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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, 1999
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 LOGO)
(Exact name of registrant as specified in its charter)
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DELAWARE 58-2112281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 LAKE HEARN DRIVE, ATLANTA, GEORGIA 30319
(Address of principal executive offices) (Zip Code)
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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
Income PRIDES
Growth PRIDES
Exchangeable Subordinated Debentures due 2029
3% Exchangeable Subordinated Debentures due 2030
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 February 29, 2000, the aggregate market value of the Class A Common
Stock held by non-affiliates of the registrant was $26,120,609,289 based on the
closing price on the New York Stock Exchange on such date.
There were 577,251,034 shares of Class A Common Stock and 27,597,792 shares
of Class C Common Stock outstanding as of February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Summary Annual Report to Stockholders are incorporated
by reference into Part II, and portions of the Proxy Statement for the 2000
Annual Meeting of Stockholders are incorporated by reference into Part III.
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COX COMMUNICATIONS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 35
Item 3. Legal Proceedings........................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......... 37
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 37
Item 6. Selected Consolidated Financial Data........................ 37
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 39
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 47
Item 8. Consolidated Financial Statements and Supplementary Data.... 49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 82
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 82
Item 11. Executive Compensation...................................... 82
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 82
Item 13. Certain Relationships and Related Transactions.............. 82
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 82
SIGNATURES............................................................. 87
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PART I
ITEM 1. BUSINESS
Cox Communications, Inc. is one of the nation's largest broadband
communications companies with U.S broadband network operations and investments
in cable television programming networks, telecommunications and technology, and
broadband networks. Cox operates in one operating segment, broadband
communications.
Cox's business strategy is to utilize the technological capabilities of its
advanced broadband network, its strong locally and regionally clustered cable
television systems and its longstanding commitment to superior customer service
to provide an array of entertainment and communications services to both
residential and commercial customers in its markets. Today, these services
primarily include analog and digital video, high-speed Internet access and local
and long-distance telephone. Additional services could include video on demand,
Internet to the television, targeted advertising and other types of interactive
and e-commerce applications.
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 and
telecommunications and technology companies which are complementary to Cox's
business strategy. Cox believes that these investments have contributed to the
growth of its 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 and 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 67.4% owned subsidiary of Cox Enterprises, Inc. ("CEI").
CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of
the largest diversified media companies in the United States with consolidated
revenues in 1999 of approximately $6.1 billion. CEI, which has a 102-year
history in the media and communications industry, publishes 16 daily newspapers
and owns or operates 13 television stations in addition to its interest in Cox.
Through its indirect majority-owned subsidiary, Cox Radio, Inc., CEI owns or
operates 76 radio broadcast stations pending closing of previously announced
transactions. Through Manheim Auctions, CEI is also the world's largest operator
of wholesale auto auctions.
U.S. BROADBAND NETWORKS
BUSINESS STRATEGY
Cox believes that aggressive investment in the technological capabilities
of its broadband network, the long-term competitive advantages of clustering and
commitment to customer service will enhance its ability to continue to grow its
cable television operations and offer new services to existing and new
customers.
TECHNOLOGY AND CAPITAL IMPROVEMENTS. Cox emphasizes high technical
standards for its cable television systems. 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 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.
Giving effect to the completion of the acquisition of cable television systems
from both Multimedia Cablevision, Inc., a subsidiary of Gannett Co., Inc., and
AT&T Corp., as if they occurred on December 31, 1999, approximately 70% of Cox's
networks had bandwidth capacity of 550 MHz or 750 MHz. Cox anticipates that
approximately 79% of its networks will have bandwidth capacity of 550 MHz or 750
MHz by the end of 2000. Including the effects of the Multimedia and AT&T cable
television systems acquisitions, Cox anticipates that, of its fifteen largest
systems at the end of 2000, approximately 80% of its customers will have access
to 750 MHz capacity and over 4.5 million customers will be able to receive
two-way services.
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In addition to increasing channel capacity, Cox's investment in technology
has improved the reliability of its service. Cox's hybrid fiber-coaxial
broadband networks had a 99.990% reliability rate in 1999, 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.
CLUSTERING. As an integral part of its broadband communications strategy,
Cox has continually sought the advantages and efficiencies of operating large
local and regional cable television clusters. As of December 31, 1999,
approximately 70% of Cox's customers were served by Cox's 15 largest clusters
which averaged approximately 285,000 customers each. See "-- Cable
Television -- Operating Data." Locally and regionally clustered cable television
systems 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. Local and regional 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.
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. Cox believes that its high level of customer satisfaction will help it
compete more effectively as it delivers 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
major 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 Phoenix,
Arizona, 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.
ADVERTISING REVENUE. In addition to providing entertainment and community
services to its residential and commercial customers, Cox derives revenues from
the sale of advertising time on satellite-delivered networks such as ESPN, MTV
and CNN. Currently, Cox inserts advertising on 40 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.
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CABLE TELEVISION
Cox's cable television operations represent the primary element of its
integrated broadband communications strategy. As of December 31, 1999, these
clusters passed approximately 8.0 million homes and provided service to
approximately 5.1 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 CNN, MTV, 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. 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:
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1999 1998 1997 1996 1995
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Basic customers(a)................ 5,136,184 3,753,608 3,235,338 3,259,384 3,248,759
New services(b)................... 554,025 169,731 18,941 -- --
--------- --------- --------- --------- ---------
Revenue Generating Units(c)....... 5,690,209 3,923,339 3,254,279 3,259,384 3,248,759
Homes passed(d)................... 8,031,340 5,923,428 5,023,870 5,016,749 5,005,858
Basic penetration(e).............. 64.0% 63.4% 64.4% 65.0% 64.9%
Premium service units(f).......... 3,237,013 2,206,833 1,865,184 2,000,673 1,827,068
</TABLE>
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(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, high-speed Internet access 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.
(f) Premium service units include single or multi-channel services offered for
a monthly fee per service.
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The following pro forma basic customers give effect to the acquisitions of
cable television systems from both Multimedia Cablevision, Inc., a subsidiary of
Gannett Co., Inc., and AT&T Corp. had occurred on December 31, 1999:
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BASIC
CUSTOMERS
TOP 15 LOCAL AND REGIONAL CLUSTERS: ---------
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Phoenix, AZ............................................ 617,615
San Diego, CA.......................................... 513,673
New England............................................ 431,871
Hampton Roads, VA...................................... 411,738
Las Vegas, NV.......................................... 339,968
New Orleans, LA........................................ 264,286
Northern Virginia...................................... 261,821
Oklahoma City, OK...................................... 234,827
Orange County, CA...................................... 232,058
Omaha, NE.............................................. 173,010
Wichita, KS............................................ 164,240
Tulsa, OK.............................................. 159,402
Fort Walton/Pensacola, FL.............................. 157,026
Baton Rouge, LA........................................ 150,901
Tucson, AZ............................................. 132,272
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Pro Forma Subtotal -- Top Fifteen Local and
Regional Clusters................................. 4,244,708
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OTHER LOCAL AND REGIONAL CLUSTERS:
Arkansas............................................... 295,729
California............................................. 156,333
Florida................................................ 89,821
Georgia................................................ 72,478
Louisiana.............................................. 239,396
Kansas................................................. 143,139
North Carolina......................................... 95,813
Ohio................................................... 74,972
Oklahoma............................................... 86,995
Texas.................................................. 496,073
Virginia............................................... 57,783
Idaho.................................................. 10,050
Mississippi............................................ 13,206
Other.................................................. 25,923
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Pro Forma Subtotal -- Other Local and Regional
Clusters.......................................... 1,857,711
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PRO FORMA TOTAL BASIC CUSTOMERS............................. 6,102,419
=========
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FRANCHISES. Cable television systems are constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchise agreements 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 franchise agreements 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 2000, Cox held approximately 600 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 1999 and 1998, franchise fee payments made by
Cox averaged approximately 4% of gross revenues.
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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 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 franchise
authority or a third party acquires the system, 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.
COX 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 its 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, 1999 and 1998:
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DECEMBER 31
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1999 1998
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Digital television ready homes passed....................... 4,247,032 2,028,307
Digital customers........................................... 265,296 74,843
Digital penetration......................................... 6.2% 3.7%
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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 of up to 100 times faster than traditional
phone modems and provides unique online content that capitalizes on the
substantial capacity of Cox's broadband network. To enhance Cox's cable based
high-speed Internet access market, Cox has an equity interest in Excite@Home.
See "-- Investments -- Telecommunications and Technology
Investments -- Excite@Home." Below is a summary of Cox's high-speed Internet
access operating statistics as of December 31, 1999 and 1998:
<TABLE>
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DECEMBER 31
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1999 1998
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Data ready homes passed..................................... 3,759,229 2,634,515
Customers................................................... 186,918 67,069
Penetration................................................. 5.0% 2.5%
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COX DIGITAL TELEPHONE
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. Below is a summary of Cox Digital Telephone operating
statistics as of December 31, 1999 and 1998:
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DECEMBER 31
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1999 1998
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Telephone ready homes passed................................ 1,150,367 611,253
Customers................................................... 101,811 27,819
Penetration................................................. 8.9% 4.6%
Lines....................................................... 150,812 42,668
Lines per customer.......................................... 1.48 1.53
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COX BUSINESS SERVICES
Cox delivers telecommunications services to businesses through its
competitive local exchange carrier operation, Cox Business Services. Through its
dedicated fiber optic networks, Cox Business Services provides business
customers video, telephony and high-speed Internet access services. Below is a
summary of Cox Business Services as of December 31, 1999 and 1998:
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DECEMBER 31
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1999 1998
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Buildings connected on-net.................................. 1,513 530
Voice grade equivalent circuits............................. 638,943 322,615
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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 Cox's significant programming investments as of
December 31, 1999:
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COX
INVESTMENT DESCRIPTION OWNERSHIP INTEREST
- ---------- ----------- ------------------
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Discovery Communications, Inc.... The Discovery Channel, The 24.6%
Learning Channel, Animal Planet
Network, retail and other
ancillary businesses
Flextech plc..................... Cable and satellite television 20,701,084 shares
programming based in the United
Kingdom
GEMS Television.................. Spanish-language service targeted 50.0%
at women
In Demand, L.L.C................. Pay-per-view programming, 11.1%
formerly Viewer's Choice
Music Choice..................... Digital audio services 13.6%
Outdoor Life Network............. Outdoor recreation-related 33.0%
programming
Product Information Network...... Infomercial distribution 45.0%
Speedvision Network.............. Automotive, marine and aviation- 32.7%
related programming
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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 cable homes in the United States. The Learning Channel broadcasts
a variety of educational and nonfiction programming. In addition, through
internally generated funding, investments are being made by Discovery in
building a documentary programming library. Cox accounts for its investment in
Discovery under the equity method.
Flextech plc. Flextech plc is an English publicly held programming
company. Cox accounted for its investment in Flextech under the fair value
method. In March 2000, Cox sold its entire interest in Flextech and received net
proceeds of approximately $522.3 million. Cox expects to recognize a gain in
connection with this transaction during first quarter 2000.
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 Spanish-speaking women in both Latin America and the
United States. Cox accounts for its investment in GEMS Television under the
equity method.
In Demand, L.L.C. In Demand, L.L.C. is a cable operator-controlled buying
cooperative for pay-per-view programming. Cox accounts for its investment in In
Demand under the cost method.
Music Choice. Music Choice distributes audio programming 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 accounts for its investment in Music
Choice under the cost method.
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Outdoor Life Network. Outdoor Life's programming consists primarily of
outdoor recreation, adventure and wildlife themes. 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. 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 accounts for its
investment in Speedvision under the equity method.
TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS
Cox has made substantial investments in telecommunications and technology.
The following table summarizes Cox's significant telecommunications and
technology investments as of December 31, 1999:
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COX
INVESTMENT DESCRIPTION OWNERSHIP INTEREST
- ---------- ----------- ------------------
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AT&T Corp.(a)................... Long-distance telephone, cable 50,333,401 shares
television, and other
telecommunications services
Cox Interactive Media Joint Operates and promotes 49.0%
Ventures...................... advertising supported local
Internet content
Excite@Home..................... Nationwide network providing 29,114,600 shares
high-speed internet access and
unique online content via cable
modems, formerly @Home
Corporation
Liberate Technologies, Interactive applications 1,041,666 shares
Ltd.(b)....................... software
National Cable Communications... Cable television advertising 16.7%
sales
NextLink Nevada................. Telecommunications services in 37.5%
Las Vegas and other areas of
Nevada
Sprint PCS(c)................... Wireless telecommunications 132,800,830 shares
TiVo, Inc....................... Developer of consumer electronic 240,153 shares
device that stores real-time
video on hard disks
</TABLE>
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(a) In April 1999, AT&T's outstanding shares split three-for-two. Accordingly,
all shares presented herein reflect the effect of this stock split.
(b) In January 2000, Liberate's outstanding shares split two-for-one.
Accordingly, all shares presented herein reflect the effect of this stock
split.
(c) Cox also owns warrants to purchase Sprint PCS common stock -- Series 2 and
convertible preferred stock which are exercisable or convertible into 10.3
million shares of Sprint PCS common stock -- Series 2. In February 2000,
Sprint PCS' outstanding shares split two-for-one. Accordingly, all shares
presented herein reflect the effect of this stock split.
AT&T Corp. In March 2000, Cox's 50.3 million shares of AT&T common stock
were exchanged for the stock of AT&T subsidiaries that own cable television
systems serving approximately 495,000 customers and certain other assets and
liabilities, including cash. See "Acquisitions, Transactions and Investments" in
Part II, Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Cox Interactive Media Joint Ventures. Cox has invested in a series of
local joint ventures with Cox Interactive Media, Inc., an indirect, wholly owned
subsidiary of CEI, to develop, operate and promote advertising supported local
Internet content, or City Sites, in the markets where Cox operates cable
television systems featuring high-speed Internet access. Cox Interactive Media
owns the remaining equity interest in the
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joint ventures and is responsible for the day to day operations of the joint
ventures. Cox accounts for its investment in the Cox Interactive Media joint
ventures under the equity method.
Excite@Home. Excite@Home, formerly @Home Corporation, is both an Internet
service and content provider and supplier of comprehensive Internet navigation
services. Excite@Home provides customers high-speed access to the Internet via a
cable modem and the cable television broadband network. In May 1999, @Home
Corporation acquired Excite and changed its name to Excite@Home. Cox accounts
for its investment in Excite@Home under the fair value method.
Liberate Technologies, Ltd. Liberate Technologies develops and sells
software that enables the delivery of Internet-enhanced content and applications
to information appliances, such as cable television set-top boxes, game consoles
and personal digital assistants. In May 1999, Cox purchased 1,041,666 shares of
Liberate's common stock for $5.0 million. Liberate completed an initial public
offering of its common stock in July 1999. Cox accounts for its investment in
Liberate Technologies under the fair value method.
National Cable Communications. National Cable Communications is the
largest cable advertising representation firm which enables advertisers to place
advertising with selected multiple systems on a regional or national
single-source basis. Cox accounts for its investment in National Cable
Communications under the cost method.
NextLink Nevada. NextLink Nevada markets and provides telephony services
in the Las Vegas metropolitan area and elsewhere in Nevada through telephone
networks owned or leased by NextLink Nevada. Cox accounts for its investment in
NextLink Nevada under the equity method.
Sprint PCS. Sprint PCS is a personal communications services provider and
an indirect wholly-owned subsidiary of Sprint Corporation. At December 31, 1999,
Cox's investment in Sprint PCS was comprised of 132.8 million shares of Sprint
PCS common stock -- Series 2 and warrants to purchase Sprint PCS common
stock -- Series 2 and convertible preferred stock which are exercisable or
convertible into 10.3 million shares of Sprint PCS common stock -- Series 2. Cox
accounts for its investment in Sprint PCS under the fair value method.
In November 1999, Cox issued 14,375,000 exchangeable subordinated
debentures due 2029, which are referred to as PRIZES. The PRIZES are indexed to
the trading price of Sprint PCS common stock -- Series 1 and are exchangeable by
the holder for cash. See Note 9, "Debt" in Part II, Item 8 "Consolidated
Financial Statements and Supplementary Data." In December 1999, Cox sold 3.9
million shares of its Sprint PCS common stock -- Series 2 for approximately
$197.3 million and recognized a pre-tax gain of approximately $165.6 million.
Cox sold an additional 16.1 million shares of Sprint PCS common stock -- Series
2 in January and February 2000 and expects to recognize a gain in first quarter
2000. In March 2000, Cox issued $275.0 million aggregate principal amount 3%
Exchangeable Subordinated Debentures due 2030, which are referred to as Premium
PHONES. The Premium PHONES are exchangeable by the holder initially for cash
and, beginning in March 2002, at Cox's election, for cash or Sprint PCS common
stock -- Series 2. See Notes 19, "Subsequent Events," in Part II, Item 8
"Consolidated Financial Statements and Supplementary Data."
TiVo, Inc. TiVo, Inc. develops a consumer electronic device that acts like
a digital personal video recorder, storing real-time video on hard disks. Cox
accounts for its investment in TiVo under the fair value method.
Cox PCS. In May 1999, Cox exercised its right under the Cox Communications
PCS, L.P. partnership agreement to transfer its remaining 32.0% equity interest
in Cox PCS to Sprint Corporation in exchange for approximately 38.1 million
shares of Sprint PCS Common Stock -- Series 2. As a result of this transaction,
Cox recognized a pre-tax gain of $908.5 million.
Syntellect, Inc. Cox sold its investment in Syntellect, Inc. in September
1999 for net proceeds of $2.4 million and recorded a pre-tax loss of $2.9
million.
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BROADBAND NETWORK INVESTMENTS
Telewest Communications plc. In January 1999, Cox sold its entire interest
in Telewest for $727.9 million in cash and recognized a pre-tax gain of $433.1
million.
TWC Cable Partners. In October 1999, Cox reorganized its partnership with
Time Warner, under which Cox acquired control of the cable television system
serving Fort Walton Beach, Florida and received $104.5 million, and Time Warner
acquired control of the cable television system serving Staten Island, New York.
Cox recognized a pre-tax gain of $94.8 million in connection with this
reorganization.
COMPETITION
Each of Cox's broadband services 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, specialized mobile radio providers commonly known as
SMR systems, satellite services, as well as from the availability of additional
spectrum the FCC makes available from time to time in spectrum auctions.
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.
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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. These systems also are
beginning to offer local and long distance telephone service and Internet access
along with video service. A satellite TV or 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
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, commonly called HSDs, located on
the customer's property.
The availability of reasonably-priced home satellite dish earth stations
enables individual households to receive many of the satellite-delivered program
services formerly available only to cable subscribers. 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. 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. 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.
DBS remains the cable television industry's largest competitor, and DBS
subscribership shows continued growth. According to the FCC's Sixth Annual
Report regarding the status of competition in the video programming market,
high-power satellites provided video programming to over ten million subscribers
as of June 1999.
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, including Internet services.
To deliver their signals, 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.
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Until recently, satellite program providers were only authorized to provide
the signals of television network stations to subscribers who live in areas
where over-the-air reception cannot be received. In November 1999, Congress
passed legislation amending the Satellite Home Viewer Act which governs the
delivery of television broadcast signals by satellite companies. The legislation
authorizes for the first time the satellite delivery of local broadcast signals
to subscribers who reside within a television station's local market. Satellite
carriers may continue to retransmit local broadcast signals for the first six
months that the legislation is effective but then must obtain retransmission
consent from the television station before continuing carriage. Congress also
has imposed on satellite carriers "must-carry" obligations with respect to local
television stations. Beginning January 1, 2002, a satellite carrier delivering
the signal of any local television station also would be required to carry all
stations licensed to the carried station's local market. With respect to the
delivery of out-of-market, or distant, television broadcast signals to unserved
subscribers, the legislation permits satellite carriers to provide the signal of
a distant network affiliate to only those subscribers who cannot receive a
signal of at least Grade B intensity (as defined in the FCC's rules) from the
local network affiliate. The legislation grandfathers for a period of five years
from enactment current subscribers under certain conditions who would otherwise
be ineligible to receive distant network signals. This legislation will likely
improve the competitive position of DBS providers against cable operators.
Consolidation over the last twelve months in the high-powered DBS industry
has provided DBS companies with additional channel capacity. Two major
companies, DirecTV and EchoStar Communications Corporation, are currently
offering nationwide high-power DBS services. DirecTV and its parent company,
Hughes Network Systems, Inc., last year acquired Primestar's medium-power DBS
business and the high-power DBS business of Tempo, a subsidiary of Primestar,
which was a consortium of cable operators including Cox and a satellite company.
EchoStar recently acquired a high-power DBS license from MCI Telecommunications
Corporation and two DBS satellites currently under construction from News Corp.
DirecTV and EchoStar have significantly enhanced the number of channels on which
they can provide programming to subscribers and will improve significantly their
competitive positions against cable operators. Like cable, the DBS industry is
developing ways to bring advanced services to their customers. For example,
Hughes Network Systems offers a satellite-delivered Internet access service with
a telephone return path. EchoStar plans to offer e-mail, e-commerce, and on-line
banking services in the near future. 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 differences between cable and DBS continue to diminish. 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 the number of local broadcast signals that
DBS provides offer in their program package. The disadvantages of DBS service
compared to cable service currently include a lack of local programming (where
local television stations are not available), local service, and higher upfront
equipment and additional outlet costs. The advantages of DBS include more
programming, greater channel capacity (including the capacity for "Near Video On
Demand" movies on pay-per-view), digital quality picture and CD-quality sound.
The FCC's Annual Report indicates that subscribers continue to report higher
levels of satisfaction over cable television. These advantages may lessen as
cable operators offer digital services that allow them to match DBS service in
number of channels and capacity.
Programming also is currently available to the owners of home satellite
dish earth stations through conventional, medium-powered satellites. However, in
contrast to the growth of DBS subscribers, the medium-powered or C-Band industry
is experiencing a steady decline in subscribers as customers move to DBS
services with its smaller antennas. Nevertheless, medium powered service is
expected to continue as a viable business for the foreseeable future as a niche
distribution medium serving rural subscribers unserved by cable.
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
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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. Currently, a few wireless
operators offer Internet service. One such system in Phoenix, operates under
developmental authority, has over 10,000 customers for its Internet service, and
is competing with Cox's cable system and U S West's DSL offering discussed
below. BellSouth Entertainment, a Bell South-affiliated company, provides
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 imposed cross-ownership restrictions of these frequencies
by cable operators and telephone companies until the year 2000. Cable operators
and telephone companies are precluded from operating on these frequencies in the
same authorized or franchised service areas in which they provide service. The
FCC recently initiated a proceeding to determine whether the cross-ownership
restrictions should be continued past the year 2000. 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 thereby facilitating competition
between incumbent cable operators and telephone companies. The 1996 Act enables
communications carriers or other entrants to provide video programming services
as either cable operators or open video system operators. The 1996 Act also
contains restrictions on telephone companies buying out incumbent cable
operators in a telephone company's service area, especially in suburban and
rural markets. See "-- Legislation and Regulation."
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 delivers
high definition television pictures, multiple digital-quality 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.
Other new technologies, including Internet-based services, may become
competitive with services that cable television systems can offer. Cox's cable
systems offer interactive online computer services. Cox's cable systems compete
with a number of other companies, many of whom have substantial resources, such
as existing Internet service providers, commonly known as ISPs, as well as local
and long distance telephone companies and DBS providers. 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. The FCC
believes the marketplace is working and expanding consumer choice for broadband
services, has concluded that alternative means of access are or soon will be
made available to a broad range of ISPs and has declined to take action on ISP
access to broadband cable facilities. The FCC indicated that it would continue
to monitor this issue. Several local jurisdictions also are reviewing this
issue. See "-- Legislation and Regulation."
Telephone companies are accelerating the deployment of Asymmetric Digital
Subscriber Line Technology commonly known as ADSL. Although wireless and
satellite broadband technologies exist, ADSL-type technology, or xDSL, allow
Internet access to subscribers at peak data transmission speeds equal to or
greater than that of modems over conventional telephone lines and are the most
significant competitors to Internet over cable broadband. xDSL technology has
several advantages over cable broadband technology. Among the
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advantages is the ability to offer customers simultaneous, high speed Internet
and voice or facsimile capabilities over a single telephone line. Dedicated
lines that run from the telephone subscriber's home to the central office of the
telephone company can guarantee the user a constant, high-seed rate of data
transmission and security. This means that there is no decrease in data transfer
speeds as more users get on line, unlike cable's shared network. In Phoenix, US
West uses very high speed digital subscriber line, or VDSL, for distribution of
video, high-speed Internet access and telephone service over existing copper
phone lines. In addition, U S West has announced that it has begun trials of an
interactive service that integrates customers' telephone, Internet access, and
existing television service.
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;
- 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 have become subject to additional
federal regulatory requirements for the provision of 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 services using the facilities of a new entrant without making a
similar investment in facilities.
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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, terrestrial and satellite wireless service
providers, resellers 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 proposed 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 or 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).
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;
- 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. On November 5, 1999, the FCC issued an
order that reconsidered the unbundling obligations contained in Section 251 of
the 1996 Act. The FCC eliminated several items from its previous list of
unbundled network elements. The FCC stated that its revised unbundling rules are
designed to advance the development of facilities-based competition and to
provide incentives for incumbent and competitive carriers to invest in their own
facilities and innovate. Because Cox makes use of its existing cable television
network to offer telecommunications services, it does not make extensive use of
ILEC unbundled network elements. This relative lack of
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dependence upon ILEC network elements provides Cox with additional flexibility
to create innovative services and positions it favorably vis-a-vis
non-facilities-based telecommunications providers.
The Local Competition Order was the first part in a "trilogy" of orders
intended to reform access pricing and universal service consistent with the 1996
Act's goal of encouraging local competition. As described below, the FCC also
has issued orders 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 universal service procedures.
In July 1996, the FCC released an Order promulgating rules implementing the
1996 Act's directive for local telephone number portability. Under the number
portability directive 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, or 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 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.
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 has addressed the type of costs incumbent LECs may recover
from providers as part of the local number portability tariff review. The FCC
has denied incumbent LECs requests for reconsideration of its local number
portability cost recovery rules. The number portability directive is subject to
appeals pending before the Tenth Circuit Court of Appeals.
Nationwide number portability requires the use of a numbering administrator
and the FCC recovers the costs of number administration by assessing charges on
all telecommunications carriers in proportion to their interstate
telecommunications revenues. Telecommunications carriers with end-user revenues
are required to pay an allocated portion of the shared costs incurred by the
regional database administrator in proportion to that carrier's international,
interstate, and intrastate end-user telecommunications revenues for that region.
The FCC has notified carriers that they must report their revenues by April
2000. Currently, Cox will be required to contribute to the number portability
cost recovery mechanism in the fourth quarter 2000. The LNP Administrator will
use the information collected in the LNP worksheets to determine the allocated
portion of the shared costs incurred by the regional database administrator in
proportion to that carrier's international, interstate, and intrastate end-user
telecommunications revenues for that region.
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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, every telecommunications carrier that
provides interstate telecommunications services must contribute to the universal
service mechanisms established by the FCC. 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
1996 Act also directs the FCC to promote affordable telecommunications access
and the FCC adopted a two-track framework to identify necessary universal
service subsidies and provide a mechanism to make them portable. The FCC has put
into place a program to identify subsidies to fund high cost service areas not
served by rural LECs. The program, in the short run, preserves many of the
existing subsidies. The FCC has not announced a timetable for reforming
universal service in rural high cost areas.
