer electronics compatibility requirements. Although OVS operators are
not subject to franchise fees, as defined by the 1996 Act, they may be subject
to fees charged by local franchising authorities or other governmental
entities in lieu of franchise fees. Such fees may not exceed the rate at which
franchise fees are imposed on cable operators and may be itemized separately
on subscriber bills.
Under the 1996 Act, common carriers leasing capacity for the provision of
video programming services over cable television systems or OVS operators are
not bound by the interconnection obligations of Title II, which otherwise
would require the carrier to make capacity available on a nondiscriminatory
basis to any other person for the provision of cable television service
directly to subscribers. Additionally, under the 1996 Act, common carriers
providing video programming are not required to obtain a Section 214
certification to establish or operate a video programming delivery system.
The FCC has ruled that cable operators may elect to operate OVS systems, but
only if they are subject to effective competition. Under the FCC's rules, a
cable television operator may not terminate an existing franchise agreement to
become an OVS operator.
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Other Statutory Provisions. One of the underlying competitive policy goals
of the Communications Act is to limit the ability of vertically integrated
program suppliers from favoring affiliated cable operators over unaffiliated
program distributors. Consequently, with certain limitations, the federal law
generally:
. precludes any satellite video programmer affiliated with a cable company,
or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors;
. requires such programmers to sell their programming to other multichannel
video distributors; and
. limits the ability of such programmers to offer exclusive programming
arrangements to their affiliates.
The Communications Act also contains restrictions on the transmission by
cable operators of obscene or indecent programming. It requires cable
operators to block fully both the video and audio portion of sexually explicit
or indecent programming on channels that are primarily dedicated to sexually
oriented programming, or alternatively, to carry such programming only at
"safe harbor" time periods currently defined by the FCC as the hours between
10 p.m. to 6 a.m. A three-judge federal district court recently determined
that this provision was unconstitutional; however, the federal government
announced that it will appeal the lower court's ruling.
The Communications Act also includes provisions, among others, concerning:
. customer service;
. subscriber privacy;
. marketing practices;
. equal employment opportunity; and
. regulation of technical standards and equipment compatibility.
Other FCC Regulations. The FCC has adopted cable inside wiring rules to
provide a more specific procedure for the disposition of residential home
wiring and internal building wiring that belongs to an incumbent cable
operator that is forced by the building owner to terminate its cable services
in a building with multiple dwelling units. The FCC is also considering
additional rules relating to inside wiring that, if adopted, may disadvantage
incumbent cable operators. MDU owners can use these new rules to attempt to
force cable operators without MDU service contracts to either sell, abandon or
remove internal wiring which may carry voice as well as video communications
and terminate service to MDU subscribers unless operators retain rights under
common or state law to maintain ownership rights in the wiring.
Consumer Equipment. The FCC has adopted regulations to implement the
requirements of the 1992 Cable Act designed to improve the compatibility of
cable television systems and consumer electronics equipment. These
regulations, inter alia, generally prohibit cable television operators from
scrambling their basic service tier and from changing the infrared codes used
in their existing customer premises equipment. This latter requirement could
make it more difficult or costly for cable television operators to upgrade
their customer premises equipment and the FCC has been asked to reconsider its
regulations. The 1996 Act directs the FCC to set only minimal standards to
assure compatibility between television sets, VCRs and cable television
systems, and to rely on the marketplace. Pursuant to this statutory mandate,
the FCC has adopted rules to assure the competitive availability to consumers
of customer premises equipment, such as converters, used to access the
services offered by cable television systems and other multichannel video
programming distributors. Pursuant to those rules, consumers are given the
right to attach compatible equipment to Cox's cable facilities, so long as the
equipment does not harm Cox's network, does not interfere with the services
purchased by other subscribers, and is not used to receive unauthorized
services. As of July 1, 2000, cable television operators are required to
separate security from non-security functions in the subscriber premises
equipment which they sell or lease to their subscriber and offer their
subscribers the option of using component security modules obtained from the
cable operator with set-top units purchased or leased from retail outlets. As
of January 1, 2005, Cox will be prohibited from selling or leasing new set-top
equipment (e.g., converter box) which includes integrated security functions
(e.g., signal scrambling). All new equipment provided beginning on that date
must be capable of using
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separate component security modules. However, Cox will not be required to
discontinue the leasing of old converters that include integrated security
functions if those converters were provided to subscribers before January 1,
2005.
The FCC actively regulates other parts of Cox's cable operations, involving
such areas as:
. hiring and promotion of employees and use of outside vendors;
. consumer protection and customer service standards;
. technical standards and testing of cable facilities;
. program carriage and limitations dealing with exclusivity of syndicated and
network programs, local sports broadcast programming, advertising in
children's programming, political advertising, origination cablecasting,
sponsorship identification and closed captioning of video programming;
. registration of cable systems and the filing of informational reports;
. maintenance of various records and public inspection files;
. microwave frequency usage;
. antenna structure notification, marking and lighting; and
. emergency alert system requirements.
The FCC may enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. Local franchising authorities are also permitted to enforce the
FCC's technical and consumer protection standards. The FCC has ongoing
rulemaking proceedings that may change its existing rules or lead to new
regulations. Cox is unable to predict the impact that any further FCC rule
changes may have on its business and operations.
Regulatory Fees and Other Matters. Pursuant to the Communications Act, the
FCC has adopted requirements for payment of annual "regulatory fees" by the
various industries it regulates, including the cable television industry.
Currently, cable television systems are required to pay regulatory fees of
$0.44 per subscriber per year, which may be passed on to subscribers as
"external cost" adjustments to rates for basic cable service. Fees are also
assessed for other licenses, including licenses for business radio and cable
television relay systems. Those fees, however, may not be collected directly
from subscribers.
In addition, the FCC has adopted regulations pursuant to the 1992 Cable Act
which require cable systems not subject to effective competition to permit
subscribers to purchase video programming on a per-channel or a per-event
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable system is technically incapable of
doing so. Generally cable systems must become technically capable of complying
with the statutory obligation by December 2002. 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 subscribers 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 October 1, 1998, the plaintiffs files a "show cause" petition with
the FCC. The petition requests the FCC to require the defendants to show cause
why the California cable systems should not be found in violation of the "buy-
through" provision of the Communications Act and the FCCs rules and to issue a
$0.5 million forfeiture against the defendants' cable systems. CoxCom, Inc.
(successor-in-interest by merger to Cox Communications San Diego, Inc., Cox
Communications Santa Barbara, Inc., Cox
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Communications Bakersfield, Inc. and Cox Communications Palos Verdes, Inc.)
files an opposition to the petition on December 1, 1998, responding to the
matters raised in the petition. Both parties have files additional pleadings
with the FCC in connection with the matters raised in the petition.
The government of Mexico has authorized the allocation of a new broadcast
station on channel 3 in Tijuana, Mexico, which when operational, will cause
interference with the operations of Cox's cable system serving the San Diego
area. Cox provides its subscribers with converters which are tuned to channel
3, and ingress from the Mexican station's signal will cause co-channel
interference on the system in those areas of the San Diego market where the
Mexican station's signal is received. The United States Government has
requested the Mexican government to modify the Mexican station's channel
allocation and technical facilities. If the Mexican government declines to
make the requested modifications, Cox would be required to incur expenses to
retune subscribers' converters to a different channel. Cable reception in
those franchise areas where the Mexican station could be received would be
disrupted until the converters were retuned.
Copyright. Cable systems utilize local and distant television and radio
broadcast signals in their channel line-ups. This programming is protected by
the copyright laws and Cox generally does not obtain a license to use this
programming directly from the owners of the programming. Consequently, Cox
must comply with an alternative federal copyright licensing process covering
television and radio broadcast signals. In exchange for filing certain reports
and contributing a percentage of revenues to a federal copyright royalty pool,
Cox obtains blanket permission to retransmit copyrighted material on broadcast
signals. The nature and amount of future payments for broadcast signal
carriage cannot be predicted at this time.
In a report to Congress, the Copyright Office recommended that Congress make
major revisions to both the cable television and satellite compulsory
licenses:
. to make them as simple as possible to administer;
. to provide copyright owners with full compensation for the use of their
works; and
. to treat every multichannel video delivery system the same, except to the
extent that technological differences or differences in the regulatory
burdens placed upon the delivery system justify different copyright
treatment.
The possible simplification, modification or elimination of the compulsory
copyright license is the subject of continuing legislative review. The
elimination or substantial modification of the cable compulsory license could
adversely affect Cox's ability to obtain suitable programming and could
substantially increase the cost of programming that remains available for
distribution to Cox's subscribers. Cox cannot predict the outcome of this
legislative activity.
Cox distributes programming and advertising that use music controlled by the
two principal major music performing rights organizations, the Association of
Songwriters, Composers, Artists and Producers (ASCAP) and Broadcast Music,
Inc. (BMI). In October 1989, the special rate court of the U.S. District Court
for the Southern District of New York imposed interim rates on the cable
industry's use of ASCAP-controlled music. The same federal district court
established a special rate court for BMI. BMI and cable industry
representatives concluded negotiations for a standard licensing agreement
covering the performance of BMI music contained in advertising and other
information inserted by operators into cable programming and on certain local
access and origination channels carried on cable television systems. ASCAP and
cable television industry representatives have also met to develop a standard
licensing agreement covering the use of ASCAP-controlled music in local
origination and access channels and pay-per-view programming. Although Cox
cannot predict the ultimate outcome of these industry negotiations or the
amount of any license fees Cox may be required to pay for past and future use
of ASCAP-controlled music, Cox does not believe such license fees will be
significant to its financial position, results of operations or liquidity.
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Franchise Matters. Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. Consistent with
the Communications Act, state and/or local officials are usually involved in
franchise selection, system design and construction, safety, service rates,
consumer relations, billing practices and community related programming and
services. Although franchising matters are normally regulated at the local
level through a franchise agreement and/or a local ordinance, the
Communications Act does provide some oversight and guidelines to govern a
cable operator's relationship with a local franchising authority. For example,
the Communications Act:
. affirms the right of franchising authorities (state or local, depending on
the practice in individual states) to award one or more franchises within
their jurisdictions;
. generally prohibits a cable television system from operating in communities
without a franchise, except where a system operated in the community
without a franchise prior to July 1984 and the franchising authority has
not required a cable operator to obtain a franchise;
. encourages competition with existing cable television systems by:
. allowing municipalities to operate their own cable systems without
franchises;
. preventing franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises covering an
existing cable television system's service area; and
. prohibiting (with limited exceptions) the common ownership of cable
television systems and co-located wireless cable or satellite TV systems.
. permits local authorities when granting or renewing Cox's franchises to
establish requirements for cable-related facilities and equipment, but
prohibits franchising authorities from establishing requirements for
specific video programming or information services other than in broad
categories;
. permits Cox to obtain modification of its franchise requirements from the
franchise authority or by judicial action if warranted by changed
circumstances;
. generally prohibits franchising authorities from:
. imposing requirements during the initial cable franchising process or
during franchise renewal that require, prohibit or restrict Cox from
providing telecommunications services;
. imposing franchise fees on revenues Cox derives from providing
telecommunications services over its cable systems, or
. restricting Cox's use of any type of subscriber equipment or
transmission technology; and
. limits Cox's payment of franchise fees to the local franchising authority
to 5% of gross revenues derived from providing cable services over Cox's
cable television systems.
Cox has franchises covering approximately 288 communities. The franchises
typically require that periodic payment of fees to franchising authorities of
up to 5% of "revenues" (as defined by each franchise agreement). These
franchise fees may be passed on to subscribers and separately itemized on
their monthly bills. In 1997, a federal appellate court overturned an FCC
order that had concluded a cable operator's gross revenue did not include
money collected from subscribers that is allocated by the operator to pay
local franchise fees. Instead, the court concluded that a cable operator's
gross revenue includes all revenue received from subscribers, without
deduction. The FCC subsequently determined that cable operators may "pass
through" on subscribers' monthly bills any additional payments of franchise
fees that franchising authorities require cable operators to make for past
periods when they had relied upon the FCC's earlier decision. Various
municipal groups have requested the FCC to reconsider its decision. Cox is
unable to predict the ultimate resolution of this matter, but does not expect
that any additional franchise fees required to pay to franchising authorities
will be material to Cox's business and operations.
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The Communications Act contains renewal procedures designed to protect cable
operators against arbitrary denials of renewal, although recent changes to the
franchise renewal provision could make it easier for a franchising authority
to deny a franchise renewal. Moreover, even if a franchise is renewed, the
franchising authority may seek to impose upon new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a
franchising authority's consent is required for the purchase or sale of a
cable system or franchise, the franchising authority may attempt to impose
more burdensome or onerous franchise requirements on Cox in connection with a
request for such consent. Historically, cable operators providing satisfactory
services to their subscribers and complying with the terms of their franchises
have typically obtained franchise renewals. Cox believes that it has generally
met the terms of its franchises and has provided quality levels of service.
Cox anticipates that its future franchise renewal prospects generally will be
favorable.
Cable television systems use local streets and rights-of-way. Consequently,
Cox must comply with state and local regulation which is typically imposed
through the franchising process. Cable systems generally are operated pursuant
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchisee fails to comply
with material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be
granted or that renewals will be made on similar terms and conditions.
Franchises usually call for the payment of fees, often based on a percentage
of the system's gross customer revenues, to the granting authority. Upon
receipt of a franchise, the cable system owner usually is subject to a broad
range of obligations to the issuing authority directly affecting the business
of the system. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or
burdensome.
Each franchise generally contains provisions governing:
. cable service rates;
. franchise fees;
. franchise term;
. system construction and maintenance obligations;
. system channel capacity;
. design and technical performance;
. customer service standards;
. franchise renewal;
. sale or transfer of the franchise;
. territory of the franchisee;
. indemnification of the franchising authority;
. use and occupancy of public streets; and
. types of cable services provided.
The 1984 Cable Act places certain limitations on a franchising authority's
ability to control the operation of a cable television system, and courts have
from time to time reviewed the constitutionality of several general franchise
requirements, including franchise fees and access channel requirements, often
with inconsistent results. On the other hand, the 1992 Cable Act prohibits
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable television systems, especially
in the area of customer service and rate regulation. The 1992 Cable Act also
allows franchising authorities to operate their own multichannel video
distribution system without having to obtain a franchise and permits states or
local franchising authorities to adopt certain restrictions on the ownership
of cable television systems. Moreover, franchising authorities have immunity
from monetary damage awards arising from regulation of cable television
systems or decisions made on franchise grants, renewals, transfers and
amendments.
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A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Attempts in other states to
regulate cable television systems are continuing and can be expected to
increase. To date, those states in which Cox operates that have enacted such
state level regulation are Connecticut, Massachusetts, and Rhode Island. State
and local franchising jurisdiction is not unlimited, however; and it must be
exercised consistently with federal law.
Telecommunications Regulation. The telecommunications services currently
offered by Cox affiliates and Sprint PCS are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications service providers
to the extent that those facilities are used to provide, originate and
terminate interstate or international communications.
Landline Telecommunications Services. While the current switched voice and
data market is dominated by local exchange companies, also known as incumbent
LECs, the 1996 Act presents new opportunities for new entrants into these
markets. The LECs provide a full range of local telecommunications services
and equipment to customers, as well as originating and terminating access to
their local networks to interexchange carriers and commercial mobile radio
service providers. Because LECs historically have had exclusive state
franchises by law to provide telephone services, they have established
monopoly relationships with their customers. Under the new law and subject to
certain exemptions for rural telephone companies, the FCC is directed to
preempt any state law or regulation that acts to prevent new competitive entry
into incumbent LEC markets.
The 1996 Act also eliminates the interexchange (referred to as interLATA)
restrictions contained in the Modified Final Judgment and the 1981 consent
decree. The 1996 Act which required AT&T to divest its local telephone
operations establishes procedures under which a Bell Operating Company,
commonly known as a BOC, can enter the market for interLATA services within
its telephone service area. Before a BOC can enter the landline interLATA
market, it must enter into a state-approved interconnection agreement with a
company that provides local exchange service to business and residential
customers predominantly over its own facilities. Alternatively, if no such
competitor requests interconnection, the BOC can request authority to provide
interLATA services if it offers interconnection pursuant to state-approved
terms and conditions. The interconnection provided by the BOC must comply with
a "competitive checklist." Several BOCs have filed applications for authority
to provide interLATA services, including Southwestern Bell for Oklahoma and
BellSouth for Louisiana. The FCC has denied each of the applications it has
considered to date, although some of these denials are subject to pending
appeals.
Regulatory Requirements for All LECs Including New Entrants. Under the 1996
Act, new landline entrants will become subject to additional federal
regulatory requirements when they provide local exchange service in any
market. The 1996 Act imposes a number of access and interconnection
requirements on all LECs, with additional requirements imposed on incumbent
LECs. Specifically, the 1996 Act:
. requires the FCC to implement rules under which all LECs must provide
telephone number portability, dialing parity, reciprocal compensation for
transport and termination of local traffic, resale and access to rights of
way; and
. specifies procedures for state commissions to review and approve both
voluntary and compulsory interconnection agreements entered into between
new entrants and incumbent LECs.
These requirements also place burdens on new entrants that may benefit other
competitors. In particular, the resale requirement means that a company can
seek to resell the facilities of a new entrant without making a similar
investment in facilities.
One of the goals of the Communications Act as originally passed was to
extend telephone service to all citizens of the United States. This goal has
been achieved primarily by state commissions maintaining the rates for basic
local exchange service at a reasonable level. It was widely accepted that
incumbent LECs were able to maintain relatively low local rates by subsidizing
them with revenues from business and toll services, and by
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subsidizing rural service at the expense of urban customers. The extent of
these subsidies has been widely disputed and incumbent LECs that possess this
information generally have not made it available for review and verification.
The 1996 Act continues the goal of preserving and advancing universal
service by requiring the FCC to establish an explicit mechanism for
subsidizing service to those who might otherwise drop off the public switched
telephone network. The rules adopted by the FCC in the Universal Service Order
require telecommunications carriers generally (subject to limited exemptions)
to contribute to funding existing universal service programs for high cost
carriers and low income customers and to new universal service programs for
schools, libraries and rural health care providers. The FCC has not yet
finalized its program for universal service funding for high cost areas
generally or made modifications to its universal service programs for rural
carriers.
Depending upon how the FCC completes the implementation of its statutory
mandate and how states adjust their existing programs or create new programs,
this subsidy mechanism may provide an additional source of revenue to those
LECs willing and able to provide service to those markets that are less
financially desirable, either because of the high cost of providing service or
the limited revenues that might be available from serving a particular subset
of customers in an area, i.e., residential customers.
Another goal of the 1996 Act is to increase competition for
telecommunications services, thereby reducing the need for continuing
regulation of these services. To this end the 1996 Act requires the FCC to
streamline its regulation of incumbent LECs and permits the FCC to forbear
from regulating particular classes of telecommunications services or
providers, including through relaxation or potentially eventual termination of
FCC service tariffing requirements. Indeed, several incumbent LECs have
petitions pending before the FCC requesting relaxed regulation of high
capacity special access offerings, including in markets where Cox provides
competing services.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The
1996 Act also limits the FCC's ability to review incumbent LEC tariff filings.
These changes will increase the speed with which incumbent LECs are able to
introduce new service offerings and new pricing of existing services, thereby
increasing their flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long
distance carriers, microwave carriers, wireless service providers, re-sellers
and private networks built by large end-users or any combination of these
entities.
Broadband PCS Auction. In the 1993 Budget Act, Congress gave the FCC the
authority to preempt states from regulating the entry of or the rates charged
by any Commercial Mobile Radio Service provider commonly known as a CMRS
provider, including personal communications services providers. On February 3,
1994, the FCC adopted rules implementing the 1993 Budget Act and created the
CMRS regulatory classification. The CMRS classification applies to all mobile
services (including personal communications services) that are for profit and
that provide interconnected service to the public or a substantial portion of
the public. At that time, the FCC preempted state regulation and established a
procedure for states to petition the FCC for authority to regulate CMRS rates.
Eight states submitted requests to continue regulation of cellular providers
within their jurisdictions. On May 19, 1995, the FCC released orders denying
the requests.
States are permitted under the 1993 Budget Act to regulate "other terms and
conditions" of CMRS, including the siting and zoning of CMRS equipment. A
petition for rulemaking is pending before the FCC requesting that the FCC
preempt state and local siting and zoning regulation to the extent such
regulation acts to inhibit or prevent entry into the CMRS marketplace. The
petition generally has been opposed by state and local governments and
supported by CMRS providers and potential personal communications services
providers. The 1996 Act contains a provision prohibiting state and local
governments from discriminating in their zoning
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decisions which apply to personal wireless service facilities and enforcing
rules or regulations that prevent the provision of wireless services.
Additionally, the 1996 Act specifically determined that CMRS providers are
not required to provide equal access to interexchange carriers for the
provision of interexchange services. While the FCC has prescribed rules for
the unblocking of access to a preferred interexchange carrier, the legislation
eliminates the equal access requirement imposed on the wireless affiliates of
the BOCs. In addition, the 1996 Act permits the BOCs, upon enactment, to
provide interexchange service to their cellular customers.
The FCC has allocated 120 MHz of spectrum in the 2 GHz band to be licensed
to competing broadband personal communications services providers. These
service providers are beginning to offer advanced digital wireless services in
competition with current cellular and specialized mobile radio services, as
well as with landline telephone service. Spectrum is being auctioned in blocks
of 30 MHz and 10 MHz for geographic areas classified as either Major Trading
Areas commonly known as MTAs or the smaller Basic Trading Areas commonly known
as BTAs. A licensee may, however, disaggregate its spectrum by selling a
portion of it to other parties. A licensee may also geographically partition
its spectrum by selling part of its license area to other parties. Six
broadband personal communications services licenses have been auctioned in
each service area (except that only five licenses were auctioned in the three
markets in which pioneer preference licenses were issued).
. The first broadband personal communications services auction included two
30 MHz frequency blocks of spectrum (Blocks "A" and "B") licensed by MTA.
. The second auction was for 30 MHz blocks of broadband spectrum, licensed by
BTA (Block "C" auction). Block C licenses were available only to parties
that met specific FCC eligibility criteria.
. A 10 MHz BTA spectrum block, Block "F," was also auctioned only to parties
meeting specific eligibility criteria following the Block "C" auction.
. The FCC also has licensed two BTA 10 MHz blocks of spectrum, Blocks "D" and
"E," which are not subject to the additional eligibility requirements
imposed on Blocks "C" and "F."
On March 22, 1999 the FCC is scheduled to reauction 10 MHz D, E and F block
licenses and 15 and 30 MHz C block licenses that were either returned to the
FCC or recaptured by the FCC after licensees defaulted on an FCC obligation.
Upon completion of this auction, this spectrum will be available to competing
broadband personal communications services providers.
Regulatory Updates. In November 1998, AT&T filed a Petition requesting that
the FCC issue a declaratory ruling confirming that long distance carriers may
elect not to purchase switched access service offered under tariff by
competitive local exchange carriers. AT&T's Petition claims that several new
entrants into the local switched access market have attempted to charge rates
that are substantially higher than those offered by incumbent LECs. The FCC's
decision on this matter could affect the prices that all switched access
providers, including Cox, charge for the switched access services that they
provide to long distance carriers. The Petition is pending at the FCC.
In November 1998, the Idaho Public Utilities Commission filed a Petition
requesting that the FCC find that CTC Telecom, Inc., a competitive local
exchange carrier preparing to provide integrated telecommunications, Internet
and cable service in a new residential development outside of Boise, should
have its telecommunications offerings classified for regulatory purposes as an
incumbent LEC. The Petition further requests that all "similarly situated"
carriers also should be classified as incumbent LECs. Because Cox believes
that such a policy is contrary to the plain language of the 1996 Act and could
adversely affect its regulatory classification when it provides
telecommunications services under similar conditions, Cox filed comments with
the FCC opposing the Idaho Public Utilities Commission Petition. The Petition
is pending at the FCC.
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State Telecommunications Regulation. In addition to federal rules and
regulations that apply to Cox's telephony operations, state commissions
regulate, to varying degrees, the intrastate services of landline
telecommunications providers, including those of Cox's landline affiliates.
New entrants providing local exchange services typically must apply for and
receive state certification and operate in accordance with state commission
pricing, terms and quality of service regulations. Under the 1996 Act, state
commissions also must review interconnection agreements entered into between
incumbent LECs and new entrants, as well as enforce the terms of disputed
agreements. States may also choose to assess universal service funding
contributions from new carriers provided that a state's program is consistent
with the FCC's universal service rules.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the cable television
or telephony industries. Other existing federal regulations, copyright
licensing and, in many jurisdictions, state and local franchise requirements
currently are the subject of a variety of judicial proceedings, legislative
hearings and administrative and legislative proposals which could change, in
varying degrees, the manner in which cable television or telephony systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television or telephony industries can be predicted at this time.
Employees
At December 31, 1998, Cox had approximately 9,785 full-time-equivalent
employees. Cox considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
Cox's principal physical assets consist of cable television operating plant
and equipment, including signal receiving, encoding and decoding devices,
headends and distribution systems and customer house drop equipment for each
of its cable television systems. The signal receiving apparatus typically
includes a tower, antenna, ancillary electronic equipment and earth stations
for reception of satellite signals. Headends, consisting of associated
electronic equipment necessary for the reception, amplification and modulation
of signals, are located near the receiving devices. Cox's distribution system
consists primarily of coaxial and fiber optic cables and related electronic
equipment. Customer devices consist of decoding converters, cable modems and
telephone network interface units. The physical components of cable television
systems require maintenance and periodic upgrading to keep pace with
technological advances.
Cox's cable distribution plant and related equipment are generally attached
to utility poles under pole rental agreements with local public utilities,
although in some areas the distribution cable is buried in underground ducts
or trenches. Cox owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices
in each of its market areas and leases most of its service vehicles. Cox
believes that its properties, both owned and leased, taken as a whole, are in
good operating condition and are suitable and adequate for Cox's business
operations.
ITEM 3. LEGAL PROCEEDINGS
On October 9, 1997, three individual subscribers filed a putative class
action suit in Superior Court of the State of California, County of San Diego
against Cox and its cable television system subsidiaries in California (the
"Cox California Systems") arising out of the manner in which the Cox
California Systems sell premium channel cable services. The suit alleges that
the Cox California Systems unlawfully require limited basic cable customers to
purchase the expanded basic services tier in order to purchase premium
channels, i.e., channels sold on an a la carte basis such as Home Box Office
and Showtime. The suit asserts causes of action under California antitrust and
consumer protection laws. The suit seeks injunctive relief as well as an order
awarding the class members compensatory damages, plus statutory damages,
punitive damages, interest and attorney's fees. On February 13, 1998, the
Court granted Cox's motion to stay the suit and referred it on grounds of
Primary Jurisdiction to the Federal Communications Commission for
consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. The plaintiffs filed a
Petition for Order to
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Show Cause against Cox on October 1, 1998. In addition, they sought to have
the stay lifted by the court. On January 15, 1999, the court denied the
plaintiff's motion to lift the stay. This matter is now in the briefing phase
before the FCC. Cox intends to defend this action vigorously. The outcome of
this matter cannot be predicted at this time.
Cox and certain subsidiaries are defendants in eight putative subscriber
class action suits in state courts in Arizona, Oklahoma, Louisiana, Florida,
Nebraska, Indiana, Texas and Nevada initiated between October 17, 1997 and
December 17, 1998. The suits all challenge the propriety of late fees charged
by the subsidiaries to customers who fail to pay for services in a timely
manner. The suits seek injunctive relief and various formulations of damages
under various claimed causes of action under various bodies of state law.
These actions are in various stages of defense and, in two cases, the parties
have reached settlement agreements, both of which have been approved by the
court. The remaining actions are being defended vigorously. The outcome of
these matters cannot be predicted at this time.
Cox has been named along with Teleport and Teleport's officers and directors
(including some who are officers of Cox), as defendants in three putative
class action suits filed in the Chancery Court of New Castle County, Delaware.
The suits challenge the AT&T/Teleport merger and seek injunctive relief and
damages based on various theories alleging that the AT&T/Teleport merger's
terms do not offer appropriate compensation or protection to Teleport's public
shareholders. The actions are currently dormant, however, Cox intends to
defend them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Shareholder Information" of Cox's 1998 Annual Report to
Stockholders (see Exhibit 13).
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data for each of the five years
in the period ended December 31, 1998 has been derived from and should be read
in conjunction with the Consolidated Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1998 1997 1996 1995(a) 1994
--------- --------- --------- --------- ---------
(Millions of Dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $ 1,716.8 $ 1,610.4 $ 1,460.3 $ 1,286.2 $ 736.3
Operating income........ 201.4 205.3 221.7 226.0 139.8
Interest expense........ 223.3 202.1 146.1 132.3 46.1
Equity in net losses of
affiliated companies... 547.2 404.4 170.4 79.7 43.9
Gain on investments,
net.................... 2,484.2 116.6 4.6 188.8 --
Gain on issuance of
stock by affiliated
companies.............. 165.3 90.8 50.1 -- --
Dividends received...... 12.2 -- -- -- --
Net income (loss)....... 1,270.7 (136.5) (51.6) 103.8 26.6
Basic net income (loss)
per share.............. $ 4.66 $ (0.50) $ (0.19) $ 0.41 $ --
Diluted net income
(loss) per share....... 4.60 (0.50) (0.19) 0.41 --
Other Operating and
Financial Data:
Operating cash flow (b). $ 659.1 $ 609.8 $ 556.9 $ 493.3 $ 268.5
Operating cash flow
margin (b)............. 38.4% 37.9% 38.1% 38.4% 36.5%
Ratio of debt to
operating cash flow
(b).................... 6.2x(c) 5.2x(c) 5.2x 5.2x 2.9x
Cash flows from
operating activities... 665.5 554.5 309.1 324.9 205.0
Cash flows from
investing activities... (1,600.4) (1,108.0) (522.2) (865.5) (372.2)
Cash flows from
financing activities... 937.2 539.3 246.2 576.4 156.3
Balance Sheet Data:
December 31
Total assets........... $12,878.1 $ 6,556.6 $ 5,784.6 $ 5,555.3 $ 1,874.7
Total debt (including
amounts due to CEI)... 4,090.8 3,148.8 2,881.0 2,575.3 787.8
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1998 1997 1996 1995(a) 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Customer Data:
Basic customers(d)...... 3,741,608 3,235,338 3,259,384 3,248,759 1,851,726
New services(e)......... 169,731 18,941 -- -- --
--------- --------- --------- --------- ---------
Revenue Generating Units
(f).................... 3,911,339 3,254,279 3,259,384 3,248,759 1,851,726
Homes passed(g)......... 5,923,428 5,023,870 5,016,749 5,005,858 2,878,857
Basic penetration(h).... 63.2% 64.4% 65.0% 64.9% 64.3%
Premium service
units(i)............... 2,206,833 1,865,184 2,000,673 1,827,068 1,203,606
</TABLE>
- --------
(a) 1995 operating data includes the February 1, 1995 merger with the Times
Mirror Company's cable television business.
(b) Operating cash flow (operating income before depreciation and
amortization), a non-GAAP measure of performance, is a commonly used
financial analysis tool for measuring and comparing cable television
companies in several areas such as liquidity, operating performance and
leverage. Operating cash flow should not be considered as an alternative
to net income as an indicator of Cox's performance or as an alternative to
cash flows from operating activities as a measure of liquidity.
(c) Using the fourth quarter annualized operating cash flow, the ratio was
5.1x and 4.6x at December 31, 1998 and 1997, respectively.
(d) A home with one or more television sets connected to a cable television
system is counted as one basic service customer.
(e) New services include Cox Digital TV, Cox@Home and Cox Digital Telephone.
(f) Each basic customer and each new service is a Revenue Generating Unit. In
certain locations, a household may purchase more than one new service,
each of which is counted as a separate Revenue Generating Unit.
(g) A home is deemed to be "passed" if it can be connected to the distribution
system without any further extension of the distribution plant.
(h) Basic customers as a percentage of homes passed by cable.
(i) Premium service units include single or multi-channel services offered for
a monthly fee per service.
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Acquisitions, Dispositions and Investments
U.S. Broadband Networks
1998 Acquisitions and Transactions
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 June 1998, Cox acquired a cable television system serving approximately
115,000 customers in Tucson, Sierra Vista and portions of Pima County, Arizona
from Tele-Communications, Inc. for approximately $250.2 million.
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. for a combination of common and convertible preferred
stock and cash with an aggregate value of approximately $1,325.0 million,
including the refinancing of $680.8 million of Prime South indebtedness. Prime
South operated a cable television system serving approximately 293,000
residential customers, 105,000 hotel units and interests in various other
nonconsolidated operations in the greater Las Vegas area.
In October 1998, Cox and TCI discontinued negotiations to form a joint
venture serving approximately 270,000 customers in several key Oklahoma
communities. Accordingly, a non-binding agreement, which was signed during
April 1998, was terminated. The termination of this agreement had no financial
impact on Cox.
1997 Acquisitions and Transactions
In January 1997, Cox and TCI exchanged certain cable television systems
owned by Cox serving approximately 319,000 customers for certain cable
television systems owned by TCI serving approximately 296,000 customers. As a
result of the transaction, Cox received TCI's systems in Bellevue/LaVista,
Nebraska and Council Bluffs, Iowa; Chesapeake, Virginia; Scottsdale, Arizona;
North Attleboro/Taunton, Massachusetts; Lincoln, Rhode Island; and St.
Bernard, Louisiana. No significant gain or loss resulted from this
transaction.
In January 1997, Cox exchanged cable television systems in western
Massachusetts and Weymouth, Massachusetts for cable television systems in
James City and York County, Virginia and Pawtucket, Rhode Island. Each of the
systems served approximately 48,000 customers. No gain or loss resulted from
this transaction.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,200 customers for Hampton and
Williamsburg, Virginia cable television systems serving approximately 45,300
customers. The transaction included a Texas cable television system serving
approximately 7,000 customers which was purchased and then immediately traded
by Cox. Cox recognized a pre-tax gain of $27.8 million in conjunction with the
exchange.
In December 1997, Cox exchanged its Lafayette, Indiana cable television
system serving approximately 38,000 customers and the net proceeds from the
sale of a Sun City, California cable television system for a suburban Phoenix
cable television system serving approximately 36,000 customers. No gain or
loss resulted from this transaction.
38
<PAGE>
1997 Dispositions
In September 1997, Cox sold its Sun City cable television system serving
approximately 10,000 customers. An insignificant loss was recognized in
conjunction with the sale. The net proceeds from the sale of Sun City were
used in the Lafayette exchange described above.
In December 1997, Cox sold its Central Ohio cable television system serving
approximately 85,000 customers for $204.2 million. Cox recognized a pre-tax
gain of $26.4 million in conjunction with the sale. For tax purposes, Cox
accounted for the disposition as a like-kind exchange. Tax rules allow Cox to
defer a substantial portion of the related tax gain on this transaction upon
the reinvestment of the net proceeds in qualifying future acquisitions, which
occurred with the purchase of the Tucson and Sierra Vista, Arizona cable
television systems.
Investments
See "Investments" in Part I, Item 1 "Business" and Note 6 in Part II, Item 8
"Consolidated Financial Statements and Supplementary Data."
Results of Operations
1998 compared with 1997
Revenues for the year ended December 31, 1998 were $1,716.8 million, a 6.6%
increase over revenues of $1,610.4 million for the year ended December 31,
1997. Basic customers were 3,741,608, a 2.8% increase over customers at
December 31, 1997 after adjusting for the trades and sales of cable television
systems.
Complete basic revenues increased 11.7% to $1,219.2 million in 1998,
primarily due to basic and digital customer growth. Rate increases implemented
primarily during fourth quarter 1997 and the acquisition of the Las Vegas
cable television system also contributed to the growth. As of December 31,
1998, digital television had launched in seven markets with 74,843 customers.
Pay-per-view revenues in 1998 were $44.5 million, a 6.0% decrease from the
same period in 1997 primarily as a result of the Tyson/Holyfield boxing event
in 1997 offset by increased pay-per-view revenues contributed from the Las
Vegas cable television system. Advertising revenues increased 32.3% to $136.7
million due to political advertising and a robust economy which created growth
in local and national advertising sales during 1998. The Las Vegas cable
television system also contributed to the growth.
Data revenues increased to $20.1 million from $3.3 million primarily as a
result of Cox's residential data service, Cox@Home, which as of December 31,
1998 had launched in eight markets with 67,069 customers. Telephony revenues
increased to $31.8 million from $13.1 million primarily due to growth in both
the residential and commercial telephony business. Cox's residential telephone
offering had launched in six markets with 27,819 customers as of December 31,
1998.
Revenues from satellite operations were $33.5 million for the current year,
a decrease from revenues of $120.6 million for the same period in 1997. This
decrease was due to the restructuring of PrimeStar Partners, L.P. during April
1998 which resulted in the exchange of Cox's interest and net assets in and
operations of PrimeStar Partners, L.P. for an ownership interest in PrimeStar,
Inc.
Programming costs were $406.7 million in 1998, an increase of 13.7% over
1997 due to basic and digital customer growth, January 1998 programming rate
increases, 1998 channel additions and additional
39
<PAGE>
programming costs related to the acquisition of the Las Vegas cable television
system. Plant operations expenses decreased 3.5% to $132.8 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 1997. Marketing costs increased to $99.5 million in 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 year ended
December 31, 1998 increased 22.3% to $389.2 million due primarily to costs
associated with digital video, high-speed data and telephony services.
Depreciation was $373.5 million for the year ended December 31, 1998, a
13.2% increase compared to the same period in 1997. The continued upgrade and
rebuild of the broadband network and the acquisition of the Las Vegas cable
television system are principal components of this increase. Amortization
increased 12.9% to $84.2 million primarily due to additional franchise value
resulting from the acquisitions of the Las Vegas and the Tucson and Sierra
Vista, Arizona cable television systems. Operating income for 1998 was $201.4
million, a decrease of 1.9% compared to 1997.
Interest expense increased $21.2 million to $223.3 million primarily due to
an increase in total debt outstanding. Equity in net losses of affiliated
companies was $547.2 million primarily due to losses of $330.0 million, $107.8
million and $46.6 million associated with Sprint PCS, Cox PCS and Teleport,
respectively.
Net gain on investments of $2,484.2 million primarily includes:
. $1,719.3 million pre-tax gain on the conversion of Cox's equity ownership
of Teleport into AT&T common stock during July 1998; and
. $769.5 million pre-tax gain related to the reorganization of Sprint PCS
in November 1998.
Gain on issuance of stock by affiliated companies of $165.3 million
primarily resulted from a stock acquisition by Teleport. Dividends received of
$12.2 million were from AT&T.
Net income for the year ended December 31, 1998 was $1,270.7 million as
compared to net loss of $136.5 million for the year ended December 31, 1997.
Operating cash flow (operating income before depreciation and amortization),
a non-GAAP measure of performance, is a commonly used financial analysis tool
for measuring and comparing cable television companies in several areas such
as liquidity, operating performance and leverage. Operating cash flow
increased 8.1% to $659.1 million for the year ended December 31, 1998. The
operating cash flow margin (operating cash flow as a percentage of revenues)
for the year ended December 31, 1998 was 38.4%, an increase from 37.9% for the
year ended December 31, 1997. Operating cash flow should not be considered as
an alternative to net income as an indicator of Cox's performance or as an
alternative to cash flows from operations as a measure of liquidity.
1997 compared with 1996
Revenues for the year ended December 31, 1997 were $1,610.4 million, a 10.3%
increase over revenues of $1,460.3 million for the year ended December 31,
1996. Basic customers were 3,235,338, a 2.7% increase over customers at
December 31, 1996 after adjusting for the trades and sales of cable television
systems.
Complete basic revenues increased 8.1% to $1,091.8 million in 1997 due to
customer growth and rate increases implemented primarily during the fourth
quarter of 1996. These increases are the result of new channel additions,
increased programming costs and pass-through of inflation adjustments.
40
<PAGE>
Premium service revenues in 1997 were $186.6 million, down $2.2 million
compared to 1996 as premium units decreased to 1,865,184 due to the completion
of the spring 1996 three-for-one promotion. Pay-per-view revenues in 1997 were
$47.3 million, a 3.7% increase from the same period in 1996; however,
excluding revenues from a March 1996 Tyson/Bruno boxing event and a November
1996 Tyson/Holyfield boxing event, pay-per-view revenues increased 21.0%.
Advertising revenues increased 7.8% to $103.3 million due to growth in local
and national advertising sales during 1997; however, excluding revenues from
non-recurring 1996 Sprint campaigns, advertising revenues increased 12.0%.
Revenues from satellite operations were $120.6 million for 1997, a 45.0%
increase over revenues of $83.2 million for 1996 as PrimeStar customers
increased to 171,531 at December 31, 1997 from 130,606 at December 31, 1996.
Programming costs were $357.9 million in 1997, an increase of 9.5% over
1996. These cost increases were due primarily to Cox's customer growth,
January 1997 programming rate increases and new channel additions. Plant
operations expenses decreased 2.4% to $137.6 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 1997.
Marketing costs increased to $77.6 million in 1997 due in part to costs
associated with the rollout of high-speed data and telephony services. General
and administrative expenses for the year ended December 31, 1997 increased
7.0% to $318.2 million due primarily to the increase in direct costs
associated with high-speed data and telephony services.
Depreciation was $330.0 million for the year ended December 31, 1997, a
24.9% increase compared to the same period in 1996 due to the continued
upgrade and rebuild of the broadband network. Amortization increased 5.1% to
$74.6 million due to additional goodwill and franchise value resulting from
the trades of cable television systems during 1997. Operating income for 1997
was $205.3 million, a decrease of 7.4% compared to the same period in 1996.
Interest expense increased $56.1 million to $202.1 million due to the
discontinuance of capitalizing interest resulting from the launch of services
by Cox's PCS investments. Equity in net losses of affiliated companies was
$404.4 million primarily due to losses of $225.2 million, $85.0 million and
$48.6 million associated with Sprint PCS, Cox PCS and Teleport, respectively.
Net gain on investments of $116.6 million primarily includes:
. $190.8 million recognized in the second quarter of 1997 primarily as a
result of the exchange of Cox's interest in UK Gold and UK Living to
Flextech plc; and
. $54.9 million recognized in the fourth quarter of 1997 primarily related
to the sale of E! Entertainment Television.
. Offset by a $183.9 million charge due to the decline in fair market value
of Telewest considered to be other than temporary.
Gain on issuance of stock by affiliated companies of $90.8 million,
recognized during the fourth quarter 1997, primarily resulted from a secondary
public offering of Teleport.
Net loss for the year ended December 31, 1997 was $136.5 million as compared
to net loss of $51.6 million for the year ended December 31, 1996.