On July 30, 1999, the United States Court of Appeals for the Fifth Circuit
issued an opinion affirming in part, reversing in part, and remanding in part
the FCC's Universal Service Order. Among other things, the Fifth Circuit ruled
on two issues regarding the assessment of universal service contributions.
Specifically, the Fifth Circuit: (1) reversed the FCC's decision to assess
contributions based on the intrastate revenues of universal service
contributors; and (2) reversed and remanded for further consideration the FCC's
decision to assess contributions based on the international revenues of
contributors having interstate revenues. In response to the court's rulings, the
FCC adopted an order in October 1999 that amended its mandatory contribution
rules. Specifically, the FCC removed intrastate revenues from the contribution
base, so that universal service contributions are now calculated using a single
contribution factor based on interstate and international end-user
telecommunications revenues.
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
2000, Cox will be required to contribute an amount equal to 5.8% 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.
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
or other carriers 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 and area, such as residential customers. The prospects, however,
are unclear until the FCC takes action on subsidies for rural high cost areas.
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 federal universal service programs. 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 proposed or adopted rules to implement these conclusions, preferring
instead to
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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. On May 11, 1999,
the FCC released Truth-in-Billing order, adopting principles and guidelines to
ensure that telephone bills provide consumers with the information they need to
make informed decisions in the telecommunications marketplace. The FCC's "Truth
in Billing" proceeding impacts 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 suggested requiring carriers
which choose to place line items on bills use standard labels to identify these
charges but has not formally adopted this requirement.
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, also known as 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
continues to review and revise its access charge regime. In its August 1999
order, for example, the FCC revised the rules that govern the provision of
interstate access services by price cap LECs. Specifically, the FCC granted
price cap LECs immediate pricing flexibility in the form of streamlined
introduction of new services, geographic deaveraging of rates for certain
services, and removal, upon implementation of toll dialing parity, of certain
interstate interexchange services from price cap regulation. The FCC also
established a framework for granting price cap LECs greater flexibility in the
pricing of all interstate access services once they have satisfied certain
competitive criteria.
On February 25, 1999, the FCC adopted an order addressing the
jurisdictional nature of dial-up traffic delivered to ISPs. The FCC announced
that dial-up traffic delivered to ISPs is largely interstate. The FCC 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. This order was appealed to the D. C. Circuit
and that appeal is pending. 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. Some incumbent LECs have refused to pay Cox reciprocal
compensation for dial-up traffic delivered to ISPs. Most state commissions have
reconsidered their previous decisions in light of the FCC's findings and are
divided on the enforcement of reciprocal compensation provisions in existing
interconnection agreements. 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, referred to as CPNI, 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.
Some companies argued that these regulations were overly burdensome and
requested that the FCC reconsider, clarify, and/or forbear from enforcing parts
of those regulations. The FCC adopted and order on reconsideration which
lessened the regulatory burden of various CPNI safeguards, while continuing to
require that carriers protect customer privacy. Specifically, the FCC reduced
the restriction on telecommunications companies' use of CPNI to market services
and equipment to their own customers. The FCC allowed wireline telephone
carriers to use CPNI without customer approval to market related information
services. Further, the
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FCC affirmed its decision to exercise its preemption authority on a case-by-case
basis for state rules that conflict with the FCC's rules.
After the FCC adopted the Order on Reconsideration, but prior to its
release, the Court of Appeals for the Tenth Circuit issued its opinion vacating
the FCC's CPNI rules. The Court held that the FCC's CPNI rules "must fall under
the First Amendment." Although no valid FCC CPNI rules are in effect currently,
the Court did not invalidate Section 222 of the Communications Act, which
requires carriers to obtain customer approval prior to using, disclosing or
granting access to individually identifiable CPNI.
Other Related Competitive Matters. 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, or CLECs. AT&T's Petition claimed 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 FCC denied the petition in August
1999. Specifically, the FCC declined to address AT&T's concerns in a declaratory
ruling; however, determined that AT&T's petition demonstrated a need for the FCC
to revisit the issue of CLEC access rates. The FCC thus initiated a rulemaking
regarding the reasonableness of these charges and whether the FCC might adopt
rules to address, by the least intrusive means, any failure of market forces to
constrain CLEC access charges. That rulemaking is still pending.
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.
Other Commercial Mobile Radio Service Providers. Sprint PCS will face
direct competition for personal communications service subscribers from other
licensed personal communications service systems and other commercial mobile
radio service providers within its markets. The FCC has auctioned and continues
to auction blocks of spectrum for PCS and other competing services. In 1999, the
FCC reauctioned 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 license payment obligation. The FCC also has
announced its decision to reauction in July 2000, additional C and F Block
broadband PCS licenses that were returned or reclaimed by the FCC.
The FCC's rules limit the amount of cellular, broadband PCS and SMR an
entity can accumulate to 45 MHz in a region. Recently, the FCC amended the
spectrum cap rule to allow a licensee to have an attributable interest in up to
55 MHz in rural areas, which are defined as RSAs. The new rule went into effect
on November 8, 1999. While this cap will prevent certain competitors from
consolidating the CMRS spectrum in any one market, the cap will also prevent
Sprint PCS from obtaining over 45 MHz in many of the markets it serves. In May
2000, the FCC is scheduled to auction licenses for fixed, mobile and
broadcasting services in the 747-762 and 777-792 MHZ bands. This spectrum is not
subject to the CMRS spectrum cap.
Sprint PCS may also face competition from other current or developing
technologies. SMR systems, such as those used by taxicabs, as well as other more
advanced forms of digital mobile communications service, may provide competition
in certain markets. 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, or 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 communica-
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tions 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. In June 1999, the FCC completed the auction
of 220 MHz service licenses. Sixteen winning bidders won a total of 222 Phase II
220 MHz licenses.
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.
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 will be affected by the degree and form of regulatory flexibility
ultimately afforded to LECs, and in part, will depend upon the FCC
determinations in rulemaking proceedings and other settings that affect the
telecommunications markets generally, including the revision of access charges
and further changes to the universal service program.
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.
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,
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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;
- compliance with technical standards; and
- customer service standards.
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, and
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 rates charged by cable operators for certain non-basic cable
programming tiers were also subject to regulation by the FCC until April 1,
1999, when such regulation became prohibited by the 1996 Act. 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
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- 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 basic service and
equipment 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 216 communities served by Cox's cable systems representing
approximately 41% 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.
Cox cannot predict whether the FCC will modify these rate regulations in
the future.
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;
- 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 under regulations in effect prior to April 1, 1999. Cox submitted rate
justifications
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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 relating to rate
increases implemented by Cox prior to April 1, 1999.
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.
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.
USE OF CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES. The
Communications Act allows local franchising authorities and unrelated third
parties to have access to cable systems' channel capacity for their own use. For
example
- permits franchising authorities to require cable operators to set aside
certain channels for public, educational and governmental access
programming; and
- requires a cable system with 36 or more activated channels to designate a
significant portion of its channel capacity for commercial leased access
by third parties to provide programming that may compete with services
offered by the cable operator.
The FCC also regulates various aspects of third party commercial use of
channel capacity on cable systems, including the rates and certain terms and
conditions of the commercial use.
The FCC and some local jurisdictions are considering proposals by various
ISPs to deliver their services directly to cable operators' customers through
access to cable operators' broadband communications facilities. In June 1999, an
ISP petitioned the FCC to issue a declaratory ruling that ISPs are entitled to
access to cable system facilities under the commercial use channel provisions of
the Communications Act. This petition was denied in February 2000. Also in June
1999, a federal district court held in connection with Tele-Communications,
Inc.'s application to transfer two franchises to AT&T that a franchising
authority may require access to cable modem services by third party ISPs as a
condition to approval of a franchise transfer. AT&T has appealed the decision.
Although the decision is not binding on other courts and has no legal effect in
other areas of the country, it has supported attempts by other franchising
authorities to require cable operators to provide access to third party ISPs in
other circumstances, including franchise renewal.
Several local franchising authorities have imposed or attempted to impose
open access conditions in connection with franchise transfers, although the vast
majority of local franchising authorities considering proposals to require open
access to date have declined to impose such open access requirements on cable
operators. In this regard, late in September 1999, the City of Fairfax, Virginia
enacted an ordinance that
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purported to condition the transfer of a cable television franchise from Media
General, Inc. to a Cox subsidiary on Cox permitting any requesting ISP access to
its cable system on the same basis that it provides access to its affiliated
ISP. Although the City has only 6,000 customers out of a total of 260,000
customers in Fairfax County, the City and County systems are integrated
operationally. Cox accepted the franchise transfer, but rejected the open access
condition and reserved its right to challenge the legality of the purported
requirement. Several state legislatures are also considering legislation which
would require cable operators that provide Internet service over their plant to
open their facilities to third party ISPs.
The FCC continues to maintain its earlier position to monitor but not
intervene in the "Internet over cable" market, and that broadband policy should
be set at the federal level. Recently, two private antitrust suits have been
filed by open access advocates who are frustrated with the FCC's current policy
not to intervene in the open access issue. In the first, GTE has sued AT&T and
Comcast Cable Communications, Inc. in federal district court in Pittsburgh, PA,
alleging principally that the cable operators have unlawfully "tied" high-speed
Internet transport and their "@Home" product, and, by refusing to sell their
transport service to GTE and others, have engaged in a "per se" violation of
Section I of the Sherman Anti-trust Act. The second suit, a consumer class
action filed in federal district court in Los Angeles against all the major
MSOs, including Cox, with Internet affiliates @Home and RoadRunner, also alleges
unlawful product tying and seeks damages on behalf of consumers unable to access
their ISP of choice through cable systems without paying for both the bundled
cable ISP service and other ISPs' services.
Legislation is pending in the Congress which would, among other provision,
require cable operators to offer interconnection with the Internet to
unaffiliated ISPs on interconnection terms and conditions that are fair,
reasonable, and non-discriminatory, and would permit the FCC to require cable
operators to offer nondiscriminatory, direct Internet interconnection for
unaffiliated ISPs and set the rates, terms, and conditions of such
interconnection. Cox cannot predict if such proposals will be adopted, the
eventual outcome of such litigation, or whether such proposals or litigation
will have a material impact on the business and operations of Cox.
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 rate formula governs the maximum rate certain utilities
may charge for attachments to their poles and conduit by cable operators
providing only cable services and, until 2001, by certain companies providing
telecommunications 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.
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The FCC concluded that a cable operator providing Internet service over its
cable system is not providing a telecommunications service for purposes of the
new rules. The 1996 Act amendments will 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. Several parties have filed petitions for reconsideration of the FCC's
new rate formula, which has also been challenged in court. 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 20% 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 recently modified its cable television
attribution rules that identify when the ownership or management by Cox or third
parties of other communications businesses, including cable systems, television
broadcast stations and local telephone companies, may be imputed to Cox for
purposes of determining our compliance with the FCC's ownership restrictions.
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 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
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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 1992 Act required the FCC to adopt rules establishing a national
subscriber cap and limits on the number of channels that may 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 held the statutory limitation unconstitutional. In the
interim, the FCC has delayed the effectiveness of its ownership limits. Appeals
of both the district court's decision and the FCC's regulatory ownership
restrictions are pending. In connection with these ownership limitations, the
FCC recently reconsidered and reaffirmed its current 30% nationwide subscriber
ownership limit but revised the manner in which the cap is calculated. Under the
new rule, the cap is calculated by counting nationwide all homes that are
actually served instead of simply passed by cable, DBS, and other multichannel
video programming distributors. As a result of the change in the rule, the
current cap is equivalent to a 35-36% cap under the old rule.
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 of cable systems by telephone companies
and prohibited certain joint ventures between local telephone companies
and cable operators in the same market.
Local telephone companies and other entrants 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 policy which preempted local franchising
requirements for open video operators. The FCC recently modified its open video
rules to conform to the court's decision and upon the request of a local
franchising authority, an open video operator must obtain a franchise.
Open video system operators are exempt from several 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 open video system operations. Those companies that elect to
provide video services over an open video system may do so upon obtaining
certification by the FCC. Among other requirements, the 1996 Act:
- prohibits open video system operators from discriminating in the
provision of video programming services; and
- requires open video system operators to limit carriage of video services
selected by the open video system operator to one-third of the open video
system's capacity.
- Open video system 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.
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The manner in which open video system 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 open video system 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
open video system 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 open video system
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 open video
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 open video system operator.
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, and the United States Supreme Court is currently reviewing 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.
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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. 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. This
requirement to separate security and non-security functions will not apply to
equipment which uses only an analog conditional access mechanism and is
incapable of providing access to any digital transmission or other digital
service. As of January 1, 2005, Cox will be prohibited from selling or leasing
new set-top equipment (e.g., converter box) which integrates both security and
non-security functions. All new equipment provided beginning on that date must
be capable of using separate component security modules. The National Cable
Television Association has appealed this aspect of the FCC's rules. In any
event, 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 $0.48
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-
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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 filed a "show cause"
petition with the FCC. The petition requested 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 FCC's 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 Communications Bakersfield,
Inc. and Cox Communications Palos Verdes, Inc.) filed an opposition to the
petition on December 1, 1998, responding to the matters raised in the petition.
On July 19, 1999, the FCC dismissed the Petition. The FCC concluded that Cox was
offering San Diego system subscribers the ability to purchase per-channel and
per-program cable service, and that these subscribers did not have standing to
raise this issue with regard to the other systems. The suit in state court is
now proceeding. The Court has granted Cox and the plaintiffs an extension of
time during which the plaintiffs intend to file an amended complaint. Cox will
urge the court to dismiss the suit based on the FCC's dismissal of the Petition
and the plaintiff's lack of standing to pursue claims against Cox's other
California systems, as well as the failure to allege harm under the California
antitrust consumer protection laws. Cox intends to defend this action
vigorously. The outcome of this matter cannot be predicted at this time.
The government of Mexico authorized the allocation of a new broadcast
station on channel 3 in Tijuana, Mexico. Although the station recently commenced
operations without causing anticipated interference, the station has requested
permission from the government of Mexico to increase its authorized operating
power. If the station is permitted to increase power, material interference to
cable reception in certain areas served by the San Diego system could result,
and Cox would be required to incur substantial expenses to retune subscribers'
converters to a new channel. The FCC, which is monitoring the situation, has
relayed Cox's concerns to the Mexican government and continues to seek the
cooperation of that government to assure that the transmissions will not cause
unacceptable conditions.
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.
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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.
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;
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- 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 849 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.
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 a cable operator new and more
onerous requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Some franchising authorities
may also attempt to impose open access regulations as a condition of renewal.
(See # "Use of Cable Systems by the Government and Unrelated Third Parties.")
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, including open access conditions. 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;
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- 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;
- types of cable services provided; and
- public, educational, and governmental access channel capacity.
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.
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 carrier 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
limited 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 (generally referred to as
interLATA) restrictions contained in the Modified Final Judgment and the 1981
consent decree. The 1996 Act 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
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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. Unless the interconnecting
carrier agrees, the interconnection provided by the BOC must comply with a
"competitive checklist." Several BOCs have filed applications for authority to
provide interLATA services, on a state-by-state basis. These applications
include SBC in Texas and Bell Atlantic in New York. The FCC has recently granted
Bell Atlantic's application to provide long distance services in New York. SBC's
application to provide long distance or interLATA service in the State of Texas
is under review at the FCC. Other BOC long distance applications can be
expected.
The 1996 Act also imposes access and interconnection requirements on ILECs
to open their networks to competitors. The FCC adopted rules implementing those
requirements in August 1996. State regulators are responsible for arbitrating
interconnection disputes that arise between ILECs and new entrants. In addition,
the 1996 Act specifies procedures for state commissions to review and approve
interconnection agreements entered into between new entrants and ILECs. The FCC
adopted interconnection rules establishing pricing standards and negotiation and
arbitration guidelines that the states must follow in reviewing interconnection
agreements between ILECs and their competitors. In 1997, the U.S. Court of
Appeals for the Eighth Circuit vacated certain portions of the FCC's rules, but
in January 1999, the Supreme Court reversed the Eighth Circuit and upheld, for
the most part, the FCC's interconnection rules; however, the Supreme Court
instructed the FCC to reconsider its determination regarding the extent to which
ILECs are required to unbundle elements of their networks and provide those
elements to competitors. On November 5, 1999, the FCC issued an order that
reconsidered the unbundling obligations contained in the 1996 Act. The FCC
eliminated items from its previous list of unbundled network elements. The FCC
stated that its revised unbundling rules are designed to advance the development
of facilities-based competition and to provide incentives for incumbent and
competitive carriers to invest in their own facilities and innovate.
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 services using 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 subsidizing rural
service at the expense of urban customers. The extent of these subsidies has
been widely disputed and the 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 its Universal Service orders 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 put in place a program to
fund high cost service areas not served by rural LECs that, in the short run,
preserves many of the existing
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subsidies. It has not yet proposed a program for universal service funding for
high cost areas served by rural LECs.
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
or other carriers, e.g., wireless providers, 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, such as 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, in an August 1999 order, the FCC established a framework
for granting price cap LECs relief from the FCC's rate level, rate structure,
and tariffing rules once they satisfy certain competitive criteria. In November,
1999, however, the FCC denied certain BOC petitions for forbearance from
dominant carrier regulation for special access and high capacity transport
services. The FCC concluded that the state of competition in the market for
special access and high capacity dedicated transport services was not
sufficiently developed to support a conclusion that the BOC petitioners lack
market power, and thus qualify for non-dominant treatment in the provision of
these services. An incumbent price cap LEC, however, may file a petition with
the FCC in accordance with the procedures outlined in the August 1999 order,
identifying the relief it seeks and demonstrating that it has satisfied the
certain "triggers." The LEC must demonstrate that sufficient competition has
developed in a market for special access and high capacity dedicated transport
services to warrant relaxation of the FCC rules for that market.
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. The FCC is also examining ways to
further streamline the periodic accounting filings required of large incumbent
LECs.
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, resellers and private
networks built by large end-users or any combination of these entities.
BROADBAND PCS AND SPECTRUM AUCTIONS. 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. States are permitted under the 1993 Budget Act to regulate "other
terms and conditions" of CMRS, including the siting and zoning of CMRS
equipment.
The 1993 Budget Act also provided the FCC with the authority to auction
spectrum that satisfied specific criteria. The FCC auctioned and continues to
auction blocks of spectrum for PCS and other competing services. The first
broadband PCS auction (Blocks "A" and "B") was completed in March 1995 and a
Sprint PCS subsidiary acquired a significant number of licenses nationwide. 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
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additional eligibility requirements imposed on Blocks "C" and "F." There is a
history of substantial difficulty with the C Block, with many of the winning
bidders at auction proving unable to get financing to satisfy their license
payment obligations to the FCC.
On March 23, 1999, through April 15, 1999, the FCC reauctioned 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
license payment obligation. Upon completion of the auction, this spectrum became
available to competing broadband personal communications services providers.
The FCC continues to make spectrum available for services that might
compete with Sprint PCS. For example, in May 2000, the FCC is scheduled to
auction licenses for fixed, mobile, and broadcasting services in the 747-762 and
777-792 MHZ bands. The FCC also has announced its decision to reauction in July
2000, C and F Block broadband PCS licenses that were returned or reclaimed by
the FCC.
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. States are also playing an increasing role in telephone number
assignment and number conservation.
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, 1999, Cox had approximately 12,348 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.
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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 arising
out of the manner in which such systems sell premium channel cable services. The
suit alleges that Cox's California Systems unlawfully require limited basic
cable customers to purchase the expanded basic services tier in order to
purchase premium channels, i.e., channels sold on an a-la-carte basis such as
Home Box Office and Showtime. The suit asserts causes of action under California
antitrust and consumer protection laws. The suit seeks injunctive relief as well
as an order awarding the class members compensatory damages, plus statutory
damages, punitive damages, interest and attorney's fees. Cox moved to dismiss
the suit on dispositive substantive grounds or in the alternative to stay the
suit on primary jurisdiction grounds. On February 13, 1998, the Court stayed the
suit and referred it on grounds of primary jurisdiction to the FCC for
consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. On October 1, 1998, the
plaintiffs filed a Petition with the FCC which alleged that the Cox California
Systems violated the "buy-through" prohibition of the FCC's rules. Under the
"buy-through" prohibition, cable systems may not require subscribers to purchase
intermediate tiers of cable service as a prerequisite to receiving per-channel
and per-program cable service unless such systems can demonstrate that they are
not technically capable of complying with the buy-through requirement. In July
1999, the FCC dismissed the Petition. The FCC concluded that Cox's San Diego
system is complying with the buy-through rule and that the named plaintiffs lack
standing to raise this issue with regard to Cox's other California systems. The
suit is now proceeding in state court. The court granted Cox and the plaintiffs
an extension of time during which the parties may explore the possibility of a
resolution to the suit. If no resolution is reached, the plaintiffs may file an
amended complaint and Cox may renew its motion to dismiss the suit based on the
grounds raised in its earlier motion and the additional grounds of the FCC's
dismissal of the Petition and the plaintiffs' lack of standing to pursue claims
against Cox's other California systems. The outcome of this matter cannot be
predicted at this time.
Cox and certain subsidiaries are defendants in four putative subscriber
class action suits in state courts in Louisiana, Indiana, Texas and Nevada
initiated between October 17, 1997 and December 17, 1998. The suits all
challenge the propriety of late fees charged by the subsidiaries to customers
who fail to pay for services in a timely manner. The suits seek injunctive
relief and various formulations of damages under certain claimed causes of
action under various bodies of state law. These actions are in various stages of
defense. Settlement in Nevada is pending final court approval. The remaining
actions are being defended vigorously. The outcome of these matters cannot be
predicted at this time. Three additional suits that have been pending in Arizona
and Florida have been settled; one additional suit that had been pending in
Nebraska was dismissed.
On November 10, 1999, Fred and Roberta Lipschutz, Arthur Simon and John
Galley III, on behalf of themselves and all persons similarly situated, filed a
putative class action suit against Cox and thirteen other defendants in the
United States District Court for the Central District of California. The action
alleges that a putative class defined as all persons who since November 10,
1995, have purchased broadband Internet data transmission services from a "cable
company defendant" has been injured because alleged agreements among the "cable
company defendants" and/or the "cable company defendants" and defendants @Home
Corporation and RoadRunner have required the putative class to purchase both
Internet data transmission services and interface/content services from @Home or
RoadRunner. The complaint asserts claims under Section 1 of the Sherman
Antitrust Act, the California Cartwright Act, and California unfair competition
law and seeks injunctive relief and compensatory and treble damages. An amended
complaint adding additional named plaintiffs was filed on December 30, 1999 and
Cox filed its answer to the amended complaint on January 19, 2000. Cox intends
to defend this action vigorously. The outcome of this matter cannot be predicted
at this time.
Cox is a party to various other legal proceedings which are ordinary and
incidental to its business. Management does not expect that any of these other
legal proceedings currently pending will have a material adverse impact on Cox's
consolidated financial position, results of operations or cash flows.
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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 1999 Summary Annual Report
to Stockholders (see Exhibit 13).
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for each of
the five years in the period ended December 31, 1999 has been derived from and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7. and the Consolidated
Financial Statements and Supplementary Data and notes thereto in Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ 2,318.1 $ 1,716.8 $ 1,610.4 $1,460.3 $1,286.2
Operating income.................... 262.9 201.4 257.1 221.7 226.0
Interest expense.................... 305.7 223.3 202.1 146.1 132.3
Equity in net losses of affiliated
companies........................ 90.5 547.2 404.4 170.4 79.7
Gain on investments, net............ 1,569.4 2,484.2 64.7 4.6 188.8
Gain on issuance of stock by
affiliated companies............. -- 165.3 90.8 50.1 --
Dividend income..................... 44.3 12.2 -- -- --
Net income (loss)................... 881.9 1,270.7 (136.5) (51.6) 103.8
Basic net income (loss) per
share(a)......................... $ 1.54 $ 2.33 $ (0.25) $ (0.10) $ 0.20
Diluted net income (loss) per
share(a)......................... 1.51 2.30 (0.25) (0.10) 0.20
OTHER OPERATING AND FINANCIAL DATA:
Operating cash flow(b).............. $ 901.2 $ 659.1 $ 609.8 $ 556.9 $ 493.3
Operating cash flow margin(b)....... 38.9% 38.4% 37.9% 38.1% 38.4%
Ratio of debt to operating cash
flow (b)......................... 7.1x(c) 6.2x(c) 5.2x(c) 5.2x 5.2x
Cash flows provided by operating
activities....................... $ 404.7 $ 667.2 $ 553.6 $ 309.1 $ 324.9
Cash flows (used in) investing
activities....................... (3,849.6) (1,600.4) (1,108.0) (522.2) (865.5)
Cash flows provided by financing
activities....................... 3,447.6 935.6 540.3 246.2 576.4
BALANCE SHEET DATA:
December 31
Total assets........................ $26,614.5 $12,878.1 $ 6,556.6 $5,784.6 $5,555.3
Total debt (including amounts due to
CEI)............................. 6,375.8 4,090.8 3,148.8 2,881.0 2,575.3
Total Cox-obligated capital and
preferred securities of
subsidiary trusts................ 1,150.6 -- -- -- --
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CUSTOMER DATA:
Basic customers(d)...................... 5,136,184 3,753,608 3,235,338 3,259,384 3,248,759
New services(e)......................... 554,025 169,731 18,941 -- --
--------- --------- --------- --------- ---------
Revenue Generating Units(f)............. 5,690,209 3,923,339 3,254,279 3,259,384 3,248,759
Homes passed(g)......................... 8,031,340 5,923,428 5,023,870 5,016,749 5,005,858
Basic penetration(h).................... 64.0% 63.4% 64.4% 65.0% 64.9%
Premium service units(i)................ 3,237,013 2,206,833 1,865,184 2,000,673 1,827,068
</TABLE>
- ---------------
(a) All historical per share amounts have been restated to reflect Cox's
two-for-one stock split which was effective on May 21, 1999.
(b) Operating cash flow (operating income before depreciation, amortization and
gain on sale and exchange of cable television systems), 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 net cash provided by operating
activities as a measure of liquidity.
(c) Using the fourth quarter annualized operating cash flow, the ratio would
have been 5.5x, 5.1x and 4.6x at December 31, 1999, 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 Television, high-speed Internet access 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.
(i) Premium service units include single or multi-channel services offered for
a monthly fee per service.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITIONS, TRANSACTIONS AND INVESTMENTS
Recent Acquisitions
In January 2000, Cox completed the acquisition of cable television systems
serving 522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia
Cablevision, Inc., a subsidiary of Gannett Co., Inc., in a cash transaction
valued at $2.7 billion.
In March 2000, Cox and AT&T Corp. exchanged Cox's 50.3 million shares of
AT&T common stock for the stock of AT&T subsidiaries that own cable television
systems serving approximately 495,000 customers and certain other assets and
liabilities, including cash. In return for its 50.3 million shares of AT&T
common stock, Cox received: cable television systems serving Tulsa, Oklahoma
(160,000 customers) and Baton Rouge, Louisiana (156,000 customers); the
remaining 20% ownership interest in a partnership in which Cox acquired an 80%
interest through its merger with TCA Cable TV, Inc.; Peak Cablevision LLC, which
has 117,000 customers in Oklahoma, Arkansas, Utah and Nevada; and approximately
$750.0 million in other assets, including cash.
1999 Acquisitions and Transactions
In August 1999, Cox completed its merger with TCA, a cable television
operator serving approximately 883,000 customers in Texas, Arkansas, Louisiana
and four other states for consideration consisting of $1.6 billion in cash, 38.3
million shares of Cox Class A common stock and assumed indebtedness of $540.0
million. Upon completion of the merger, Cox repaid $340.0 million of the assumed
TCA debt. Cox also acquired VPI Communications, Inc., an affiliate of TCA, and
TCA's interest in two majority owned partnerships in connection with the TCA
merger. VPI provides advertising sales and turnkey advertising services to 82
cable television system operators representing more than 3.5 million customers
nationwide.