Operating cash flow increased 9.5% to $609.8 million for the year ended
December 31, 1997. The operating cash flow margin for the year ended December
31, 1997 was 37.9%, a slight decrease from 38.1% for the year ended December
31, 1996. This decrease was due to the increased launch costs associated with
residential and commercial data and telephony. Operating cash flow should not
be considered as an alternative to net income as an indicator of Cox's
performance or as an alternative to cash flows from operations as a measure of
liquidity.
41
<PAGE>
Liquidity and Capital Resources
Uses of Cash
As part of Cox's ongoing strategic plan, Cox has invested, and will continue
to invest, significant amounts of capital to enhance the reliability and
capacity of its broadband network in preparation for the offering of new
services and to make investments in affiliated companies primarily focused on
telephony, programming and communications-related activities.
During 1998, Cox made capital expenditures of $808.9 million. These
expenditures were primarily directed at upgrading and rebuilding its broadband
network for the delivery of high-speed data and telephony. Capital
expenditures for 1999 and 2000 are expected to range between $925.0 million
and $975.0 million. Capital expenditures for 2001 are expected to range
between $775.0 million and $825.0 million and for 2002 and 2003 are expected
to range between $650.0 million and $700.0 million.
In addition to improvements of existing systems, Cox made strategic
investments in businesses focused on telephony, programming and
communications-related activities. Investments in affiliated companies of
$169.1 million included additional equity funding of $86.4 million to Sprint
PCS and other telephony investments, $71.7 million used to purchase additional
equity ownership of Telewest and $11.0 million equity funding to other
interests. Future funding requirements for investments in affiliated companies
are expected to be approximately $17.0 million. These 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.
Restricted cash invested represents proceeds from the sale of the Central
Ohio cable television system in December 1997 held in escrow pending
reinvestment in a future cable television system acquisition, which occurred
with the purchase of the Tucson and Sierra Vista, Arizona cable television
systems for $250.2 million during June 1998. In addition, during 1998 Cox made
payments of $1,230.5 million for the purchases of cable television systems,
primarily for the acquisition of the Las Vegas system.
Cox's current credit facilities contain covenants which, among other
provisions, restrict the payment of cash dividends or the repurchase of
capital stock if certain requirements are not met as to the ratio of debt to
operating cash flow. Historically, Cox has not paid dividends nor does Cox
intend to pay dividends in the foreseeable future but to reinvest future
earnings, consistent with its business strategy. Although Cox was in
compliance with its credit facility covenants at December 31, 1998, Cox was
prevented from paying dividends.
Sources of Cash
During 1998, Cox generated $665.5 million from operations. Additionally, net
cash provided by financing activities was $937.2 million and included proceeds
of $197.6 million from the issuance of medium term notes and $645.9 million of
notes, debentures and Reset Put Securities. Proceeds from sale of investments
of $353.2 million represents $63.2 million received from the exercise of the
Cox PCS put, $74.0 million received from the PrimeStar transaction and $215.6
million received from the sale of 3.3 million shares of AT&T stock.
Revolving Credit Facilities
As of December 31, 1998, Cox had a $1,200.0 million revolving credit
facility which matures on October 9, 2002. In addition, Cox had an $800.0
million revolving credit facility which matures on September 29, 1999, at
which time any outstanding borrowings convert to a long-term loan due
September 27, 2002. These facilities are committed to back outstanding
commercial paper. The weighted-average interest rates for outstanding debt on
the revolving credit facilities at December 31, 1998 and 1997 were 6.1% and
6.0%, respectively.
42
<PAGE>
Commercial Paper
As of December 31, 1998, Cox had a $1,500.0 million commercial paper
program. The commercial paper program is backed by amounts available under the
revolving credit facilities. The weighted-average interest rate for
outstanding commercial paper for both the years ended December 31, 1998 and
1997 was 5.8%.
Shelf Registrations
In April 1996, Cox filed a Form S-3 Registration Statement with the
Securities and Exchange Commission under which Cox may from time to time offer
and issue debentures, notes, bonds or other evidence of indebtedness for a
maximum aggregate amount of $750.0 million. As of December 31, 1998, Cox had
issued $425.0 million of medium term notes under the 1996 shelf registration.
In July 1998, Cox filed a Form S-3 Registration Statement with the
Securities and Exchange Commission under which Cox may from time to time offer
and issue debentures, notes, bonds or other evidence of indebtedness for a
maximum aggregate amount of $1,000.0 million. In 1998, Cox issued $200.0
million of notes and $200.0 million of debentures under the 1998 shelf
registration. In addition, during July 1998, Cox issued $250.0 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, 2033 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.
In anticipation of the issuance of these debt securities under the 1998
shelf registration, Cox entered into a series of transactions under a forward
treasury lock agreement in order to hedge its interest rate exposure. Such
transactions totaled a notional amount of $50.0 million for the notes due
August 1, 2008, $50.0 million for the debentures due August 1, 2028 and $50.0
million for the REPS due August 1, 2033. The hedging transactions were settled
in July 1998 at a minimal cost, which will be reflected as adjustments to
interest expense over the life of the debt securities.
Floating Rate Reset Notes
In June 1997, Cox issued $150.0 million principal amount of floating rate
reset notes due June 15, 2009. The reset notes bear interest at a floating
rate equal to 0.8975% per annum below LIBOR until June 15, 1999, at which time
the interest rate will be reset at a fixed annual rate equal to 6.62% plus
Cox's spread to the ten year Treasury. The reset notes are redeemable at the
election of the holder, in whole but not in part, at 100.0% of the principal
amount on June 15, 1999. In addition, in exchange for a premium paid to Cox of
$2.9 million, the reset notes may be purchased by a third party at the
election of the third party, in whole but not in part, at 100.0% of the
principal amount on June 15, 1999. Amortization of the premium will be
reflected as adjustments to interest expense. The weighted-average interest
rates for the reset notes at December 31, 1998 and 1997 were 4.8% and 4.9%,
respectively.
Other
CEI continues to perform day-to-day cash management services for Cox with
settlements of balances between Cox and CEI occurring periodically bearing
interest at fifty basis points above CEI's current commercial paper
borrowings.
43
<PAGE>
At December 31, 1998, Cox had approximately $4,090.8 million of outstanding
indebtedness and had approximately $1,767.8 million available under its
revolving credit facilities, shelf registration statements and commercial
paper program.
Cox expects that the cost of its cable upgrades and investment activity will
exceed Cox's cash flow from operations and, therefore, additional capital will
be necessary. Cox believes it will be able to meet its capital needs for the
next twelve months with unused amounts available under existing revolving
agreements, the shelf registration statements and the commercial paper
program. In addition, Cox is pursuing alternatives to monetize certain
unconsolidated investments.
Cox believes its operations are not materially affected by inflation.
Cox's Board of Directors has approved a two-for-one stock split of all
outstanding shares of Cox's capital stock. Stockholders will vote for the
proposed stock split at Cox's annual meeting, currently scheduled for May 13,
1999. Cox will promptly effect the stock split once it is approved, unless the
Board determines that the stock split is no longer in the best interests of
Cox and its stockholders.
Recently Issued Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Financial Instruments
and Hedging Activities," was issued. This statement requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The effect on the financial statements upon
adoption of SFAS No. 133 has not been determined.
Other Matters
Year 2000 Readiness Disclosure
General
The Year 2000 issue is the potential impact of computer programs and
embedded computer microprocessors being unable to properly process dates or
date-sensitive calculations beyond December 31, 1999. Computer systems that
process dates or date-sensitive calculations may recognize only the last two
digits to identify the year in a date, or identify digits as an instruction.
Accordingly, the year "00" may be recognized as the year 1900 rather than the
year 2000, which may result in miscalculations or system failures. A computer
system is deemed to be year 2000 compliant when it continues to produce
understandable, accurate and predictable results which conform to the original
functional specifications, regardless of the millennium change. Cox recognizes
the importance of this issue and is actively managing an appropriate
transition into the year 2000.
State of Readiness
In June 1997, Cox appointed a project team, using both internal and external
resources, to develop its Year 2000 initiative. Cox is, as necessary,
upgrading and replacing affected information technology systems (such as
computer systems and software applications) and non-information technology
systems (such as equipment with embedded microprocessors). Cox is also
designing a contingency and business continuation plan and will implement
these plans as necessary.
The project team has developed a plan to assess, remediate, and test its
information technology and non-information technology systems sufficiently in
advance of the year 2000 to reduce the risk of an interruption in critical
services as a result of the millennium date change. The Year 2000 initiative
addresses the following systems:
44
<PAGE>
.Applications: custom and packaged software applications;
.Infrastructure: local- and wide-area networks, hardware, processors and
operating systems;
.Plant: the Cox plant, distribution network and programming components; and
.Vendors: business-critical third party vendors.
The general phases of the Year 2000 initiative common to all systems are as
follows:
. Phase 1: inventory of all business processes to document the Year 2000
status for each product and service;
. Phase 2: assign priorities to identified items;
. Phase 3: assess the Year 2000 compliance of items determined to be
material to Cox;
. Phase 4: repair or replace material items that are determined not to be
Year 2000 compliant;
. Phase 5: test material items;
. Phase 6: integration testing of multiple information technology and non-
information technology assets, both custom and vendor-provided, to
determine correct manipulation of dates and date-related data; and
. Phase 7: design and implement contingency and business continuation plans
for each organization and Cox location, where appropriate.
Status of Initiative as of December 31, 1998
<TABLE>
<CAPTION>
Applications Infrastructure Plant Vendors
- ------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Phase 1- Substantially Substantially Substantially Substantially
3 complete complete complete complete
- ------------------------------------------------------------------------------------------
Phase 4 Substantially Substantially Expect to complete Substantially
complete complete mid-1999 complete
- ------------------------------------------------------------------------------------------
Phase 5 In progress In progress Development of In progress
procedures in
progress, expect to
implement in mid-
1999
- ------------------------------------------------------------------------------------------
Phase 6 In progress In progress Development of In progress
procedures in
progress, expect to
implement in mid-
1999
- ------------------------------------------------------------------------------------------
Phase 7 Expect to commence Expect to commence Expect to commence Expect to commence
mid-1999 mid-1999 mid-1999 mid-1999
</TABLE>
Applications. Applications consist of custom and packaged software. In 1995,
Cox began a company-wide business systems replacement project to meet the
growth in the cable business and to meet emerging business needs. Accordingly,
Cox is in the process of replacing or upgrading substantially all applications
irrespective of the Year 2000 issue.
Cox's two most critical applications are its common financial system and the
cable operation support system. The financial system is based on packaged
software from JDEdwards. This software was upgraded to version 7.5 during
fourth quarter 1998. Cox has made appropriate inquiries and JDEdwards has
provided certification that Version 7.5 is Year 2000 compliant. Cox operates
all of its cable properties using the ICOMS subscriber management system
licensed from Convergys, Inc. Cox has made appropriate inquiries and
Convergys, Inc. has provided opinions indicating that ICOMS is Year 2000
compliant.
45
<PAGE>
Cox has a very limited inventory of custom or in-house developed software.
Cox believes that all such software over 10,000 lines of code has been made
Year 2000 compliant as of December 31, 1998.
Infrastructure. Infrastructure consists of local- and wide-area networks,
hardware, processors and operating systems. Cox has received recommendations
from significant vendors as to the appropriate version of software needed to
be Year 2000 compliant. Cox intends to remain current with all Year 2000
compliant software versions where available. The project team has also
conducted reviews of the Infrastructure Year 2000 exposure to non-information
technology systems (i.e., elevator, automated lighting, etc.). Based upon the
project team's review, Cox has concluded that exposure from non-information
technology systems failing to be Year 2000 compliant is limited and does not
pose a material financial risk to the Company.
Plant. The cable plant is comprised of an integrated distribution network
providing video, voice and data services to its customers. In 1995, Cox began
to deploy fiber optic cable and to upgrade the technical quality of its hybrid
fiber-coaxial broadband network facilitating the delivery of additional
programming and services. As a result, substantially all of Cox's cable plant
equipment and software is state-of-the-art, which has helped to reduce the
level of plant Year 2000 issues. Certain equipment is known to require
upgrades or replacement to operate properly. Some of these upgrades are not
yet available from their respective vendors. Cox expects substantially all
plant activities will be completed through repair and replacement by mid-1999.
Cox is currently developing testing and integration testing procedures, and
will implement testing activity, where appropriate, in mid-1999. Due to the
nature of the cable plant network, testing procedures are dependent on testing
performed by vendors and Cox in a non-production environment.
Vendors. Cox's assessment of its vendors includes a formal communication
program with Cox's significant vendors to determine the extent to which Cox is
vulnerable should those third parties fail to remediate their own Year 2000
non-compliance. In addition, Cox is currently developing testing and
integration testing procedures, including the purchase of testing programs,
and has begun testing. With respect to customers, most of Cox's customer base
consists of individual subscribers, thus, vulnerability to a few key customers
is not a significant risk to Cox. Cox is not aware of any anticipated Year
2000 non-compliance by its vendors or customers that could materially affect
Cox's business operations; however, Cox does not control the systems of other
companies and cannot assure that such systems will be converted in a timely
fashion and, if not converted, would not have an adverse effect on Cox's
business operations.
Like most other companies, Cox is dependent upon a variety of external
suppliers including vendors providing electrical power, telephony, water, fuel
for vehicles and other necessary commodities. Cox also relies upon the
interstate banking system and related electronic communications for such
functions as transmitting financial data from field locations to the home
office and sweeping cash into lockboxes. Cox is currently not aware of any
material non-compliance by these vendors that will materially affect Cox's
business operations; however, Cox does not control these systems and cannot
assure that they will be converted in a timely fashion and, if not converted,
would not have an adverse effect on Cox's business operations.
Costs
Total costs associated with Year 2000 compliance are not expected to be
material to Cox's financial position. Most of the costs associated with Cox's
applications systems upgrades and replacements are being incurred irrespective
of the Year 2000 initiative. In addition, the timing of these upgrades and
replacements has not been accelerated in order to become Year 2000 compliant.
As of December 31, 1998, the total incremental costs expended on the Year 2000
initiative is approximately $1.0 million. Cox expects that the total
incremental costs of the Year 2000 initiative upon completion will be
approximately $3.9 million.
46
<PAGE>
Risks and Reasonably Likely Worst Case Scenarios
The failure to correct a material Year 2000 problem could result in system
failures leading to a disruption in, or failure of certain normal business
activities or operations. Such failures could materially and adversely affect
Cox's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, Cox is unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on Cox's results of operations,
liquidity or financial condition. The Year 2000 initiative is expected to
significantly reduce Cox's level of uncertainty about the Year 2000 problem
and, in particular, about the Year 2000 compliance and readiness of its
material Vendors. Cox believes that the new applications and cable plant
business systems implemented since 1995 and its Year 2000 initiative reduce
the possibility of significant disruptions to normal operations.
Contingency and Business Continuation Plan
The Year 2000 initiative calls for suitable contingency planning for Cox's
at-risk business functions. Cox normally makes contingency plans in order to
avoid interrupted service providing video, voice and data products to Cox's
customers. The normal contingency planning will be revised in mid-1999, where
appropriate, to specifically address Year 2000 exposure with respect to
service to customers.
All statements relating to the Year 2000 made in Forms 10-K, 10-Q or
Registration Statements filed by Cox with the Securities and Exchange
Commission after January 1, 1996 are hereby incorporated by reference and
designated as Year 2000 Readiness Disclosures.
Rate Regulation
Many franchising authorities have become certified by the FCC to regulate
rates charged by Cox for basic cable service and associated basic cable
service equipment. Some local franchising authority decisions have been
rendered that were adverse to Cox. In addition, a number of such franchising
authorities and customers of Cox filed complaints with the FCC regarding the
rates charged for cable programming services. In December 1995, the FCC
approved a resolution of all outstanding rate complaints covering the Cox and
former Times Mirror cable television systems. The resolution, among other
things, provided for the payment of refunds of $7.1 million plus interest to
one million customers in January 1996, and the removal of additional outlet
charges for regulated services from all of the former Times Mirror cable
television systems. The resolution also stated that Cox's CPS tier rates as of
June 30, 1995 were not unreasonable. Refunds under the resolution were fully
provided for in Cox's financial statements at December 31, 1995. Cox and the
franchising authorities reached a settlement of the suit and the appeal was
dismissed with prejudice on November 6, 1997.
The Telecommunications Act of 1996 became effective in February 1996. The
1996 Act is intended to promote substantial competition in the delivery of
video and other services by local telephone companies (also known as local
exchange carriers or "LECs") and other service providers, and permits cable
television operators to provide telephone services. Among other provisions,
the 1996 Act deregulates the CPS tier of large cable operators on March 31,
1999 and upon enactment the CPS rates of small cable operators serving 50,000
or fewer subscribers, revises the procedures for filing a CPS complaint, and
adds a new effective competition test.
Risk Factors
This Form 10-K includes forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements include, among others, statements concerning our outlook
for the future and information about our strategic plans and objectives,
expectations as to subscriber and revenue growth, anticipated rates of
subscriber penetration, and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. Actual results may differ
materially from those in the forward-looking statements, and
47
<PAGE>
may be affected by known and unknown risks, uncertainties and other factors.
Many of these risks and uncertainties have been discussed in our prior filings
with the Securities and Exchange Commission. Factors to consider in connection
with any of our forward-looking statements include, but are not limited to:
. Our ability to implement successfully our growth strategies and the level of
success of our operating initiatives, including future expenditures on
capital projects, terms and availability of capital, the actual level of
revenue growth, adverse changes in the price of telephony interconnection or
cable television programming, and disruptions in the supply of services and
equipment. In addition, material changes in the cost of equipment or
significant unanticipated capital expenditures could disrupt our business
plan and adversely affect our business operations.
. Trends in our businesses, particularly trends in the market for existing and
new communications services and changes in business strategy and development
plans.
. Our ability to increase penetration in existing markets, as well as those we
enter through acquisitions or other business combinations, including our
ability to continue to control costs and maintain high standards of customer
service, the extent to which consumer demand for voice, video and data
services increases, subscriber availability and growth, and subscriber
demand and competition.
. Our ability to generate sufficient cash flow to meet our debt service
obligations and to finance ongoing operations. Cox has historically reported
net losses, and we operate with a significant level of indebtedness. Cash
generated from operating activities and borrowing has been sufficient to
fund our debt service, working capital obligations and capital expenditure
requirements. We believe that Cox will continue to generate cash and obtain
financing sufficient to meet such requirements. However, if Cox were unable
to meet such requirements, we would have to consider refinancing our
indebtedness or obtaining new financing. Although in the past we have been
able to refinance our indebtedness and obtain new financing, there can be no
assurance that we will be able to do so in the future or that, if we were
able to do so, the terms available would be acceptable to us. In addition,
we must manage exposure to interest rate risk due to variable rate debt
instruments.
. Changes in our relationship with, the performance of, and the market value
of companies in which we have significant investments, especially
investments in telecommunications and technology, including AT&T Corp.,
Sprint PCS and @Home Corporation.
. Competition from alternative methods of receiving and distributing signals
and from other sources of news, information and entertainment, such as
newspapers, movie theaters, online computer services and home video
products. Because our franchises are generally non-exclusive, there is
potential for competition from other operators of cable television systems
and other distribution systems capable of delivering programming to homes or
businesses, including direct broadcast satellite systems and multichannel,
multipoint distribution services. In addition, we face general competitive
factors, such as the introduction of new technologies (such as Internet-
based services), changes in prices or demand for our products as a result of
competitive actions or economic factors, and competitive pressures within
the broadband communications industry.
. Our ability to obtain the necessary FCC, as well as state and local,
authorizations for new services, and our response to adverse regulatory
changes. The cable television industry is subject to extensive regulation by
federal, local and, in some instances, state governmental agencies. Advances
in communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. Thus it is
not possible to predict the effect that ongoing developments might have on
the cable communications industry or on our operations.
. Our ability to successfully implement our Year 2000 initiative. See "--Other
Matters--Year 2000 Readiness Disclosure."
48
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cox has estimated the fair values of financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment, however, is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Cox would realize in a current
market exchange.
The carrying amounts of cash, restricted cash, accounts receivable, other
assets, accounts payable, deferred income and amounts due to/from Cox
Enterprises, Inc. are reasonable estimates of their fair value at December 31,
1998 and 1997.
The estimated fair value of debt instruments are based on discounted cash
flow analyses using Cox's incremental borrowing rate for similar types of
borrowing arrangements and dealer quotations. The revolving credit agreements,
commercial paper and Floating Rate Reset Notes at December 31, 1998 and 1997
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 December 31,
1998 was $2,385.7 million compared to a carrying amount of $2,393.6 million.
The estimated fair value of the remaining debt instruments at December 31,
1997 was $1,557.7 million compared to a carrying amount of $1,518.4 million.
In addition, the effect of a hypothetical one percentage point decrease in
interest rates would increase the estimated fair value of the remaining debt
instruments with a carrying amount of $2,364.5 million to $2,540.6 million at
December 31, 1998 and $1,518.4 million to $1,595.0 million at December 31,
1997.
In December 1998, Cox entered into four costless collar agreements to hedge
its position in 10.0 million shares of AT&T common stock. The agreements
contain a notional amount of $78.00 per share and mature at various dates
through January 2003. Cox has recorded the costless collar agreements at their
estimated fair market value, with unrealized losses resulting from changes in
fair value between measurement dates of $4.3 million at December 31, 1998
recorded as a component of accumulated other comprehensive income.
The fair values of some of Cox's investments are estimated based on quoted
market prices for those or similar investments. For cost method investments
for which there are no quoted market prices, a reasonable estimate of fair
value was not practicable as such estimate could not be made without incurring
excessive costs (see Note 10).