Also in August 1999, Cox and MediaOne exchanged selected cable television
systems serving communities in Massachusetts, Rhode Island and Connecticut. In
connection with the transaction, Cox traded its cable television systems in
Massachusetts, serving more than 54,000 customers, for MediaOne properties in
Connecticut and Rhode Island, serving 51,000 customers, and cash. Cox recognized
a pre-tax gain of $77.4 million upon completion of this transaction.
In October 1999, Cox completed the acquisition of cable television systems
serving more than 260,000 customers in Fairfax County and Fredericksburg,
Virginia from Media General, Inc. in a cash transaction valued at $1.4 billion.
Also in October 1999, Cox reorganized its partnership with Time Warner
Entertainment Company, L.P., under which Cox acquired control of the cable
television system serving Fort Walton Beach, Florida and received $104.5
million, and Time Warner acquired control of the cable television system serving
Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in
connection with this reorganization.
1998 Acquisitions and Transactions
In June 1998, Cox completed the acquisition of a cable television system
serving approximately 115,000 customers in Arizona from Tele-Communications,
Inc. in a cash transaction valued at $250.2 million.
In October 1998, Cox completed the acquisition of a cable television system
serving approximately 293,000 residential customers and 105,000 hotel units in
the greater Las Vegas area 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 $1.3 billion, including the
refinancing of certain Prime South indebtedness.
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Investments
See "Investments" in Part I, Item 1. "Business" and Note 6, "Investments,"
in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data."
RESULTS OF OPERATIONS
The results of operations discussed below include the effects of the
following as of their acquisition dates:
- the August 1999 TCA merger;
- the August 1999 exchange of selected cable television systems with
MediaOne;
- the October 1999 acquisition of cable television systems from Media
General;
- the October 1999 reorganization of Cox's partnership with Time Warner,
under which Cox obtained control of the cable television system serving
Ft. Walton Beach, Florida;
- the April 1998 disposition of Cox's partnership interests and net assets
in and operations of PrimeStar Partners, L.P.;
- the June 1998 acquisition of cable television systems in Tucson and
Sierra Vista, Arizona; and
- the October 1998 acquisition of a cable television system in Las Vegas,
Nevada.
These transactions are collectively referred to in the discussion below as
the 1999 and 1998 transactions.
1999 COMPARED WITH 1998
Total revenues for the year ended December 31, 1999 were $2,318.1 million,
a 35% increase over revenues of $1,716.8 million for the year ended December 31,
1998. Of this increase, 23% relates to increased revenues from the 1999 and 1998
transactions. The remaining 12% increase includes the effects of:
- basic and digital customer growth at existing cable television systems;
- rate increases, implemented primarily during the fourth quarter 1998,
resulting from channel additions, increased programming costs and the
pass-through of inflation adjustments;
- an increase in pay-per-view revenues due to national boxing events during
the first and third quarters of 1999 and an increase in digital
pay-per-view revenues;
- growth in local and national advertising sales; and
- growth in data, commercial telephony and residential telephony product
subscriptions.
Programming costs were $561.3 million for the year ended December 31, 1999,
an increase of 38% over the same period in 1998. Of this increase, 25% relates
to the 1999 and 1998 transactions. The remaining 13% increase is due to basic
and digital customer growth at existing cable television systems, January 1999
programming rate increases, channel additions and the 1999 pay-per-view events
discussed above. Plant operations expenses increased 31% to $173.5 million. Of
this increase, 19% relates to the 1999 and 1998 transactions. The remaining 12%
increase relates to increased plant maintenance and costs related to significant
growth of new services at existing cable television systems.
Marketing costs increased 48% to $147.0 million. Of this increase, 29%
relates to the 1999 and 1998 transactions, including the acquisition of VPI as
part of the TCA merger. The remaining 19% increase relates 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, 1999
increased 37% to $535.1 million due to the 1999 and 1998 transactions and costs
associated with digital video, high-speed data and telephony services in newly
launched markets.
Depreciation increased to $550.7 million for the year ended December 31,
1999 compared to $373.5 million during the year ended December 31, 1998 due to
the 1999 and 1998 transactions and the continued
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upgrade and rebuild of Cox's broadband network. Amortization increased to $165.0
million for the year ended December 31, 1999 compared to $84.2 million during
1998 due to the 1999 and 1998 transactions. Gain on sale and exchange of cable
television systems reflects the $77.4 million pre-tax gain on the August 1999
exchange of cable television systems with MediaOne. Operating income for the
year ended December 31, 1999 was $262.9 million, an increase of 31% compared to
1998.
Interest expense increased to $305.7 million for the year ended December
31, 1999 compared to $223.3 million in 1998 primarily due to an increase in the
total debt outstanding. Equity in net losses of affiliated companies was $90.5
million primarily due to losses associated with Cox PCS.
Net gain on investments of $1,569.4 million primarily includes:
- $433.1 million pre-tax gain on the sale of Cox's interest in Telewest in
January 1999;
- $908.5 million pre-tax gain on the transfer of Cox's remaining interest
in Cox PCS to Sprint Corporation during May 1999 in exchange for
approximately 38.1 million shares of Sprint PCS' common stock -- Series
2;
- $94.8 million pre-tax gain in connection with the October 1999
reorganization of Cox's partnership with Time Warner under which Cox
acquired control of the cable television system serving Ft. Walton Beach,
Florida and received $104.5 million; and
- $165.6 million pre-tax gain on the sale of 3.9 million shares of Sprint
PCS common stock in December 1999.
Minority interest of $18.6 million primarily represents the coupon
distributions with respect to $650.0 million FELINE PRIDES issued by Cox in
August 1999 and $500.0 million RHINOS issued by Cox in October 1999.
Net income for the year ended December 31, 1999 was $881.9 million as
compared to $1,270.7 million for the year ended December 31, 1998.
Operating cash flow (operating income before depreciation, amortization and
gain on sale and exchange of cable television systems), 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 37% to $901.2
million for the year ended December 31, 1999. The operating cash flow margin
(operating cash flow as a percentage of revenues) for the year ended December
31, 1999 was 38.9%, an increase from 38.4% over the year ended December 31,
1998. Operating cash flows should not be considered as an alternative to net
income as an indicator of Cox's performance or as an alternative to net cash
provided by operating activities as a measure of liquidity.
1998 COMPARED WITH 1997
Total revenues for the year ended December 31, 1998 were $1,716.8 million,
a 7% increase over revenues of $1,610.4 million for the year ended December 31,
1997. The increase includes the net effects of:
- basic and digital customer growth at existing cable television systems;
- rate increases, implemented primarily during the fourth quarter of 1997,
resulting from channel additions, increased programming costs the
pass-through of inflation adjustments and the acquisition of the Las
Vegas cable television system;
- an increase in pay-per-view revenues contributed by the Las Vegas cable
television system offset by a decrease in comparative revenues due to the
1997 Tyson/Holyfield boxing event;
- growth in local and national advertising sales due to political
advertising, a robust economy and the acquisition of the Las Vegas cable
television system;
- growth in data, commercial telephony and residential telephony product
offerings; and
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- a decrease in revenues from satellite operations during 1998 as a result
of 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 for an ownership interest in PrimeStar,
Inc.
Programming costs were $406.7 million in 1998, an increase of 14% over 1997
due to basic and digital customer growth, January 1998 programming rate
increases and channel additions and additional programming costs related to the
acquisition of the Las Vegas cable television system. Plant operations expenses
increased 21% 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 of 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 11% 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%
increase compared to 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 13% 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
22% 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
Communications Group, Inc., 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. Dividend income of
$12.2 million was from Cox's investment in 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 increased 8% to $659.1 million for the year ended
December 31, 1998. The operating cash flow margin 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 net cash flows
provided by operating activities as a measure of liquidity.
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 1999, Cox made capital expenditures of approximately $1.2 billion.
These expenditures were primarily for upgrading and rebuilding its broadband
network to allow for the delivery of advanced broadband services including
digital video, high-speed Internet access, telephony, video on demand and
Internet to the television. Capital expenditures for 2000 are expected to range
between $1.5 billion and $1.7 billion. Capital
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expenditures for each of 2001 and 2002 are expected to range between $1.3
billion and $1.5 billion and for each of 2003 and 2004 are expected to range
between $1.0 billion and $1.2 billion.
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 $31.0
million primarily included debt and equity funding for NextLink Nevada. Future
funding requirements for investments in affiliated companies are expected to
total approximately $20.0 million over the next five years. Actual capital
requirements may vary significantly from the amounts stated above and will
depend on numerous factors as many of these affiliates are growing businesses
and specific financing requirements will change depending on the evolution of
these businesses.
Payments for the purchases of cable television systems of $3.5 billion
primarily represents cash paid in connection with the TCA merger and the
acquisition of cable television systems from Media General.
During 1999, Cox paid $350.0 million towards its revolving credit
borrowings and extinguished the remaining balance of $150.0 million on its
Floating Rate Reset Notes. Net repayments on commercial paper were $512.4
million.
SOURCES OF CASH
During 1999, Cox generated $404.7 million from operations. Proceeds from
the sale of investments of $872.9 million include $727.9 million from the sale
of Cox's interest in Telewest in January 1999 and $130.3 million for the sale of
3.9 million shares of Sprint PCS common stock in December 1999. Proceeds on
exchange of cable television systems of $114.2 million primarily represents cash
received from Time Warner in connection with the reorganization of Cox's
partnership with Time Warner, under which Cox acquired control of the cable
television system in Ft. Walton Beach, Florida.
Proceeds from the issuance of debt during 1999 was approximately $3.3
billion, net of underwriting discounts, and is composed of the following:
- the issuance of senior debt securities for aggregate proceeds of $2.0
billion; and
- the issuance of 14,375,000 Exchangeable Subordinated Debentures due 2029,
called PRIZES, for aggregate proceeds of approximately $1.3 billion. The
PRIZES are indexed to the trading price of Sprint PCS common
stock -- Series 1 and are exchangeable by the holder for cash based on
the market value of Sprint PCS common stock -- Series 1. The PRIZES are
listed on the NYSE under the symbol "PRI."
Proceeds from the issuance of common stock is from the issuance of 10.1
million shares of Class A common stock for aggregate proceeds of $350.3 million,
net of offering costs of $12.4 million.
Proceeds from the issuance of Cox-obligated capital and preferred
securities of subsidiary trusts were approximately $1.2 billion, and included
the following:
- the issuance of FELINE PRIDES for proceeds of $650.0 million; and
- the issuance of RHINOS by a wholly owned subsidiary trust to an affiliate
of The Bank of America for aggregate proceeds of $500.0 million. The
RHINOS are long-term auction rate term preferred securities of Cox RHINOS
Trust.
Each FELINE PRIDES consists of a unit comprised of:
(1) a three-year forward purchase contract under which the holder is
obligated to purchase from Cox new shares of Cox Class A common stock
based upon a settlement rate, and
(2) either:
(A) beneficial ownership of a 7% capital security having a stated
liquidation amount equal to $50, representing a preferred
undivided beneficial interest in the assets of Cox Trust II, a
wholly owned financing subsidiary of Cox, or
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(B) a 5% undivided beneficial ownership in a zero coupon U.S.
Treasury Security having a principal amount at maturity equal
to $1,000.
Units comprised of a purchase contract and a beneficial interest in capital
securities are called Income PRIDES and units comprised of a purchase contract
and a beneficial interest in the treasury securities are called Growth PRIDES.
The Income PRIDES and the Growth PRIDES are listed on the NYSE under the symbols
"COXPrI" and "COXPrG," respectively.
OTHER
At December 31, 1999, Cox had approximately $6.4 billion of outstanding
indebtedness and $1.2 billion of outstanding Cox-obligated capital securities of
subsidiary trusts. In addition, Cox had approximately $5.0 billion available
under its revolving credit facilities, shelf registration statements and
commercial paper program.
Cox expects that the cost of its network 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.
All historical weighted average share, per share and historical balance
sheet amounts have been restated to reflect Cox's two-for-one stock split which
was effective on May 21, 1999.
In January 2000, Cox borrowed $500.0 million under a floating rate bridge
loan which is due and payable on March 31, 2000.
In March 2000, Cox issued $275.0 million aggregate principal amount of 3%
Exchangeable Subordinated Debentures due 2030, also referred to as Premium
PHONES, for proceeds of $269.5 million, net of underwriting discounts. Prior to
March 14, 2002, the Premium Phones are exchangeable at the holders' option for
cash in an amount based on the trading price of the underlying reference shares,
which are initially shares of Sprint PCS common stock -- Series 1. On or after
that date, the Premium Phones can be exchanged by the holders, at Cox's
election, for cash or the underlying reference shares. The Premium PHONES are
listed on the NYSE under the symbol "COX 30."
On March 16, 2000, Cox notified the trustee, who then gave notice to the
record holders of Cox's Floating Rate Notes due August 15, 2000, of Cox's
intention to redeem all $525.0 million aggregate principal amount outstanding of
the Floating Rate Notes on March 31, 2000.
The above description of certain material terms of the FELINE PRIDES, the
PRIZES and the Premium PHONES are summaries and not intended to be comprehensive
descriptions of these securities. Additional terms of the FELINE PRIDES, the
PRIZES and the Premium PHONES can be found in Notes 9, 10 and 19 in Part II,
Item 8."Consolidated Financial Statements and Supplementary Data." For a
complete description of each of these securities, you should read Cox's
prospectus supplement dated August 9, 1999 with respect to the FELINE PRIDES,
Cox's prospectus supplement dated November 29, 1999 with respect to the PRIZES
and Cox's prospectus supplement dated March 8, 2000 with respect to the Premium
PHONES. The disclosure regarding each of these securities in this section is
qualified in its entirety by reference to the respective prospectus supplements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1998, SFAS No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities," was issued. This statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated,
44
<PAGE> 47
reassessed and documented pursuant to the provisions of SFAS No. 133. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Management is in the process of
assessing the impact of SFAS No. 133 on the consolidated financial statements.
OTHER MATTERS
YEAR 2000 READINESS DISCLOSURE
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 that conform to the original
functional specifications, regardless of the millennium change.
The initial discussions of Year 2000 readiness exclude information on
acquisitions, which are discussed separately, below.
Cox did not experience any material Year 2000 failures subsequent to
December 31, 1999. Although Cox believes it has taken the appropriate steps to
address Year 2000 readiness, there is no guarantee that Cox's efforts will
prevent a material adverse impact on the consolidated results of operations and
financial condition.
Vendors
Cox's assessment of its vendors included 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 completed testing with certain key vendors.
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 Year 2000 non-compliance or failures 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 were converted in a timely fashion or, if not converted, would
not have an adverse effect on Cox's business operations.
Costs
Total costs associated with Year 2000 compliance have not been material to
Cox's financial position. Most of the costs associated with Cox's applications
systems, including subscriber equipment, upgrades and replacements are being
incurred irrespective of the Year 2000 initiative. In addition, the timing of
these upgrades and replacements was not accelerated in order to become Year 2000
compliant. As of December 31, 1999, the total incremental costs expended on the
Year 2000 initiative is approximately $2.7 million. Cox expects that the total
incremental costs of the Year 2000 initiative upon completion will be less than
$3.0 million.
Risks and Reasonably Likely Worst Case Scenarios
The failure to correct a material Year 2000 problem could result in system
failures leading to a disruption in, or failure of certain normal business
activities or operations. Such failures could materially and adversely affect
Cox's results of operations, liquidity and financial condition. In spite of 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 unaware at this time of any material consequences of Year 2000
failures that would have material impact on Cox's results of operations,
liquidity or financial condition.
Recently Closed Acquisitions
Cox has completed the TCA merger, as well as the acquisition of certain
cable television systems from Media General, Inc., MediaOne Group, First
Commonwealth Communications, Inc., Cable Plus Holding
45
<PAGE> 48
Company, Multimedia and AT&T. Prior to the acquisition of each of these systems,
their respective owners began implementing their own Year 2000 readiness
initiatives. In connection with each acquisition, the seller either covenanted,
warranted or represented to Cox that the acquired systems either were already
Year 2000 compliant, that such systems would be compliant before the respective
acquisitions' closing dates, or that such systems were on track with their
respective plans to address the Year 2000 problem. Cox is in the process of
verifying the compliance claims, and further, has negotiated certain contractual
rights in connection with the acquisitions providing recourse against the
sellers in the event that covenants, representations, and warranties relating to
Year 2000 readiness are not met. Following the closing of the recent
transactions, Cox has in some cases remediated certain systems and components.
At present, Cox is unaware of any January 1, 2000 or likely material failures.
However, the acquired systems operate on diverse platforms, some of which are
based on older and possibly outdated technologies and in some instances have not
been certified compliant by their vendors.
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 has been revised 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 SEC after January 1, 1996 are
hereby incorporated by reference and designated as Year 2000 Readiness
Disclosures.
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 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 our 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,
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
46
<PAGE> 49
will continue to generate cash and obtain financing sufficient to meet
these requirements. However, if Cox were unable to meet these
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 Sprint PCS
and Excite@Home.
- 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 broadband communications industry or on
our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that Cox will incur losses due to adverse changes
in equity, interest, commodity or currency exchange rate and prices. Cox's
primary market risk exposure pertains to changes in interest rates.
With respect to financial instruments, Cox has estimated the fair values of
such instruments using available market information and appropriate valuation
methodologies. Considerable judgment, however, is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that Cox would
realize in a current market exchange.
The carrying amounts of cash, accounts receivable, other assets, accounts
payable, deferred income and amounts due to/from Cox Enterprises are reasonable
estimates of their fair value at December 31, 1999 and 1998.
The estimated fair values 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 commercial paper and floating
rate notes at December 31, 1999 and the revolving credit agreements, commercial
paper and floating rate reset notes at December 31, 1998 bear interest at
current market rates and, thus, approximate fair value. In addition, the RHINOS
at December 31, 1999 bear interest at current market rates and, thus,
approximate fair value. Cox is exposed to interest rate volatility with respect
to the foregoing variable rate debt instruments.
The estimated fair value of Cox's remaining debt instruments at December
31, 1999 was $3,858.3 million compared to a carrying amount of $4,064.1 million.
The estimated fair value of the remaining debt instruments at December 31, 1998
was $2,385.7 million compared to a carrying amount of $2,393.6 million. In
addition, the effect of a hypothetical one percentage point decrease in interest
rates would increase the estimated fair value of the remaining debt instruments
with a carrying amount of $4,064.1 million to $4,065.3 million at December 31,
1999 and $2,393.6 million to $2,540.6 million at December 31, 1998.
47
<PAGE> 50
The estimated fair value of the FELINE PRIDES at December 31, 1999 was
$884.0 million compared to a carrying amount of $642.3 million. In addition, the
effect of a hypothetical one percentage point decrease in interest rates would
increase the estimated fair value of the FELINE PRIDES with a carrying amount of
$642.3 million to $886.0 million at December 31, 1999. The estimated fair value
of the PRIZES at December 31, 1999 was $1,400.0 million compared to a carrying
amount of $1,272.2 million. In addition, the effect of a hypothetical one
percentage point decrease in interest rates would increase the estimated fair
value of the PRIZES with a carrying amount of $1,272.2 million to $1,417.0
million at December 31, 1999.
The 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.
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<PAGE> 51
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COX COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 33,313 $ 30,604
Accounts and notes receivable, less allowance for doubtful
accounts of $14,783 and $7,872............................ 260,518 166,052
Net plant and equipment..................................... 4,038,236 2,652,212
Investments................................................. 11,769,610 5,981,057
Intangible assets........................................... 10,174,034 3,959,906
Amounts due from Cox Enterprises, Inc....................... 114,821 --
Other assets................................................ 223,965 88,273
----------- -----------
Total assets...................................... $26,614,497 $12,878,104
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 477,134 $ 296,950
Deferred income taxes....................................... 6,670,521 2,886,636
Other liabilities........................................... 209,211 227,197
Debt........................................................ 6,375,795 3,920,159
Amounts due to Cox Enterprises, Inc......................... -- 170,596
----------- -----------
Total liabilities................................. 13,732,661 7,501,538
----------- -----------
Commitments and contingencies (Note 18)
Minority interests in equity of consolidated subsidiaries... 195,616 --
Cox-obligated capital and preferred securities of subsidiary
trusts.................................................... 1,150,636 --
Shareholders' equity
Series A preferred stock -- liquidation preference of
$22.1375 per share, $1 par value; 10,000,000 shares
authorized; shares issued and outstanding: 4,836,372... 4,836 4,836
Class A common stock, $1 par value; 650,000,000 shares
authorized; shares issued and outstanding: 576,168,914
and 527,111,512........................................ 576,169 527,112
Class C common stock, $1 par value; 60,000,000 shares
authorized; shares issued and outstanding:
27,597,792............................................. 27,598 27,598
Additional paid-in capital................................ 3,835,639 1,872,477
Retained earnings......................................... 2,232,205 1,350,277
Accumulated other comprehensive income.................... 4,859,137 1,594,266
----------- -----------
Total shareholders' equity........................ 11,535,584 5,376,566
----------- -----------
Total liabilities and shareholders' equity........ $26,614,497 $12,878,104
=========== ===========
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 52
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES............................................. $ 2,318,135 $ 1,716,757 $ 1,610,364
COSTS AND EXPENSES
Programming costs.................................. 561,343 406,748 357,880
Plant operations................................... 173,515 132,751 110,115
Marketing.......................................... 146,965 99,544 71,122
General and administrative......................... 535,123 389,234 352,217
Satellite operating and administrative............. -- 29,404 109,195
Depreciation....................................... 550,651 373,462 329,951
Amortization....................................... 165,049 84,209 74,587
Gain on sale and exchange of cable television
systems, net.................................... (77,361) -- (51,835)
------------ ------------ ------------
OPERATING INCOME..................................... 262,850 201,405 257,132
Interest expense..................................... (305,736) (223,326) (202,136)
Equity in net losses of affiliated companies......... (90,477) (547,202) (404,440)
Gain on investments, net............................. 1,569,389 2,484,162 64,742
Gain on issuance of stock by affiliated companies.... -- 165,342 90,796
Dividend income...................................... 44,292 12,164 --
Other, net........................................... 170 942 3,918
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
INTEREST........................................... 1,480,488 2,093,487 (189,988)
Income tax expense (benefit)......................... 579,965 822,815 (53,496)
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST............... 900,523 1,270,672 (136,492)
Minority interest, net of tax........................ (18,595) -- --
------------ ------------ ------------
NET INCOME (LOSS).................................... $ 881,928 $ 1,270,672 $ (136,492)
============ ============ ============
PER SHARE DATA
Basic net income (loss) per share.................. $ 1.54 $ 2.33 $ (0.25)
Diluted net income (loss) per share................ 1.51 2.30 (0.25)
Basic weighted-average shares outstanding.......... 572,608,878 545,626,528 541,001,582
Diluted weighted-average shares outstanding........ 583,081,565 552,421,730 541,001,582
</TABLE>
See notes to consolidated financial statements.
50
<PAGE> 53
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
SERIES A COMMON STOCK 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, 1996.......... -- $512,928 $27,598 $1,471,858 $ 216,097 $ 32,831 $ 2,261,312
Net loss.......... (136,492) (136,492) $ (136,492)
-----------
Issuance of stock
related to stock
compensation
plans (including
tax benefit on
stock options
exercised)...... 1,624 11,376 13,000
Capital
contribution by
CEI............. 36,524 36,524
Change in net
unrealized loss
on securities,
net of
reclassification
adjustment...... 182,968
-----------
Other
comprehensive
income.......... 182,968 182,968 182,968
-----------
Comprehensive
income.......... $ 46,476
------ -------- ------- ---------- ---------- ---------- ----------- ===========
BALANCE AT DECEMBER
31, 1997.......... -- 514,552 27,598 1,519,758 79,605 215,799 2,357,312
Net income........ 1,270,672 1,270,672 $ 1,270,672
-----------
Issuance of stock
related to stock
compensation
plans (including
tax benefit on
stock options
exercised)...... 1,224 10,888 12,112
Issuance of Class
A common stock
and series A
preferred stock
related to the
acquisition of
Prime South..... $4,836 11,336 341,831 358,003
Change in net
unrealized gain
on securities,
net of
reclassification
adjustment...... 1,378,467
-----------
Other
comprehensive
income.......... 1,378,467 1,378,467 1,378,467
-----------
Comprehensive
income.......... $ 2,649,139
------ -------- ------- ---------- ---------- ---------- ----------- ===========
BALANCE AT DECEMBER
31, 1998.......... 4,836 527,112 27,598 1,872,477 1,350,277 1,594,266 5,376,566
Net income........ 881,928 881,928 $ 881,928
-----------
Issuance of stock
related to stock
compensation
plans (including
tax benefit on
stock options
exercised)...... 634 14,054 14,688
Issuance of stock
related to the
TCA merger...... 38,323 1,607,051 1,645,374
Issuance of common
stock related to
public
offering........ 10,100 327,784 337,884
Fair value of
forward purchase
contracts, less
the present
value of
contract
adjustment
payments, issued
as a part of
FELINE PRIDES... 14,273 14,273
Change in net
unrealized gain
on securities,
net of
reclassification
adjustment...... 3,264,871
-----------
Other
comprehensive
income.......... 3,264,871 3,264,871 3,264,871
-----------
Comprehensive
income.......... $ 4,146,799
------ -------- ------- ---------- ---------- ---------- ----------- ===========
BALANCE AT DECEMBER
31, 1999.......... $4,836 $576,169 $27,598 $3,835,639 $2,232,205 $4,859,137 $11,535,584
====== ======== ======= ========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 54
COX COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ 881,928 $ 1,270,672 $ (136,492)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net of effects of
acquisitions:
Depreciation.............................................. 550,651 373,462 329,951
Amortization.............................................. 165,049 84,209 74,587
Equity in net losses of affiliated companies.............. 90,477 547,202 404,440
Deferred income taxes..................................... 366,579 972,663 101,821
Gain on sale and exchange of cable television systems,
net..................................................... (77,361) -- (51,835)
Gain on investments, net.................................. (1,569,389) (2,484,162) (64,742)
Gain on issuance of stock by affiliated companies......... -- (165,342) (90,796)
(Increase) decrease in accounts and notes receivable........ 28,719 (17,348) (29,312)
(Increase) decrease in prepaid assets....................... (117,076) 8,744 12,894
Increase (decrease) in accounts payable and accrued
liabilities............................................... 104,864 9,122 (4,350)
Increase (decrease) in other liabilities.................... (43,673) 49,797 (9,310)
Increase in taxes payable................................... 33,436 13,619 7,730
Other, net.................................................. (9,492) 4,534 9,025
----------- ----------- -----------
Net cash provided by operating activities.......... 404,712 667,172 553,611
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (1,154,527) (808,902) (708,089)
Investments in affiliated companies......................... (30,955) (169,102) (388,075)
Proceeds from the sale of investments....................... 872,880 353,159 310,920
Restricted cash invested.................................... -- 204,210 (204,210)
Payments for purchases of cable television systems.......... (3,522,412) (1,230,453) (66,762)
Proceeds on exchange of cable television systems............ 114,204 -- --
(Increase) decrease in amounts due from Cox Enterprises,
Inc....................................................... (114,821) 50,856 (50,856)
Other, net.................................................. (13,938) (187) (889)
----------- ----------- -----------
Net cash used in investing activities.............. (3,849,569) (1,600,419) (1,107,961)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving credit borrowings (repayments), net............... (350,000) (450,001) 350,000
Commercial paper borrowings (repayments), net............... (512,443) 343,087 (34,748)
Proceeds from issuance of debt.............................. 3,263,513 843,531 246,457
Repayment of debt........................................... (196,875) (17,689) (15,993)
Payment of debt issuance costs and discounts................ (83,190) (1,639) 926
Proceeds from exercise of stock options..................... 9,356 12,112 13,000
Payment to reacquire minority interest in subsidiary........ -- -- (10,000)
Increase (decrease) in amounts due to Cox Enterprises,
Inc....................................................... (170,596) 170,596 (19,359)
Proceeds from issuance of common stock, net of offering
costs..................................................... 337,884 -- --
Proceeds from issuance of Cox-obligated capital and
preferred securities of subsidiary trusts................. 1,150,000 -- --
Increase in book overdrafts................................. 2,667 35,595 9,977
Other, net.................................................. (2,750) -- --
----------- ----------- -----------
Net cash provided by financing activities.......... 3,447,566 935,592 540,260
----------- ----------- -----------
Net increase (decrease) in cash............................. 2,709 2,345 (14,090)
Cash at beginning of period................................. 30,604 28,259 42,349
----------- ----------- -----------
Cash at end of period....................................... $ 33,313 $ 30,604 $ 28,259
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
52
<PAGE> 55
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Cox Communications, Inc. ("Cox"), an indirect 67% owned subsidiary of Cox
Enterprises, Inc.("CEI"), is one of the nation's largest broadband
communications companies, serving more than 5.1 million customers as of December
31, 1999. Cox has interests in U.S. broadband network operations and investments
in cable television programming networks, telecommunications and technology and
broadband networks.
Cox operates in one operating segment, broadband communications. All
significant intercompany account balances and transactions among consolidated
entities have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS
Cash and equivalents
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use and which have
maturities of three months or less.
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation.
Additions to cable plant generally include material, labor and overhead.
Depreciation is computed using principally the straight-line method over
estimated useful lives as follows: 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.
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.
Investments
Investments in affiliated entities 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
original cost and adjusted periodically to recognize Cox's proportionate share
of the investees' net income or losses, additional contributions made and
dividends received. When net losses from an equity method investment exceed its
carrying amount, the investment balance is reduced to zero and additional losses
are not provided for unless Cox is committed to provide further financial
support to the entity. Cox resumes accounting for the investment under the
equity method when the entity subsequently reports net income and Cox's share of
that net income equals the share of net losses not recognized during the period
the equity method was suspended.
Investments in publicly traded entities are classified as
available-for-sale under Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
are recorded at their fair value, with unrealized gains and losses resulting
from changes in fair value between measurement dates recorded as a component of
accumulated other comprehensive income. Cox recognizes realized losses for any
decline in market value considered to be other than temporary. Investments in
privately held entities are stated at cost, adjusted for any known diminution in
value determined to be other than temporary in nature.
Deferred Charges
Franchise and license acquisition costs are amortized using the
straight-line method over their legal or estimated useful lives up to 40 years.
The excess of cost over the fair value of net assets acquired is amortized using
the straight-line method over its estimated useful life up to 40 years.
53
<PAGE> 56
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cox assesses on an on-going basis the recoverability of certain deferred
charges 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
deferred charges to determine whether events or circumstances warrant revised
estimates of useful lives.
Valuation of Long-Lived Assets
Cox evaluates the recoverability of long-lived assets, including plant and
equipment and deferred charges, 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 deferred charges 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
Cox accounts for employee equity-based compensation 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."
Revenue Recognition
Revenue is recognized as broadband communications services are provided.
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 were 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 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 using the liability method as prescribed by
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and
liability based approach in accounting for income taxes. Deferred income taxes
reflect the net tax effect on future years of temporary differences between the
carrying amount of assets and liabilities 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
54
<PAGE> 57
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets that more likely than not will be realized. The financial effect of
changes in tax laws or rates is accounted for in the period of enactment.
Debt Issuance Costs
Costs associated with the refinancing and issuance of debt as well as debt
discounts, if any, are deferred and expensed as interest over the appropriate
term of the related debt agreement.
Gain on Issuance of Affiliate Stock
Gains recognized on the issuance of stock by an affiliated entity to adjust
the underlying net assets "sold" to fair value are recorded as income in the
Consolidated Statements of Operations.
Net Income (Loss) Per Common Share
Cox computes earnings per share in accordance with SFAS No. 128, "Earnings
per Share." Basic earnings per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share is computed in the same manner, but
also includes the dilutive effect of outstanding forward purchase contracts,
convertible preferred securities and various forms of equity-based employee
compensation.
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.
Recently Issued Accounting Pronouncements
In 1998, SFAS No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities," was issued. This statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management is in the
process of assessing the impact of SFAS No. 133 on the consolidated financial
statements.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified for comparative purposes with 1999.
3. CASH MANAGEMENT SYSTEM
Cox participates in CEI's cash management program, whereby financial
institutions send daily notification of checks presented for payment. CEI
transfers funds from other sources for remittance of the checks presented for
payment. Book overdrafts of $71.9 million and $69.2 million existed at December
31, 1999 and 1998, respectively, as a result of checks outstanding. These book
overdrafts are reclassified as accounts payable and are considered financing
activities in the Consolidated Statements of Cash Flows.
55
<PAGE> 58
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS, DISPOSITIONS AND EXCHANGES OF BUSINESSES
Recent Acquisitions
In January 2000, Cox completed the acquisition of cable television systems
serving 522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia
Cablevision, Inc., a subsidiary of Gannett Co., Inc., in a cash transaction
valued at $2.7 billion.
In March 2000, Cox and AT&T Corp. ("AT&T") exchanged Cox's 50.3 million
shares of AT&T common stock for the stock of AT&T subsidiaries that own cable
television systems serving approximately 495,000 customers and certain other
assets and liabilities, including cash. In return for its 50.3 million shares of
AT&T common stock, Cox will receive: cable television systems serving Tulsa,
Oklahoma (160,000 customers) and Baton Rouge, Louisiana (156,000 customers); the
remaining 20% ownership interest in a partnership in which Cox acquired an 80%
interest through its merger with TCA Cable TV, Inc.; Peak Cablevision LLC, which
has 117,000 customers in Oklahoma, Arkansas, Utah and Nevada; and approximately
$750.0 million in other assets, including cash.
1999 Acquisitions and Transactions
In August 1999, Cox completed its merger with TCA, a cable television
operator serving approximately 883,000 customers in Texas, Arkansas, Louisiana
and four other states for consideration consisting of $1.6 billion in cash, 38.3
million shares of Cox Class A common stock and assumed indebtedness of $540.0
million. Upon completion of the merger, Cox repaid $340.0 million of the assumed
TCA debt. Cox also acquired VPI Communications, Inc., an affiliate of TCA, and
TCA's interest in two majority owned partnerships in connection with the TCA
merger. VPI provides advertising sales and turnkey advertising services to 82
cable television system operators representing more than 3.5 million customers
nationwide.
Also in August 1999, Cox and MediaOne exchanged selected cable television
systems serving communities in Massachusetts, Rhode Island and Connecticut. In
connection with the transaction, Cox traded cable television systems in
Massachusetts, serving more than 54,000 customers, for MediaOne properties in
Connecticut and Rhode Island, serving 51,000 customers, and cash. Cox recognized
a pre-tax gain of $77.4 million upon completion of this transaction.
In October 1999, Cox completed the acquisition of cable television systems
serving more than 260,000 customers in Fairfax County and Fredericksburg,
Virginia from Media General, Inc. in a cash transaction valued at $1.4 billion.
Also in October 1999, Cox reorganized its partnership with Time Warner
Entertainment Company, L.P., under which Cox acquired control of the cable
television system serving Fort Walton Beach, Florida, and received $104.5
million, and Time Warner acquired control of the cable television system serving
Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in
connection with this reorganization.
The consummated acquisitions and exchange of businesses have been accounted
for by Cox under the purchase method of accounting in accordance with APB
Opinion No. 16, "Business Combinations."
1998 Acquisitions and Transactions
In June 1998, Cox completed the acquisition of a cable television system
serving approximately 115,000 customers in Arizona from Tele-Communications,
Inc. in a cash transaction valued at $250.2 million.
In October 1998, Cox completed the acquisition of a cable television system
serving approximately 293,000 residential customers and 105,000 hotel units in
the greater Las Vegas area and certain related businesses owned by Prime South
Diversified, Inc. for a combination of common and convertible preferred
56
<PAGE> 59
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock and cash with an aggregate value of approximately $1.3 billion, including
the refinancing of certain Prime South indebtedness.
The following summarized, unaudited, pro forma consolidated financial
information for the twelve months ended December 31, 1999 and 1998 assumes the
TCA merger and acquisitions of cable television systems from Media General and
Prime South had occurred on January 1 of each year:
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31
--------------------------------
1999 1998
------------ ------------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Revenue............................................... $2,708,737 $2,397,752
Operating income...................................... 241,049 169,614
Net income............................................ 770,479 1,076,341
Earnings per share:
Basic net income per share.......................... $ 1.28 $ 1.79
Diluted net income per share........................ 1.25 1.76
</TABLE>
1997 Acquisitions, Dispositions 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 described below for a suburban
Phoenix cable television system serving approximately 36,000 customers. No gain
or loss resulted from this transaction.
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.
57
<PAGE> 60
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Land........................................................ $ 57,033 $ 36,615
Buildings and building improvements......................... 234,757 199,963
Transmission and distribution plant......................... 4,516,654 2,998,328
Miscellaneous equipment..................................... 514,907 347,351
Construction in progress.................................... 210,015 120,084
----------- -----------
Plant and equipment, at cost.............................. 5,533,366 3,702,341
Less accumulated depreciation............................... (1,495,130) (1,050,129)
----------- -----------
Net plant and equipment................................ $ 4,038,236 $ 2,652,212
=========== ===========
</TABLE>
6. INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Equity method investments................................... $ 77,945 $ 90,700
Fair value method investments............................... 11,685,786 5,886,502
Cost method investments..................................... 5,879 3,855
----------- ----------
Total investments...................................... $11,769,610 $5,981,057
=========== ==========
</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 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
COX'S
COMBINED PROPORTIONATE SHARE
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
-------------------------------------- -------------------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ----------- --------- ------------------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............. $1,732,838 $ 3,358,790 $ 2,589,222 $ 470,331 $ 731,670 $ 541,655
Operating loss........ (350,062) (2,269,529) (1,740,697) (94,911) (419,453) (324,465)
Net loss.............. (450,654) (2,774,548) (2,243,610) (121,861) (516,256) (421,830)
</TABLE>
<TABLE>
<CAPTION>
COMBINED
DECEMBER 31
-----------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Current assets.............................................. $ 853,678 $ 940,745
Noncurrent assets........................................... 1,566,648 2,036,592
Current liabilities......................................... 398,736 568,068
Noncurrent liabilities...................................... 2,236,958 2,058,535
Equity...................................................... (215,368) 350,734
</TABLE>
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,
1999, the aggregate unamortized excess of Cox's investments over its equity in
the underlying net assets of the affiliates was approximately $24.0 million and
is being amortized over periods ranging from
58
<PAGE> 61
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five to 35 years. Amortization included in equity in net losses of affiliates
was $0.9 million for the years ended December 31, 1999 and 1998 and $2.5 million
for the year ended December 31, 1997.
The investment balances and supplemental financial information above
include the effects of the Cox PCS stock put, AT&T/Teleport merger and the
Sprint PCS reorganization as described below. Additionally, the above balances
include investments in and advances to affiliated companies. The advances are
generally interest-bearing long-term notes receivable, which total $30.8 million
and $14.4 million at December 31, 1999 and 1998, respectively. Interest income
recognized on notes receivable was $3.6 million, $0.4 million and $1.7 million
in 1999, 1998 and 1997, respectively.
Cox has classified its fair value method investments in publicly traded
entities as available-for-sale securities under SFAS No. 115, which have an
aggregate cost at December 31, 1999 and 1998 of $3,784.8 million and $3,281.2
million, respectively.
EQUITY METHOD INVESTMENTS
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.
Cox recorded $11.8 million, $22.0 million and $14.4 million of equity in
net losses in affiliated companies for the years ended December 31, 1999, 1998
and 1997, respectively, related to its investment in Discovery.
Cox PCS. In May 1999, Cox exercised its right under the Cox Communications
PCS, L.P. partnership agreement to transfer its remaining 32.0% equity interest
in Cox PCS to Sprint Corporation in exchange for approximately 38.1 million
shares of Sprint PCS common stock -- Series 2. As a result of this transaction,
Cox recognized a pre-tax gain of $908.5 million.
Cox recorded $65.1 million, $107.8 million and $85.0 million of equity in
net losses in affiliated companies for the years ended December 31, 1999, 1998
and 1997, respectively, related to its investment in Cox PCS.
TWC Cable Partners. In October 1999, Cox reorganized its partnership with
Time Warner, under which Cox acquired control of the cable television system
serving Fort Walton Beach, Florida and received $104.5 million, and Time Warner
acquired control of the cable television system serving Staten Island, New York.
Cox recognized a pre-tax gain of $94.8 million in connection with this
reorganization. Cox's share of equity in net losses in affiliated companies were
nominal for the years ended December 31, 1999, 1998 and 1997 with respect to its
investment in TWC Cable Partners.
FAIR VALUE METHOD INVESTMENTS
Liberate Technologies, Ltd. Liberate Technologies develops and sells
software that enables the delivery of Internet-enhanced content and applications
to information appliances, such as cable television set-top boxes, game consoles
and personal digital assistants. In May 1999, Cox purchased 1,041,666 shares of
Liberate's common stock for $5.0 million. Liberate completed an initial public
offering of its common stock in July 1999. In January 2000, Liberate's
outstanding shares split two-for-one. Accordingly, all references to the number
of Liberate shares in the Consolidated Financial Statements and notes herein
have been restated to give effect to this split.
Sprint PCS/Sprint Spectrum. Sprint PCS is a personal communications
services provider and an indirect wholly-owned subsidiary of Sprint Corporation.
Prior to November 1998, Cox, TCI, Comcast Corporation and Sprint Corporation
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%
59
<PAGE> 62
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest. Sprint Spectrum was the holder of 29 broadband personal communications
services licenses. Cox recorded $330.0 million and $225.2 million of equity in
net losses in affiliated companies for the years ended December 31, 1998 and
1997, respectively, related to its investment in Sprint Spectrum.
In addition, subsidiaries of Cox, TCI and Sprint also owned a partnership,
PhillieCo L.P., which held a broadband personal communications services license
for the Philadelphia MTA and was affiliated with the Sprint PCS nationwide
network. Prior to November 1998, Cox owned a 17.6% interest in PhillieCo. Equity
in net losses in affiliated companies for the year ended December 1998 and 1997
related to Cox's investment in PhillieCo were nominal.
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 under the fair value method.
At December 31, 1999, Cox's investment in Sprint PCS, including the shares
received from the Cox PCS put described above, was comprised of 132.8 million
shares of Sprint PCS common stock -- Series 2 and warrants to purchase Sprint
PCS common stock -- Series 2 and convertible preferred stock which are
exercisable or convertible into 10.3 million shares of Sprint PCS common
stock -- Series 2.
In November 1999, Cox issued 14,375,000 exchangeable subordinated
debentures due 2029, which are referred to as PRIZES. The PRIZES are indexed to
the trading price of Sprint PCS common stock -- Series 1 and are exchangeable by
the holder for cash. (See Note 9.) In December 1999, Cox sold 3.9 million shares
of its Sprint PCS common stock -- Series 2 for approximately $197.3 million and
recognized a pre-tax gain of approximately $165.6 million. Cox sold an
additional 16.1 million shares of Sprint PCS common stock -- Series 2 in January
and February 2000 and expects to recognize a gain in first quarter 2000. Also in
February 2000, Sprint PCS' outstanding shares split two-for-one. Accordingly,
all references to the number of Sprint PCS shares in the Consolidated Financial
Statements and notes herein have been restated to give effect to this split.
AT&T/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 interest in Teleport was accounted for using a quarter
lag. In April 1998, Teleport completed the acquisitions 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 September 1998.
In July 1998, Cox exchanged its interest in Teleport for 55.3 million
shares of AT&T common stock. As a result of the exchange, Cox recognized a
pre-tax gain of $1,719.3 million in September 1998 and accounted for the AT&T
common stock under the fair value method. In addition, Cox sold 5.0 million
shares of AT&T common stock in December 1998 with aggregate proceeds of $215.6
million and recognized a pre-tax gain of $30.4 million.
In April 1999, AT&T's outstanding shares split three-for-two. Accordingly,
all references to the number of AT&T shares in the Consolidated Financial
Statements and notes herein have been restated to give effect to this split. In
March 2000, Cox's remaining 50.3 million shares of AT&T common stock were
exchanged for the stock of AT&T subsidiaries that own cable television systems
serving approximately 495,000 customers and certain other assets and
liabilities, including cash. See Note 4.
60
<PAGE> 63
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excite@Home. Excite@Home, formerly @Home Corporation, is both an Internet
service and content provider and supplier of comprehensive Internet navigation
services. Excite@Home provides customers high-speed access to the Internet via a
cable modem and the cable television broadband network. In May 1999, @Home
Corporation acquired Excite and changed its name to Excite@Home.
Telewest Communications plc. Telewest Communications plc ("Telewest") is a
company that operates and constructs cable television and telephony systems in
the United Kingdom. In December 1997, Cox recognized a $183.9 million charge due
to a decline in the fair market value of its investment in Telewest considered
to be other-than-temporary. In January 1999, Cox sold its entire interest in
Telewest for $727.9 million in cash and recognized a pre-tax gain of $433.1
million.
COST METHOD INVESTMENTS
PrimeStar Partners, L.P. Prior to April 1998, Cox owned a 10.4% interest
in 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 April 1999 PrimeStar, Inc.
completed 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 $1.3 billion in cash and stock.
E! Entertainment Television. In December 1997, Cox sold its 10.4% interest
in E! Entertainment Television for $57.0 million, resulting in a pre-tax gain of
$44.9 million.
OTHER
Cox also has other equity method, fair value method and cost method
investments and does not consider these other investments to be individually
significant to its consolidated financial position, results of operations or
liquidity.
7. DEFERRED CHARGES
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Franchise and license acquisition costs and excess cost over
fair value of net assets acquired......................... $10,738,101 $4,367,404
Other....................................................... 17,335 10,224
----------- ----------
Total..................................................... 10,755,436 4,377,628
Less accumulated amortization............................... (581,402) (417,722)
----------- ----------
Net deferred charges...................................... $10,174,034 $3,959,906
=========== ==========
</TABLE>
61
<PAGE> 64
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Current and deferred income tax expenses (benefits) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current:
Federal............................................ $164,338 $(179,684) $(152,623)
State.............................................. 49,048 29,836 (2,694)
-------- --------- ---------
Total current................................... 213,386 (149,848) (155,317)
-------- --------- ---------
Deferred:
Federal............................................ 318,672 885,064 95,932
State.............................................. 47,907 87,599 5,889
-------- --------- ---------
Total deferred.................................. 366,579 972,663 101,821
-------- --------- ---------
Net income tax expense (benefit)................ $579,965 $ 822,815 $ (53,496)
======== ========= =========
</TABLE>
The difference between net income tax expense (benefit) and income taxes
expected at the U.S. statutory federal income tax rate of 35% are as indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal tax expense (benefit) at statutory rates on
income (loss) before income taxes.................... $518,171 $732,720 $(66,499)
State income taxes, net of federal benefit............. 63,021 76,333 (7,404)
Amortization of acquisition adjustments................ 26,104 18,450 18,491
Non-deductible preferred stock dividends of a
subsidiary........................................... -- -- 1,169
Other, net............................................. (27,331) (4,688) 747
-------- -------- --------
Net income tax expense (benefit).................. $579,965 $822,815 $(53,496)
======== ======== ========
</TABLE>
Significant components of Cox's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Depreciation and amortization............................... $(2,324,083) $ (901,682)
Equity in net losses of affiliated companies................ (1,339,886) (1,000,524)
Unrealized gain on securities............................... (3,041,343) (1,006,209)
Net operating losses........................................ 27,270 9,447
Other....................................................... 7,521 12,332
----------- -----------
Net deferred tax liability............................. $(6,670,521) $(2,886,636)
=========== ===========
</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.
62
<PAGE> 65
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEBT
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Revolving credit facilities................................. $ -- $ 349,998
Commercial paper............................................ 514,516 1,026,164
Medium-term notes........................................... 423,938 423,812
6.4% Notes due August 1, 2008............................... 198,497 198,322
6.8% Debentures due August 1, 2028.......................... 197,365 197,273
6.15% Reset Put Securities due August 1, 2033............... 248,203 248,150
6.375% Notes due June 15, 2000.............................. 424,883 424,648
6.875% Notes due June 15, 2005.............................. 365,196 363,819
7.625% Debentures due June 15, 2025......................... 132,436 132,234
6.5% Notes due November 15, 2002............................ 199,745 199,658
7.25% Debentures due November 15, 2015...................... 99,253 99,207
Floating Rate Notes due August 15, 2000..................... 525,000 --
7.0% Notes due August 15, 2001.............................. 299,728 --
7.5% Notes due August 15, 2004.............................. 373,821 --
7.75% Notes due August 15, 2006............................. 399,227 --
7.875% Notes due August 15, 2009............................ 399,548 --
6.53% Debentures due February 1, 2028....................... 190,000 --
Exchangeable Subordinated Debentures due November 15,
2029...................................................... 1,272,188 --
Floating Rate Reset Notes due June 15, 2009................. -- 147,425
Capitalized lease obligations............................... 91,176 69,898
Other....................................................... 21,075 39,551
---------- ----------
Total debt................................................ $6,375,795 $3,920,159
========== ==========
</TABLE>
Shelf Registrations
In April 1996, Cox filed a shelf registration statement on Form S-3 with
the Securities and Exchange Commission ("SEC") under which Cox may from time to
time offer and issue debentures, notes, bonds or other evidences of indebtedness
for a maximum aggregate amount of $750.0 million. As of December 31, 1999, Cox
had issued $425.0 million principal amount of medium-term notes under this shelf
registration.
In July 1999, Cox and certain wholly-owned Cox financing trusts filed a
shelf registration statement on Form S-3 with the SEC (the "July 1999 shelf
registration") under which Cox may from time to time offer and issue shares of
its Class A common stock and preferred stock, as well as debentures, bonds,
notes and other evidences of indebtedness, stock purchase contracts and stock
purchase units, and the Cox trusts may issue preferred securities and capital
securities for an aggregate offering amount of up to $8.0 billion. Upon filing
of this shelf registration, Cox transferred the $2.0 billion of securities
registered on its April 1999 shelf registration.
In August 1999, Cox issued $2.0 billion aggregate principal amount of
senior debt securities under the July 1999 shelf registration with maturity
dates ranging from August 15, 2000 to August 15, 2009 and interest rates ranging
from London Interbank Offered Rate ("LIBOR") plus 60 basis points to 7.875%,
less a discount of $2.9 million and offering costs of $9.2 million.
63
<PAGE> 66
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving Credit Facilities
As of December 31, 1999, Cox had a 364-day credit agreement, which matures
on September 26, 2000, and a 5-year credit agreement, which matures on October
9, 2002, providing for borrowings of up to $1.5 billion and $1.2 billion,
respectively. As of December 31, 1999, Cox had no borrowings outstanding under
either credit agreement. These agreements are committed to back outstanding
commercial paper as discussed below.
At Cox's option, the interest rates on borrowings under the revolving
credit agreements are based on LIBOR, the certificate of deposit rate plus
varying percentages or an alternate base rate. The weighted-average interest
rate for outstanding debt on the revolving credit facilities for both the years
ended December 31, 1999 and 1998 was 6.1%. 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 certain financial 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. Cox was in compliance with its credit facility covenants at
December 31, 1999.
Commercial Paper
As of December 31, 1999, Cox had a $2.5 billion commercial paper program.
The commercial paper program is backed by amounts available under the revolving
credit facilities. The weighted-average interest rates for outstanding
commercial paper for the years ended December 31, 1999 and 1998 were 5.4% and
5.8%, respectively.
Medium Term Notes
At December 31, 1999 and 1998, Cox had outstanding borrowings under several
fixed rate medium term notes due in varying amounts through 2028 and interest is
fixed at rates ranging from 6.7% to 7.2%.
Exchangeable Subordinated Debentures
In November 1999, Cox issued 14,375,000 Exchangeable Subordinated
Debentures due November 2029, called PRIZES, under the July 1999 shelf
registration, for aggregate proceeds of approximately $1.3 billion, less
offering costs of approximately $35.0 million. The PRIZES are unsecured,
subordinated obligations, ranking junior in right of payment to all of Cox's
existing and future senior indebtedness.
Upon issuance, each PRIZES had an original principal amount of $88.50. The
original principal amount of each PRIZES is indexed to the trading price of
Sprint Corporation's PCS common stock -- Series 1 (the "Sprint PCS Stock"). The
original principal amount per PRIZES was based on the NYSE closing price of the
Sprint PCS Stock on November 22, 1999. The minimum amount payable upon
redemption or maturity of a PRIZES, which is called the contingent principal
amount, was initially equal to the original principal amount. The contingent
principal amount will be reduced if Sprint Corporation pays a regular cash
dividend or if there are other distributions on or in respect of the Sprint PCS
Stock.
The maximum number of shares of Sprint PCS Stock attributable to each
PRIZES upon issuance was initially equal to one share, and the minimum number
was initially equal to 0.8621 shares. The number of shares of Sprint PCS Stock
referenced by each PRIZES is subject to dilution adjustments and, therefore, as
a result of Sprint's two-for-one stock split in February 2000, the number of
reference shares attributable to each PRIZES is now two. The maximum and minimum
number of reference shares will be redetermined on
64
<PAGE> 67
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
November 15, 2002, or in the case of a redemption of the PRIZES on a date which
is between November 6 and November 15, 2002, effective on such redemption date.
Interest on the PRIZES is payable quarterly, subject to deferral at Cox's
option, equal to the sum of $1.7147 per PRIZES, reflecting a basic interest rate
of 7.75% per year on the original principal amount, through November 15, 2002,
and thereafter in an amount equal to $0.4425 per PRIZES, reflecting a basic
interest rate of 2% per year on the original principal amount, in each case plus
an amount equal to any regular cash dividends paid on the Sprint PCS Stock. Cox
will also distribute to holders of the PRIZES, as additional interest, any
property or the cash value of any property distributed on or in respect of the
Sprint PCS Stock other than publically traded equity securities, which will
themselves become reference shares.
At maturity, holders of the PRIZES are entitled to receive, in cash, an
amount equal to the higher of (a) the then contingent principal amount of the
PRIZES or (b) the sum of the then current market value of the maximum number of
shares of the reference shares attributable to each PRIZES on the maturity date
and any accumulated and unpaid distributions. Prior to maturity, the PRIZES are
exchangeable at the holders' option at any time for an amount of cash equal to
100% of the then market value of the minimum number of shares of the reference
shares attributable to the PRIZES and any accumulated and unpaid distributions.
The PRIZES are redeemable by Cox at any time at a redemption price equal to
the sum of (a) the higher of (1) the contingent principal amount of the PRIZES
or (2) the sum of the then current market value of the maximum number of shares
of the reference shares attributable to each PRIZES on the redemption date and
any accumulated and unpaid distributions, plus, in the case of (1) or (2), the
final period distribution, and (b) an amount equal to $20.3095 per PRIZES if Cox
redeems the PRIZES prior to February 15, 2000, and that amount as successively
reduced by $1.7147 per PRIZES if redeemed prior to each following quarterly
distribution date through November 15, 2002.