49
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
----------- ----------
(Thousands of Dollars)
<S> <C> <C>
Assets
Cash.................................................... $ 30,604 $ 28,259
Restricted cash......................................... -- 204,210
Accounts and notes receivable, less allowance for doubt-
ful accounts of $7,872 and $6,955...................... 166,052 144,073
Net plant and equipment................................. 2,652,212 1,979,063
Investments............................................. 5,981,057 1,598,273
Intangible assets....................................... 3,959,906 2,458,717
Amounts due from Cox Enterprises, Inc. ("CEI").......... -- 50,856
Other assets............................................ 88,273 93,150
----------- ----------
Total assets.......................................... $12,878,104 $6,556,601
=========== ==========
Liabilities and shareholders' equity
Accounts payable and accrued expenses................... $ 296,950 $ 217,984
Deferred income......................................... 39,147 26,698
Deferred income taxes................................... 2,886,636 721,594
Other liabilities....................................... 188,050 84,179
Debt.................................................... 3,920,159 3,148,834
Amounts due to CEI...................................... 170,596 --
----------- ----------
Total liabilities..................................... 7,501,538 4,199,289
----------- ----------
Commitments and contingencies (Note 17)
Shareholders' equity
Series A Preferred Stock - liquidation preference of
$44.275 per share, $1 par value; 5,000,000 shares
authorized; issued and outstanding: 2,418,186....... 2,418 --
Class A Common Stock, $1 par value; 316,000,000 shares
authorized; shares issued and outstanding:
263,555,756 and 257,276,414.......................... 263,556 257,276
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............................ 2,152,250 1,790,833
Retained earnings..................................... 1,350,277 79,605
Accumulated other comprehensive income................ 1,594,266 215,799
----------- ----------
Total shareholders' equity.......................... 5,376,566 2,357,312
----------- ----------
Total liabilities and shareholders' equity.......... $12,878,104 $6,556,601
=========== ==========
</TABLE>
See notes to consolidated financial statements.
50
<PAGE>
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(Thousands of Dollars, except per
share data)
Revenues
<S> <C> <C> <C>
Complete basic..................... $ 1,219,223 $ 1,091,831 $ 1,009,733
Premium service.................... 192,576 186,625 188,809
Pay-per-view....................... 44,486 47,314 45,610
Advertising........................ 136,653 103,271 95,840
Data............................... 20,082 3,304 --
Telephony.......................... 31,763 13,099 6,098
Satellite.......................... 33,492 120,574 83,164
Other.............................. 38,482 44,346 31,031
------------ ------------ ------------
Total revenues................... 1,716,757 1,610,364 1,460,285
Costs and expenses
Programming costs.................. 406,748 357,880 326,857
Plant operations................... 132,751 137,597 140,927
Marketing.......................... 99,544 77,625 62,589
General and administrative ........ 389,234 318,232 297,335
Satellite operating and
administrative ................... 29,404 109,195 75,680
Depreciation....................... 373,462 329,951 264,188
Amortization....................... 84,209 74,587 70,973
------------ ------------ ------------
Operating income..................... 201,405 205,297 221,736
Interest expense..................... (223,326) (202,136) (146,077)
Equity in net losses of affiliated
companies........................... (547,202) (404,440) (170,435)
Gain on investments, net............. 2,484,162 116,577 4,640
Gain on issuance of stock by
affiliated companies................ 165,342 90,796 50,100
Dividends received .................. 12,164 -- --
Other, net........................... 942 3,918 11,531
------------ ------------ ------------
Income (loss) before income taxes.... 2,093,487 (189,988) (28,505)
Income tax expense (benefit)......... 822,815 (53,496) 23,046
------------ ------------ ------------
Net income (loss).................... $ 1,270,672 $ (136,492) $ (51,551)
============ ============ ============
<CAPTION>
Per share data
<S> <C> <C> <C>
Basic net income (loss) per share.. $ 4.66 $ (0.50) $ (0.19)
Diluted net income (loss) per
share.............................. 4.60 (0.50) (0.19)
Basic weighted-average shares
outstanding ...................... 272,813,264 270,500,791 270,240,757
Diluted weighted-average shares
outstanding ...................... 276,210,865 270,500,791 270,240,757
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------
Accumulated
Series A Additional other
Preferred paid-in Retained comprehensive Comprehensive
Stock Class A Class C capital earnings income Total income (loss)
--------- -------- ------- ---------- ---------- ------------- ---------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $256,365 $13,799 $1,739,422 $ 267,648 $ 54,779 $2,332,013
Net loss................ (51,551) (51,551) $ (51,551)
----------
Issuance of stock
related to stock
compensation plans .... 99 1,591 1,690
Capital contribution by
CEI.................... 1,108 1,108
Foreign currency
translation adjustment
....................... 26,837
Change in net unrealized
loss on securities, net
of reclassification
adjustment............. (48,785)
----------
Other comprehensive
loss................... (21,948) (21,948) (21,948)
----------
Comprehensive loss...... $ (73,499)
------ -------- ------- ---------- ---------- ---------- ---------- ==========
Balance at December 31,
1996................... -- 256,464 13,799 1,742,121 216,097 32,831 2,261,312
Net loss................ (136,492) (136,492) $ (136,492)
----------
Issuance of stock
related to stock
compensation plans .... 812 12,188 13,000
Capital contribution by
CEI.................... 36,524 36,524
Foreign currency
translation adjustment
....................... (9,914)
Change in net unrealized
gain on securities, net
of reclassification
adjustment............. 192,882
----------
Other comprehensive
income................. 182,968 182,968 182,968
----------
Comprehensive income.... $ 46,476
------ -------- ------- ---------- ---------- ---------- ---------- ==========
Net income.............. 1,270,672 1,270,672 $1,270,672
----------
Issuance of Series A
Preferred Stock........ $2,418 104,647 107,065
Issuance of stock
related to stock
compensation plans..... 612 11,500 12,112
Issuance of stock
related to the
acquisition of Prime
South.................. 5,668 245,270 250,938
Foreign currency
translation adjustment
....................... (4,416)
Change in net unrealized
gain on securities, net
of reclassification
adjustment............. 1,382,883
----------
Other comprehensive
income................. 1,378,467 1,378,467 1,378,467
----------
Comprehensive income.... $2,649,139
------ -------- ------- ---------- ---------- ---------- ---------- ==========
Balance at December 31,
1997................... -- 257,276 13,799 1,790,833 79,605 215,799 2,357,312
Balance at December 31,
1998................... $2,418 $263,556 $13,799 $2,152,250 $1,350,277 $1,594,266 $5,376,566
====== ======== ======= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1998 1997 1996
----------- ----------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)........................ $ 1,270,672 $ (136,492) $ (51,551)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities, net of effects of
acquisitions:
Depreciation............................ 373,462 329,951 264,188
Amortization............................ 84,209 74,587 70,973
Equity in net losses of affiliated
companies.............................. 547,202 404,440 170,435
Deferred income taxes................... 972,663 101,821 (52,519)
Gain on investments, net................ (2,484,162) (116,577) (4,640)
Gain on issuance of stock by affiliated
companies.............................. (165,342) (90,796) (50,100)
Increase in accounts receivable.......... (17,348) (29,312) (4,222)
(Increase) decrease in prepaid assets.... 8,744 12,894 (30,117)
Increase (decrease) in accounts payable
and accrued expenses.................... 9,122 (4,350) 31,161
Increase (decrease) in other current
liabilities............................. 49,797 (9,310) 20,749
Increase (decrease) in taxes payable..... 13,619 7,730 (32,762)
Other, net............................... 2,895 9,951 (22,458)
----------- ----------- ---------
Net cash provided by operating
activities............................ 665,533 554,537 309,137
----------- ----------- ---------
Cash flows from investing activities
Capital expenditures..................... (808,902) (708,089) (578,926)
Investments in affiliated companies...... (169,102) (388,075) (338,402)
Proceeds from the sale of investments.... 353,159 310,920 201,791
Proceeds from affiliated companies....... -- -- 162,287
Restricted cash invested................. 204,210 (204,210) --
Payments for purchases of cable
television systems...................... (1,230,453) (66,762) --
Decrease (increase) in amounts due from
CEI..................................... 50,856 (50,856) --
Other, net............................... (187) (889) 1,085
----------- ----------- ---------
Net cash used in investing activities.. (1,600,419) (1,107,961) (552,165)
----------- ----------- ---------
Cash flows from financing activities
Revolving credit (repayments) borrowings,
net..................................... (450,001) 350,000 (418,364)
Commercial paper borrowings (repayments),
net..................................... 343,087 (34,748) 718,704
Proceeds from issuance of debt........... 843,531 246,457 124,279
Repayment of debt ....................... (17,689) (15,993) (8,104)
Proceeds from exercise of stock options.. 12,112 13,000 1,275
Payment to reacquire minority interest in
subsidiary.............................. -- (10,000) --
Increase (decrease) in amounts due to
CEI..................................... 170,596 (19,359) (126,764)
Increase (decrease) in book overdrafts... 35,595 9,977 (44,815)
----------- ----------- ---------
Net cash provided by financing
activities............................ 937,231 539,334 246,211
----------- ----------- ---------
Net increase (decrease) in cash.......... 2,345 (14,090) 3,183
Cash at beginning of period.............. 28,259 42,349 39,166
----------- ----------- ---------
Cash at end of period.................... $ 30,604 $ 28,259 $ 42,349
=========== =========== =========
</TABLE>
See noted to consolidated financial statements.
53
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Cox Communications, Inc. ("Cox"), an indirect 73.3% owned subsidiary of CEI,
is among the nation's largest multiple system operators, serving more than 3.7
million customers. Cox is a fully integrated, diversified broadband
communications company with interests in domestic cable distribution systems,
programming networks, telecommunications and technology and broadband
networks.
All significant intercompany accounts have been eliminated in the
consolidated financial statements of Cox.
2. Summary of Significant Accounting Policies
Restricted Cash
In December 1997, Cox sold its Central Ohio cable television operation
serving approximately 85,000 customers, for $204.2 million. For tax purposes,
Cox accounted for the disposition as a like-kind exchange. Tax rules allow Cox
to defer a substantial portion of the related tax gain on this transaction
upon the reinvestment of the net proceeds in qualifying future acquisitions,
which occurred with the acquisition of the Tucson and Sierra Vista, Arizona
cable television systems.
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using principally the straight-line method at rates
based upon estimated useful lives of five to 20 years for buildings and
building improvements, five to 12 years for cable television systems and three
to 10 years for other plant and equipment.
The costs of initial cable television connections are capitalized as cable
plant at standard rates for Cox's labor and at actual costs for materials and
outside labor. Expenditures for maintenance and repairs are charged to
operating expense as incurred. At the time of retirements, sales or other
dispositions of property, the original cost and related accumulated
depreciation are written off.
Effective July 1, 1997, Cox revised the cost component factor used to
capitalize indirect costs relating to network construction activity resulting
in additional indirect costs being capitalized.
Investments
Investments in affiliates are accounted for under the equity method or cost
basis depending upon the level of ownership in the investment and/or Cox's
ability to exercise significant influence over the operating and financial
policies of the investee. Equity method investments are recorded at cost and
adjusted periodically to recognize Cox's proportionate share of the investees'
undistributed income or losses.
Unrestricted publicly traded investments are classified as available-for-
sale under Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and are
recorded at their fair value, with unrealized gains and losses resulting from
changes in fair value between measurement dates recorded as a component of
accumulated other comprehensive income. Cox recognizes realized losses for any
decline in market value considered to be other than temporary. Investments in
privately held companies are stated at cost, adjusted for any known diminution
in value determined to be other than temporary in nature.
54
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets consist primarily of goodwill and franchise value.
Intangibles resulting from business combinations generally are amortized on a
straight-line basis over 40 years. Cox assesses on an on-going basis the
recoverability of certain intangible assets based on estimates of future
undiscounted cash flows for the applicable business acquired compared to net
book value. If the future undiscounted cash flow estimate is less than net
book value, net book value is then reduced to the undiscounted cash flow
estimate. Cox also evaluates the amortization periods of intangible assets to
determine whether events or circumstances warrant revised estimates of useful
lives.
Impairment of Long-Lived Assets
Cox reviews long-lived assets and certain intangibles for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, with any impairment losses being reported in the
period in which the recognition criteria are first applied based on the fair
value of the asset. Long-lived assets and certain intangibles to be disposed
of are reported at the lower of carrying amount or fair value less cost to
sell.
Pension, Postretirement and Postemployment Benefits
Cox generally provides defined pension benefits to all employees based on
years of service and compensation during those years. Cox provides certain
health care and life insurance benefits to substantially all employees and
retirees through certain CEI plans. Expense related to the CEI plans is
allocated to Cox through the intercompany account. The amount of the
allocations is generally based on actuarial determinations of the effects of
Cox employees' participation in the plans.
Stock Compensation Plans
As described in Note 12, Cox accounts for stock compensation plans using the
intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and discloses the pro forma effect on net income and
earnings per share of using the fair value method as required by SFAS No. 123,
"Accounting for Stock-Based Compensation."
Foreign Currency Translation
The financial statements of Cox's non-U.S. investments are translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation."
Net assets of non-U.S. investments whose functional currencies are other than
the U.S. dollar are translated at the current rate of exchange. Income and
expense items are translated at the average exchange rate for the year. The
resulting translation adjustments are recorded, net of taxes, directly into a
separate component of other comprehensive income.
Revenue Recognition
Cox bills its customers in advance, however, revenue is recognized as
broadband communications services are provided. Receivables are generally
collected within 30 days. Credit risk is managed by disconnecting services to
customers who are delinquent. Other revenues are recognized as services are
provided. Revenues obtained from the connection of customers to the cable
television systems are less than related direct selling costs, therefore, such
revenues are recognized as received.
Income Taxes
Prior to October 1998, the accounts of Cox have been included in the
consolidated federal income tax return and certain state income tax returns of
CEI. Current federal and state income tax expenses and benefits were allocated
on a separate return basis to Cox based on the current year tax effects of the
inclusion of its income, expenses and credits in the consolidated income tax
returns of CEI or based on separate state income
55
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
tax returns. In connection with Cox's acquisition of the Las Vegas, Nevada
cable television system in October 1998 (see Note 4), CEI's ownership interest
in Cox was reduced. As such, effective October 1998, Cox is no longer included
in the consolidated federal income tax return of CEI.
Cox provides for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires an asset and liability
based approach in accounting for income taxes. Deferred income tax assets and
liabilities are recorded to reflect the tax consequences on future years of
temporary differences of revenue and expense items for financial statement and
income tax purposes. Valuation allowances reduce deferred tax assets to an
amount that represents management's best estimate of such deferred tax assets
that more likely than not will be realized.
Net Income (Loss) Per Common Share
Effective December 1997, Cox adopted SFAS No. 128, "Earnings per Share."
This statement establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the consolidated statement of operations for all entities with
complex capital structures. Basic EPS is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion No. 15, "Earnings per Share," which is superseded
by this statement. This statement requires restatement of all prior-period EPS
data presented.
Use of Estimates
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.
Derivative Financial Instruments
Cox uses derivative financial instruments, costless collar agreements, to
manage its exposure to fluctuations in the price of Cox's investment in
certain publicly traded stock (see Note 10). Such instruments are included in
the financial statements at fair market value, with unrealized gains and
losses resulting from changes in fair value between measurement dates recorded
as a component of accumulated other comprehensive income.
Recently Issued Accounting Pronouncements
In 1998, Cox adopted several statements issued by the Financial Accounting
Standards Board. SFAS No. 130, "Reporting Comprehensive Income," requires the
components of comprehensive income to be disclosed in the financial
statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," requires certain information to be reported about
operating segments on a basis consistent with Cox's internal organizational
structure. Management's analysis concluded that Cox operates in one operating
segment, broadband communications. Accordingly, all applicable enterprise-wide
disclosures are reflected in the consolidated financial statements. SFAS
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises the disclosures for pensions and other
postretirement benefits and standardizes them into a combined format. Required
disclosures have been made in accompanying footnotes, and applicable prior
years' information has been reclassified for the impact of adopting these
statements. The adoption of these statements had no impact on Cox's reported
financial position, results of operations or cash flows.
In June 1998, SFAS No. 133, "Accounting for Derivative Financial Instruments
and Hedging Activities," was issued. This statement requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. SFAS No. 133 is effective for fiscal
56
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
years beginning after June 15, 1999. The effect on the financial statements
upon adoption of SFAS No. 133 has not been determined.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified for comparative purposes with 1998.
3. Cash Management System
Cox participates in CEI's cash management system, whereby the bank sends
daily notification of checks presented for payment. CEI transfers funds from
other sources to cover the checks presented for payment. Book overdrafts of
$69.2 million and $33.6 million existed at December 31, 1998 and 1997,
respectively, as a result of checks outstanding. These book overdrafts are
reclassified as accounts payable and are considered financing activities in
the Consolidated Statement of Cash Flows.
4. Acquisitions, Dispositions and Exchanges of Businesses
1998 Acquisitions and Transactions
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 June 1998, Cox acquired a cable television system serving approximately
115,000 customers in Tucson, Sierra Vista and portions of Pima County, Arizona
from Tele-Communications, Inc. ("TCI") for approximately $250.2 million.
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. ("Prime South") for a combination of common and
convertible preferred stock and cash with an aggregate value of approximately
$1,325.0 million, including the refinancing of $680.8 million of Prime South
indebtedness. Prime South operated a cable television system serving
approximately 293,000 residential customers, 105,000 hotel units and interests
in various other nonconsolidated operations in the greater Las Vegas area. The
acquisition of Prime South was accounted for as a purchase with the operations
being consolidated into Cox's as of the acquisition date. The purchase price
was allocated to the assets and liabilities assumed based on their estimated
fair market value at the date of acquisition. The purchase price allocations
are expected to be finalized mid-1999 upon receipt of independent appraisals
of the plant and equipment acquired. No material adjustments to the initial
purchase price allocations are expected. The excess of the purchase price over
the fair value of net assets acquired has been recorded as franchise value and
is being amortized on a straight-line basis over 40 years.
The following summarized, unaudited, pro forma financial information for the
twelve months ended December 31, 1998 and 1997 assumes the acquisition of the
Las Vegas cable television system had occurred on January 1 of each year:
<TABLE>
<CAPTION>
Pro Forma
Year Ended December
31
---------------------
1998 1997
---------- ----------
(Thousands of
Dollars,
except per share
data)
(unaudited)
<S> <C> <C>
Revenue.............................................. $1,854,973 $1,773,888
Operating income..................................... 205,180 202,188
Net income (loss).................................... 1,249,992 (179,867)
Earnings per share:
Basic net income (loss) per share................... $ 4.51 $ (0.65)
Diluted net income (loss) per share................. 4.46 (0.65)
</TABLE>
57
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1998, Cox and TCI discontinued negotiations to form a joint
venture serving approximately 270,000 customers in several key Oklahoma
communities. Accordingly, a non-binding agreement, which was signed during
April 1998, was terminated. The termination of this agreement had no financial
impact on Cox.
1997 Acquisitions and Transactions
In January 1997, Cox and TCI exchanged certain cable television systems
owned by Cox serving approximately 319,000 customers for certain cable
television systems owned by TCI serving approximately 296,000 customers. As a
result of the transaction, Cox received TCI's systems in Bellevue/LaVista,
Nebraska and Council Bluffs, Iowa; Chesapeake, Virginia; Scottsdale, Arizona;
North Attleboro/Taunton, Massachusetts; Lincoln, Rhode Island; and St.
Bernard, Louisiana. No significant gain or loss resulted from this
transaction.
In January 1997, Cox exchanged cable television systems in western
Massachusetts and Weymouth, Massachusetts for cable television systems in
James City and York County, Virginia and Pawtucket, Rhode Island. Each of the
systems served approximately 48,000 customers. No gain or loss resulted from
this transaction.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable
television system serving approximately 42,200 customers for Hampton and
Williamsburg, Virginia cable television systems serving approximately 45,300
customers. The transaction included a Texas cable television system serving
approximately 7,000 customers which was purchased and then immediately traded
by Cox. Cox recognized a pre-tax gain of $27.8 million in conjunction with the
exchange.
In December 1997, Cox exchanged its Lafayette, Indiana cable television
system serving approximately 38,000 customers and the net proceeds from the
sale of a Sun City, California cable television system for a suburban Phoenix
cable television system serving approximately 36,000 customers. No gain or
loss resulted from this transaction.
1997 Dispositions
In September 1997, Cox sold its Sun City cable television system serving
approximately 10,000 customers. An insignificant loss was recognized in
conjunction with the sale. The net proceeds from the sale of Sun City were
used in the Lafayette exchange described above.
In December 1997, Cox sold its Central Ohio cable television system serving
approximately 85,000 customers for $204.2 million. Cox recognized a pre-tax
gain of $26.4 million in conjunction with the sale. For tax purposes, Cox
accounted for the disposition as a like-kind exchange. Tax rules allow Cox to
defer a substantial portion of the related tax gain on this transaction upon
the reinvestment of the net proceeds in qualifying future acquisitions, which
occurred with the purchase of the Tucson and Sierra Vista, Arizona cable
television systems.
1996 Acquisitions and Transactions
In January 1996, Cox acquired a cable television system serving
approximately 51,000 customers in Newport News, Virginia, for approximately
$122.3 million. Cox operates this system as part of its cluster of systems in
the Hampton Roads, Virginia area. In April 1996, Cox exchanged its
Williamsport, Pennsylvania cable television system for $13.0 million and a
cable television system in East Providence, Rhode Island. The Williamsport
system served approximately 24,500 customers in Williamsport. The East
Providence system serves approximately 15,500 customers. No gain or loss
resulted from this transaction.