The PRIZES are being accounted for as an indexed debt instrument pursuant
to EITF Issue No. 86-28, "Accounting Implications of Indexed Debt Instruments,"
since the maturity value of the PRIZES is dependent upon the market value of the
Sprint PCS Stock. Therefore, the carrying value of the PRIZES will be adjusted
through earnings in Cox's consolidated statement of operations as the market
value of the Sprint PCS Stock increases or decreases such that Cox would be
required to pay an amount of contingent principal in excess of the original
principal amount of the PRIZES. No amount of contingent principal for the PRIZES
was owed by Cox as of December 31, 1999.
Other
In June 1999, Cox called and repaid its $150.0 million principal amount of
Floating Rate Reset Notes prior to their 2009 maturity date and incurred nominal
fees representing the present value of the future interest expense differential
that would have been paid had the debt been held to maturity.
In August 1999, Cox completed its merger with TCA and assumed indebtedness
of $540.0 million. Upon completion of the merger, Cox extinguished $340.0
million of the TCA debt. The remaining $200.0 million of debentures mature in
February 2028, bearing interest at 6.53% per year. In August 1999, Cox purchased
$10.0 million of these debentures to satisfy certain financial debt covenants.
In January 2000, Cox borrowed $500.0 million under a floating rate bridge
loan which is due and payable on March 31, 2000.
Maturities of long-term debt, including debt discount, for each of the five
years following December 31, 1999, are $979.4 million, $362.3 million, $221.6
million, $555.5 million and $483.3 million, respectively. Commercial paper
outstanding at December 31, 1999 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
65
<PAGE> 68
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases of $23.3 million, $21.2 million, $18.4 million, $14.1 million and $9.5
million for each of the five years following December 31, 1999, respectively.
10. COX-OBLIGATED CAPITAL AND PREFERRED SECURITIES OF SUBSIDIARY TRUSTS
In August 1999, Cox Trust II (the "Trust"), a statutory business trust
formed under the laws of the State of Delaware and a wholly-owned consolidated
subsidiary of Cox, issued 13 million FELINE PRIDES and 1.3 million Trust capital
securities, under the July 1999 shelf registration, with net aggregate proceeds
of $650.0 million, less offering costs of $19.5 million. The Trust invested the
proceeds in 7% Senior Debentures due 2004 (the "Debentures") issued by Cox,
which represent the sole assets of the Trust. The Debentures are unsecured, bear
interest at a rate of 7% per year payable in cash on a quarterly basis and
mature in August 2004. The obligations of the Trust related to the FELINE PRIDES
and the Trust capital securities are guaranteed by Cox to the extent Cox makes
payments pursuant to the Debentures. This guarantee, when taken together with
Cox's obligations under the Debentures and the indenture governing the
Debentures and Cox's obligations under the amended and restated declaration of
trust governing the Trust, provides a full and unconditional guarantee of the
Trust's obligation under the capital securities of the Trust. Upon issuance, the
FELINE PRIDES consisted of 11.7 million Income PRIDES and 1.3 million Growth
PRIDES, with a public offering price of $50 and $43.114, respectively. The stand
alone Trust capital securities had a public offering price of $48.844 per
security.
Each Income PRIDES consists of a capital security of the Trust and a
forward purchase contract under which the holder is required to purchase common
stock from Cox on August 16, 2002. The Trust capital securities forming a part
of the Income PRIDES and the stand alone Trust capital securities bear interest,
in the form of distributions, at an annual rate of 7% payable in cash on a
quarterly basis. On or prior to the fifth business day preceding August 16,
2002, the holders of Income PRIDES may elect to participate in a remarketing of
the Trust capital securities in order to satisfy the holders' obligations under
the related forward purchase contracts forming a part of the Income PRIDES in
lieu of satisfying their obligations in cash. The holders of the stand-alone
Trust capital securities may also elect to participate in this remarketing.
Each Growth PRIDES consists of a 5% undivided beneficial ownership in a
zero-coupon U.S. Treasury security, having a principal amount at maturity equal
to $1,000, and a forward purchase contract under which the holder is required to
purchase common stock from Cox on August 16, 2002. The forward purchase
contracts forming a part of the Growth PRIDES entitle the holders to unsecured
contract adjustment payments of .25% of $50 per year payable in cash on a
quarterly basis. The zero-coupon U.S. Treasury securities are pledged to Cox to
secure the holders' obligations under the forward purchase contracts forming a
part of the Growth PRIDES.
The forward purchase contracts require the holder to purchase a minimum of
1.1962 shares and a maximum of 1.4414 shares of Cox Class A common stock per
forward purchase contract depending upon the average closing price per share of
Cox's Class A common stock for a 20 consecutive day period ending on the third
trading day immediately preceding August 16, 2002.
Interest on the Debentures, and therefore the distribution rate on the
Trust capital securities, will be reset on August 16, 2002 to a rate whereby the
Trust capital securities have an approximate market value of 100.5% of $50 per
security on the third business day immediately preceding August 16, 2002,
subject to a maximum reset rate equal to the two-year benchmark U.S. Treasury
rate plus 200 basis points.
The Debentures and, thus, the Trust capital securities, are redeemable at
Cox's option upon the occurrence of certain events based on a stated liquidation
equal to the unpaid principal amount plus accumulated and unpaid distributions.
Following any redemption prior to August 16, 2002, holders of the Income PRIDES
will own a portfolio of U.S. Treasury securities as a component of their Income
PRIDES.
66
<PAGE> 69
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon issuance of the FELINE PRIDES and the Trust capital securities, Cox
recorded an increase of $15.0 million to shareholders' equity, which is equal to
the fair value of the forward purchase contracts, and a liability of $0.8
million, with a corresponding reduction to shareholders' equity, which is equal
to the present value of the total future contract adjustment payments to be made
under the Growth PRIDES. The FELINE PRIDES are presented as mezzanine equity in
Cox's Consolidated Balance Sheet and the distributions paid by the Trust, as
well as the contract adjustment payments described above, are presented as
minority interest in Cox's Consolidated Statement of Operations. The Income
PRIDES and the Growth PRIDES are listed on the NYSE under the symbols "COXPrI"
and "COXPrG," respectively.
In October 1999, Cox RHINOS Trust (the "RHINOS Trust"), a statutory
business trust formed under the laws of the State of Delaware and a wholly-owned
consolidated subsidiary of Cox, issued 500,000 Redeemable Hybrid Income
Overnight Shares ("RHINOS") to a special purpose entity organized by The Bank of
America, N.A., for aggregate proceeds of $500.0 million, less offering costs of
$11.3 million. The RHINOS are long-term auction rate reset preferred securities,
representing undivided beneficial interests in the assets of the RHINOS Trust.
The RHINOS Trust invested the proceeds in Senior Notes due 2029 (the "Notes")
issued by Cox, which represent the sole assets of the RHINOS Trust. The Notes
bear interest and, thus, the RHINOS pay distributions, at a floating rate based
on LIBOR plus 75 points per year payable in cash on a quarterly basis and mature
in October 2029. The obligations of the RHINOS Trust related to the RHINOS are
unconditionally guaranteed by Cox to the extent Cox makes payments pursuant to
the Notes.
The RHINOS are redeemable at Cox's option with the proceeds from one or
more public offerings of its Class A common stock underwritten by Banc of
America Securities LLC. If the RHINOS remain outstanding on or after October 6,
2002 or if the closing price of Cox's Class A common stock falls below $28 per
share, subject to adjustment upon the occurrence of certain events, Cox may be
required to remarket the RHINOS in a private auction to qualified institutional
investors. The interest rate and maturity date of the RHINOS would be reset upon
completion of the remarketing.
The RHINOS are presented as mezzanine equity in Cox's consolidated balance
sheet and the distributions paid by the RHINOS Trust are presented as minority
interest in Cox's Consolidated Statement of Operations.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
With respect to financial instruments, Cox has estimated the fair values of
such instruments using available market information and appropriate valuation
methodologies. Considerable judgment, however, is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that Cox would
realize in a current market exchange.
The carrying amounts of cash, accounts receivable, other assets, accounts
payable, deferred income and amounts due to/from CEI are reasonable estimates of
their fair value at December 31, 1999 and 1998.
The estimated fair values 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 commercial paper and floating
rate notes at December 31, 1999 and the revolving credit agreements, commercial
paper and the Reset Notes at December 31, 1998 bear interest at current market
rates and, thus, approximate fair value. In addition, the RHINOS at December 31,
1999 bear interest at current market rates and, thus, approximate fair value.
Cox is exposed to interest rate volatility with respect to the foregoing
variable rate debt instruments.
The estimated fair value of Cox's remaining debt instruments at December
31, 1999 was $3,858.3 million compared to a carrying amount of $4,064.1 million.
The estimated fair value of the remaining debt instruments at December 31, 1998
was $2,385.7 million compared to a carrying amount of $2,393.6 million. In
67
<PAGE> 70
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $4,064.1 million to $4,065.3 million at December 31,
1999 and $2,393.6 million to $2,540.6 million at December 31, 1998.
The estimated fair value of the FELINE PRIDES at December 31, 1999 was
$884.0 million compared to a carrying amount of $642.3 million. In addition, the
effect of a hypothetical one percentage point decrease in interest rates would
increase the estimated fair value of the FELINE PRIDES with a carrying amount of
$642.3 million to $886.0 million at December 31, 1999. The estimated fair value
of the PRIZES at December 31, 1999 was $1,400.0 million compared to a carrying
amount of $1,272.2 million. In addition, the effect of a hypothetical one
percentage point decrease in interest rates would increase the estimated fair
value of the PRIZES with a carrying amount of $1,272.2 million to $1,417.0
million at December 31, 1999.
The 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.
12. RETIREMENT PLANS
Qualified Pension Plan
Cox maintains a qualified noncontributory defined benefit pension plan.
Plan assets consist primarily of common stock, investment-grade corporate bonds,
cash and cash equivalents and U.S. government obligations. The pension 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 pension plan in an amount that falls between the
minimum contribution required by ERISA and maximum tax deductible contribution.
Total pension expense was $5.7 million, $5.3 million and $4.0 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
68
<PAGE> 71
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in the benefit obligations, changes in plan assets and funded
status of the pension plan for the periods ended December 31, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year......... $ 95,219 $ 75,676
Service cost.............................................. 10,215 7,480
Interest cost............................................. 7,683 6,141
Plan amendments........................................... -- 1
Actuarial loss (gain)..................................... (9,457) 7,838
Benefits paid............................................. (2,842) (1,917)
-------- --------
Projected benefit obligation at end of the year........... 100,818 95,219
-------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $109,131 $ 95,083
Actual return on plan assets.............................. 16,765 14,612
Employer contributions.................................... 11,820 1,353
Benefits paid............................................. (2,842) (1,917)
-------- --------
Fair value of plan assets at end of year.................. 134,874 109,131
-------- --------
Funded status of plan....................................... 34,056 13,912
Unrecognized actuarial losses............................... (31,138) (14,205)
Unrecognized prior service cost............................. 577 657
Unrecognized net transition obligation...................... (630) (869)
-------- --------
Prepaid (accrued) benefit cost.............................. $ 2,865 $ (505)
======== ========
</TABLE>
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
---------------------------
1999 1998 1997
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................................ $10,215 $ 7,480 $ 5,775
Interest cost........................................... 7,683 6,141 5,296
Expected return on plan assets.......................... (9,289) (7,873) (7,047)
Prior service cost amortization......................... 80 80 80
Actuarial gain.......................................... -- -- (198)
Transition amount amortization.......................... (239) (239) (239)
------- ------- -------
Net periodic total cost................................. $ 8,450 $ 5,589 $ 3,667
======= ======= =======
WEIGHTED-AVERAGE PENSION ASSUMPTIONS
Discount rate........................................... 8.00% 6.75% 7.25%
Expected return on plan assets.......................... 9.00 9.00 9.00
Rate of compensation increase........................... 5.75 4.50 5.00
</TABLE>
Nonqualified Pension Plan
Certain key employees of Cox participate in an unfunded, nonqualified
supplemental pension plan of CEI which has generally the same benefit payout
formula as the pension plan. Total pension expense recorded by
69
<PAGE> 72
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cox for the nonqualified CEI plan was $1.8 million for the years ended December
31, 1999 and 1998, respectively, and $1.5 million for the year ended December
31, 1997.
Other Retirement Plans
CEI provides certain health care and life insurance benefits to
substantially all retirees of Cox. Post-retirement expense allocated to Cox by
CEI was $1.7 million, $1.6 million and $1.2 million for the years ended December
31, 1999, 1998 and 1997, respectively. The accumulated post-retirement benefit
obligation ("APBO") attributable to Cox employees and retirees was $12.9 million
and $16.5 million at December 31, 1999 and 1998, respectively. The funded status
of the post-retirement plan covering the employees of Cox is not determinable.
The APBO for the post-retirement plan of CEI substantially exceeded the fair
value of assets held in the plan at December 31, 1999 and 1998.
Actuarial assumptions used to determine the APBO include a discount rate of
8.00%, 6.75%, and 7.25% for the years ended December 31, 1999, 1998 and 1997
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, 1999, 1998 and 1997, the
assumed health care cost trend rate for retirees is 9.5%, 10.0%, and 10.5%,
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,
1999:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Effect on service and interest cost components.............. $ 503 $ (479)
Effect on other post-retirement benefit obligations......... 6,208 (5,470)
</TABLE>
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 $7.6 million, $5.3
million and $4.6 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
13. STOCK COMPENSATION PLANS
At December 31, 1999, Cox had two stock-based compensation plans: a
Long-Term Incentive Plan (the "LTIP") and an Employee Stock Purchase Plan (the
"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 1999, 1998 and 1997 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 1999, 1998 and 1997 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
-----------------------------------------------
1999 1998 1997
------------ -------------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
As reported:
Net income (loss)......................... $ 881,928 $ 1,270,672 $ (136,492)
Basic net income (loss) per share......... $ 1.54 $ 2.33 $ (0.25)
Diluted net income (loss) per share....... 1.51 2.30 (0.25)
Pro forma:
Net income................................ $ 872,928 $ 1,265,037 $ (146,465)
Basic net income (loss) per share......... $ 1.52 $ 2.32 $ (0.27)
Diluted net income (loss) per share....... 1.50 2.29 (0.27)
</TABLE>
70
<PAGE> 73
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999, 1998 and 1997: expected volatility of 32.6%, 30.0% and 28.0%,
respectively, no payment of dividends, expected life of six years for 1999 and
1998 and four years for 1997 after vesting and risk-free interest rates of 5.5%,
5.7% and 6.3%, respectively.
Under the LTIP, 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 12,000,000
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. During 1998 and 1997, the
acceleration provisions were met based on the market value of the shares,
effectively resulting in all outstanding options becoming fully vested. During
1999, options granted on January 1 and February 1 also met the acceleration
provisions and became fully vested.
A summary of the status of Cox's stock options granted under the LTIP as of
December 31, 1999, 1998 and 1997 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ---------------------
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........................... 4,518,156 $12.20 4,624,820 $ 9.79 4,015,390 $ 9.17
Granted........................ 1,144,870 32.91 1,109,134 19.64 1,330,258 11.32
Exercised...................... (552,361) 13.68 (1,185,906) 9.56 (479,730) 8.94
Canceled....................... (76,318) 33.54 (29,892) 19.16 (241,098) 9.63
--------- ---------- ---------
Outstanding at end of year....... 5,034,347 16.42 4,518,156 12.20 4,624,820 9.79
========= ========== =========
Options exercisable at
year-end....................... 4,810,543 $15.42 4,518,156 $12.20 4,624,820 $ 9.79
Weighted-average grant date fair
value of options granted
during the year................ $15.69 $8.06 $5.11
</TABLE>
71
<PAGE> 74
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE WEIGHTED- AVERAGE WEIGHTED-
REMAINING AVERAGE REMAINING AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE LIFE PRICE
- --------------- ----------- ----------- --------- ----------- ----------- ---------
<C> <C> <S> <C> <C> <C> <C>
$ 6.95 -- 8.49 1,252,260 5.5 years $ 8.46 1,252,260 5.5 years $ 8.46
10.22 -- 11.31 1,895,262 6.6 10.89 1,895,262 6.6 10.89
16.05 29,672 9.6 16.05 29,672 9.6 16.05
19.50 -- 22.05 878,245 8.0 19.64 878,245 8.0 19.64
28.77 29,672 9.6 28.77 29,672 9.6 28.77
33.59 -- 37.38 907,024 9.1 34.35 725,432 9.1 33.60
39.05 -- 42.03 42,212 9.4 40.53 -- -- --
--------- ---------
5,034,347 7.1 $16.42 4,810,543 7.0 $15.42
========= =========
</TABLE>
Options to purchase 1,766,329 shares of Class A common stock at $50.94 per
share were granted on January 3, 2000.
In June 1995, Cox adopted an ESPP (the "1995 ESPP"), under which Cox was
authorized, and did, issue purchase rights totaling 1,500,000 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 1,114,418 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 2,500,000 shares of Class A common stock to
substantially all employees who had completed six months of service. Purchase
rights totaling 1,116,002 shares were issued under the 1997 ESPP. Under the
terms of the 1997 ESPP, the purchase price was 85.0% of the market value of the
Class A common stock on October 31, 1997 and employees were allowed to purchase
the shares via payroll deductions through January 31, 2000, at which time the
shares were issued to the employees. As of January 31, 2000, the 1997 ESPP was
completed and 883,269 shares were issued to employees. During 1999, 49,961
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 1999 was estimated using the Black-Scholes model with
the following assumptions: expected volatility of 30.0%, no payment of
dividends, expected life of 2.08 years and risk-free interest rate of 5.7%. The
weighted-average fair value of each purchase right granted in 1998 was $8.67.
14. SHAREHOLDERS' EQUITY
On March 18, 1999, the Cox Board of Directors approved a two-for-one stock
split that was effected on May 21, 1999 with respect to stockholders of record
on May 14, 1999. Cox's certificate of incorporation was amended to increase the
authorized preferred stock from 5,000,000 to 10,000,000 shares, the authorized
Class A common stock from 316,000,000 to 650,000,000 shares and the authorized
Class C common stock from 14,000,000 to 60,000,000 shares. All references to
number of shares and per share information in the consolidated financial
statements and notes therein have been restated to give effect to this stock
split.
72
<PAGE> 75
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 cable television systems from Prime South
(see Note 4), Cox issued 4,836,372 shares of Series A 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 Series A 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 Series A 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 occurs first. 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 650,000,000 shares of Class A common stock and
60,000,000 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.
In July 1999, Cox filed a registration statement on Form S-4 with the SEC
to register shares of Class A common stock to be issued to TCA shareholders in
connection with the TCA merger (See Note 4).
In August 1999, Cox issued 10,100,000 shares of Class A common stock under
the July 1999 shelf registration for aggregate proceeds of $350.3 million, less
offering costs of $12.4 million.
73
<PAGE> 76
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income........................................ $881,928,000
------------
BASIC EPS......................................... 881,928,000 572,608,878 $1.54
=====
EFFECT OF DILUTIVE SECURITIES:
Options......................................... -- 2,943,253
ESPP............................................ -- 1,022,560
Convertible preferred stock..................... -- 4,114,169
Forward purchase contracts forming a part of the
FELINE PRIDES................................ -- 2,392,705
------------ -----------
DILUTED EPS....................................... $881,928,000 583,081,565 $1.51
============ =========== =====
</TABLE>
<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....................................... 1,270,672,000 545,626,528 $2.33
=====
EFFECT OF DILUTIVE SECURITIES:
Options....................................... -- 2,183,774
ESPP.......................................... -- 768,974
Convertible preferred stock................... -- 3,842,454
-------------- -----------
DILUTED EPS..................................... $1,270,672,000 552,421,730 $2.30
============== =========== =====
</TABLE>
As Cox was in a net loss position for the year ended December 31, 1997, all
potentially dilutive securities were anti-dilutive and were not included in the
diluted EPS calculation.
As of December 31, 1999 and 1998, CEI owned approximately 67.4% and 73.3%,
respectively, of the outstanding shares of Cox common stock and held 76.9% and
81.6%, respectively, of the voting power of Cox.
15. TRANSACTIONS WITH AFFILIATED COMPANIES
CEI performs day to day cash management services for Cox. In addition, CEI
provides certain other management services to Cox including legal, corporate
secretarial, tax, cash management, internal audit, risk management, benefits
administration, including self-insured health and other insured plans, and other
support services. Cox was allocated expenses for the years ended December 31,
1999, 1998 and 1997 of approximately $3.3 million, $3.0 million and $2.8
million, respectively, related to these services. Cox pays rent and certain
other occupancy costs to CEI for its home office facilities, which amounts
approximated $5.6 million, $5.2 million and $3.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Allocated expenses are based on
CEI's estimate of expenses relative 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
74
<PAGE> 77
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 due
from CEI bear interest equal to CEI's current commercial paper borrowing rate,
which was 6.81% at December 31, 1999. Outstanding amounts due to CEI bear
interest at fifty basis points above CEI's current commercial paper borrowing
rate. This rate was 6.5% at December 31, 1998.
Included in amounts due to (from) CEI are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
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
Cash transferred to CEI................................... (389,476)
Net operating expense allocations (reimbursements)........ 104,059
---------
Intercompany due from CEI, December 31, 1999................ $(114,821)
=========
</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, 1999, 1998 and 1997 were
approximately $47.0 million, $34.1 million and $30.2 million, respectively.
75
<PAGE> 78
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. OTHER COMPREHENSIVE INCOME
The following represents the components of other comprehensive income and
related tax effects for the years ended December 31, 1999, 1998 and 1997:
<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, 1997
Unrealized gains on securities
Unrealized holding gains arising during the period...... $ 147,450 $ (70,429) $ 77,021
Add: reclassification adjustment for net losses realized
in net income........................................ 160,956 (55,009) 105,947
---------- ----------- ----------
OTHER COMPREHENSIVE INCOME, DECEMBER 31, 1997............. $ 308,406 $ (125,438) $ 182,968
========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1998
Unrealized gains on securities
Unrealized holding gains arising during the period...... $2,267,809 $ (870,681) $1,397,128
Less: reclassification adjustment for gains realized in
net income........................................... (30,343) 11,682 (18,661)
---------- ----------- ----------
OTHER COMPREHENSIVE INCOME, DECEMBER 31, 1998............. $2,237,466 $ (858,999) $1,378,467
========== =========== ==========
FOR THE YEAR ENDED DECEMBER 31, 1999
Unrealized gains on securities
Unrealized holding gains arising during the period...... $6,006,535 $(2,307,149) $3,699,386
Less: reclassification adjustment for gains realized in
net income........................................... (706,528) 272,013 (434,515)
---------- ----------- ----------
OTHER COMPREHENSIVE INCOME, DECEMBER 31, 1999............. $5,300,007 $(2,035,136) $3,264,871
========== =========== ==========
</TABLE>
Components of accumulated comprehensive income consisted of net unrealized
gain on securities of $7,901.0 million ($4,859.1 million, net of tax) and
$2,601.0 million ($1,594.3 million, net of tax) at December 31, 1999 and 1998,
respectively.
76
<PAGE> 79
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
---------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
SIGNIFICANT NON-CASH TRANSACTIONS:
Ft. Walton Beach cable television system
acquisition................................... $ 79,457 $ -- $ --
MediaOne cable television system exchange........ 93,050 -- --
TCA merger stock issuance........................ 1,645,373 -- --
Assumed TCA indebtedness......................... 540,000 -- --
Other assumed TCA liabilities.................... 58,369 -- --
Cox PCS stock exchange........................... 794,546 -- --
PrimeStar merger stock exchange.................. -- 94,696 --
Teleport stock issuance.......................... -- 150,386 --
Teleport merger stock exchange................... -- 2,076,861 --
Sprint PCS stock exchange........................ -- 899,077 --
Prime South acquisition:
Cox Series A preferred stock issued......... -- 107,065 --
Cox Class A common stock issued............. -- 250,938 --
Capital contributions by CEI..................... -- -- 36,524
Transfer of PCS license.......................... -- -- (251,918)
Capitalized lease obligations.................... 50,356 50,313 31,201
ADDITIONAL CASH FLOW INFORMATION:
Cash paid for interest........................... $ 244,559 $ 197,197 $ 206,861
Cash paid (refunded) for income taxes............ 179,950 (163,467) (151,047)
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
Cox leases land, office facilities and various items of equipment under
noncancellable operating leases. Rental expense under operating leases amounted
to $9.3 million in 1999, $7.6 million in 1998 and $19.8 million in 1997. Future
minimum lease payments as of December 31, 1999 for all noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
2000................................................ $11,616
2001................................................ 10,757
2002................................................ 8,681
2003................................................ 7,700
2004................................................ 5,280
Thereafter.......................................... 17,928
-------
Total..................................... $61,692
=======
</TABLE>
At December 31, 1999, Cox had outstanding purchase commitments totaling
approximately $179.7 million for additions to plant and equipment and $454.7
million to rebuild certain existing cable television systems.
Cox has guaranteed borrowings of certain affiliates totaling approximately
$2.5 million at December 31, 1999. Cox has unused letters of credit outstanding
totaling $30.5 million at December 31, 1999.
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
77
<PAGE> 80
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arising out of the manner in which such systems sell premium channel cable
services. The suit alleges that Cox's California Systems unlawfully require
limited basic cable customers to purchase the expanded basic services tier in
order to purchase premium channels, i.e., channels sold on an a-la-carte basis
such as Home Box Office and Showtime. The suit asserts causes of action under
California antitrust and consumer protection laws. The suit seeks injunctive
relief as well as an order awarding the class members compensatory damages, plus
statutory damages, punitive damages, interest and attorney's fees. Cox moved to
dismiss the suit on dispositive substantive grounds or in the alternative to
stay the suit on primary jurisdiction grounds. On February 13, 1998, the Court
stayed the suit and referred it on grounds of primary jurisdiction to the FCC
for consideration of issues best addressed by the FCC's expertise should the
plaintiffs elect to file a complaint with the FCC. On October 1, 1998, the
plaintiffs filed a Petition with the FCC which alleged that the Cox California
Systems violated the "buy-through" prohibition of the FCC's rules. Under the
"buy-through" prohibition, cable systems may not require subscribers to purchase
intermediate tiers of cable service as a prerequisite to receiving per-channel
and per-program cable service unless such systems can demonstrate that they are
not technically capable of complying with the buy-through requirement. In July
1999, the FCC dismissed the Petition. The FCC concluded that Cox's San Diego
system is complying with the buy-through rule and that the named plaintiffs lack
standing to raise this issue with regard to Cox's other California systems. The
suit is now proceeding in state court. The court granted Cox and the plaintiffs
an extension of time during which the parties may explore the possibility of a
resolution to the suit. If no resolution is reached, the plaintiffs may file an
amended complaint and Cox may renew its motion to dismiss the suit based on the
grounds raised in its earlier motion and the additional grounds of the FCC's
dismissal of the Petition and the plaintiffs' lack of standing to pursue claims
against Cox's other California systems. The outcome of this matter cannot be
predicted at this time.
Cox and certain subsidiaries are defendants in four putative subscriber
class action suits in state courts in Louisiana, Indiana, Texas and Nevada
initiated between October 17, 1997 and December 17, 1998. The suits all
challenge the propriety of late fees charged by the subsidiaries to customers
who fail to pay for services in a timely manner. The suits seek injunctive
relief and various formulations of damages under certain claimed causes of
action under various bodies of state law. These actions are in various stages of
defense. Settlement in Nevada is pending final court approval. The remaining
actions are being defended vigorously. The outcome of these matters cannot be
predicted at this time. Three additional suits that have been pending in Arizona
and Florida have been settled; one additional suit that had been pending in
Nebraska was dismissed.
On November 10, 1999, Fred and Roberta Lipschutz, Arthur Simon and John
Galley III, on behalf of themselves and all persons similarly situated, filed a
putative class action suit against Cox and thirteen other defendants in the
United States District Court for the Central District of California. The action
alleges that a putative class defined as all persons who since November 10,
1995, have purchased broadband Internet data transmission services from a "cable
company defendant" has been injured because alleged agreements among the "cable
company defendants" and/or the "cable company defendants" and defendants @Home
Corporation and RoadRunner have required the putative class to purchase both
Internet data transmission services and interface/content services from @Home or
RoadRunner. The complaint asserts claims under Section 1 of the Sherman
Antitrust Act, the California Cartwright Act, and California unfair competition
law and seeks injunctive relief and compensatory and treble damages. An amended
complaint adding additional named plaintiffs was filed on December 30, 1999 and
Cox filed its answer to the amended complaint on January 19, 2000. Cox intends
to defend this action vigorously. The outcome of this matter cannot be predicted
at this time.
Cox is a party to various other legal proceedings which are ordinary and
incidental to its business. Management does not expect that any of these other
legal proceedings currently pending will have a material adverse impact on Cox's
consolidated financial position, results of operations or cash flows.
78
<PAGE> 81
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUBSEQUENT EVENTS
In March 2000, Cox sold its entire interest in Flextech plc, an English
publically held programming company which Cox had accounted for under the fair
value method, and received net proceeds of approximately $522.3 million. Cox
expects to recognize a gain in connection with this transaction in first quarter
2000.
In March 2000, Cox issued $275.0 million aggregate principal amount of 3%
Exchangeable Subordinated Debentures due 2030 (the "Premium PHONES") under the
July 1999 shelf registration, for proceeds of approximately $269.5 million, net
of underwriting commissions. The Premium PHONES are unsecured, subordinated
obligations, ranking junior in right of payment to all of Cox's existing and
future senior indebtedness.
Upon issuance, the Premium PHONES had an original principal amount of
$1,000 per Premium PHONES. The original principal amount of each Premium PHONES
is indexed to 16.28 shares of Sprint PCS Stock with an initial value of $61.43
per share. The last reported sales price for the Sprint PCS Stock on March 7,
2000 was $58.50 per share. The minimum amount payable upon redemption or
maturity of a Premium PHONES, which is called the adjusted principal amount, was
initially equal to the original principal amount. The original principal amount
will be reduced if Sprint Corporation pays certain extraordinary distributions
on or in respect of the Sprint PCS Stock.
Interest on the Premium PHONES is payable semi-annually at a rate of 3% per
year on the original principal amount of the PHONES plus an amount equal to any
regular cash dividends paid on the Sprint PCS Stock or any property or the cash
value of any property distributed on or in respect of the Sprint PCS Stock,
other than publicly traded equity securities.
Prior to March 14, 2002, the Premium PHONES are exchangeable at the
holders' option initially for cash based on the market value of the shares
underlying each Premium PHONES, plus any accumulated and unpaid distributions.
On and after that date, the Premium PHONES can be exchanged by the holder based
on the market value of the underlying shares for cash, shares of Sprint PCS
Stock or a combination of both. In addition, on or after March 17, 2004, Cox may
redeem the Premium PHONES for cash based on the market value of the underlying
shares, plus any accumulated and unpaid distributions, and any final period
distribution.
At maturity, holders of the Premium PHONES are entitled to receive, at
Cox's election, cash, equal to the then exchange market value of the underlying
shares plus any accumulated and unpaid distributions, or the underlying shares
themselves.
The Premium PHONES will be accounted for as an indexed debt instrument
since the maturity value of the Premium PHONES is dependent upon the market
value of the Sprint PCS Stock. Therefore, the carrying value of the Premium
PHONES will be adjusted through earnings in Cox's consolidated statement of
operations as the market value of the Sprint PCS Stock increases or decreases
such that Cox would be required to pay an amount of contingent principal in
excess of the original principal amount of the Premium PHONES. The Premium
PHONES are listed on the NYSE under the symbol "COX 30."
On March 16, 2000, Cox notified the trustee, who then gave notice to the
record holders of Cox's Floating Rate Notes due August 15, 2000, of Cox's
intention to redeem the $525.0 million aggregate principal amount outstanding of
the Floating Rates Notes on March 31, 2000.
In April 2000, pending shareholder approval, Cox will begin administering a
third ESPP (the "2000 ESPP"), under which Cox would be authorized to issue
purchase rights totaling 2,000,000 shares of Class A common stock to
substantially all employees who had completed six months of service.
79
<PAGE> 82
COX COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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.
<TABLE>
<CAPTION>
1999
---------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................................... $498.5 $509.9 $587.9 $721.8
Programming costs.......................................... 128.8 122.3 141.0 169.2
Plant operations........................................... 39.1 36.2 45.1 53.1
Marketing.................................................. 26.6 30.9 40.6 48.9
General and administrative................................. 115.5 124.7 135.5 159.5
Depreciation............................................... 96.6 133.3 148.4 172.3
Amortization............................................... 26.7 26.0 45.4 66.9
Gain on sale and exchange of cable television systems,
net...................................................... -- -- (77.4) --
------ ------ ------ ------
Operating income........................................... $ 65.2 $ 36.5 $109.3 $ 51.9
====== ====== ====== ======
Net income................................................. $251.2 $505.8 $ 11.9 $113.0
====== ====== ====== ======
Basic net income per share................................. $ 0.45 $ 0.91 $ 0.02 $ 0.19
====== ====== ====== ======
Diluted net income per share............................... $ 0.45 $ 0.90 $ 0.02 $ 0.18
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- ---------- ---------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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....................... $ (0.19) $(0.02) $ 1.97 $ 0.57
======= ====== ======== ======
Diluted net income (loss) per share..................... $ (0.19) $(0.02) $ 1.95 $ 0.56
======= ====== ======== ======
</TABLE>
80
<PAGE> 83
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 9, 2000
(March 16, 2000 as to the second paragraph of Note 4 and to Note 19)
81
<PAGE> 84
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 2000 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 2000 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 2000 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 2000 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) 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.
(2) Exhibits required to be filed by Item 601 of Regulation S-K:
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> <C> <S>
1.1 -- Purchase Agreement, dated as of March 8, 2000, between Cox
Communications, Inc. and Merrill Lynch & Co.
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.)
</TABLE>
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<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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.)
2.6 -- Purchase Agreement, dated April 22, 1999, by and among Cox
Communications, Inc. and Media General, Inc. (Incorporated
by reference to Exhibit 2.1 to Cox's Current Report on Form
8-K filed with the Commission on April 30, 1999.)
2.7 -- Agreement and Plan of Merger, dated as of May 11, 1999, by
and among Cox Communications, Inc., Cox Classic Cable, Inc.
and TCA Cable TV, Inc. (Incorporated by reference to Exhibit
2.1 to Cox's Current Report on Form 8-K filed with the
Commission on May 14, 1999.)
2.8 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of
May 11, 1999, by and among Cox Communications, Inc., Cox
Classic Cable, Inc. and TCA Cable TV, Inc. (Incorporated by
reference to Exhibit 2.2 to Cox's Current Report on Form 8-K
filed with the Commission on August 25, 1999.)
2.9 -- Agreement and Plan of Reorganization among Cox Teleport
Partners, inc., TCI Holdings, Inc. and United Cable
Television Corporation, dated as of July 6, 1999.
(Incorporated by reference to Exhibit 2.1 to Cox's Current
Report on Form 8-K/A filed with the Commission on July 28,
1999.)
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 -- Amendment to the Amended Certificate of Incorporation of Cox
Communications, Inc. (Incorporated by reference to Exhibit
3.3 to Cox's Registration Statement on Form S-4, File No.
33-82419, filed with the Commission on July 7, 1999.)
3.4 -- 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.)
3.5 -- 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
(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.)
4.2 -- First Supplemental Indenture, dated as of August 12, 1999,
between Cox Communications, Inc. and The Bank of New York,
as Trustee. (Incorporated by reference to Exhibit 4.4 to
Cox's Current Report on Form 8-K filed with the Commission
on August 23, 1999.)
</TABLE>
83
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
4.3 -- Form of Preferred Securities Guarantee Agreement.
(Incorporated by reference to Exhibit 4.5 to Cox's
Registration Statement on Form S-3, File No. 33-82575, filed
with the Commission on July 28, 1999.)
4.4 -- Form of Capital Securities Guarantee Agreement.
(Incorporated by reference to Exhibit 4.6 to Cox's
Registration Statement on Form S-3, File No. 33-82575, filed
with the Commission on August 6, 1999.)
4.5 -- Indenture, dated as of January 30, 1998, between TCA Cable
TV, Inc. and Chase Bank of Texas, National Association, as
Trustee (Incorporated by reference to Exhibit 4(a) of TCA's
Registration Statement on Form S-3, File No. 333-32015).
4.6 -- First Supplemental Indenture, dated as of August 12, 1999,
among TCA Cable TV, Inc., Cox Classic Cable, Inc. and Chase
Bank of Texas, National Association, as Trustee.
(Incorporated by reference to Exhibit 4.2 to Cox's Current
Report on Form 8-K filed with the Commission on August 25,
1999.)
4.7 -- Second Supplemental Indenture, dated as of October 6, 1999,
by and between Cox Communications, Inc., as Issuer and The
Bank of New York, as Trustee. (Incorporated by reference to
Exhibit 4.1 to Cox's Quarterly Report on Form 10-Q filed
with the Commission on November 8, 1999.)
4.8 -- Guarantee Agreement, dated as of October 6, 1999, by and
between Cox Communications, Inc., as Guarantor and The Bank
of New York, as Guarantee Trustee. (Incorporated by
reference to Exhibit 4.2 to Cox's Quarterly Report on Form
10-Q filed with the Commission on November 8, 1999.)
4.9 -- Second Supplemental Indenture, dated as of March 14, 2000,
between Cox Communications, Inc. and The Bank of New York,
as Trustee.
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.)
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.)
</TABLE>
84
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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 -- 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.)
10.9 -- 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.)
10.10 -- 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.)
10.11 -- 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).
10.12 -- 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., files with the Commission on March 19,
1999.)
10.13 -- Amended and Restated 5-Year Credit Agreement, dated as of
September 28, 1999, by and among Cox Communications, Inc.,
The Chase Manhattan Bank, as Documentation Agent, Chase Bank
of Texas, National Association, as Administrative Agent for
the Banks, and Chase Securities Inc., as Sole Book Manager
and Lead Arranger. (Incorporated by reference to Exhibit
10.3 to Cox's Quarterly Report on Form 10-Q, filed with the
Commission on November 8, 1999.)
10.14 -- Amended and Restated 364-Day Credit Agreement, dated
September 28, 1999, by and among Cox Communications, Inc.,
Bank of America National Trust and Savings Association, as
Syndication Agent, The Bank of New York and Wachovia Bank,
N.A., as Co-Documentation Agents, Chase Bank of Texas,
National Association, as Administrative Agent for the Banks,
and Chase Securities Inc., as Sole Book Manager and Lead
Arranger. (Incorporated by reference to Exhibit 10.2 to
Cox's Quarterly Report on Form 10-Q, filed with the
Commission on November 8, 1999.)
10.15 -- Purchase Contract Agreement, dated as of August 12, 1999,
between Cox Communications, Inc. and The First National Bank
of Chicago, as Purchase Contract Agent. (Incorporated by
reference to Exhibit 4.1 to Cox's Current Report on Form 8-K
filed with the Commission on August 23, 1999.)
10.16 -- Remarketing Agreement, dated as of August 12, 1999, among
Cox Communications, Inc., Cox Trust II, The First National
Bank of Chicago, as Purchase Contract Agent, and Merrill
Lynch & Co., Merrill Lunch, Pierce, Fenner & Smith
Incorporated, as Remarketing Agent. (Incorporated by
reference to Exhibit 4.2 to Cox's Current Report on Form 8-K
filed with the Commission on August 23, 1999.)
10.17 -- Pledge Agreement, dated as of August 12, 1999, among Cox
Communications, Inc., The Bank of New York, as Collateral
Agent, Custodial Agent and Securities Intermediary, and The
First National Bank of Chicago, as Purchase Contract Agent.
(Incorporated by reference to Exhibit 4.3 to Cox's Current
Report on Form 8-K filed with the Commission on August 23,
1999.)
</TABLE>
85
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.18 -- Remarketing Agreement, dated as of October 6, 1999, by and
among Cox Communications, Inc., Cox RHINOS Trust and Banc of
America Securities LLC. (Incorporated by reference to
Exhibit 10.1 to Cox's Quarterly Report on Form 10-Q, filed
with the Commission on November 8, 1999.)
13 -- Portions of the 1999 Annual Report to Stockholders
(expressly incorporated by reference in Part II, Item 5 of
this Report).
21 -- Subsidiaries of Cox Communications, Inc.
23 -- Consent of Deloitte & Touche LLP.
24 -- Power of Attorney (included on page 87)
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
86
<PAGE> 89
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 22, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES C. KENNEDY Chairman of the Board of March 22, 2000
- ----------------------------------------------------- Directors
James C. Kennedy
/s/ JAMES O. ROBBINS President and Chief Executive March 22, 2000
- ----------------------------------------------------- Officer; Director
James O. Robbins
/s/ JIMMY W. HAYES Executive Vice President, March 22, 2000
- ----------------------------------------------------- Finance and Administration
Jimmy W. Hayes Chief Financial Officer
(principal financial officer)
/s/ HOWARD B. TIGERMAN Controller March 22, 2000
- ----------------------------------------------------- Chief Accounting Officer
Howard B. Tigerman (principal accounting officer)
/s/ JANET MORRISON CLARKE Director March 22, 2000
- -----------------------------------------------------
Janet Morrison Clarke
/s/ DAVID E. EASTERLY Director March 22, 2000
- -----------------------------------------------------
David E. Easterly
</TABLE>
87
<PAGE> 90
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT F. ERUBURU Director March 22, 2000
- -----------------------------------------------------
Robert F. Erburu
/s/ ROBERT C. O'LEARY Director March 22, 2000
- -----------------------------------------------------
Robert C. O'Leary
/s/ ANDREW J. YOUNG Director March 22, 2000
- -----------------------------------------------------
Andrew J. Young
</TABLE>
88
<PAGE> 91
(COX COMMUNICATIONS LOGO)
<PAGE> 1
EXHIBIT 1.1
================================================================================
COX COMMUNICATIONS, INC.
(a Delaware corporation)
275,000 Premium PHONES
3% Exchangeable Subordinated Debentures due 2030
PURCHASE AGREEMENT
Dated: March 8, 2000
================================================================================
<PAGE> 2
Table of Contents
<TABLE>
<S> <C> <C>
SECTION 1. Representations and Warranties......................2
(a) Representations and Warranties by the Company....................2
(i) Compliance with Registration Requirements...........2
(ii) Incorporated Documents..............................3
(iii) Independent Accountants.............................3
(iv) Financial Statements................................3
(v) No Material Adverse Change in Business..............4
(vi) Good Standing of the Company........................4
(vii) Good Standing of Subsidiaries.......................4
(viii) Capitalization......................................5
(ix) Authorization of Agreement..........................5
(x) Authorization of the Indenture......................5
(xi) Authorization of Securities.........................5
(xii) Description of the Securities and the Indenture.....6
(xiii) Absence of Defaults and Conflicts...................6
(xiv) Absence of Labor Dispute............................6
(xv) Absence of Proceedings..............................6
(xvi) Accuracy of Exhibits................................7
(xvii) Possession of Intellectual Property.................7
(xviii) Absence of Further Requirements.....................7
(xix) Possession of Licenses and Permits..................7
(xx) Title to Property...................................8
(xxi) Investment Company Act..............................8
(xxii) Environmental Laws..................................8
(b) Officers' Certificates...........................................9
SECTION 2. Sale and Delivery to Underwriter; Closing...........9
(a) Securities.......................................................9
(b) Payment..........................................................9
(c) Denominations; Registration......................................9
SECTION 3. Covenants of the Company............................9
(a) Compliance with Securities Regulations and Commission
Requests.................................................9
(b) Filing of Amendments....................................10
(c) Delivery of Registration Statements.....................10
(d) Delivery of Prospectus..................................10
(e) Continued Compliance with Securities Laws...............10
(f) Blue Sky Qualifications.................................11
(g) Rule 158................................................11
(h) Use of Proceeds.........................................11
(i) Listing.................................................11
(j) Restriction on Sale of Securities.......................12
(k) Reporting Requirements..................................12
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 4. Payment of Expenses................................12
(a) Expenses................................................12
(b) Termination of Agreement................................12
SECTION 5. Conditions of Underwriter's Obligations............13
(a) Effectiveness of Registration Statement.................13
(b) Opinion of Counsel for Company..........................13
(c) Opinion of Counsel for Underwriter......................13
(d) Officers' Certificate...................................13
(e) Accountant's Comfort Letters............................14
(f) Maintenance of Rating...................................14
(g) Additional Documents....................................14
(h) Termination of Agreement................................14
SECTION 6. Indemnification....................................14
(a) Indemnification of Underwriter..................................14
(b) Indemnification of Company, Directors and Officers..............15
(c) Actions against Parties; Notification...........................15
(d) Settlement without Consent if Failure to Reimburse..............16
SECTION 7. Contribution.......................................16
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery...........................................17
SECTION 9. Termination of Agreement...........................18
(a) Termination; General............................................18
(b) Liabilities. ...................................................18
SECTION 10. Notices............................................19
SECTION 11. Parties............................................19
SECTION 12. GOVERNING LAW AND TIME.............................20
SECTION 13. Effect of Headings.................................20
SECTION 14. Counterparts.......................................20
SCHEDULES
Schedule A - Pricing Information................................Sch A-1
Schedule B - List of Subsidiaries...............................Sch B-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel....................A-1
</TABLE>
ii
<PAGE> 4
COX COMMUNICATIONS, INC.
(a Delaware corporation)
275,000 Premium PHONES
3% Exchangeable Subordinated Debentures due 2030
PURCHASE AGREEMENT
March 8, 2000
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Cox Communications, Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the "Underwriter"), with respect to the issue and sale by
the Company and the purchase by the Underwriter of 275,000 of the Company's
Premium PHONES - 3% Exchangeable Subordinated Debentures due 2030 (the
"Securities"). The Securities are to be issued pursuant to an indenture, dated
as of June 27, 1995, between the Company and The Bank of New York, as trustee
(the "Trustee"), as supplemented by the Second Supplemental Indenture, dated as
of March 14, 2000, between the Company and the Trustee (the indenture, as so
supplemented, the "Indenture").
The Company understands that the Underwriter proposes to make a public
offering of the Securities as soon as the Underwriter deems advisable after this
Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (Nos. 333-82575, 333-82575-01
and 333-82575-02) and pre-effective amendment nos. 1, 2 and 3 thereto for the
registration of certain securities, including the Securities, under the
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus or prospectuses, and the offering thereof from time to
time in accordance with Rule 415 of the rules and regulations of the Commission
under the 1933 Act (the "1933 Act Regulations"). Such registration statement has
been declared effective by the Commission, and the Indenture has been duly
qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act").
Such registration statement, including the exhibits and schedules thereto, if
any, in the form in which it became effective, is herein called the
"Registration Statement"; and the final base prospectus contained in the
Registration Statement and the final prospectus supplement relating to the
offering of the Securities, in the form first furnished to the Underwriter by
the Company for use in connection with the offering
<PAGE> 5
of the Securities, are collectively referred to herein as the "Prospectus";
provided, however, that all references to the "Registration Statement" and the
"Prospectus" shall also be deemed to include all documents incorporated therein
by reference pursuant to the Securities Exchange Act of 1934, as amended (the
"1934 Act"), prior to the execution and delivery of this Agreement; and
provided, further, that if the Company files a registration statement with the
Commission pursuant to Section 462(b) of the 1933 Act Regulations (the "Rule
462(b) Registration Statement"),then after such filing, all references to
"Registration Statement" shall also be deemed to include the Rule 462(b)
Registration Statement. A "preliminary prospectus" shall be deemed to refer to
any prospectus used in connection with the offer and sale of the Securities that
omitted information to be included upon pricing in a form of prospectus filed
with the Commission pursuant to Rule 424(b) of the 1933 Act Regulations and was
used after the Registration Statement became effective but prior to the
execution and delivery of this Agreement. For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the
Prospectus or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the 1934 Act which is incorporated by reference in the
Registration Statement, such preliminary prospectus or the Prospectus, as the
case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to the Underwriter as of the date hereof and as of the Closing Time
(as defined in Section 2(c) hereof) (in each case, a "Representation Date"), and
agrees with the Underwriter, as follows:
(i) Compliance with Registration Requirements. The Company meets the
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information
has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at each Representation Date, the Registration
Statement, the Rule 462(b) Registration Statement
2
<PAGE> 6
and any amendments thereto complied and will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations and the 1939 Act and the rules and regulations of the
Commission under the 1939 Act (the "1939 Act Regulations"), and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Neither the Prospectus nor
any amendments or supplements thereto, at the time the Prospectus or
any amendments or supplements thereto were issued and at the Closing
Time, included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement (or any amendment thereto) or
the Prospectus (or any amendment or supplement thereto) made in
reliance upon and in conformity with information furnished to the
Company in writing by the Underwriter expressly for use in the
Registration Statement (or such amendment thereto) or the Prospectus
(or such amendment or supplement thereto).
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriter for use in connection with this offering
was identical in all material respects to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or deemed to be
incorporated by reference in the Registration Statement and the
Prospectus, when they became effective or at the time they were or
hereafter are filed with the Commission, complied and will comply in
all material respects with the requirements of the 1933 Act and the
1933 Act Regulations or the 1934 Act and the rules and regulations of
the Commission thereunder (the "1934 Act Regulations"), as applicable,
and, when read together with the other information in the Prospectus,
at the time the Registration Statement became effective, at the time
the Prospectus was issued and at Closing Time, did not and will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(iii) Independent Accountants. The accountants who certified the financial
statements and supporting schedules of the Company and its
subsidiaries, of Cox Communications PCS, L.P. ("PCS") and its
subsidiaries and of TCA Cable TV, Inc. ("TCA") and its subsidiaries
included in the Registration Statement and the Prospectus are
independent public accountants with respect to the Company and its
subsidiaries as required by the 1933 Act and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements of the Company included
in the Registration Statement and the Prospectus, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated
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subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have
been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the
periods involved. The financial statements of PCS included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of PCS and
its consolidated subsidiaries at the dates indicated and the statement
of operations, stockholders' equity and cash flows of PCS and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved. The financial
statements of TCA included in the Registration Statement and the
Prospectus, together with the related schedules and notes, present
fairly the financial position of TCA and its consolidated subsidiaries
at the date indicated and the statement of operations, stockholders'
equity and cash flows of TCA and its subsidiaries for the period
specified; said financial statements have been prepared in conformity
with GAAP. The supporting schedules, if any, included in the
Registration Statement and the Prospectus present fairly in accordance
with GAAP the information required to be stated therein. The pro forma
financial statements of the Company and its consolidated subsidiaries
and the related notes thereto included in the Registration Statement
and the Prospectus present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in
the preparation thereof are reasonable and the adjustments used therein
are appropriate to give effect to the transactions and circumstances
referred to therein.
(v) No Material Adverse Change in Business. Since the respective dates as
of which information is given in the Registration Statement and the
Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise, whether or not arising
in the ordinary course of business (a "Material Adverse Effect"), (B)
there have been no transactions entered into by the Company or any of
its subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly organized and
is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as
a foreign corporation to transact business and is in good standing in
each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
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(vii) Good Standing of Subsidiaries. Each "significant subsidiary" of the
Company (as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation or limited liability
company in good standing under the laws of the jurisdiction of its
incorporation or organization, as the case may be, has corporate or
other power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each such Subsidiary owned by the
Company, directly or through subsidiaries, has been duly authorized and
validly issued, is fully paid and non-assessable and is owned free and
clear of any security interest, mortgage, pledge, lien, encumbrance,
claim or equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar rights
of any securityholder or such Subsidiary. The only subsidiaries of the
Company are (a) the subsidiaries listed on Schedule B hereto and (b)
certain other subsidiaries which, considered in the aggregate as a
single Subsidiary, do not constitute a "significant subsidiary" as
defined in Rule 1-02 of Regulation S-X.
(viii) Capitalization. The shares of outstanding capital stock of the Company
have been duly authorized and validly issued and are fully paid and
non-assessable; none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company.
(ix) Authorization of Agreement. This Agreement has been duly authorized,
executed and delivered by the Company.
(x) Authorization of the Indenture. The Indenture has been duly authorized,
executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Trustee, constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or
similar laws affecting enforcement of creditors' rights generally and
except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding
in equity or at law). The Indenture has been duly qualified under the
1939 Act.
(xi) Authorization of Securities. The Securities have been duly authorized
by the Company for issuance and sale and, at the Closing Time, will
have been duly executed by the Company and, when authenticated, issued
and delivered in the manner provided for in the Indenture and delivered
against payment of the purchase price therefor as provided in this
Agreement, will constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency (including, without
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limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting enforcement of creditors' rights
generally and except as enforcement thereof is subject to general
principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law). The Securities will be in the
form contemplated by, and each registered holder thereof will be
entitled to the benefits of, the Indenture.
(xii) Description of the Securities and the Indenture. The Securities and the
Indenture as of each Representation Date, conform and will conform, as
applicable, in all material respects to the respective statements
relating thereto contained in the Prospectus and will be in
substantially the respective forms filed or incorporated by reference,
as the case may be, as exhibits to the Registration Statement.
(xiii) Absence of Defaults and Conflicts. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or other
constitutive documents or in default in the performance or observance
of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any
of its subsidiaries is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a
Material Adverse Effect; and the execution, delivery and performance by
the Company of this Agreement, the Indenture and the Securities and the
consummation of the transactions contemplated in this Agreement and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use of Proceeds") and
compliance by the Company with its obligations under this Agreement and
under the Indenture and the Securities do not and will not, whether
with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event
(as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions
of the charter or by-laws or other constitutive documents of the
Company or any of its subsidiaries or any applicable law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or any of
their assets, properties or operations. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company or
any of its subsidiaries.
(xiv) Absence of Labor Dispute. No labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the knowledge of the
Company, is
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imminent which, individually or in the aggregate, may reasonably be
expected to result in a Material Adverse Effect.
(xv) Absence of Proceedings. There is no action, suit, proceeding, inquiry
or investigation before or brought by any court or governmental agency
or body, domestic or foreign, now pending, or, to the knowledge of the
Company, threatened, against or affecting the Company or any of its
subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which, individually or
in the aggregate, might reasonably be expected to result in a Material
Adverse Effect, or which, individually or in the aggregate, might
reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any of its
subsidiaries is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xvi) Accuracy of Exhibits. There are no contracts or documents which are
required to be described in the Registration Statement, the Prospectus
or the documents incorporated by reference therein or to be filed as
exhibits thereto which have not been so described and filed as
required.