58
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1996 Dispositions
In January 1996, Cox sold its cable television system in Texarkana, Texas.
The system served approximately 23,400 customers. No gain or loss resulted
from this transaction. In April 1996, Cox sold certain cable television
systems in the Ashland, Kentucky and Defiance, Ohio area for $136.0 million.
These systems together served approximately 78,600 customers. No gain or loss
resulted from this transaction.
5. Plant and Equipment
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Land................................................. $ 36,615 $ 29,384
Buildings and building improvements.................. 199,963 128,772
Transmission and distribution plant.................. 2,998,328 2,398,746
Miscellaneous equipment.............................. 347,351 239,068
Construction in progress............................. 120,084 44,948
---------- ----------
Plant and equipment, at cost........................ 3,702,341 2,840,918
Less accumulated depreciation........................ (1,050,129) (861,855)
---------- ----------
Net plant and equipment............................. $2,652,212 $1,979,063
========== ==========
6. Investments
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Equity method investments............................ $ 90,700 $ 795,179
Fair value method investments........................ 5,886,502 799,518
Cost method investments.............................. 3,855 3,576
---------- ----------
Total investments................................... $5,981,057 $1,598,273
========== ==========
</TABLE>
Summarized combined unaudited financial information for all equity method
investments and Cox's proportionate share (determined based on Cox's ownership
interest in each investment) for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Cox's Proportionate Share
Combined Year Ended December 31 Year Ended December 31
------------------------------------ -------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ---------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 3,358,790 $ 2,589,222 $1,569,634 $ 731,670 $ 541,655 $ 359,926
Operating loss.......... (2,269,529) (1,740,697) (283,539) (419,453) (324,465) (82,637)
Net loss................ (2,774,548) (2,243,610) (566,626) (516,256) (421,830) (159,415)
</TABLE>
<TABLE>
<CAPTION>
Combined December 31
----------------------
1998 1997
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
Current assets........................................ $ 940,745 $ 1,854,575
Noncurrent assets..................................... 2,036,592 10,685,314
Current liabilities................................... 568,068 2,462,963
Noncurrent liabilities................................ 2,058,535 6,633,148
Equity................................................ 350,734 3,443,778
</TABLE>
59
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cox's share of the net losses as stated above is not equal to the net losses
from equity method investments reported in the Consolidated Statements of
Operations primarily due to amortization and other expenses. At December 31,
1998, the aggregate unamortized excess of Cox's investments over its equity in
the underlying net assets of the affiliates was approximately $24.8 million
and is being amortized over periods ranging from five to 40 years.
Amortization included in equity in net losses of affiliates for the years
ended December 31, 1998, 1997 and 1996 was $0.9 million, $2.5 million and $4.3
million, respectively.
The investment balances and supplemental financial information above
includes the effects of the Teleport/AT&T Corp. ("AT&T") merger and the Sprint
PCS reorganization as described below. Additionally, the 1998 balances include
investments in and advances to affiliated companies. The advances are
generally interest-bearing long-term notes receivable, which total $14.4
million and $5.7 million at December 31, 1998 and 1997, respectively. Interest
income recognized on notes receivable was $0.4 million, $1.7 million and $12.0
million in 1998, 1997 and 1996, respectively.
Cox has classified its fair value method investments in publicly traded
companies as available-for-sale securities under SFAS No. 115, which have an
aggregate cost at December 31, 1998 and 1997 of $3,281.2 million and $439.4
million, respectively. Also, at December 31, 1998 and 1997, cost method
investments were carried at an aggregate cost of $3.9 million and $3.6
million, respectively.
Equity Method Investments
Discovery Communications, Inc. The principal businesses of Discovery
Communications, Inc. ("Discovery") are the advertiser-supported basic cable
networks The Discovery Channel, The Learning Channel, Animal Planet Network,
Discovery Europe, and its retail division consisting primarily of over 100
stores of The Nature Company. The Discovery Channel provides nature, science
and technology, history, exploration and adventure programming and is
distributed to customers in virtually all U.S. cable homes. The Learning
Channel broadcasts a variety of educational and nonfiction programming. In
addition, through internally generated funding, significant investments are
being made by Discovery in building a documentary programming library. Cox
holds a 24.6% interest in Discovery, with the remaining interest held in
varying proportions by Liberty Media, NewChannels Corp. and Discovery's
management.
Cox recorded $(22.0) million, $(14.4) million and $0.1 million of equity in
net (losses) income in affiliated companies for the years ended December 31,
1998, 1997 and 1996, respectively.
Cox Communications PCS, L.P. Cox and CEI, through subsidiaries, formed a
partnership, Cox Pioneer Partnership, which is owned approximately 78.0% by
Cox and approximately 22.0% by CEI. On December 31, 1996, Cox Pioneer
Partnership and Sprint Spectrum Holdings Company, L.P. (a partnership of Cox,
TCI, Comcast Corporation ("Comcast") and Sprint Corporation ("Sprint")) formed
Cox Communications PCS, L.P. ("Cox PCS") to operate a personal communications
services system in the Los Angeles-San Diego MTA. In February 1998, Cox
Pioneer Partnership exercised its right under the Cox PCS partnership
agreement to sell a portion of its interest in Cox PCS to Sprint Spectrum
Holdings Company, L.P. This sale occurred in June 1998 and, as of December 31,
1998, Sprint Spectrum Holdings Company, L.P., as general partner and limited
partner, owned 59.2% of Cox PCS, and Cox Pioneer Partnership, as general
partner, owned 40.8% of Cox PCS. The net proceeds from this sale were
allocated between Cox and CEI in accordance with the partnership agreement of
Cox Pioneer Partnership. Cox's share of the proceeds was $63.2 million. In
addition, Cox recognized a $62.2 million pre-tax gain as a result of this
transaction.
Cox recorded $107.8 million and $85.0 million of equity in net losses in
affiliated companies for the years ended December 31, 1998 and 1997,
respectively, related to the operations of Cox PCS. Cox also recorded $60.7
million of equity in net losses of affiliated companies for the year ended
December 31, 1996 related to the operations of the personal communications
services system prior to the formation of Cox PCS.
60
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Value Method Investments
Gemstar International Group Limited. In May 1997, Starsight Telecast, Inc.
merged with Gemstar International Group Limited, a public company that
develops and markets proprietary technologies aimed at making technology more
user-friendly to consumers. Cox, as a holder of 2,166,647 Starsight shares,
received 1,313,421 shares of Gemstar as a result of the merger. This
transaction resulted in a gain of approximately $11.0 million. In December
1997, Cox sold its entire interest in Gemstar for $29.3 million resulting in
an additional pre-tax gain of approximately $9.9 million.
Sprint PCS. Prior to November 1998, Cox, TCI, Comcast and Sprint engaged in
the wireless communications business, primarily personal communications
services, through a limited partnership, Sprint Spectrum L.P. in which Cox
owned a 15.0% interest. Sprint Spectrum was the holder of 29 broadband
personal communications services licenses.
Cox recorded $330.0 million, $225.2 million and $56.5 million of equity in
net losses in affiliated companies for the years ended December 31, 1998, 1997
and 1996, respectively, for its ownership interest in Sprint Spectrum.
Subsidiaries of Cox, TCI and Sprint also formed a partnership, PhillieCo
L.P. PhillieCo held a broadband personal communications services license for
the Philadelphia MTA. Prior to November 1998, Cox owned a 17.6% interest in
PhillieCo. PhillieCo was affiliated with the Sprint PCS nationwide network and
used the "Sprint PCS" trademark.
In November 1998, as a result of a reorganization by Sprint Corporation,
both the Sprint Spectrum and PhillieCo partnerships were combined into a new
publicly traded tracking stock of Sprint Corporation, Sprint PCS. Cox's equity
ownership in both Sprint Spectrum and PhillieCo was converted into common
shares, convertible preferred stock and warrants of Sprint PCS. Cox recognized
a $769.5 million pre-tax gain in connection with this reorganization in fourth
quarter 1998 based on the estimated fair market value of the common stock,
convertible preferred stock and warrants received and has accounted for these
instruments as fair value method investments.
AT&T Corp./Teleport. Prior to April 1998, Cox owned 34.4% of the Class B
Common Stock of Teleport Communications Group, Inc. ("Teleport"), which
represented 22.4% of total shares outstanding and 32.7% of the voting power of
Teleport. Cox's equity ownership in 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 exchanged its interest in Teleport for 36.9 million shares
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 a fair value method investment. In
addition, Cox recognized a pre-tax gain of $30.4 million as a result of the
sale of 3.3 million shares of AT&T common stock during the quarter ended
December 31, 1998. Cox received gross proceeds of $215.6 million related to
the sale of these shares and determined the cost basis of the shares sold by
specific identification.
Cox recorded $46.6 million, $48.6 million and $28.5 million of equity in net
losses in affiliated companies for the years ended December 31, 1998, 1997 and
1996, respectively, for its ownership in Teleport.
61
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also during December 1998, Cox entered into four costless collar agreements
to minimize the impact of potential adverse market risk on 10.0 million shares
of AT&T common stock (see Note 10).
@Home Network. @Home is a national Internet "backbone" service that allows
customers access to the Internet at speeds that can be up to one hundred times
faster than traditional phone modems by using a cable modem and the cable
television broadband network. Cox holds approximately 12.3% of @Home (11.3% on
a fully diluted basis after giving effect to the exercise of certain warrants
issued to Cablevision Systems Corporation).
On January 19, 1999, Excite Inc. and @Home entered into a merger agreement
pursuant to which Excite would be merged with and into @Home. The merger is
subject to approval by Excite's and @Home's stockholders. If this merger is
consummated, Cox's percentage ownership interest in @Home will be reduced as a
result of the issuance of @Home common stock to the stockholders of Excite.
Telewest Communications plc. At December 31, 1998, Cox had an 11.9%
ownership interest in Telewest Communications plc ("Telewest"), a company that
is currently operating and constructing cable television and telephony systems
in the United Kingdom. In December 1997, Cox recognized a $183.9 million
charge due to the decline in the fair market value of Telewest considered to
be other-than-temporary. In January 1999, Cox sold its entire interest in
Telewest and received $727.9 million in proceeds resulting in a pre-tax gain
of $400.8 million.
Cost Method Investments
PrimeStar Partners, L.P. Prior to April 1998, Cox owned a 10.4% interest in
the PrimeStar Partners, L.P., a provider of direct broadcast satellite
services. In April 1998, Cox contributed its 10.4% partnership interest and
net assets in and operations of PrimeStar Partners, L.P. to a newly formed
entity, PrimeStar, Inc., in exchange for a 9.43% interest and $74.0 million in
cash. As a result of this transaction, Cox recorded a $37.3 million pre-tax
gain based on the estimated fair market value of the common stock received.
During fourth quarter 1998, Cox concluded, after careful analysis, that it
would not recover its investment and recognized $131.4 million in charges
related to its investment in PrimeStar, Inc. In January 1999 PrimeStar, Inc.
announced the sale of its direct broadcast satellite service to Hughes
Electronics Corporation (a division of General Motors Corporation and the
parent company of DirecTV, a direct broadcast satellite service competing with
Cox's cable television systems) for $1.8 billion in cash and stock. PrimeStar,
Inc. will use the $1.8 billion proceeds to extinguish outstanding obligations
and wind-down its remaining operations. The pending sale is subject to consent
of certain PrimeStar, Inc. lenders and the receipt of necessary regulatory and
other approvals.
E! Entertainment Television. In December 1997, Cox sold its 10.4% interest
in E! Entertainment Television to Comcast/The Walt Disney Company for $57.0
million, resulting in a pre-tax gain of $44.9 million.
Other
In addition, Cox also owns other equity method, fair value method and cost
method investments in cable-related companies and programming content
providers. Cox does not consider these other investments to be individually
significant to its consolidated financial position, results of operations or
liquidity.
62
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Intangible Assets
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Goodwill and franchise value......................... $4,367,404 $2,793,553
Other................................................ 10,224 15,033
---------- ----------
Total............................................... 4,377,628 2,808,586
Less accumulated amortization........................ (417,722) (349,869)
---------- ----------
Net intangible assets............................... $3,959,906 $2,458,717
========== ==========
</TABLE>
8. Income Taxes
Current and deferred income tax expenses (benefits) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1998 1997 1996
--------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Current:
Federal........................................ $(179,684) $(152,623) $ 41,694
State.......................................... 29,836 (2,694) 33,871
--------- --------- --------
Total current................................. (149,848) (155,317) 75,565
--------- --------- --------
Deferred:
Federal........................................ 885,064 95,932 (38,340)
State.......................................... 87,599 5,889 (14,179)
--------- --------- --------
Total deferred................................ 972,663 101,821 (52,519)
--------- --------- --------
Net income tax expense (benefit).............. $ 822,815 $ (53,496) $ 23,046
========= ========= ========
</TABLE>
Income tax expense differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to income (loss) before income taxes as
a result of the following items:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Computed tax expense (benefit) at federal
statutory
rates on income (loss) before income taxes..... $732,720 $(66,499) $ (9,977)
State income taxes, net of federal tax benefit.. 76,333 (7,404) 12,793
Amortization of acquisition adjustments......... 18,450 18,491 19,075
Benefit arising from low income housing credits. -- -- (3,494)
Non-deductible preferred stock dividends of a
subsidiary -- 1,169 2,339
Other, net...................................... (4,688) 747 2,310
-------- -------- --------
Net income tax expense (benefit)............... $822,815 $(53,496) $23,046
======== ======== ========
</TABLE>
63
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the net deferred tax liability consist of the
following:
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
----------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Depreciation and amortization................. $ (901,682) $(463,527)
Equity in net losses of affiliated companies.. (1,000,524) (124,478)
Net operating losses.......................... 9,447 --
Unrealized gain on securities................. (1,006,209) (143,788)
Other......................................... 12,332 10,199
----------- ---------
Net deferred tax liability................... $(2,886,636) $(721,594)
=========== =========
</TABLE>
Cox is currently subject to various federal and state income tax return
audits. Cox does not believe that current income tax audits will have a
material impact on its financial statements.
9. Debt
<TABLE>
<CAPTION>
December 31
-----------------------
1998 1997
---------- ------------
(Thousands of Dollars)
<S> <C> <C>
Revolving credit facilities......................... $ 349,998 $ 799,999
Commercial Paper, net of unamortized discount of
$2,414 and $2,191.................................. 1,026,164 683,300
Medium-term notes, net of unamortized discount of
$1,188 and $1,201.................................. 463,363 263,352
6.4% Notes, due August 1, 2008, net of unamortized
discount and hedging of $1,678..................... 198,322 --
6.8% Debentures, due August 1, 2028, net of
unamortized discount and hedging of $2,727......... 197,273 --
6.15% Reset Put Securities, due August 1, 2033, net
of unamortized discount and hedging of $1,850...... 248,150 --
Floating Rate Reset Notes, due June 15, 2009, net of
unamortized discount of $2,575 and $2,820.......... 147,425 147,180
6.375% Notes due June 15, 2000, net of unamortized
discount of $352 and $587.......................... 424,648 424,414
6.875% Notes, due June 15, 2005, net of unamortized
discount and hedging of $11,181 and $12,462........ 363,819 362,538
7.625% Debentures, due June 15, 2025, net of
unamortized discount and hedging of $17,766 and
$17,953............................................ 132,234 132,047
6.5% Notes, due November 15, 2002, net of
unamortized discount of $342 and $430.............. 199,658 199,570
7.25% Debentures, due November 15, 2015, net of
unamortized discount of $793 and $840.............. 99,207 99,160
Capitalized lease obligations....................... 69,898 37,274
---------- ----------
Total debt.......................................... $3,920,159 $3,148,834
========== ==========
</TABLE>
Revolving Credit Facilities
As of December 31, 1998, Cox had a $1,200.0 million revolving credit
facility which matures on October 9, 2002, on which Cox had outstanding
borrowings of $350.0 million at December 31, 1998. In addition, Cox had an
$800.0 million revolving credit facility which matures on September 29, 1999,
at which time any outstanding borrowings convert to a long-term loan due
September 27, 2002. These facilities are committed to back outstanding
commercial paper as discussed below.
64
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At Cox's option, the interest rates on borrowings under the revolving credit
agreements are based on the London Interbank Offered Rate ("LIBOR"), the
certificate of deposit rate plus varying percentages or an alternate base
rate. The weighted-average interest rates for outstanding debt on the
revolving credit facilities at December 31, 1998 and 1997 were 6.1% and 6.0%,
respectively. The credit facilities impose a commitment fee on the unused
portion of the total amount available based on a ratio of debt to operating
cash flow and a utilization fee based on the level of borrowings.
Cox's current credit facilities contain covenants which, among other
provisions, restrict the payment of cash dividends or the repurchase of
capital stock if certain requirements are not met as to the ratio of debt to
operating cash flow. Historically, Cox has not paid dividends nor does Cox
intend to pay dividends in the foreseeable future but to reinvest future
earnings, consistent with its business strategy. Although Cox was in
compliance with its credit facility covenants at December 31, 1998, Cox was
prevented from paying dividends.
Commercial Paper
As of December 31, 1998, Cox had a $1,500.0 million commercial paper
program. The commercial paper program is backed by amounts available under the
revolving credit facilities. The weighted-average interest rate for
outstanding commercial paper for both the years ended December 31, 1998 and
1997 was 5.8%.
Medium Term Notes
At December 31, 1998 and 1997, Cox had outstanding borrowings under several
fixed rate medium term notes totaling $41.8 million. The notes are due in
varying amounts through 2023 and interest is fixed at rates ranging from 7.1%
to 8.9%.
Shelf Registrations
In April 1996, Cox filed a Form S-3 Registration Statement (the "1996 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 $750.0 million. As of
December 31, 1998, Cox had issued $425.0 million of medium term notes under
the 1996 Shelf Registration.
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 $1,000.0 million. In 1998,
Cox issued $200.0 million of Notes and $200.0 million of Debentures under the
1998 Shelf Registration. In addition, during July 1998, Cox issued $250.0
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, 2033 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.
In anticipation of the issuance of these debt securities under the 1998
Shelf Registration, Cox entered into a series of transactions under a forward
treasury lock agreement in order to hedge its interest rate exposure. Such
transactions totaled a notional amount of $50.0 million for the Notes due
August 1, 2008, $50.0 million for the Debentures due August 1, 2028 and $50.0
million for the REPS due August 1, 2033. The hedging transactions were settled
in July 1998 at a minimal cost, which will be reflected as adjustments to
interest expense over the life of the debt securities.
65
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Floating Rate Reset Notes
In June 1997, Cox issued $150.0 million principal amount of Floating Rate
Reset Notes due June 15, 2009 (the "Reset Notes"). The Reset Notes bear
interest at a floating rate equal to 0.8975% per annum below LIBOR until June
15, 1999, at which time the interest rate will be reset at a fixed annual rate
equal to 6.62% plus Cox's spread to the ten year Treasury. The Reset Notes are
redeemable at the election of the holder, in whole but not in part, at 100.0%
of the principal amount on June 15, 1999. In addition, in exchange for a
premium paid to Cox of $2.9 million, the Reset Notes may be purchased by a
third party at the election of the third party, in whole but not in part, at
100.0% of the principal amount on June 15, 1999. Amortization of the premium
will be reflected as adjustments to interest expense. The weighted-average
interest rates for the Reset Notes at December 31, 1998 and 1997 were 4.8% and
4.9%, respectively.
Other
Maturities of long-term debt, including debt discount, for each of the five
years following December 31, 1998, are $34.9 million, $440.8 million, $49.3
million, $1,582.4 million and $31.7 million, respectively. Commercial paper
outstanding at December 31, 1998 is classified as long-term as Cox intends to
refinance these borrowings on a long-term basis, either through continued
commercial paper borrowings or utilization of other available credit
facilities. Included in the maturities of long-term debt are obligations under
capital leases of $13.0 million, $9.9 million, $8.0 million, $6.5 million and
$4.8 million for each of the five years following December 31, 1998,
respectively.
10. Fair Value of Financial Instruments
Cox has estimated the fair values of financial instruments using available
market information and appropriate valuation methodologies. Considerable
judgment, however, is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Cox would realize in a current
market exchange.
The carrying amounts of cash, restricted cash, accounts receivable, other
assets, accounts payable, deferred income and amounts due to/from CEI are
reasonable estimates of their fair value at December 31, 1998 and 1997.
The estimated fair value of debt instruments are based on discounted cash
flow analyses using Cox's incremental borrowing rate for similar types of
borrowing arrangements and dealer quotations. The revolving credit agreements,
commercial paper and Floating Rate Reset Notes at December 31, 1998 and 1997
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 December 31,
1998 was $2,385.7 million compared to a carrying amount of $2,393.6 million.
The estimated fair value of the remaining debt instruments at December 31,
1997 was $1,557.7 million compared to a carrying amount of $1,518.4 million.
In addition, the effect of a hypothetical one percentage point decrease in
interest rates would increase the estimated fair value of the remaining debt
instruments with a carrying amount of $2,364.5 million to $2,540.6 million at
December 31, 1998 and $1,518.4 million to $1,595.0 million at December 31,
1997.
In December 1998, Cox entered into four costless collar agreements to hedge
its position in 10.0 million shares of AT&T common stock. The agreements
contain a notional amount of $78.00 per share and mature at various dates
through January 2003. Cox has recorded the costless collar agreements at their
estimated fair market value, with unrealized losses resulting from changes in
fair value between measurement dates of $4.3 million at December 31, 1998
recorded as a component of accumulated other comprehensive income.