(xvii) Possession of Intellectual Property. Except as disclosed in the
Prospectus, the Company and its subsidiaries own or possess, or can
acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") necessary
to carry on the business now operated by them, other than those the
absence of which would not have a Material Adverse Effect, and neither
the Company nor any of its subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xviii) Absence of Further Requirements. No filing with, or authorization,
approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary
or required for the performance by the Company of its obligations
hereunder, in connection with the offering, issuance or sale of the
Securities under this Agreement or the consummation of the transactions
contemplated by this Agreement or for the due execution, delivery or
performance of the Indenture by the Company, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws, the laws
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of a foreign jurisdiction or the by-laws and rules of the NASD and
except for the qualification of the Indenture under the 1939 Act.
(xix) Possession of Licenses and Permits. The Company and its subsidiaries
possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them other
than those the absence of which would not have a Material Adverse
Effect; the Company and its subsidiaries are in compliance with the
terms and conditions of all such Governmental Licenses, except where
the failure so to comply would not, singly or in the aggregate, have a
Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to
be in full force and effect would not have a Material Adverse Effect;
and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.
(xx) Title to Property. The Company and its subsidiaries have good and
marketable title to all material real property owned by the Company and
its subsidiaries and good title to all other properties owned by them,
in each case, free and clear of all mortgages, pledges, liens, security
interests, claims, restrictions or encumbrances of any kind except such
as (a) are described in the Prospectus or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any subsidiary has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xxi) Investment Company Act. The Company is not, and upon the issuance and
sale of the Securities as herein contemplated and the application of
the net proceeds therefrom as described in the Prospectus will not be,
an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(xxii) Environmental Laws. Except as described in the Registration Statement
and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation,
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laws and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by
any private party or governmental body or agency, against or affecting
the Company or any of its subsidiaries relating to Hazardous Materials
or any Environmental Laws.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company delivered to the Underwriter or to counsel for the Underwriter in
connection with the offering of the Securities shall be deemed a representation
and warranty by the Company to the Underwriter as to the matters covered
thereby.
SECTION 2. Sale and Delivery to Underwriter; Closing.
(a) Securities. On the basis of the representations, warranties and
agreements herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees
to purchase from the Company, at the price per Security set forth in Schedule A.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the offices of Brown & Wood
LLP, or at such other place as shall be agreed upon by the Underwriter and the
Company, at 9:00 A.M. (Eastern time) on the fourth business day after the date
hereof, or such other time not later than ten business days after such date as
shall be agreed upon by the Underwriter and the Company (such time and date of
payment and delivery being herein called "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Underwriter of certificates for the Securities to be purchased by it.
(c) Denominations; Registration. Certificates for the Securities shall be
in such denominations and registered in such names as the Underwriter may
request in writing at least one full business day before the Closing Time. The
Securities will be made available for examination and packaging by the
Underwriter in The City of New York not later than 10:00 A.M. (Eastern time) on
the business day prior to the Closing Time.
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SECTION 3. Covenants of the Company. The Company covenants with the
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. Subject
to Section 3(b), the Company will notify the Underwriter immediately,
and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule
424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under
Rule 424(b) was received for filing by the Commission and, in the event
that it was not, it will promptly file such prospectus. The Company
will use its reasonable best efforts to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Underwriter notice of
its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)) or any amendment,
supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the 1933 Act, the 1934 Act or
otherwise, will furnish the Underwriter with copies of any such
documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Underwriter or counsel for the Underwriter shall object in
writing within three business days of receipt.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Underwriter and counsel for the Underwriter, without
charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated or deemed
to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Underwriter, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits). The copies of the Registration Statement and each amendment
thereto furnished to the Underwriter will be identical in all material
respects to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectus. The Company will furnish to the Underwriter,
without charge, during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of
the Prospectus (as amended or
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supplemented) as the Underwriter may reasonably request. The Prospectus
and any amendments or supplements thereto furnished to the Underwriter
will be identical in all material respects to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply with
the 1933 Act and the 1933 Act Regulations, the 1934 Act and the 1934
Act Regulations and the 1939 Act and the 1939 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of counsel for the Underwriter or counsel for the Company, to
amend the Registration Statement or amend or supplement the Prospectus
in order that the Prospectus will not include any untrue statements of
a material fact or omit to state a material fact necessary in order to
make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or
if it shall be necessary, in the opinion of any such counsel, at any
such time to amend the Registration Statement or amend or supplement
the Prospectus in order to comply with the requirements of the 1933 Act
or the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or
to make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriter, without
charge, such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its reasonable best
efforts, in cooperation with the Underwriter, to qualify the Securities
for offering and sale under the applicable securities laws of such
states and other jurisdictions as the Underwriter may designate and to
maintain such qualifications in effect for a period of not less than
one year from the date of this Agreement; provided, however, that the
Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for
a period of not less than one year from the date of this Agreement. The
Company will also supply the Underwriter with such information as is
necessary for the determination of the legality of the Securities for
investment under the laws of such jurisdictions as the Underwriter may
request.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
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(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds".
(i) Listing. The Company will use its commercially reasonable efforts to
have the Securities approved for listing, subject only to official
notice of issuance, on the New York Stock Exchange and to cause the
Securities to be registered under the 1934 Act.
(j) Restriction on Sale of Securities. Through the 45th day after the date
of this Agreement, the Company will not, without the consent of the
Underwriter, directly or indirectly, offer, sell, offer to sell, grant
an option for the sale of or otherwise dispose of any of (i) the
Securities, any securities of the Company convertible into or
exchangeable for the Securities or any securities of the Company
exchangeable for, convertible into or for which the principal amount
thereof or payment thereon is referenced to the price of or dividend
rate on shares of Sprint's PCS Common Stock - Series 1, par value $1.00
per share (the "Sprint PCS Stock"), of Sprint Corporation ("Sprint") or
(ii) shares of Sprint's PCS Common Stock - Series 2 owned by the
Company; provided, however, that the foregoing shall not prohibit the
Company from taking any of the foregoing actions in connection with any
exchanges or redemptions of the Securities or in connection with any
tender offer or exchange offer for all or a portion of the outstanding
shares of Sprint's PCS Common Stock - Series 2.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934
Act and the 1934 Act Regulations.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriter
of this Agreement, the Indenture and such other documents as may be
required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and
delivery of the Securities to the Underwriter, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors,
(v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriter in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the
printing and delivery to the Underwriter of copies of the Prospectus
and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriter of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of the
Trustee, including the fees and disbursements of counsel for the
Trustee in connection with the Indenture and the Securities, (ix) any
fees payable in connection with the rating
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of the Securities, and (x) the listing fees and related expenses
incurred with respect to the listing of the Securities on the New York
Stock Exchange.
(b) Termination of Agreement. If this Agreement is terminated by the
Underwriter in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriter for all of
their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriter.
SECTION 5. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Securities pursuant to this Agreement
are subject to the accuracy of the representations and warranties of the Company
contained in Section 1 hereof or in certificates of any officer of the Company
or any subsidiary of the Company delivered pursuant to the provisions hereof, to
the performance by the Company of its covenants and other obligations hereunder,
and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective
and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of counsel to
the Underwriter. A prospectus containing information relating to the
description of the Securities, the specific method of distribution and
similar matters shall have been filed with the Commission in accordance
with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance
with the requirements of Rule 430A).
(b) Opinion of Counsel for Company. At Closing Time, the Underwriter shall
have received the favorable opinion, dated as of Closing Time, of Dow,
Lohnes & Albertson, PLLC, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriter, to the effect
set forth in Exhibit A hereto.
(c) Opinion of Counsel for Underwriter. At Closing Time, the Underwriter
shall have received the favorable opinion, dated as of Closing Time, of
Brown & Wood LLP, counsel for the Underwriter, in form and substance
satisfactory to the Underwriter with respect to the issuance and sale
of the Securities and other related matters as the Underwriter may
reasonably require. Such counsel may state that, insofar as such
opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in
the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, and the Underwriter shall have received a
certificate of the President or a Vice President
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of the Company and of the chief financial officer, chief accounting
officer or the Treasurer of the Company, dated as of Closing Time, to
the effect that (i) there has been no such material adverse change,
(ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at
and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or are contemplated by the Commission.
(e) Accountant's Comfort Letters. At Closing Time, the Underwriter shall
have received letters from Deloitte & Touche LLP, in relation to the
Company, and KPMG LLP, in relation to TCA, each dated such date, in
form and substance satisfactory to the Underwriter, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) Maintenance of Rating. At Closing Time the Securities shall be rated at
least Baa3 by Moody's Investors Service Inc. and BBB by Standard &
Poor's Ratings Service, and the Company shall have delivered to the
Underwriter a letter, dated the Closing Time, from each such rating
agency, or other evidence satisfactory to the Underwriter, confirming
that the Securities have such ratings; and since the date of this
Agreement, there shall not have occurred a downgrading in the rating
assigned to the Securities or any of the Company's other debt
securities by any "nationally recognized statistical rating agency", as
that term is defined by the Commission for purposes of Rule 436(g)(2)
under the 1933 Act, and no such organization shall have publicly
announced that it has under surveillance or review, with possible
negative implications, its rating of the Securities or any of the
Company's other debt securities.
(g) Additional Documents. At Closing Time counsel for the Underwriter shall
have been furnished with such documents and opinions as they may
require for the purpose of enabling them to pass upon the issuance and
sale of the Securities as herein contemplated, or in order to evidence
the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in
form and substance to the Underwriter and counsel for the Underwriter.
(h) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled,
this Agreement may be terminated by the Underwriter by notice to the
Company at any time at or prior to Closing Time, and such termination
shall be without liability of any party to any other party except as
provided in Section 4 and except that Sections 6, 7 and 8 shall survive
any such termination and remain in full force and effect.
14
<PAGE> 18
SECTION 6. Indemnification.
(a) Indemnification of Underwriter. The Company agrees to indemnify and
hold harmless the Underwriter and each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission referred to
under (i) above; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the
Underwriter), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, referred to under (i) above,
to the extent that any such expense is not paid under (i) or (ii)
above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto), or any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) and provided, further, that this indemnity agreement shall
not inure to the benefit of the Underwriter or any person controlling the
Underwriter on account of any loss, claim, damage, liability or action arising
from the sale of Securities to any person by the Underwriter if the Underwriter
failed to send or give a copy of an amendment or supplement to the Prospectus to
that person and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in the Prospectus
was corrected in said amendment or supplement and the delivery thereof was
required by law and would have constituted a complete defense to the claim of
that person, unless such failure resulted from non-compliance by the Company
with Section 3(a) or (b). For purposes of the
15
<PAGE> 19
second proviso to the immediately preceding sentence, the term Prospectus shall
not be deemed to include the documents incorporated by reference therein, and
the Underwriter shall not be obligated to send or give any supplement or
amendment to any document incorporated by reference in a preliminary prospectus
or supplement thereto or the Prospectus to any person.
(b) Indemnification of Company, Directors and Officers. The Underwriter
agrees to indemnify and hold harmless the Company, its directors, each of its
officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), or any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by the Underwriter expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by the Underwriter, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action. If it so
elects within a reasonable time after receipt of notice, an indemnifying party,
jointly with any other indemnifying parties receiving such notice, may assume
the defense of such action with counsel chosen by it and approved by the
indemnified parties defendant in such action, unless such indemnified parties
reasonably object to such assumption on the ground that there may be legal
defenses available to them which are different from or in addition to those
available to such indemnifying party. If an indemnifying party assumes the
defense of such action, the indemnifying parties shall not be liable for any
fees and expenses of counsel for the indemnified parties thereafter in
connection with such action. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as
16
<PAGE> 20
to or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 90 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 45 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof
is for any reason unavailable to or insufficient to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then the Company and the Underwriter shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriter on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriter on the
other hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriter on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount or commission received by the Underwriter,
in each case as set forth on the cover of the Prospectus, bear to the aggregate
initial public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriter
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in
17
<PAGE> 21
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, the Underwriter shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which the
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls the
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as the Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Underwriter.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Underwriter may terminate this Agreement, by
notice to the Company, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise or of Sprint and its subsidiaries considered as one enterprise,
in each case whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Underwriter, impracticable to market
the Securities or to enforce contracts for the sale of the Securities, or (iii)
if trading in any securities of the Company or in the Sprint PCS Stock has been
suspended or limited by the Commission or the New York Stock Exchange, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges
18
<PAGE> 22
or by such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 6, 7
and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriter shall be directed to Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, North Tower, World Financial Center, New York, New
York 10281-1201, attention of Daniel Richards, Managing Director; and notices to
the Company shall be directed to it at 1400 Lake Hearn Drive, Atlanta, Georgia
30319, attention of Andrew A. Merdek.
SECTION 11. Parties. This Agreement shall inure to the benefit of and be
binding upon the Underwriter and the Company and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Underwriter
and the Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriter and the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from the Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 12. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED WHOLLY IN SUCH STATE. SPECIFIED TIMES OF DAY
REFER TO NEW YORK CITY TIME.
SECTION 13. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
SECTION 14. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts hereof shall constitute a single instrument.
19
<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Company in accordance with its terms.
Very truly yours,
COX COMMUNICATIONS, INC.
By: /s/ Dallas S. Clement
------------------------------
Name: Dallas S. Clement
Title: Vice President and
Treasurer
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Tristram Collins
-------------------------------
Authorized Signatory
<PAGE> 24
Sch A-1
SCHEDULE A
COX COMMUNICATIONS, INC.
275,000 Premium PHONES
3% Exchangeable Subordinated Debentures due 2030
1. The initial public offering price per Security shall be $1,000.
2. The purchase price per Security to be paid by the Underwriter shall
be $980, being an amount equal to the initial public offering price
set forth above less a $20 underwriting discount per Security.
3. The interest rate on the Securities shall be 3% per annum.
4. The Securities shall be redeemable at the option of the Company, and
exchangeable at the option of the holder thereof, as set forth in
the terms of the Securities.
<PAGE> 25
SCHEDULE B
List of Subsidiaries
Cox Communications Hampton Roads, Inc.
Cox Communications Las Vegas, Inc.
Cox Classic Cable, Inc.
CoxCom, Inc.
Cox Teleport Partners, Inc.
<PAGE> 1
EXHIBIT 4.9
COX COMMUNICATIONS, INC.
AND
THE BANK OF NEW YORK
Trustee
---------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of March 14, 2000
---------------------
Supplementing the Indenture
Dated as of June 27, 1995
--------------------
Creating a series of Debt Securities designated
3% Exchangeable Subordinated Debentures due 2030
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated the 14th day of March, 2000,
between COX COMMUNICATIONS, INC., a corporation existing under the laws of the
State of Delaware (the "Company"), and THE BANK OF NEW YORK, a New York banking
corporation, having its principal corporate trust office in The City of New
York, New York, as trustee (the "Trustee").
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an Indenture dated as of June 27, 1995 (the "Original Indenture" and, as
supplemented to the date hereof, the "Indenture"), providing for the issuance by
the Company from time to time of its debentures, notes, bonds or other evidences
of indebtedness to be issued in one or more series (in the Original Indenture
and herein called the "Securities");
WHEREAS, the Company, in the exercise of the power and authority
conferred upon and reserved to it under the provisions of the Original Indenture
and pursuant to appropriate resolutions of the Board of Directors, has duly
determined to make, execute and deliver to the Trustee this Second Supplemental
Indenture to the Original Indenture in order to establish the form and terms of,
and to provide for the creation and issue of, a series of Securities designated
as the "3% Exchangeable Subordinated Debentures due 2030" under the Original
Indenture in an aggregate original principal amount of up to $335,366,000 (the
"Debentures");
WHEREAS, Section 9.01 of the Original Indenture provides, among other
things, that the Company, when authorized by a Board Resolution, and the
Trustee, at any time and from time to time, without the consent of any Holders,
may enter into an indenture supplemental to the Original Indenture to establish
the terms of Securities of any series as permitted by Sections 2.01 and 2.03 of
the Original Indenture; and
WHEREAS, all things necessary to make the Securities, when executed by
the Company and authenticated and delivered by the Trustee and issued upon the
terms and subject to the conditions hereinafter and in the Indenture set forth
against payment therefor, the valid, binding and legal obligations of the
Company and to make this Second Supplemental Indenture a valid, binding and
legal agreement of the Company, have been duly authorized.
NOW, THEREFORE, THIS SECOND SUPPLEMENTAL INDENTURE WITNESSETH that, in
order to establish the terms of the series of Securities designated as the "3%
Exchangeable Subordinated Debentures due 2030," and for and in consideration of
the premises and of the covenants contained in the Original Indenture and in
this Second Supplemental Indenture and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, it is mutually
covenanted and agreed as follows:
<PAGE> 3
Article One
DEFINITIONS AND OTHER
PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions.
Each capitalized term that is used herein and is defined in the
Original Indenture shall have the meaning specified in the Original Indenture
unless such term is otherwise defined herein, in which case such term shall have
the meaning specified herein.
"Additional Distribution" shall mean any distribution to Holders of the
Debentures made pursuant to Section 206 as a result of a Reference Share
Distribution.
"Adjusted Principal Amount" shall mean, for each $1,000 Original
Principal Amount of the Debentures, $1,000, minus any and all Extraordinary
Additional Distributions and any Yield Adjustments made in respect to such
Original Principal Amount of Debentures pursuant to Section 204.
"Average Transaction Consideration" shall mean, with respect to a
holder of one Reference Share in a Reference Share Offer, (a) the aggregate
consideration actually paid or distributed in respect of all Reference Shares
accepted in such Reference Share Offer, divided by (b) the total number of
Reference Shares outstanding immediately prior to the expiration of the
Reference Share Offer and entitled to participate in such Reference Share Offer.
"Business Day" shall mean any day that is not a Saturday, Sunday or
legal holiday, on which banking institutions or trust companies in The City of
New York are authorized or obligated by law or regulation to close.
"Closing Price" shall mean, with respect to any security on any date of
determination, the closing sale price (or, if no closing sale price is reported,
the last reported sale price) of that security (regular way) on the New York
Stock Exchange on that date or, if the security is not listed for trading on the
New York Stock Exchange on that date, as reported in the composite transactions
for the principal United States national or regional securities exchange on
which the security is so listed, or if the security is not so listed on a United
States national or regional securities exchange, as reported by the Nasdaq
National Market or, if the security is not so reported, the last quoted bid
price for the security in the over-the-counter market as reported by the
National Quotation Bureau or a similar organization. In the event that no such
quotation is available for that day, the Board of Directors will be entitled to
determine the Closing Price on the basis of those quotations that it in good
faith considers appropriate, unless "Closing Price" is to be determined for
purposes of valuing securities to be distributed pursuant to a Reference Share
Distribution and in the opinion of the Board of Directors there is a substantial
likelihood that such securities will have an aggregate fair market value in
excess of $100,000,000, in which event the Closing Price will be determined by a
nationally recognized investment banking or appraisal firm appointed by the
Company for such purpose. With respect to options, warrants and other rights to
purchase a security, the Closing Price shall be the value of the underlying
security determined as aforesaid, minus the exercise price; and with respect to
securities
1
<PAGE> 4
exchangeable for or convertible into a relevant security, the Closing Price
shall be the Closing Price of the exchangeable or convertible security
determined as aforesaid or, if it has no Closing Price, the fully converted
value based upon the Closing Price of the underlying security determined as
aforesaid. If an "ex-dividend" date for a security occurs during the period used
in determining the security's Current Market Value or Exchange Market Value, the
Closing Price of the security on any day prior to the "ex-dividend" date used in
such determination shall be reduced by the amount of the dividend. For this
purpose, the amount of a non-cash dividend will be equal to the amount of the
dividend, as of the record date therefor, as determined by a nationally
recognized investment banking firm retained by the Company for this purpose. To
the extent that trading (regular way) of, or quotations for, any security as to
which "Closing Price" is to be determined continues past 4:00 p.m., New York
City time, on the applicable securities exchange, the National Market System or
over-the-counter market, as the case may be, "Closing Price" shall be deemed to
refer to the price or bid at the time that is then customary for determining the
trading day's index levels for stocks traded on such securities exchange, the
National Market System or over-the-counter market.
"Common Equity Securities" shall mean any securities (i) that are
common stock or Tracking Stock or participate without limitation in earnings and
dividends in parity with such common stock or Tracking Stock and (ii) that are
Marketable Securities. For greater certainty, the term "Common Equity
Securities" does not mean warrants, options or other rights to purchase, or
securities exchangeable or convertible into, Common Equity Securities.
"Company" shall mean the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter "Company"
shall mean such successor Person, and any other obligor upon the Debentures.
"Current Market Value" shall mean, with respect to any Reference Share,
the average of the Closing Prices for such Reference Share over the 20 Trading
Day period immediately prior to (but not including) the fifth Trading Day
preceding the applicable Redemption Date (or, in the case of Section 204(b), the
Stated Maturity).
"Debenture" shall mean $1,000 Original Principal Amount of the
Debentures.
"Debentures" shall mean the Company's 3% Exchangeable Subordinated
Debentures due 2030.
"Depository" shall have the meaning assigned to it in the Original
Indenture.
"DTC" shall mean The Depository Trust Company.
"Exchange Agent" shall mean any Person authorized by the Company to act
as Exchange Agent under the Indenture. The Company initially authorizes the
Trustee to act as Exchange Agent for the Debentures on its behalf. The Company
may at any time and from time to time authorize one or more Persons (including
the Company) to act as Exchange Agent in addition to or in place of the Trustee
with respect to the Debentures.
2
<PAGE> 5
"Exchange Date" shall mean, with respect to any Notice of Exchange, the
date on which the Notice of Exchange and all documents, instruments and payments
required to be tendered in connection with the related exchange have been
received by the Exchange Agent.
"Exchange Market Value" shall mean, for each Reference Share
attributable to the Debentures at the date of determination, (a) in the case of
a Notice of Exchange delivered to the Exchange Agent prior to March 14, 2002,
the Closing Price for such Reference Share on the twentieth Trading Day
following the Exchange Date (unless more than $1,000,000 aggregate Original
Principal Amount of Debentures have been validly tendered for exchange on such
date, in which case Exchange Market Value shall mean the average of the Closing
Prices for such Reference Share over the five Trading Day period ending on the
twentieth Trading Day immediately following the Exchange Date); and (b) in the
case of a Notice of Exchange delivered to the Exchange Agent on or after March
14, 2002, the Closing Price for such Reference Share on the Trading Day
following the Exchange Date (unless more than $1,000,000 aggregate Original
Principal Amount of Debentures have been validly tendered for exchange on such
date, in which case the Exchange Market Value shall mean the average of the
Closing Prices for such Reference Share over the five Trading Day period
immediately following the Exchange Date). The aggregate Exchange Market Value of
the Reference Shares attributable to any Debenture for which a Notice of
Exchange is delivered to the Trustee shall equal the sum of the Exchange Market
Values of the Reference Shares attributable to such Debenture.
"Extraordinary Additional Distribution" shall mean any Additional
Distribution other than a Regular Additional Distribution, whether of cash or
property; provided that in the event of a Reference Share Offer, the amount of
the Extraordinary Additional Distribution on each Debenture in respect of such
Reference Share Offer shall equal the portion of the Average Transaction
Consideration deemed to be received on the Reference Shares of the class or
series subject to the Reference Share Offer attributable to such Debenture
(immediately prior to giving effect to the Reference Share Proportionate
Reduction relating to that Reference Share Offer) other than the portion of the
Average Transaction Consideration that consists of Common Equity Securities,
which themselves become part of the Reference Shares as a result of the
Reference Share Offer Adjustment.
"Extraordinary Distribution" shall mean any Reference Share
Distribution other than a Regular Cash Dividend.
"Final Period Distribution" shall mean, for each Debenture, (a) all
Regular Cash Dividends on any Reference Shares attributable to such Debenture
for which the ex-dividend date has occurred but which, at the date of
determination, have not been received by the holders of such Reference Shares
and (b) all Extraordinary Distributions on any Reference Shares attributable to
such Debenture for which the ex-dividend date has occurred but which, at the
date of determination, have not been received by the holders of such Reference
Shares, but only to the extent that the value of such Extraordinary
Distributions (determined in accordance with Section 206(d) or (e)) exceeds the
Adjusted Principal Amount of such Debenture.
"Interest Payment Date" shall have the meaning assigned to it in
Section 205.
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"Maturity Repayment Amount" shall have the meaning assigned to it in
the form of Debenture attached hereto as Exhibit A.
"Notice of Exchange" shall mean the notice of exchange given to the
Exchange Agent by a Holder of its request to exchange Debentures pursuant to
Section 209(c).
"Optional Redemption" shall mean any redemption of the Debentures, in
whole or in part, at the option of the Company pursuant to Section 208(a).
"Original Principal Amount" shall mean the face value of $1,000
principal amount per Debenture.
"Reference Company" shall mean Sprint Corporation, for so long as any
Reference Shares are Sprint PCS Stock, and any other issuer of a Reference
Share.
"Reference Share" shall initially mean one share of Sprint PCS Stock;
and after the date hereof shall mean and include each share or fraction of a
share of Common Equity Securities received by a holder of a Reference Share in
respect of that Reference Share, and, to the extent the Reference Share remains
outstanding after any of the following events but without duplication, including
the Reference Share outstanding immediately prior thereto, in each case directly
or as the result of successive applications of this paragraph upon any of the
following events: (i) a distribution on or in respect of a Reference Share, made
in Reference Shares; (ii) the combination of a Reference Share into a smaller
number of shares or other units; (iii) the subdivision of outstanding shares or
other units of a Reference Share; (iv) the conversion or reclassification of a
Reference Share by issuance or exchange of other Common Equity Securities; (v)
any Common Equity Securities issued for a Reference Share in any consolidation
or merger of a Reference Company, or any surviving entity or subsequent
surviving entity of a Reference Company (referred to herein as a "Reference
Company Successor"), with or into another entity (other than any Common Equity
Securities issued in connection with (A) a Reference Share Offer or (B) a merger
or consolidation in which (x) the Reference Company is the continuing
corporation and in which the Reference Shares outstanding immediately prior to
the merger or consolidation issued by such Reference Company are not exchanged
for cash, securities or other property of the Reference Company or another
corporation or (y) an election is given as to the consideration to be received
by a holder of such Reference Shares); (vi) any Common Equity Securities issued
in exchange for a Reference Share in any statutory exchange of securities of a
Reference Company or any Reference Company Successor with another corporation
(other than any Common Equity Securities issued in connection with (A) a
Reference Share Offer or (B) a statutory exchange of securities in which (x) the
Reference Company is the continuing corporation and in which the Reference
Shares outstanding immediately prior to the statutory exchange issued by such
Reference Company are not exchanged for cash, securities or other property of
the Reference Company or another corporation or (y) an election is given as to
the consideration to be received by a holder of such Reference Shares); (vii)
any Common Equity Securities issued with respect to a Reference Share in
connection with any liquidation, dissolution or winding up of the Reference
Company or any Reference Company Successor; and (viii) any Common Equity
Securities received in exchange for a Reference Share as part of the Average
Transaction Consideration deemed received in any Reference Share Offer. For
purposes of this definition, (I) a conversion or redemption by Sprint
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Corporation of all shares of Sprint PCS Stock pursuant to Article Sixth, Section
7.1 of its Articles of Incorporation shall be deemed a consolidation or merger;
and (II) a redemption by Sprint Corporation pursuant to Article Sixth, Section
7.2 of its Articles of Incorporation of all of the outstanding shares of Sprint
PCS Stock in exchange for common stock of one or more wholly-owned subsidiaries
that collectively hold all of the assets and liabilities attributed to its PCS
Group shall be deemed a statutory exchange of shares of Sprint PCS Stock for
shares of common stock of the relevant subsidiary or subsidiaries; provided,
however, that if there is an election given to holders of Sprint PCS Stock in
connection with any such conversion or redemption, the transaction shall be
deemed a Reference Share Offer.