The fair values of some of Cox's investments are estimated based on quoted
market prices for those or similar investments. For cost method investments
for which there are no quoted market prices, a reasonable estimate of fair
value was not practicable as such estimate could not be made without incurring
excessive costs.
66
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Retirement Plans
Qualified Pension Plan
Effective January 1, 1996, Cox established the Cox Communications, Inc.
Pension Plan (the "CCI Plan"), a qualified noncontributory defined benefit
pension plan. The employees of the former Times Mirror Company's cable
television systems became participants in the CCI Plan retroactive to the
merger date of February 1, 1995. The remaining Cox employees, excluding
certain key employees, participated in the qualified noncontributory defined
benefit pension plan of CEI (the "CEI Plan") until August 1, 1996, when they
entered the CCI Plan and plan assets were transferred to the CCI Plan from
CEI. Times Mirror also transferred plan assets to the CCI Plan during 1996.
Plan assets consist primarily of common stock, investment-grade corporate
bonds, cash and cash equivalents and U.S. government obligations. The CCI Plan
calls for benefits to be paid to eligible employees at retirement based
primarily upon years of service with Cox and compensation rates near
retirement. Current policy is to fund the CCI Plan in an amount that falls
between the minimum contribution required by ERISA and maximum tax deductible
contribution.
Total pension expense attributable to Cox employees' participation in the
CCI Plan and the CEI Plan was $5.3 million, $4.0 million and $5.2 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The 1997
pension expense includes a credit to adjust for prior years estimates of
pension expense recognized for former employees of Times Mirror.
The changes in the benefit obligations, changes in plan assets and funded
status of the CCI Plan for the periods ended December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1998 1997
--------- -------------
(Thousands of Dollars)
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 75,676 $ 68,486
Service cost....................................... 7,480 5,775
Interest cost...................................... 6,141 5,296
Plan amendments.................................... 1 --
Actuarial loss (gain).............................. 7,838 (948)
Benefits paid...................................... (1,917) (2,933)
-------- --------
Benefit obligation at end of the year.............. 95,219 75,676
-------- --------
Change in Plan Assets:
Fair value of plan assets at beginning of year..... 95,083 85,697
Actual return on plan assets....................... 14,612 8,979
Company contributions.............................. 1,353 3,340
Benefits paid...................................... (1,917) (2,933)
-------- --------
Fair value of plan assets at end of year........... 109,131 95,083
-------- --------
Funded status of plan............................... 13,912 19,407
Unrecognized actuarial losses....................... (14,205) (15,304)
Unrecognized prior service cost..................... 657 735
Unrecognized net transition obligation.............. (869) (1,107)
-------- --------
Prepaid (accrued) benefit cost...................... $ (505) $ 3,731
======== ========
</TABLE>
67
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net periodic benefit cost and the weighted-average
assumptions used in accounting for pension benefits follow:
<TABLE>
<CAPTION>
Year Ended December
31
----------------------
1998 1997 1996
------ ------ ------
(Thousands of
Dollars)
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost........................................... $7,480 $5,775 $4,274
Interest cost.......................................... 6,141 5,296 3,048
Expected return on plan assets......................... (7,873) (7,047) (4,028)
Prior service cost amortization........................ 80 80 24
Actuarial gain......................................... -- (198) --
Transition amount amortization......................... (239) (239) (99)
------ ------ ------
Net periodic benefit cost.............................. $5,589 $3,667 $3,219
====== ====== ======
Weighted-average assumptions:
Discount rate.......................................... 6.75% 7.25% 7.75%
Expected return on plan assets......................... 9.00% 9.00% 9.00%
Rate of compensation increase.......................... 4.50% 5.00% 5.50%
</TABLE>
Nonqualified Pension Plan
Certain key employees of Cox participate in an unfunded, nonqualified
supplemental pension plan of CEI (the "Nonqualified CEI Plan") which has
generally the same benefit payout formula as the CCI Plan. Total pension
expense recorded by Cox for the Nonqualified CEI Plan was $1.8 million, $1.5
million and $1.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Other Retirement Plans
CEI provides certain health care and life insurance benefits to
substantially all retirees of Cox. Postretirement expense allocated to Cox by
CEI was $1.6 million, $1.2 million and $1.1 million for the years ended
December 31, 1998, 1997 and 1996, respectively. The accumulated postretirement
benefit obligation ("APBO") attributable to Cox employees and retirees was
$16.5 million and $11.6 million at December 31, 1998 and 1997, respectively.
The funded status of the postretirement plan covering the employees of Cox is
not determinable. The APBO for the postretirement plan of CEI substantially
exceeded the fair value of assets held in the plan at December 31, 1998 and
1997.
Actuarial assumptions used to determine the APBO include a discount rate of
6.75%, 7.25% and 7.75% for the years ended December 31, 1998, 1997 and 1996
respectively, and an expected long-term rate of return on plan assets of 9.0%
for all three years. For the years ended December 31, 1998, 1997 and 1996, the
assumed health care cost trend rate for retirees is 10.0%, 10.5% and 11.5%,
respectively. For participants prior to age 65, the trend rate gradually
decreases to 5.5% by year 2007 and remains level thereafter. For retirees at
age 65 or older, this rate decreases to 5.0% by year 2008. A 1% change in
assumed health care cost trend rates would have the following effects as of
December 31, 1998:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Effect on service and interest cost components.......... $ 479 $ (457)
Effect on other postretirement benefit obligations...... 7,387 (7,048)
</TABLE>
68
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, substantially all of Cox's employees are eligible to
participate in the Savings and Investment plan. Under the terms of the plan,
Cox matches 50.0% of employee contributions up to a maximum of 6.0% of the
employee's base salary. Cox's expense under the plan was $5.3 million, $4.6
million and $4.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
12. Stock Compensation Plans
At December 31, 1998, Cox had two stock-based compensation plans: a Long-
Term Incentive Plan ("LTIP") and an Employee Stock Purchase Plan ("ESPP"). Cox
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" in
accounting for its plans and accordingly, since the grant price of stock
compensation awards equals or exceeds the current market price at the grant
date, no compensation cost was recognized in 1998, 1997 and 1996 for these
plans. Had compensation cost for the LTIP and ESPP been determined based on
the fair value at the grant dates for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," Cox's net income (loss) and basic and diluted net income (loss)
per share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1998 1997 1996
---------- --------- --------
(Thousands of Dollars, except
per share data)
<S> <C> <C> <C>
As reported:
Net income (loss)............................. $1,270,672 $(136,492) $(51,551)
Basic net income (loss) per share............. 4.66 (0.50) (0.19)
Diluted net income (loss) per share........... 4.60 (0.50) (0.19)
Pro forma:
Net income (loss)............................. $1,265,037 $(146,465) $(55,807)
Basic net income (loss) per share............. 4.64 (0.54) (0.21)
Diluted net income (loss) per share........... 4.58 (0.54) (0.21)
</TABLE>
During 1995, Cox adopted an LTIP under which executive officers and selected
key employees are eligible to receive awards of various forms of equity-based
incentive compensation, including stock options, stock appreciation rights,
stock bonuses, restricted stock awards, performance units and phantom stock.
Cox has reserved 6,000,000 shares of Class A Common Stock for issuance under
the LTIP. The LTIP is to be administered by the Compensation Committee of the
Cox Board of Directors or its designee.
Options granted may be "Incentive Stock Options" or "Nonqualified Stock
Options." The exercise prices of the options are determined by the
Compensation Committee when the options are granted, subject to a minimum
price of the fair market value of the Class A Common Stock on the date of
grant. These options become exercisable over a period of three to five years
from the date of grant and expire 10 years from the date of grant. An
accelerated vesting schedule has been provided such that the options become
fully vested if the market value of the shares exceeds the exercise price by
140.0% for ten consecutive trading days. During 1997 and 1998, the
acceleration provisions were met based on the market value of the shares,
effectively resulting in all outstanding options becoming fully vested.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1998 and 1997: expected volatility of 30.0% and 28.0%, no payment of
dividends, expected life of 6 and 4 years after vesting and risk-free interest
rates of 5.7% and 6.3%, respectively.
69
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of Cox's stock options granted under the LTIP as of
December 31, 1998, 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,312,410 $19.57 2,007,695 $18.34 1,506,253 $17.03
Granted................ 554,567 39.29 665,129 22.63 706,930 20.94
Exercised.............. (592,953) 19.12 (239,865) 17.87 (59,210) 16.98
Canceled............... (14,946) 38.32 (120,549) 19.25 (146,278) 17.98
--------- --------- --------- ------
Outstanding at end of
year................... 2,259,078 24.40 2,312,410 19.57 2,007,695 18.34
========= ========= ========= ======
Options exercisable at
year-end............... 2,259,078 2,312,410 18,851
Weighted-average grant
date fair value of
options granted during
the year............... $16.12 $10.22 $9.17
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Number Average Weighted-
Range of Outstanding Remaining Average
Exercise And Contractual Exercise
Prices Exercisable Life Price
------------- ----------- ----------- ---------
<S> <C> <C> <C>
$ 16.98 676,667 6.3 years $16.98
20.44 - 21.13 522,320 7.1 20.93
22.63 536,749 8.0 22.63
39.00 - 44.09 523,342 9.0 39.29
---------
2,259,078 7.5 24.40
=========
</TABLE>
Options to purchase 397,231 shares of common stock at $67.19 per share were
granted on January 1, 1999.
In June 1995, Cox adopted an ESPP (the "1995 ESPP"), under which Cox was
authorized, and did, issue purchase rights totaling 750,000 shares of Class A
Common Stock to substantially all employees who had completed six months of
service. As of August 31, 1997, the 1995 ESPP was completed and 557,209 shares
were issued to employees.
In January 1998, Cox began administering a second ESPP which had been
adopted by Cox in April 1997 (the "1997 ESPP"), under which Cox was authorized
to issue purchase rights totaling 1,250,000 shares of Class A Common Stock to
substantially all employees who had completed six months of service. Purchase
rights totaling 558,001 shares were issued under the 1997 ESPP. Under the
terms of the 1997 ESPP, the purchase price was 85.0% of the market value on
October 31, 1997 and employees were allowed to purchase the shares via payroll
deductions through January 31, 2000, at which time the shares will be issued
to the employees. During 1998, 7,002 shares were issued to employees due to
cancellation of employees' participation in the 1997 ESPP or termination of
employment. The fair value of the employees' purchase rights granted in 1998
was estimated using the Black-Scholes model with the following assumptions:
expected volatility of 30.0%, no payment of dividends, expected life of 2.25
years and risk-free interest rate of 5.7%. The weighted-average fair value of
each purchase right granted in 1998 was $9.11.
70
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Shareholders' Equity
Preferred Stock
During 1998, Cox authorized Series A Preferred Stock to be issued in
accordance with Cox's certificate of incorporation. During October 1998, in
conjunction with the acquisition of Prime South (see Note 4), Cox issued
2,418,186 shares of Series A Convertible Preferred Stock. The following
summarizes the material terms of the Preferred Stock:
. Dividends. Holders of Preferred Stock are entitled to dividends only when,
and to the extent that, dividends are declared on the Preferred Stock by
the Board of Directors of Cox.
. Voting. Holders of Preferred 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.
. Conversion. Shares of the Preferred Stock are convertible into shares of
Class A Common Stock at the option of the holders only after October 1,
2003, a change in control of Cox or notification of liquidation, which ever
first occurs. Shares of the Preferred Stock are convertible into shares of
Class A Common Stock pursuant to a formula based upon 20.0% of the fair
value of the Las Vegas, Nevada cable television system and the average
closing price of the Class A Common Stock over a specified ten-day period.
Shares of the Preferred Stock will automatically convert into shares of
Class A Common Stock if the Las Vegas, Nevada cable television system makes
a distribution on its capital stock or upon the sale of all or
substantially all of the assets of Cox pursuant to the formula as described
before. Appreciation realized upon the conversion of the Series A Preferred
Stock into Class A Common Stock is anticipated to be accounted for as
contingent purchase price in accordance with APB Opinion No. 16, "Business
Combinations."
Common Stock
Cox is authorized to issue 316,000,000 shares of Class A Common Stock and
14,000,000 shares of Class C Common Stock. Except with respect to voting,
transfer and convertibility, shares of Class A Common Stock and Class C Common
Stock are identical in all respects. Holders of Class A Common Stock are
entitled to one vote per share and holders of Class C Common Stock are
entitled to ten votes per share. The Class C Common Stock is subject to
significant transfer restrictions and is convertible on a share for share
basis into Class A Common Stock at the option of the holder.
Net Income (Loss) Per Common Share
The following table reconciles the numerator and the denominator of the
basic and diluted per-share computations for income from operations for the
year ended December 31, 1998:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
-------------- ------------- ---------
<S> <C> <C> <C>
Net income............................... $1,270,672,000
--------------
Basic EPS................................ 1,270,672,000 272,813,264 $4.66
=====
Effect of Dilutive Securities:
Options................................. -- 1,091,887
ESPP.................................... -- 384,487
Preferred common stock equivalent....... -- 1,921,227
-------------- -----------
Diluted EPS.............................. $1,270,672,000 276,210,865 $4.60
============== =========== =====
</TABLE>
71
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As Cox was in a net loss position for the years ended December 31, 1997 and
1996, all potentially dilutive securities were anti-dilutive and were not
included in the diluted EPS calculation.
As of December 31, 1998 and 1997, CEI owned approximately 73.3% and 75.0%,
respectively, of the outstanding shares of Cox Common Stock and 81.6% and
82.9%, respectively, of the voting power of Cox.
14. Transactions with Affiliated Companies
Cox borrows funds for working capital and other needs from CEI. In addition,
certain management services are provided to Cox by CEI. Such services include
legal, corporate secretarial, tax, cash management, internal audit, risk
management, benefits administration and other support services. Cox was
allocated expenses for the years ended December 31, 1998, 1997 and 1996 of
approximately $3.0 million, $2.8 million and $2.5 million, respectively,
related to these services. Cox pays rent and certain other occupancy costs to
CEI for its home office facilities, which amounts approximated $5.2 million,
$3.8 million and $3.0 million for the years ended December 31, 1998, 1997 and
1996, respectively. Allocated expenses are based on CEI's estimate of expenses
related to the services provided to Cox in relation to those provided to other
divisions of CEI. Rent and occupancy expense is allocated based on occupied
space. Management believes that these allocations were made on a reasonable
basis. However, the allocations are not necessarily indicative of the level of
expenses that might have been incurred had Cox contracted directly with third
parties. Management has not made a study or any attempt to obtain quotes from
third parties to determine what the cost of obtaining such services from third
parties would have been. The fees and expenses to be paid by Cox to CEI are
subject to change.
In August 1996, CEI transferred to the CCI Plan a prepaid pension cost of
$1.8 million which represents the excess of the plan assets over the projected
benefit obligation attributable to the Cox employees that had previously
participated in the CEI Plan. This transfer resulted in a contribution to
capital of $1.1 million, net of federal and state deferred tax liabilities of
$0.7 million.
In March 1997, the formation of Cox PCS and the subsequent transfer to Cox
PCS of the personal communications services license for the Los Angeles-San
Diego MTA and the related obligation to the FCC resulted in a capital
contribution to Cox of $36.5 million from CEI.
The amounts due to CEI are generally due on demand and represent the net of
various transactions, including those described above. Outstanding amounts
to/from CEI bear interest at fifty basis points above CEI's current commercial
paper borrowings. This rate as of both December 31, 1998 and 1997 was 6.5%.
Included in amounts due to (from) CEI are the following transactions:
<TABLE>
<CAPTION>
(Thousands of Dollars)
----------------------
<S> <C>
Intercompany due to CEI, December 31, 1996............... $ 57,147
Cash transferred from CEI............................... 83,900
Net operating expense allocations (reimbursements)...... (155,379)
Contribution to capital................................. (36,524)
---------
Intercompany due from CEI, December 31, 1997............. (50,856)
Cash transferred from CEI............................... 52,862
Net operating expense allocations (reimbursements)...... 168,590
---------
Intercompany due to CEI, December 31, 1998............... $ 170,596
=========
</TABLE>
Cox pays fees to certain entities in which it has an ownership interest in
exchange for cable television programming. Programming fees paid to such
affiliates for the years ended December 31, 1998, 1997 and 1996 were
approximately $34.1 million, $30.2 million and $24.5 million, respectively.
72
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Other Comprehensive Income
The following represents the components of other comprehensive income and
related tax effects for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
For the year ended December 31, 1996:
Foreign currency translation adjustment:
Unrealized gains arising during the
period................................. $ 35,103 $ (10,883) $ 24,220
Add: reclassification adjustment for net
losses realized in net income.......... 4,026 (1,409) 2,617
---------- --------- ----------
Net unrealized gain on translation
adjustment............................. 39,129 (12,292) 26,837
---------- --------- ----------
Unrealized holding losses on securities..... (81,199) 32,414 (48,785)
---------- --------- ----------
Other comprehensive loss, December 31, 1996. $ (42,070) $ 20,122 $ (21,948)
========== ========= ==========
For the year ended December 31, 1997:
Foreign currency translation adjustment:
Unrealized loss arising during the period. $ (16,222) $ 5,562 $ (10,660)
Add: reclassification adjustment for gains
realized in net income................. 1,059 (313) 746
---------- --------- ----------
Net unrealized loss on translation
adjustment............................. (15,163) 5,249 (9,914)
---------- --------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................. 163,672 (75,991) 87,681
Add: reclassification adjustment for net
losses realized in net income.......... 159,897 (54,696) 105,201
---------- --------- ----------
Net unrealized gains...................... 323,569 (130,687) 192,882
---------- --------- ----------
Other comprehensive income, December 31,
1997....................................... $ 308,406 $(125,438) $ 182,968
========== ========= ==========
For the year ended December 31, 1998:
Unrealized loss on translation adjustment... $ (6,127) $ 1,711 $ (4,416)
---------- --------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................. 2,273,936 (872,392) 1,401,544
Less: reclassification adjustment for
gains realized in net income........... (30,343) 11,682 (18,661)
---------- --------- ----------
Net unrealized gains...................... 2,243,593 (860,710) 1,382,883
---------- --------- ----------
Other comprehensive income, December 31,
1998....................................... $2,237,466 $(858,999) $1,378,467
========== ========= ==========
</TABLE>
Components of accumulated comprehensive income consisted of foreign currency
translation adjustment of $18.1 million ($9.1 million, net of tax) and $20.8
million ($13.5 million, net of tax) at December 31, 1998 and 1997,
respectively, and net unrealized gain on securities of $2,582.9 million
($1,585.2 million, net of tax) and $339.4 million ($202.3 million, net of tax)
at December 31, 1998 and 1997, respectively.
73
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Supplemental Disclosure of Non-cash Investing and Financing Activities
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1998 1997 1996
---------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Significant non-cash transactions:
PrimeStar merger stock exchange.............. $ 94,696 $ -- $ --
Teleport stock issuance...................... 150,386 -- --
Teleport merger stock exchange............... 2,076,861 -- --
Sprint PCS stock exchange.................... 884,683 -- --
Prime South acquisition:
Cox preferred stock issued.................. 107,065 -- --
Cox common stock issued..................... 250,938 -- --
Capital contributions by CEI................. -- 36,524 1,108
Transfer of PCS license...................... -- (251,918) --
Capitalized lease obligations................ 50,313 31,201 11,408
Additional cash flow information:
Cash paid for interest....................... $ 197,197 $ 206,861 $143,094
Cash paid (refunded) for income taxes........ (163,467) (151,047) 108,964
</TABLE>
17. Commitments and Contingencies
Cox leases land, office facilities, and various items of equipment under
noncancellable operating leases. Rental expense under operating leases
amounted to $7.6 million in 1998, $19.8 million in 1997 and $19.0 million in
1996. Future minimum lease payments as of December 31, 1998 for all
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
----------------------
<S> <C>
1999....................... $ 8,374
2000....................... 7,282
2001....................... 6,339
2002....................... 5,113
2003....................... 4,587
Thereafter................. 22,259
-------
Total..................... $53,954
=======
</TABLE>
At December 31, 1998, Cox had outstanding purchase commitments totaling
approximately $67.2 million for additions to plant and equipment and $149.6
million to rebuild certain existing cable television systems.
Cox has guaranteed borrowings of certain affiliates totaling approximately
$2.5 million at December 31, 1998. Cox has unused letters of credit
outstanding totaling $99.9 million at December 31, 1998.
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
74
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and consumer protection laws. The suit seeks injunctive relief as well as an
order awarding the class members compensatory damages, plus statutory damages,
punitive damages, interest and attorney's fees. On February 13, 1998, the
Court granted Cox's motion to stay the suit and referred it on grounds of
Primary Jurisdiction to the Federal Communications Commission for
consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. The plaintiffs filed a
Petition for Order to Show Cause against Cox on October 1, 1998. In addition,
they sought to have the stay lifted by the court. On January 15, 1999, the
court denied the plaintiff's motion to lift the stay. This matter is now in
the briefing phase before the FCC. Cox intends to defend this action
vigorously. The outcome of this matter cannot be predicted at this time.
Cox and certain subsidiaries are defendants in eight putative subscriber
class action suits in state courts in Arizona, Oklahoma, Louisiana, Florida,
Nebraska, Indiana, Texas and Nevada initiated between October 17, 1997 and
December 17, 1998. The suits all challenge the propriety of late fees charged
by the subsidiaries to customers who fail to pay for services in a timely
manner. The suits seek injunctive relief and various formulations of damages
under various claimed causes of action under various bodies of state law.
These actions are in various stages of defense and, in two cases, the parties
have reached settlement agreements, both of which have been approved by the
court. The remaining actions are being defended vigorously. The outcome of
these matters cannot be predicted at this time.
Cox has been named along with Teleport and Teleport's officers and directors
(including some who are officers of Cox), as defendants in three putative
class action suits filed in the Chancery Court of New Castle County, Delaware.
The suits challenge the AT&T/Teleport merger and seek injunctive relief and
damages based on various theories alleging that the AT&T/Teleport merger's
terms do not offer appropriate compensation or protection to Teleport's public
shareholders. The actions are currently dormant, however, Cox intends to
defend them vigorously.
Cox is a party to various other legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending, including the putative class actions, will have
a material adverse impact on Cox's consolidated financial position,
consolidated results of operations or consolidated cash flows.
18. Subsequent Events
In March 1999, Cox signed a definitive agreement to purchase from First
Commonwealth Communications, Inc. cable television systems serving communities
near Gloucester, New Kent, West Point and King and Queen County, Virginia. The
cable television systems, serving more than 11,000 customers, are contiguous
to Cox's Hampton Roads, Virginia cable operation. The transaction is expected
to close during third quarter 1999, pending legal and regulatory review.
Also in March 1999, Cox and MediaOne signed a definitive agreement to trade
selected cable television systems in Massachusetts, Rhode Island and
Connecticut representing a total of 105,000 customers. Under the terms of the
agreement, Cox would trade its cable television systems in Massachusetts,
serving approximately 54,000 customers for MediaOne properties in Enfield,
Connecticut and Westerly, Rhode Island, serving 51,000 customers, and cash.
The trade is expected to close during third quarter 1999.
On March 18, 1999, Cox announced that its Board of Directors has approved a
two-for-one stock split which could be effected promptly following Cox's May
13, 1999 Annual Meeting of Stockholders. The stock split requires a separate
approval by shareholders to amend Cox's Articles of Incorporation to increase
the authorized Series A Preferred Stock from 5,000,000 to 10,000,000 shares,
Class A Common Stock from 316,000,000 to
75
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
632,000,000 shares, and the Class C Common Stock from 13,798,896 to 27,597,792
shares. Because certain holders of more than a majority of Cox's common stock
have advised Cox of their intention to vote in favor of the proposed stock
split, approval of the proposal is reasonably assured. If approval is
received, the stock split will be payable to share owners of record on the
effective day, which will promptly follow shareholder approval. Because
approval is pending until May 13, 1999, financial information contained
elsewhere in this annual report has not been adjusted to reflect the impact of
the proposed stock split.
Earnings per common share amounts, after giving retroactive effect to the
two-for-one stock split, are presented below for all of the per share amounts
disclosed in the financial statements and the notes to the financial
statements:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Shares outstanding
Series A Preferred Stock............... 4,836,372 -- --
Class A Common Stock................... 527,111,512 514,552,828 512,927,302
Class C Common Stock................... 27,597,792 27,597,792 27,597,792
Per share data
Basic net income (loss) per share...... $2.33 $(0.25) $(0.10)
Diluted net income (loss) per share.... 2.30 (0.25) (0.10)
Basic weighted-average shares
outstanding........................... 545,626,528 541,001,582 540,481,514
Diluted weighted-average shares
outstanding........................... 552,421,730 541,001,582 540,481,514
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended 1998
------------------------------
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Per share data
Basic net income (loss) per share............ $(0.19) $(0.03) $1.97 $0.58
Diluted net income (loss) per share.......... (0.19) (0.03) 1.95 0.57
Quarters Ended 1997
------------------------------
<CAPTION>
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Per share data
Basic net income (loss) per share............ $(0.07) $ 0.12 $(0.15) $(0.15)
Diluted net income (loss) per share.......... (0.07) 0.12 (0.15) (0.15)
</TABLE>
19. Unaudited Quarterly Financial Information
The following table sets forth selected historical quarterly financial
information for Cox. This information is derived from unaudited quarterly
financial statements of Cox and includes, in the opinion of management, only
normal and recurring adjustments that management considers necessary for a
fair presentation of the results for such periods.
76
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1998
----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- -------- -------
<S> <C> <C> <C> <C>
(Millions of Dollars, except per
share data)
Complete basic................................ $ 284.4 $291.0 $ 302.8 $341.0
Premium service .............................. 45.6 46.5 47.9 52.5
Pay-per-view.................................. 10.4 8.0 10.0 16.1
Advertising................................... 25.0 33.4 32.4 45.9
Data.......................................... 2.8 4.0 5.1 8.2
Telephony..................................... 5.0 6.6 8.7 11.5
Satellite..................................... 33.5 -- -- --
Other......................................... 9.1 8.8 9.1 11.5
------- ------ -------- ------
Total revenues............................... 415.8 398.3 416.0 486.7
Programming costs............................. 95.0 95.7 99.9 116.2
Plant operations.............................. 32.8 30.8 35.2 34.0
Marketing..................................... 22.1 25.0 25.9 26.5
General and administrative.................... 87.4 94.8 96.1 110.9
Satellite operating and administrative........ 29.4 -- -- --
Depreciation.................................. 87.0 80.4 88.8 117.3
Amortization.................................. 18.6 17.8 19.8 28.0
------- ------ -------- ------
Operating income.............................. $ 43.5 $ 53.8 $ 50.3 $ 53.8
======= ====== ======== ======
Net income (loss)............................. $(102.0) $(12.2) $1,067.0 $317.9
======= ====== ======== ======
Basic net income (loss) per share............. $ (0.38) $(0.05) $ 3.93 $ 1.15
======= ====== ======== ======
Diluted net income (loss) per share........... (0.38) (0.05) 3.90 1.13
======= ====== ======== ======
</TABLE>
77
<PAGE>
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997
----------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(Millions of Dollars, except per share data)
<S> <C> <C> <C> <C>
Complete basic.............. $267.9 $ 270.4 $ 272.0 $ 281.5
Premium service............. 45.7 47.3 46.7 46.9
Pay-per-view................ 10.9 15.7 9.5 11.2
Advertising................. 21.3 25.8 25.5 30.7
Data........................ 0.1 0.3 0.9 2.0
Telephony................... 2.6 3.2 3.4 3.9
Satellite................... 25.9 29.9 32.3 32.5
Other....................... 8.7 8.5 17.9 9.3
----------- ----------- ----------- -----------
Total revenues............. 383.1 401.1 408.2 418.0
Programming costs........... 88.6 92.2 89.1 88.0
Plant operations............ 38.1 38.2 33.2 28.1
Marketing................... 17.8 17.9 23.7 18.2
General and administrative.. 74.7 77.2 82.8 83.5
Satellite operating and
administrative............. 24.3 28.3 27.1 29.5
Depreciation................ 72.9 85.3 81.4 90.4
Amortization................ 17.0 19.0 21.6 17.0
----------- ----------- ----------- -----------
Operating income............ $ 49.7 $ 43.0 $ 49.3 $ 63.3
=========== =========== =========== ===========
Net income (loss)........... $ (37.8) $ 61.2 $ (82.0) $ (77.9)
=========== =========== =========== ===========
Basic net income (loss) per
share...................... $ (0.14) $ 0.23 $ (0.30) $ (0.29)
=========== =========== =========== ===========
Diluted net income (loss)
per share.................. (0.14) 0.23 (0.30) (0.29)
=========== =========== =========== ===========
</TABLE>
78
<PAGE>
The Board of Directors and Shareholders
Cox Communications, Inc.
We have audited the accompanying consolidated balance sheets of Cox
Communications, Inc. (Cox) as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Cox's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cox
Communications, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 10, 1999
(March 18, 1999 as to Note 18)
79
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to Cox's
Proxy Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents incorporated by reference or filed with this Report
(1) The financial statements required by Item 8 with respect to Cox
Communications PCS, L.P. are incorporated by reference herein (see Exhibit
99.1).
(2) No financial statement schedules are required to be filed by Items 8
and 14(d) because they are not required or are not applicable, or the
required information is set forth in the applicable financial statements or
notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
80
<PAGE>
Listed below are the exhibits which are filed as part of this report
(according to the number assigned to them in Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of June 5, 1994, by and
among The Times Mirror Company, New TMC Inc., Cox Communications,
Inc. and Cox Enterprises, Inc. (Incorporated by reference to Exhibit
2.1 to Cox's Registration Statement on Form S-4, File No. 33-80152,
filed with the Commission on December 16, 1994.)
2.2 -- Amendment No. 1, dated as of December 16, 1994, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC Inc.,
Cox Communications, Inc. and Cox Enterprises, Inc. (Incorporated by
reference to Exhibit 2.2 to Cox's Registration Statement on Form S-
4, File No. 33-80152, filed with the Commission on December 16,
1994.)
2.3 -- Amendment No. 2, dated as of January 30, 1995, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC Inc.,
Cox Communications, Inc., and Cox Enterprises, Inc. (Incorporated by
reference to Exhibit 2.3 to Cox's Current Report on Form 8-K filed
with the Commission on February 15, 1995.)
2.4 -- Agreement and Plan of Merger, dated as of February 6, 1998, between
PrimeStar, Inc. and Cox Satellite, Inc. (Incorporated by reference
to Exhibit 10.25 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 19, 1999.)
2.5 -- Agreement and Plan of Merger, dated May 4, 1998, among Cox, Cox
Communications Las Vegas, Prime South Diversified, Inc. and certain
other persons (Incorporated by reference to Exhibit 2.1 to Cox's
Form 8-K filed with the Commission on May 28, 1998.)
3.1 -- Amended Certificate of Incorporation of Cox Communications, Inc.
(Incorporated by reference to Exhibit 3.1 to Cox's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.)
3.2 -- Certificate of Amendment to Certificate of Incorporation of Cox
Communications, Inc. (Incorporated by reference to Exhibit 3.3 to
Cox's Form 10-Q filed with the Commission on May 14, 1997.)
3.3 -- 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 with the Commission on December 16, 1994.)
3.4 -- Certificate of Designations of Powers, Preferences and Rights of
the Series A Convertible Preferred Stock of Cox Communications, Inc.
(Incorporated by reference to Exhibit 3.1 to Cox's Form 8-K/A filed
with the Commission on October 15, 1998.)
4.1 -- Indenture dated as of June 27, 1995 between Cox Communications,
Inc. and The Bank of New York, as Trustee, relating to the 6 3/8%
Notes due 2000, 6 1/2% Notes due 2002, 6 7/8 Notes due 2005, 7 1/4%
Debentures due 2015 and the 7 5/8% Debentures due 2025 of Cox
Communications, Inc. (Incorporated by reference to Exhibit 4.1 to
Cox's Registration Statement on Form S-1, File No. 33-99116, filed
with the Commission on November 8, 1995.)
10.1 -- Amended and Restated Agreement of Limited Partnership of MajorCo,
L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P., TCI
Network Services, Comcast Telephony Services and Cox Telephony
Partnership. (Incorporated by reference to Exhibit 10.1 to Cox's
Current Report on Form 8-K filed with the Commission on February 9,
1996.)
10.2 -- Second Amended and Restated Joint Venture Formation Agreement,
dated as of January 31, 1996, by and between Sprint Corporation,
Tele-Communications, Inc., Comcast Corporation and Cox
Communications, Inc. (Incorporated by reference to Exhibit 10.2 to
Cox's Current Report on Form 8-K filed with the Commission on
February 9, 1996.)
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.3 -- Parents Agreement, dated as of January 31, 1996 between Cox
Communications, Inc and Sprint Corporation. (Incorporated by
reference to Exhibit 10.3 to Cox's Current Report on Form 8-K filed
with the Commission on February 9, 1996.)
10.4 -- Amended and Restated Agreement of Limited Partnership of PhillieCo,
L.P., dated as of February 17, 1995, by and among Sprint Spectrum,
Inc., TCI Network, Inc. and Cox Communications Wireless, Inc.
(Incorporated by reference to Exhibit 10.4 to the Annual Report on
Form 10-K of Cox Communications, Inc., filed with the Commission on
March 31, 1995.)
10.5 -- Contribution Agreement, dated as of March 28, 1995, by and among
TCI Network Services, Comcast Telephony Services, Cox Telephony
Partnership, MajorCo, L.P. and Newtelco, L.P. (Incorporated by
reference to Exhibit 10.5 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 31, 1995.)
10.6 -- Registration Rights Agreement, dated as of January 31, 1995, by and
between Cox Communications, Inc., and Bank of America National Trust
and Savings Association, Thomas Unterman, James F. Guthrie, James R.
Simpson, Robert F. Erburu and David Laventhol, each as trustees for
certain employee benefit plans of The Times Mirror Company.
(Incorporated by reference to Exhibit 10.6 to the Annual Report on
Form 10-K of Cox Communications, Inc., filed with the Commission on
March 31, 1995.)
10.7 -- Tax Allocation Agreement, dated as of February 1, 1995, by and
between Cox Enterprises, Inc. and Cox Communications, Inc.
(Incorporated by reference to Exhibit 10.7 to the Annual Report on
Form 10-K of Cox Communications, Inc., filed with the Commission on
March 31, 1995.)
10.8 -- Asset Purchase Agreement, dated as of November 8, 1994, by and
between Newport News Cablevision, Ltd. and Cox Cable Hampton Roads,
Inc. (Incorporated by reference to Exhibit 10.8 to the Annual Report
on Form 10-K of Cox Communications, Inc., filed with the Commission
on March 31, 1995.)
10.9 -- Cox Executive Supplemental Plan of Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 10.5 to Cox's Registration
Statement on Form S-4, File No. 33-80152, filed with the Commission
on December 16, 1994.)
10.10 -- Cox Communications, Inc. Long-Term Incentive Plan. (Incorporated by
reference to Exhibit 10.8 to Cox's Registration Statement on Form S-
4, File No. 33-80152, filed with the Commission on December 16,
1994.)
10.11 -- Cox Communications, Inc. Restricted Stock Plan for Non-Employee
Directors. (Incorporated by reference to Exhibit 10.9 to Cox's
Registration Statement on Form S-4, File No. 33-80152, filed with
the Commission on December 16, 1994.)
10.12 -- 5-Year Credit Agreement, dated as of January 24, 1995, by and among
Cox Communications, Inc., Texas Commerce Bank National Association
and Chemical Bank, individually and as agents, and the other banks
signatory thereto. (Incorporated by reference to Exhibit 10.13 to
the Annual Report on Form 10-K of Cox Communications, Inc., filed
with the Commission on March 31, 1995.)
10.13 -- 364-Day Credit Agreement, dated January 24, 1995, by and among Cox
Communications, Inc., Texas Commerce Bank National Association and
Chemical Bank, individually and as agents, and the other banks
signatory. (Incorporated by reference to Exhibit 10.14 to the Annual
Report on Form 10-K of Cox Communications, Inc., filed with the
Commission on March 31, 1995.)
10.14 -- Assumption and Amendment Agreement, dated as of February 1, 1995,
among Cox Communications, Inc., Texas Commerce Bank National
Association, individually and as agent, and the other bank
signatory. (Incorporated by reference to Exhibit 10.15 to the Annual
Report on Form 10-K of Cox Communications, Inc., filed with the
Commission on March 31, 1995.)
10.15 -- Form of Letter Agreement between Cox Enterprises, Inc. and Cox
Communications, Inc. relating to the CEI Purchase. (Incorporated by
reference to Exhibit 10.16 to Cox's Amendment No. 2 to Registration
Statement on Form S-1, File No. 33-92000, filed with the Commission
on June 21, 1995.)
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.19 -- Asset Exchange Agreement, dated December 31, 1996, by and among
Heritage Cablevision of Southeast Massachusetts, Inc., Heritage
Cablevue, Inc., TCI Cablevision of St. Bernard, Inc., TCI of Council
Bluffs, Inc., TCI of Virginia, Inc., UA-Columbia Cablevision of
Massachusetts, Inc., United Cable Television of Sarpy County, Inc.,
United Cable Television of Scottsdale, Inc., and TCI American Cable
Holdings, L.P., and CoxCom, Inc. (Incorporated by reference to
Exhibit 10.17 on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 28, 1997).
10.20 -- Subscription Agreement, dated March 21, 1997, between Cox
Communications, Inc. and Flextech plc. (Incorporated by reference to
Exhibit 10.17 on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 28, 1997).
10.24 -- Merger and Contribution Agreement, dates as of February 6, 1998,
among TCI Satellite Entertainment, Inc., PrimeStar Inc., Time Warner
Entertainment Company L.P., Advance/Newhouse Partnership, Comcast
Corporation, Cox Communications, Inc., MediaOne of Delaware, Inc.,
GE American Communications, Inc. (Incorporated by reference to
Exhibit 10.24 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 19, 1998.)
13 -- Portions of the 1998 Annual Report to Stockholders (expressly
incorporated by reference in Part II, Item 5 of this Report).
21 -- Subsidiaries of Cox Communications, Inc.
23.1 -- Consent of Deloitte & Touche LLP, Atlanta, Georgia
23.2 -- Consent of Deloitte & Touche LLP, Kansas City, Missouri
24 -- Power of Attorney (included on page 76)
27 -- Financial Data Schedule
99.1 -- Cox Communications PCS, L.P. and Subsidiaries financial statements
for the three years ended December 31, 1998.
</TABLE>
- --------
83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cox Communications, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
COX COMMUNICATIONS, INC.
By: /s/ James O. Robbins
----------------------------------
James O. Robbins
President and Chief Executive
Officer
Date: March 25, 1999
POWER OF ATTORNEY
Cox Communications, Inc., a Delaware corporation, and each person whose
signature appears below, constitutes and appoints James O. Robbins and Jimmy
W. Hayes, and either of them, with full power to act without the other, such
person's true and lawful attorneys-in-fact, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Annual Report on Form 10-K and any and all amendments
to such Annual Report on Form 10-K and other documents in connection
therewith, and to file the same, and all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said attorneys-
in-fact, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Cox
Communications, Inc. and in the capacities and on the dates indicated.
Signature Title Date
/s/ James C. Kennedy Chairman of the Board of March 25,
- ------------------------------------- Directors 1998
James C. Kennedy
/s/ James O. Robbins President and Chief March 25,
- ------------------------------------- Executive Officer; Director 1998
James O. Robbins
/s/ Jimmy W. Hayes Senior Vice President, March 25,
- ------------------------------------- Finance and Administration 1998
Jimmy W. Hayes Chief Financial Officer
(principal financial
officer)
/s/ John M. Dyer Vice President, Accounting March 25,
- ------------------------------------- and Financial Planning 1998
John M. Dyer (principal accounting
officer)
/s/ Janet Morrison Clarke Director March 25,
- ------------------------------------- 1998
Janet Morrison Clarke
/s/ John R. Dillon Director March 25,
- ------------------------------------- 1998
John R. Dillon
/s/ David E. Easterly Director March 25,
- ------------------------------------- 1998
David E. Easterly
/s/ Robert F. Erburu Director March 25,
- ------------------------------------- 1998
Robert F. Erburu
/s/ Andrew J. Young Director March 25,
- ------------------------------------- 1998
Andrew J. Young
84
<PAGE>
EXHIBIT 13
Shareholder Information
Corporate Headquarters
Cox Communications, Inc.
1400 Lake Hearn Drive, NE
Atlanta, GA 30319
(404) 843-6000
www.cox.com
Stock Data
Cox's Class A Common Stock is traded on the New York Stock Exchange. The ticker
symbol: COX. Daily newspaper stock table listing: CoxCommA. As of February
17, 1999, there were 4,955 shareholders of record of Cox's Class A Common Stock,
two shareholders of record of Cox's Class C Common Stock and two shareholders of
Preferred Stock. There is no established trading market for Cox's Class C
Common Stock or Preferred Stock. There have been no stock dividends paid on any
of Cox's equity securities. Cox does not intend to pay cash dividends in the
foreseeable future. See "Management's Discussion and Analysis Liquidity and
Capital Resources Uses of Cash," in Cox's Annual Report on Form 10-K.
Quarterly Market Information
Class A Common Stock
--------------------
High Low
------- -------
1998
First Quarter 42 5/16 34 3/8
Second Quarter 49 1/2 41 5/8
Third Quarter 56 7/8 41 1/2
Fourth Quarter 70 3/4 47 1/16
1997
First Quarter 23 1/4 19 5/8
Second Quarter 27 7/8 18 1/8
Third Quarter 28 3/16 24 15/16
Fourth Quarter 40 1/16 27 11/16
Transfer Agent and Registrar
First Chicago Trust Company of New York
c/o EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-1225
www.equiserve.com
e-mail: [email protected]
Annual Meeting of Shareholders
May 13, 1999, 9 a.m.
Cox Corporate Headquarters
1400 Lake Hearn Drive, NE
Atlanta, GA 30319
<PAGE>
Form 10-K
Cox Communications' Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available free upon written request to:
Investor Relations Department
Cox Communications, Inc.
1400 Lake Hearn Drive, NE
Atlanta, GA 30319
(404) 843-5000, Ext. 6454
Company Information
Communications regarding stock transfers, lost certificates or account changes
should be directed to the transfer agent, First Chicago Trust Company of New
York, a division of EquiServe. For other information, contact one of the
following:
Analysts/Institutional Investors:
Mark Major, Director of Finance,
(404) 843-5447, fax: (404) 843-5939
[email protected]
Individual Shareholders:
Anthony Surratt, Director of Public Relations,
(404) 843-5124, fax: (404) 843-5777
[email protected]
News Media:
Ellen East, Director of Public Affairs,
(404) 843-5281, fax: (404) 843-5777
[email protected]
Independent Auditors
Deloitte & Touche LLP
100 Peachtree St., Suite 1700
Atlanta, GA 30303-1943
(404) 220-1500
Cox Communications
1400 Lake Hearn Drive, NE
Atlanta, GA 30319
(404) 843-5000
www.cox.com
(C) 1999 Cox Communications, Inc. All rights reserved. Cox, Cox
Communications, the Cox Communications logo, Cox Digital TV, and Cox Digital
Telephone are registered trademarks, trademarks, or service marks of Cox
Communications, Inc. @Home Network and the @ ball are registered trademarks of
@Home Network.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF COX COMMUNICATIONS, INC.
(as of March 26, 1999)
Cox Communications, Inc. (majority owned)
d/b/a Cox Communications Middle Georgia
Cox Communications Hampton Roads, Inc.
Local News on Cable, L.L.C. (33.3%)
Cox Communications Virginia Beach, Inc.
Cox Fibernet Virginia, Inc.
Cox Virginia Telcom, Inc.
d/b/a Cox Communications (Virginia only)
Cox Communications Las Vegas, Inc.
Cox Nevada Telcom, L.L.C.
Prime Venture I, Inc.
Prime South Holdings, Inc. (70% CCLV, 30% Prime Venture I, Inc.)
Community Cable TV
Hospitality Network, Inc.
PrimeTel of Nevada
Community Tel
Telecommunications of Nevada, LLC (minority %)
News Channel, L.L.C. (33.3%)
Cox Georgia Telcom, L.L.C.
d/b/a Cox Communications
CoxCom, Inc.
d/b/a Cox Communications Bakersfield
d/b/a Cox Communications Cleveland Area
d/b/a Cox Communications Desert Valley
d/b/a Cox Communications Gainesville/Ocala
d/b/a Cox Communications Humboldt
d/b/a Cox Communications Louisiana
d/b/a Cox Communications New England
d/b/a Cox Communications Oklahoma City
d/b/a Cox Communications Orange County
d/b/a Cox Communications Palos Verdes
d/b/a Cox Communications Pensacola
d/b/a Cox Communications Phoenix
d/b/a Cox Communications Roanoke
d/b/a Cox Communications San Diego
d/b/a Cox Communications Santa Barbara
d/b/a Cox Communications Tucson
d/b/a Cox Communications West Texas
Video Service Company
News Channel 15, L.L.C. (50% interest)
Cox Communications Hampton Roads, L.L.C.
Cox Communications Omaha, L.L.C.
Cox Communications Pensacola, L.L.C.
Cox Arizona Telcom II, L.L.C.
d/b/a Cox Communications
Cox California Telcom, L.L.C.
d/b/a Cox Communications
Cox Connecticut Telcom, L.L.C.
<PAGE>
d/b/a Cox Communications
Cox Iowa Telcom, L.L.C.
d/b/a Cox Communications
Cox Louisiana Telcom II, L.L.C.
Cox Nebraska Telcom II, L.L.C.
d/b/a Cox Communications
Cox Oklahoma Telcom, L.L.C.
Cox Rhode Island Telcom II, L.L.C.
d/b/a Cox Communications
Cox Fibernet Louisiana II, L.L.C.
Cox Fibernet Oklahoma, L.L.C.
Arizona Newschannel, L.L.C. (50%)
Rhode Island News Channel, L.L.C. (65%)
Cox Telcom Partners, Inc.
Cox Florida Telcom, L.P. (1% - Cox Telcom Partners, Inc.,
general partner; 99% - CoxCom, Inc., limited partner)
d/b/a Cox Communications
Cox Texas Telcom, L.P. (1% - Cox Telcom Partners, Inc.,
general partner; 99% - CoxCom, Inc., limited partner)
CableRep, Inc.
d/b/a Cox Studio Productions
Cox Consumer Information Network, Inc.
Padres CableRep Advertising Company, G.P.
Cox Communications E.T.E., Inc.
Cox Communications New York City, Inc.
Cox Cable New York (Partnership: 90% Cox Communications
New York City, Inc.; 10% Cox Communications E.T.E., Inc.)
TWC Cable Partners (50% interest)
d/b/a Cox Communications (Florida only)
Cox Home Video North, Inc.
d/b/a Cox Home Video
Cox Satellite Services, Inc.
Cox DC Radio, Inc.
Cox Communications NCC, Inc.
Cox @Home, Inc.
Cox Teleport Partners, Inc.
Cox Communications International, Inc.
Cox Programming Limited (a UK corporation)
Cox Communications Holdings, Inc.
Cox Communications Pioneer, Inc.
Cox Communications PCS, L.P.
PCS Leasing Co., L.P.
TMJV, Inc.
Outdoor Life Network, L.L.C. (33.0%)
Cable Network Services, L.L.C. (35.6%)
Speedvision Network, L.L.C. (32.7%)
Cox Communications Payroll, Inc.
Cox Communications Services, Inc.
Cox Communications Shopping Services, Inc.
Cox Arizona Telcom, Inc.
Cox Rhode Island Telcom, Inc.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference of our report dated
February 10, 1999 appearing in this Annual Report on Form 10-K of Cox
Communications, Inc. for the year ended December 31, 1998, in the following
Registration Statements of Cox Communications, Inc. and to the reference to us
under the heading "Experts" in the Registration Statements on Form S-3:
Form File No.
---- --------
S-8 33-80993
S-8 33-80995
S-8 33-91506
S-8 33-93148
S-8 333-44399
S-3 333-03351
S-3 333-03766
S-3 333-58531
/s/ Deloitte & Touche LLP
-----------------------------
Atlanta, Georgia
March 25, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-44399, 33-80993, 33-80995, 33-91506 and 33-93148) on Form S-8 and the
Registration Statements (Nos. 333-03351, 333-03766 and 333-58531) on Form S-3 of
Cox Communications, Inc. of our report dated February 2, 1999, on the
consolidated financial statements of Cox Communications PCS, L.P. and
subsidiaries for each of the three years in the period ended December 31, 1998,
appearing in the Annual Report on Form 10-K of Cox Communications, Inc. for the
year ended December 31, 1998.
/s/ Deloitte & Touche LLP
--------------------------------
Kansas City, Missouri
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 30,604 30,604
<SECURITIES> 0 0
<RECEIVABLES> 173,924 173,924
<ALLOWANCES> (7,872) (7,872)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 3,702,341 3,702,341
<DEPRECIATION> (1,050,129) (1,050,129)
<TOTAL-ASSETS> 12,878,104 12,878,104
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
(277,355) (277,355)
0 0
<COMMON> (2,418) (2,418)
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> (12,878,104) (12,878,104)
<SALES> 0 0
<TOTAL-REVENUES> (486,705) (1,716,757)
<CGS> 0 0
<TOTAL-COSTS> 150,162 539,499
<OTHER-EXPENSES> 145,295 457,671
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 70,525 223,326
<INCOME-PRETAX> 528,264 2,093,487
<INCOME-TAX> 210,401 822,815
<INCOME-CONTINUING> 317,863 1,270,672
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 317,863 1,270,672
<EPS-PRIMARY> 1.15 4.66
<EPS-DILUTED> 1.13 4.60
</TABLE>
<PAGE>
EXHIBIT 99.1
Cox Communications PCS, L.P. and Subsidiaries
Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997, and 1996 and
Independent Auditors' Report
<PAGE>
<TABLE>
<CAPTION>
COX COMMUNICATIONS PCS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
- ---------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Operating Revenues $ 128,319 $ 37,366 $ 692
- ---------------------------------------------------------------------------------
Operating Expenses
Costs of services and products 147,293 93,512 4,397
Selling, general and administrative 217,329 136,924 55,169
Depreciation and amortization 68,449 29,591 1,997
- ---------------------------------------------------------------------------------
Total operating expenses 433,071 260,027 61,563
- ---------------------------------------------------------------------------------
Operating Loss (304,752) (222,661) (60,871)
Interest expense (31,096) (6,213) -
Other income, net 4,379 2,207 114
- ---------------------------------------------------------------------------------
Net Loss $ (331,469) $ (226,667) $ (60,757)
----------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
COX COMMUNICATIONS PCS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets
<S> <C> <C>
Cash and equivalents $ 43,551 $ 41,516
Accounts receivable, net of allowance for doubtful accounts of $3,281 and $663 26,270 16,608
Receivable from affiliates - 203
Inventories 10,028 9,672
Prepaid expenses 2,624 1,482
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 82,473 69,481
Property, plant and equipment
Network equipment 391,598 239,873
Construction work in progress 107,077 81,785
Buildings and leasehold improvements 72,477 49,631
Other 45,623 15,195
- ---------------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment 616,775 386,484
Accumulated depreciation (80,184) (27,405)
- ---------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 536,591 359,079
Intangible assets
PCS license 251,919 251,919
Microwave relocation costs 24,367 24,807
---------------------------------------------------------------------------------------------------------------------------
Total intangible assets 276,286 276,726
Accumulated amortization (7,622) (2,096)
- ---------------------------------------------------------------------------------------------------------------------------
Net intangible assets 268,664 274,630
Other 85 107
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 887,813 $ 703,297
===========================
Liabilities and Partners' Capital
Current liabilities
Current maturities of long-term debt $ 82,715 $ 57,650
Accounts payable 17,676 31,638
Construction obligations 41,583 39,861
Payable to affiliates 26,877 16,809
Accrued advertising 13,511 695
Accrued payroll 12,253 3,951
Accrued expenses and other current liabilities 26,658 11,830
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 221,273 162,434
Long-term debt 616,554 194,269
Limited partner interest in consolidated subsidiary 2,450 2,450
Other 1,082 -
Partners' capital and accumulated deficit
Partners' capital 671,301 637,522
Accumulated deficit (624,847) (293,378)
- --------------------------------------------------------------------------------------------------------------------------
Partners' capital and accumulated deficit 46,454 344,144
- --------------------------------------------------------------------------------------------------------------------------
Total $ 887,813 $ 703,297
==========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
COX COMMUNICATIONS PCS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Cash Flow from Operating Activities
<S> <C> <C> <C>
Net loss $ (331,469) $ (226,667) $ (60,757)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization 68,449 29,591 1,997
Changes in assets and liabilities:
Receivables (9,459) 4,855 11,365
Inventories (356) (7,753) (1,919)
Prepaid expenses and other assets (1,120) (304) (1,078)
Accounts payable and other current liabilities 33,774 (16,770) 23,884
Other noncurrent liabilities 1,082 - -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (239,099) (217,048) (26,508)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures (239,995) (189,460) (107,173)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (239,995) (189,460) (107,173)
- ------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Advances from parent - - 129,184
Receivable from partner - - (2,450)
Repayment of advances from parent - - (159,866)
Proceeds from issuance of long-term debt 505,000 147,000 -
Payments on long-term debt (57,650) - -
Partner capital contributions 33,779 299,232 167,819
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 481,129 446,232 134,687
- ------------------------------------------------------------------------------------------------------------------------
Increase in Cash and Equivalents 2,035 39,724 1,006
Cash and Equivalents, Beginning of Year 41,516 1,792 786
---------- ---------- ----------
Cash and Equivalents, End of Year $ 43,551 $ 41,516 $ 1,792
======================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Organization
- --------------------------------------------------------------------------------
Cox Communications PCS, L.P. (Cox PCS) is a limited partnership formed by Cox
Pioneer Partnership (CPP) and Sprint Spectrum Holding Company, L.P. (Holdings).
Cox PCS is consolidated with its wholly owned subsidiaries, Cox PCS License,
L.L.C. and Cox PCS Assets, L.L.C. (the Special Purpose Subsidiaries), and its
majority-owned subsidiary PCS Leasing Co., L.P., (LeasingCo). Holdings holds
the minority limited partnership interest in LeasingCo at year-end 1998 and
1997. At year-end 1996, Cox PCS purchased all the assets and assumed all the
liabilities of Cox California PCS, Inc. (Cox California). For purposes of these
consolidated financial statements, this transaction has been treated as a
transaction between entities under common control and accounted for in a manner
similar to a pooling of interests.
At year-end 1996, Holdings acquired a 49% limited partner interest in Cox PCS.
CPP held a 50.5% general and a 0.5% limited partner interest and was the general
and managing partner. Holdings increased its ownership in Cox PCS to 59.2%
through an additional capital contribution of approximately $81 million and
became managing partner upon FCC approval in June 1998.
Basis of Presentation
The financial statements include the consolidated results of operations, cash
flows and financial position of Cox PCS. The assets, liabilities, results of
operations and cash flows of entities in which Cox PCS has a controlling
interest have been consolidated. All significant intercompany accounts and
transactions have been eliminated.
Cox PCS' consolidated financial statements are prepared using generally accepted
accounting principles. These principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of
operations or partners' capital as previously reported.
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Revenue Recognition
Cox PCS recognizes operating revenues as services are rendered or as products
are delivered to customers. Cox PCS records operating revenues net of an
estimate for uncollectible accounts.
Income Taxes
Cox PCS has not provided for federal or state income taxes since such taxes are
the responsibility of CPP and Holdings.
Cash and Equivalents
Cash equivalents generally include highly liquid investments with original
maturities of three months or less. They are stated at cost, which approximates
market value.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-out
method) or replacement value.
<PAGE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Generally, ordinary asset
retirements and disposals are charged against accumulated depreciation with no
gain or loss recognized. Property, plant and equipment is depreciated on a
straight-line basis over estimated economic useful lives. Repair and
maintenance costs are expensed as incurred.
Capitalized Interest
Interest costs associated with constructing capital assets are capitalized. Cox
PCS had capitalized $49 million at year-end 1998, and $33 million at year-end
1997.
PCS License
CPP acquired a license from the Federal Communications Commission (FCC) to
operate as a PCS service provider. In 1997, CPP contributed the license and the
related debt to Cox PCS. Licenses are granted for up to 10-year terms with
renewals for additional 10-year terms if license obligations are met. The
license is recorded at cost and is amortized over 40 years when service begins
in a specific geographic area. Accumulated amortization totaled $7 million at
year-end 1998 and $2 million at year-end 1997.
Microwave Relocation Costs
Cox PCS has incurred costs related to microwave relocation in constructing the
PCS network. Microwave relocation costs are being amortized over the remaining
lives of the PCS licenses. Accumulated amortization for microwave relocation
costs totaled $1 million at year-end 1998 and $0.5 million at year-end 1997.
Trademark Agreement
Sprint Corporation (Sprint) owns various trademarks and service marks utilized
by Cox PCS. Sprint expects to apply for and develop trademarks, service marks
and patents for the benefit of Cox PCS in the ordinary course of business.
Sprint(R) is a registered trademark of Sprint and Sprint PCSSM is a registered
service mark of Sprint, both of which are utilized by Cox PCS on a royalty-free
basis under trademark license agreements.
Major Customer
Cox PCS markets its products through multiple distribution channels, including
its own retail stores as well as other retail outlets. Equipment sales to one
retail outlet exceeded 10% of net operating revenues in 1998 and 1997.
- --------------------------------------------------------------------------------
3. Employee Benefit Plans
- --------------------------------------------------------------------------------
Defined Contribution and Profit Sharing Plans
Cox PCS sponsored a savings and investment plan (Cox PCS Plan) for certain
employees. Cox PCS matched contributions equal to 75% of the contribution of
each participant, up to the first 4.5% the employee elected to contribute.
Expense under the Cox PCS Plan approximated $1 million in both 1998 and 1997.
Effective January, 1999, Cox PCS employees began making contributions to the
defined contribution plan available to Sprint Corporation (Sprint) employees.
The existing assets of the Cox PCS Plan were rolled over to that defined
contribution plan in early 1999.
<PAGE>
Defined Benefit Pension Plan
Effective January 1999, Cox PCS employees were also eligible to participate in
Sprint's pension and postretirement plans.
- --------------------------------------------------------------------------------
4. Long-term Debt
- --------------------------------------------------------------------------------
Long term debt consists of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Maturing 1998 1997
------------ -------------- ---------
(in thousands)
<S> <C> <C> <C>
Term credit facilities
7.5% to 7.9% 2006 to 2007 $ 400,000 $ -
Revolving credit facilities
Variable rates 2006 105,000 -
Due to FCC
7.75% 2001 194,269 251,919
----------- ----------
Total Debt 699,269 251,919
Less: current maturities 82,715 57,650
----------- ----------
Long-term debt $ 616,554 $ 194,269
=========== ==========
</TABLE>
Cox PCS' long-term debt maturities, during each of the next five years are as
follows:
----------------------------------------
(in thousands)
1999 $ 82,715
2000 89,774
2001 24,279
2002 1,000
2003 62,000
----------------------------------------
Cox PCS licenses and property, plant and equipment totaling $757 million is
pledged as security for certain notes. Cox PCS has complied with all
restrictive or financial covenants relating to its debt arrangements at year-end
1998.
Revolving Credit Facilities
At year-end 1998, available revolving credit facilities with banks totaled $400
million and Cox PCS had borrowed $105 million at a weighted average interest
rate of 7.6%. The facility can be expanded to $750 million if Cox PCS meets
certain eligibility requirements and with lender approval. Availability will be
reduced beginning in January 2002 and expires in 2007. Borrowings under the
term loans had a weighted average interest rate of 7.7% at year-end 1998.
Fair Value
The estimated fair value of Cox PCS' long-term debt was $708 million at year-end
1998 and $252 million at year-end 1997.
<PAGE>
- --------------------------------------------------------------------------------
5. Equity
- --------------------------------------------------------------------------------
Following is a reconciliation of Cox PCS' equity:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Partners' Accumulated
Capital Deficit Total
- -----------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Beginning 1996 balance $ - $ (5,954) $ (5,954)
Capital contributions 165,369 - 165,369
Net loss - (60,757) (60,757)
----------- ---------- ----------
Ending 1996 balance 165,369 (66,711) 98,658
Capital contributions 472,067 - 472,067
Net loss - (226,667) (226,667)
Retirement of receivable from CPP against CPP's
capital account (66,625) - (66,625)
Contributions of amounts due to Cox California,
converted to partners' capital
66,711 - 66,711
----------- ---------- ----------
Ending 1997 balance 637,522 (293,378) 344,144
Capital contributions 33,779 - 33,779
Net loss - (331,469) (331,469)
----------- ---------- ----------
Ending 1998 balance $ 671,301 $ (624,847) $ 46,454
=========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
6. Additional Financial Information
- --------------------------------------------------------------------------------
Supplemental Cash Flows Disclosure
Supplemental cash and non-cash financing and investing activities for Cox PCS
included the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Interest paid, net of amounts capitalized $ 33,350 2,538
Receivable from CPP retired against CPP's capital account
- 66,625
Payable to Cox California converted to partners' capital - 66,711
Contribution of PCS license by CPP and assumption of PCS license debt -
251,919
Conversion of interest payments made by CPP to capital - 24,405
Conversion of interim funding loans from CPP and related interest to -
capital 148,430
</TABLE>
Cox PCS established a receivable from CPP for $67 million with the Cox
California purchase transaction. The receivable related to capital
contributions net of amounts due to CPP were assumed as part of the transaction.
During 1997, the receivable was relieved and offset against partners' capital.
<PAGE>
- --------------------------------------------------------------------------------
7. Commitments and Contingencies
- --------------------------------------------------------------------------------
Litigation, Claims and Assessments
Various suits arising in the ordinary course of business are pending against Cox
PCS. Cox PCS cannot predict the final outcome of these actions but believes
they will not be material to its consolidated financial statements.
Operating Leases
Minimum rental commitments at year-end 1998 for all noncancelable operating
leases, consisting mainly of leases for cell and switch sites and office space,
are as follows:
-------------------------------------
(in thousands)
1999 $ 11,353
2000 10,201
2001 9,412
2002 6,287
2003 3,983
Thereafter 22,665
-------------------------------------
Gross rental expense totaled $35 million in 1998, $21 million in 1997 and $5
million in 1996. The table excludes renewal options related to certain cell and
switch site leases. These renewal options are generally for five-year terms and
may be exercised from time to time.
- --------------------------------------------------------------------------------
8. Related Party Transactions
- --------------------------------------------------------------------------------
Affiliation Agreement
Cox PCS has entered into an affiliation agreement with Holdings that provides
for the payment of certain allocable costs and payment of affiliate fees. These
costs totaled $34 million in 1998, $20 million in 1997 and $8 million in 1996
and are included in selling, general and administrative expenses in the
accompanying consolidated statements of operations. Of these total allocated
costs, $5 million in 1998 and $2 million in 1997 were included in payables to
affiliates in the consolidated balance sheets. In addition, Holdings purchased
certain equipment, such as handsets, on behalf of Cox PCS. Payables to
affiliates for handsets, subsidies and other equipment were $22 million in 1998
and $13 million in 1997.
Partnership Agreement
In June 1998, Holdings became the managing partner of Cox PCS. Under the
partnership agreement, CPP has the right to require Holdings to purchase, under
certain circumstances, all or part of CPP's interest in Cox PCS. CPP may
require Holdings to acquire an additional 10.2% interest in Cox PCS per year
through 2000. Beginning in 2001 through 2005, CPP may require Holdings to
acquire up to all of its interest in Cox PCS. CPP has given Holdings notice to
start the appraisal process related to a potential put of all or a portion of
CPP's remaining partnership interest to Holdings.
Other Transactions
Cox PCS paid CPP or an affiliate of CPP $6 million in 1997 and had accrued an
additional $2 million at year-end 1997 for services rendered, lease expenses
incurred or commissions earned.