"Reference Share Distribution" shall mean any dividend or distribution
on or in respect of a Reference Share, including payments and distributions in
connection with (i) the consolidation or merger of a Reference Company or
Reference Company Successor, a statutory exchange of securities of a Reference
Company or Reference Company Successor or a liquidation or dissolution of a
Reference Company or Reference Company Successor or (ii) any Reference Share
Offer, but shall not include any dividend or distribution made in the form of
additional Reference Shares.
"Reference Shares Eligibility Date" shall mean March 14, 2002.
"Reference Share Offer" shall mean any tender offer or exchange offer
made for 30% or more of the outstanding shares of a class or series of Reference
Shares of a Reference Company or any consolidation, merger or statutory exchange
involving a class or series of Reference Shares of a Reference Company in which
an election is given to holders of such Reference Shares as to the consideration
to be received in the transaction. A "Reference Share Offer" shall include a
conversion or redemption by Sprint Corporation of less than all shares of Sprint
PCS Stock pursuant to Article Sixth, Section 7.1 of its Articles of
Incorporation or any conversion or redemption by Sprint Corporation of all
shares of Sprint PCS Stock pursuant to Article Sixth, Section 7.1 or Section 7.2
of its Articles of Incorporation in which a holder of Sprint PCS Stock is given
an election as to the consideration that he or she may receive.
"Reference Share Offer Adjustment" shall mean (a) an adjustment to the
Reference Shares attributable to each Debenture to include the portion of the
Average Transaction Consideration received in a Reference Share Offer that
consists of Reference Shares and (b) a reduction in the number of Reference
Shares attributable to each Debenture prior to such Reference Share Offer by the
Reference Share Proportionate Reduction.
"Reference Share Proportionate Reduction" shall mean a proportionate
reduction in the number of Reference Shares of the class or series of Reference
Shares which are the subject of the applicable Reference Share Offer and
attributable to each Debenture, calculated in accordance with the following
formula:
[OBJECT OMITTED]
where:
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<PAGE> 8
R = the fraction by which the number of Reference Shares of the
class or series of Reference Shares subject to the Reference
Share Offer and attributable to each Debenture will be
reduced;
X = the aggregate number of Reference Shares of the class or
series of Reference Shares subject to the Reference Share
Offer accepted in the Reference Share Offer; and
N = the aggregate number of Reference Shares of the class or
series of Reference Shares subject to the Reference Share
Offer outstanding immediately prior to the expiration of the
Reference Share Offer.
"Regular Additional Distribution" shall mean any Additional
Distribution as a result of a Reference Share Distribution that consists of a
Regular Cash Dividend.
"Regular Cash Dividend" shall mean any cash dividend declared by a
Reference Company on its Reference Shares in accordance with the Reference
Company's publicly announced regular common equity dividend policy.
"Securities Exchange Act" shall mean the United States Securities
Exchange Act of 1934, as amended.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on, and any other payment due pursuant to, any of the following,
whether outstanding on the date the Debentures are issued or incurred by the
Company in the future:
(a) all of the Company's indebtedness for money borrowed,
including any indebtedness secured by a mortgage or other lien
which is (1) given to secure all or part of the purchase price
of property subject to the mortgage or lien, whether given to
the vendor of that property or to another lender, or (2)
existing on property at the time the Company acquires it;
(b) all of the Company's indebtedness evidenced by notes,
debentures, bonds or other securities sold by the Company for
money;
(c) all of the Company's lease obligations which are capitalized
on the Company's books in accordance with generally accepted
accounting principles;
(d) all indebtedness of others of the kinds described in (a) and
(b) above and all lease obligations of others of the kind
described in (c) above that the Company, in any manner, assume
or guarantee or that the Company in effect guarantee through
an agreement to purchase, whether that agreement is contingent
or otherwise; and
(e) all renewals, extensions or refundings of indebtedness of the
kinds described in (a), (b) or (d) above and all renewals or
extensions of leases of the kinds described in (c) or (d)
above;
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unless, in the case of any particular indebtedness, lease, renewal, extension or
refunding, the instrument or lease creating or evidencing it or the assumption
or guarantee relating to it expressly provides that such indebtedness, lease,
renewal, extension or refunding is not superior in right of payment to the
Debentures. The Company's senior Debt Securities issued under the Original
Indenture constitute Senior Indebtedness for purposes of the Debentures.
Senior indebtedness does not include:
(a) any indebtedness of the Company or of any Restricted
Subsidiary to the Company or another Restricted Subsidiary;
(b) any guarantee by the Company or any Restricted Subsidiary of
indebtedness of the Company or another Restricted Subsidiary;
(c) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such
liabilities);
(d) letters of credit, performance bonds and similar obligations
issued in favor of governmental or franchising authorities as
a term of a cable television franchise or other governmental
franchise, license, permit or authorization held by the
Company or any of its Subsidiaries; and
(e) the Company's Exchangeable Subordinated Debentures due 2029
(the "PRIZES"), which rank pari passu with the Debentures.
"Sprint Corporation" shall mean Sprint Corporation, a Kansas
corporation.
"Sprint PCS Stock" shall mean the Sprint Corporation PCS common
stock-Series 1, par value $1.00 per share.
"Tracking Stock" shall mean an equity security which tracks the
performance of one or more subsidiaries or a distinct line of business of the
issuer of such equity security.
"Trading Day" shall mean (i) where the Closing Price of a security is
to be determined, a day on which the security (a) is not suspended from trading
or quotation at the close of business on the national or regional securities
exchange, the National Market System or over-the-counter market that is the
primary market for the trading or quotation of that security and (b) has traded
or been quoted at least once on the national or regional securities exchange,
the National Market System or over-the-counter market that is the primary market
for the trading or quotation of that security, and (ii) for any other purpose
under this Second Supplemental Indenture, any day on which the Nasdaq National
Market and the New York Stock Exchange are open for the transaction of business.
"Yield Adjustment" shall mean any adjustment required to be made to
the Adjusted Principal Amount on any Interest Payment Date following any
Extraordinary Additional Distribution (except for the Interest Payment Date
immediately following such Extraordinary Additional Distribution) so that the
interest payment on such Interest Payment Date does not
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represent an annualized yield in excess of 3% on the Adjusted Principal Amount
of the Debentures during the semi-annual period immediately preceding such
Interest Payment Date.
Section 102. Section References.
Each reference to a particular section set forth in this Second
Supplemental Indenture shall, unless the context otherwise requires, refer to
this Second Supplemental Indenture.
Section 103. Conflict with Original Indenture.
To the extent that any of the terms set forth in this Second
Supplemental Indenture or the certificates representing the Debentures shall
conflict with any of the terms of the Original Indenture, the terms of this
Second Supplemental Indenture and the certificates representing the Debentures
shall be controlling with respect to the Debentures.
Article Two
TITLE AND TERMS OF THE SECURITIES
Section 201. Title of the Securities.
The title of the Securities of the series established hereby is the "3%
Exchangeable Subordinated Debentures due 2030."
Section 202. Amount.
The aggregate Original Principal Amount of the Debentures which may be
authenticated and delivered under the Indenture is initially limited to
$335,366,000, except for Debentures authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other Debentures
pursuant to Section 2.07, 2.08, 2.09 or 9.04 of the Original Indenture;
provided, however, that the series of Securities established hereby may be
reopened, without the consent of the Holders of Outstanding Debentures, for
issuance of additional Debentures.
Section 203. Registered Securities.
The certificates for the Debentures shall be Registered Securities and
shall be in substantially the form attached hereto as Exhibit A, and shall bear
the legends as are inscribed thereon.
Section 204. Stated Maturity; Changes to Original Principal Amount or
Adjusted Principal Amount.
(a) The Stated Maturity of the principal of the Debentures shall be March
14, 2030.
(b) Not less than 30 Business Days prior to the Stated Maturity of the
principal of the Debentures, the Company shall issue a press release and provide
it to DTC for dissemination through the DTC broadcast facility, as to whether or
not the Company will deliver, or cause to be delivered, Reference Shares in
exchange for any Debentures submitted for exchange, in
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accordance with Section 209, from the date of such notice through 5:00 p.m., New
York City time, on the Trading Day next preceding such Stated Maturity. If
Reference Shares are to be delivered in connection with any such exchange,
Debentures validly exchanged during that period in accordance with Section 209
will be exchanged for the Reference Shares attributable to such Debentures, and
the Company shall pay at Stated Maturity to Holders that do not exchange their
Debentures an amount, in cash, determined in the same manner as the Redemption
Price is determined in Section 208(a)(ii) (substituting the term "Stated
Maturity" for "Redemption Date" therein), in full payment for such Debentures.
If Reference Shares are not to be delivered in connection with any such
exchange, the exchange right set forth in Section 209 will terminate as of the
30th Business Day prior to the Stated Maturity of the principal of the
Debentures and the Company shall pay at Stated Maturity to Holders of Debentures
an amount, in cash, determined in the same manner as the Redemption Price is
determined in Section 208(a)(i)(B) (substituting the term "Stated Maturity" for
"Redemption Date" therein), in full payment for such Debentures. Any notice by
the Company as to whether or not it will deliver Reference Shares in exchange
for Debentures pursuant to this Section 204(b) shall be irrevocable.
(c) The principal amount of each Debenture shall initially equal the
Original Principal Amount. Thereafter, the principal amount of each Debenture,
as of any date of determination, shall equal the Adjusted Principal Amount. In
calculating the Adjusted Principal Amount, (i) the value of any Extraordinary
Additional Distribution shall be subtracted as of the date it is distributed to
holders of the Debentures, and (ii) the amount of each Yield Adjustment shall be
subtracted on the Interest Payment Date to which such Yield Adjustment relates.
In no event will the Adjusted Principal Amount be less than zero.
(d) At least five Business Days prior to the Stated Maturity of the
principal of Debentures, the Company shall deliver an Officers' Certificate to
the Trustee which: (i) sets forth the amount to be paid in accordance with
Section 204(b) at such Stated Maturity for each Debenture and for all Debentures
then Outstanding, (ii) sets forth a reasonably detailed calculation of such
amounts, and (iii) directs the Trustee to adjust its records accordingly and to
request the Depository to adjust its records accordingly. At or prior to 10:00
a.m., New York City time, on the date of Stated Maturity of the principal of the
Debentures, the Company shall deposit with the Trustee or with a Paying Agent
(or, if the Company is acting as its own Paying Agent, segregate and hold in
trust as provided in Section 3.03 of the Original Indenture) an amount in cash
sufficient to pay, in accordance with Section 204(b), the amount due on all
Debentures that are Outstanding at 5:00 p.m., New York City time, on the date of
such Stated Maturity.
(e) In the event of an acceleration of maturity of the Debentures pursuant
to Section 6.01 of the Original Indenture (as modified by Section 217 hereof),
there shall become immediately due and payable an amount equal to the sum of (1)
the greater of (a) the Adjusted Principal Amount of the Debentures then
Outstanding and (b) the Current Market Value of the Reference Shares
attributable to the Debentures, (2) any accrued and unpaid interest on the
Debentures and (3) subject to Section 211, any Final Period Distribution on the
Debentures, determined as if (i) in the case of an Event of Default specified in
clause (g) or (h) of Section 6.01 of the Original Indenture, the date of such
Event of Default were the Stated Maturity of the principal of the Debentures and
(ii) in the case of any other Event of Default, the date of declaration of
acceleration were the Stated Maturity of the principal of the Debentures.
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Section 205. Interest.
(a) The Debentures shall bear interest from March 14, 2000 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually on March 14 and September 14 of each year (each, an
"Interest Payment Date"), commencing September 14, 2000, to the Persons in whose
names the Debentures (or one or more Predecessor Securities) are registered at
the close of business on the March 1 or September 1 immediately preceding such
Interest Payment Date. Calculations of interest on each Debenture shall be based
on the Original Principal Amount, without regard to changes in the Adjusted
Principal Amount.
(b) Interest on the Debentures will accrue at the rate of 3% per annum of
the Original Principal Amount, without regard to changes in the Adjusted
Principal Amount, until the principal thereof is paid or made available for
payment.
Section 206. Additional Distributions.
(a) The Company shall distribute, or cause to be distributed, as an
Additional Distribution to all Holders of Debentures, any Reference Share
Distribution received by holders of Reference Shares, or the cash value thereof,
in accordance with this Section 206.
(b) In the case of any Regular Cash Dividend, the Company shall pay, to the
Holder of each Debenture, as a Regular Additional Distribution, the amount of
cash received by a holder of the number of Reference Shares attributable to such
Debenture in respect of such Regular Cash Dividend. Such payment shall be made
by the Company on the next Interest Payment Date to Holders of Debentures as of
5:00 p.m., New York City time, on the Regular Record Date for such Interest
Payment Date. (c) In the case of any Extraordinary Dividend, the Company shall
deliver, to the Holder of each Debenture, as an Extraordinary Additional
Distribution, all dividends and distributions, or the fair market value thereof
(determined in accordance with Section 206(d) or (e)), received by a holder of
the number of Reference Shares attributable to such Debenture in respect of such
Extraordinary Dividend. Any distribution pursuant to this subsection (c) shall
be made by the Company to Holders of Debentures as of a special record date
which shall be the 10th Business Day after the date of the payment of the
Extraordinary Distribution by the applicable Reference Company, and shall be
distributed to such Holders on the 10th Business Day following such special
record date.
(d) If an Extraordinary Distribution consists of securities or units that
are Marketable Securities (other than securities which are, or become, Reference
Shares), such securities or units will be distributed by the Company to Holders
of the Debentures in accordance with Section 206(c); provided, that the Company
shall not distribute fractional securities or units. In lieu of fractional
securities or units, the Company shall pay the Holders of Debentures an amount
in cash equal to the Closing Price, as of the special record date, of the
security or unit to be distributed multiplied by such fractional interest. For
purposes of determining the existence of fractional interests, all Debentures
held by a Holder shall be considered together (no matter how many separate
certificates such Holder may have). In the event the Company is unable to
distribute any securities or units as part of an Extraordinary Additional
Distribution because any
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necessary qualifications or registrations of such securities or units under
applicable state or federal securities laws cannot be obtained on a timely
basis, the Company may instead deliver, in lieu of such securities or units,
cash based on the average of the Closing Prices of such securities or units over
the five Trading Days ending on the Trading Day next preceding the distribution
by the Company of such Extraordinary Additional Distribution.
(e) If an Extraordinary Distribution consists of cash, assets or property
other than securities or units that are Marketable Securities, the Company shall
pay to Holders of the Debentures an amount of cash equal to the fair market
value thereof; such fair market value to be determined as of the date such
Extraordinary Distribution is made or paid to holders of the applicable
Reference Shares. Such fair market value shall be equal to the amount determined
in good faith by the Board of Directors, unless the Board of Directors
determines in good faith that there is a substantial likelihood that the
aggregate fair market value will be in excess of $100,000,000, in which case
such fair market value shall be determined by a nationally recognized investment
banking or appraisal firm retained by the Company for this purpose. The fair
market value so determined shall be set forth in a Board Resolution or, in the
case of a determination by an investment banking or appraisal firm, an Officers'
Certificate.
(f) At least five Business Days prior to the payment or delivery of an
Extraordinary Additional Distribution by the Company pursuant to Section 206(c),
the Company shall deliver to the Trustee a Board Resolution setting a special
record date for such Extraordinary Additional Distribution and an Officers'
Certificate setting forth: (i) the exact amount of Marketable Securities or cash
to be distributed on or with respect to the Reference Shares attributable to
each Debenture, and (ii) the total amount of Marketable Securities or cash to be
distributed on or with respect to the Reference Shares attributable to all
Debentures that are Outstanding as of such special record date. If any
distribution relates to any assets or other property that is not publicly
traded, then at least five Business Days prior to such distribution, the Company
shall deliver to the Trustee: (A) a Board Resolution establishing the fair
market value of the assets or other property, unless such fair market value is
determined by a nationally recognized investment banking or appraisal firm, in
which case the Company shall deliver to the Trustee the report of such firm and
(B) an Officers' Certificate setting forth (I) the exact amount of cash to be
distributed on or with respect to the Reference Shares attributable to each
Debenture and (II) the total amount of cash to be distributed on or with respect
to the Reference Shares attributable to all Debentures that are Outstanding as
of such special record date in respect of any assets or other property that is
not publicly traded. The Trustee is only responsible for distributing Marketable
Securities in the form of global book entry securities that are DTC eligible. At
or prior to 10:00 a.m., New York City time, on the date an Extraordinary
Additional Distribution is to be made pursuant to Section 206(c), the Company
shall (x) in the case of an Extraordinary Additional Distribution consisting of
cash, deposit with the Trustee or with a Paying Agent an amount of cash equal to
the Extraordinary Additional Distribution to be paid on such date and (y) in the
case of an Extraordinary Additional Distribution consisting of Marketable
Securities, transfer by book-entry to the account of the Trustee or a Paying
Agent at DTC (or any successor Depository) the amount of Marketable Securities
to be distributed in such Extraordinary Additional Distribution on such date.
The Company shall act as its own Paying Agent for any Marketable Securities to
be delivered other than through book-entry. The Company shall issue a press
release setting forth the amount and composition, per Debenture, of any
Extraordinary
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Additional Distribution and the Adjusted Principal Amount thereof, and shall
deliver such press release to DTC for dissemination through the DTC broadcast
facility.
Section 207. Registration, Transfer and Exchange.
The principal of and interest on the Debentures shall be payable and
the Debentures may be surrendered or presented for payment, the Debentures may
be surrendered for registration of transfer or exchange, and notices and demands
to or upon the Company in respect of the Debentures and the Indenture may be
served, at the office or agency of the Company maintained for such purposes in
The City of New York, from time to time, and the Company hereby appoints the
Trustee, acting through its office or agency in The City of New York designated
from time to time for such purpose, as its agent for the foregoing purposes;
provided, however, that, at the option of the Company, payment of interest on
the Debentures may be made by check mailed to the address of the Persons
entitled thereto, as such addresses shall appear in the Security Register; and
provided, further, that (subject to Section 4.02 of the Original Indenture) the
Company may at any time remove the Trustee as its office or agency in The City
of New York designated for the foregoing purposes and may from time to time
designate one or more other offices or agencies for the foregoing purposes and
may from time to time rescind such designations.
Section 208. Redemption of the Debentures.
(a) Optional Redemption. The Debentures will be redeemable at the option of
the Company, in whole or in part at any time or from time to time after March
17, 2004, on at least 30 Business Days (but not more than 60 days) prior notice
to Holders of the Debentures. In the notice of redemption, the Company shall
specify its irrevocable election of one of the following options (each, a
"Redemption Price"):
(i) to terminate Holders' right to exchange, in accordance with Section
209, Debentures called for redemption (but not affecting the exchange
rights of Holders of any Debentures not called for redemption), in
which case (A) no further exchange of such Debentures called for
redemption pursuant to Section 209 will be permitted on or after the
30th Business Day preceding the Redemption Date and (B) on the
Redemption Date, the Company shall pay Holders, for each Debenture to
be redeemed, a Redemption Price, in cash, equal to the sum of (1) the
greater of (a) the Adjusted Principal Amount of such Debenture as of
the Redemption Date and (b) 100% of the Current Market Value of the
Reference Shares attributable to such Debenture, (2) any accrued and
unpaid interest on such Debenture to the Redemption Date and (3)
subject to Section 211, any Final Period Distribution on such
Debenture; or
(ii) to exchange Debentures surrendered at the option of Holders in
accordance with Section 209, for Reference Shares until 5:00 p.m., New
York City time, on the Trading Day next preceding the Redemption Date,
in which case on the Redemption Date the Company shall pay Holders who
do not elect to exchange Debentures for Reference Shares in accordance
with Section 209(c), for each Debenture to be redeemed, a Redemption
Price, in cash, equal to the sum of (1) the Adjusted Principal Amount
of such Debenture at the Redemption Date, (2) any accrued and unpaid
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interest on such Debenture to the Redemption Date and (3) subject to
Section 211, any Final Period Distribution on such Debenture.
(b) Notices. In case of any redemption, the Company shall deliver an
Officers' Certificate to the Trustee not less than five Business Days prior to
the Redemption Date which sets forth (i) the Redemption Price to be paid for
each Debenture called for redemption on such Redemption Date and (ii) the
aggregate amount payable for all Debentures called for redemption on such
Redemption Date.
(c) Interest Accrual to Cease. Once notice of redemption has been given and
funds are irrevocably deposited with the Trustee, interest on the Debentures
will cease to accrue on and after the Redemption Date and all rights of the
Holders of the Debentures called for redemption will cease, except for the right
of Holders to receive the Redemption Price (but without interest on such
Redemption Price) and any right to receive payment pursuant to Section 211.
(d) Payment Failure. In the event that the Company fails to pay any amount
due on redemption of the Debentures on a Redemption Date, interest on the
Debentures called for redemption shall continue to accrue at an annual rate of
3% of the Original Principal Amount thereof from the date originally set for
redemption to the actual date of payment, and such actual date of payment shall
be deemed to be the Redemption Date for purposes of calculating the amount to be
paid to the Holders of Debentures on redemption, except that the amount of the
Final Period Distribution shall be determined as of the date originally set for
redemption.
Section 209. Exchange of the Debentures.
(a) Each Debenture will be exchangeable at the option of the Holder at any
time (except as otherwise provided in subsection (f) below) for the Exchange
Market Value of the Reference Shares attributable to that Debenture. The number
of Reference Shares attributable to each Debenture initially shall be 16.28
shares of Sprint PCS Stock, subject to adjustment as a result of any Reference
Share Proportionate Reduction or any other adjustment contemplated by the
definition of "Reference Shares."
(b) The Company shall pay 100% of the Exchange Market Value of the
Reference Shares attributable to each Debenture, only in cash, for all exchanges
made prior to the Reference Shares Eligibility Date. On and after the Reference
Shares Eligibility Date, the Company may, at its option, (i) pay 100% of the
Exchange Market Value of the Reference Shares attributable to each Debenture in
cash; (ii) deliver the Reference Shares attributable to such Debenture in
payment of such Exchange Market Value; or (iii) deliver a combination of
Reference Shares and cash. Such payment or delivery will be made as promptly as
practicable, but in any event within ten Trading Days after the date of
determination of the Exchange Market Value. The Company shall notify the
Exchange Agent of its election to pay cash or deliver Reference Shares, or a
combination of the foregoing, by no later than 9:30 a.m., New York City time, on
the Trading Day next following the applicable Exchange Date. The Exchange Agent
shall notify an exchanging Holder of the Company's election under this Section
209(b) prior to 10:00 a.m., New York City time, on the next Trading Day after
the Exchange Date.
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(c) To exchange a Debenture a Holder must (a) in the case of a Debenture
held through the Depository, surrender such Debenture for exchange through
book-entry transfer into the account of the Exchange Agent, transmit an agent's
message requesting such exchange and comply with such other procedures of the
Depository as may be applicable in the case of an exchange and (b) in the case
of a Debenture held in certificated form, (i) complete and manually sign the
Notice of Exchange attached to the Debenture (or complete and sign a facsimile
of the Notice of Exchange) and deliver such Notice of Exchange to the Exchange
Agent, (ii) surrender the Debenture to the Exchange Agent, (iii) furnish
appropriate endorsements and transfer documents, if required by the Exchange
Agent, the Company or the Trustee and (iv) pay any transfer or similar tax, if
required. An exchange shall be deemed to have been effected at 5:00 p.m., New
York City time, on the Exchange Date. The delivery of a Notice of Exchange or,
in the case of book-entry, an agent's message requesting exchange, shall be
irrevocable. A Holder may exchange a portion of its Debentures only if the
portion is $1,000 Original Principal Amount or an integral multiple thereof.
Following the Exchange Date for an exchange of Debentures, all rights of the
Holder with respect to such Debentures shall cease, except for the right of such
Holder to receive the consideration specified in Section 209(b) (but without
interest thereon).
(d) As soon as practicable on each Trading Day following receipt by the
Exchange Agent of notification from DTC that DTC has received an agent's message
from a DTC participant electing to exercise its exchange option with respect to
its Debentures, and delivery of such Debentures into the Exchange Agent's DTC
participant account, or following receipt of a complete manually signed Notice
of Exchange and receipt of certificated Debentures from a Holder, the Exchange
Agent shall notify the Company of the principal amount of Debentures which has
been tendered. When the Exchange Market Value has been determined, the Company
shall deliver an Officers' Certificate to the Trustee setting forth the exact
amount to be paid or the amount of Reference Shares to be delivered to the
tendering Holder and shall deposit such amount with the Exchange Agent (except
that if the Company elects to deliver Reference Shares in certificated form, the
Company shall act as its own Paying Agent as to such shares). Upon receipt of
such payment or delivery from the Company, the Exchange Agent shall pay DTC as
soon as practicable or, in the cases of Debentures that are held in certificated
form, as directed by the tendering Holder. Where the Company acts as its own
Paying Agent with respect to certificated Reference Shares, it shall deliver
them (i) as directed by the relevant participants of the Depositary, as
identified by the Depositary, or (ii) to or at the direction of tendering
Holders of Debentures.
(e) In the case of any exchange made during the period from (but excluding)
a Regular Record Date for any Interest Payment Date to (but excluding) such
Interest Payment Date, the Holder shall tender funds equal to the interest and
any Additional Distribution payable on such Interest Payment Date.
(f) The right to exchange Debentures pursuant to this Section 209 shall
terminate at 5:00 p.m., New York City time, (i) in the case of Stated Maturity
of the principal amount of the Debentures, on the Trading Day immediately
preceding such Stated Maturity and (ii) in the case of an optional redemption,
on the Trading Day immediately preceding the Redemption Date. A Holder's right
to exchange Debentures under this Section 209 shall further be subject to
termination by the Company (i) in connection with the payment of the Debentures
at Stated
14
<PAGE> 17
Maturity, during the period set forth in the penultimate sentence of Section
206(b) and (ii) in connection with optional redemption, during the period set
forth in clause (i) of Section 208(a), provided, that any such termination shall
only apply to Debentures that have been called for redemption.
(g) If more than $1,000,000 aggregate Original Principal Amount of
Debentures are tendered for exchange on any given date, the Company shall give
notice of such event to the Trustee and the Trustee shall give notice thereof to
DTC for distribution through its broadcast facility.
Section 210. Distributions of Reference Shares or Other Securities.
(a) The Company will pay any and all documentary, stamp, transfer or
similar taxes that may be payable in respect of the transfer and delivery of
Reference Shares or in connection with an Extraordinary Additional Distribution
pursuant hereto; provided, however, that the Company shall not be required to
pay any such tax which may be payable in respect of any transfer involved in
delivery of such property to a name other than that in which the Debentures were
registered, and no such transfer or delivery shall be made unless and until the
Person requesting such transfer has paid to the Company the amount of any such
tax, or has established, to the satisfaction of the Company, that such tax has
been paid.
(b) The Company hereby warrants that upon delivery of any Reference Shares
or any securities in connection with any Extraordinary Additional Distribution
pursuant to this Supplemental Indenture, the Holder of a Debenture shall receive
all rights held by the Company in the securities to be delivered, free and clear
of any and all liens, claims, charges and encumbrances, other than any liens,
claims, charges and encumbrances which may have been placed thereon by the prior
owner thereof prior to the time acquired by the Company. In addition, the
Company further warrants that any securities to be delivered hereunder shall be
free of any transfer restrictions under federal or state securities laws (other
than such as are attributable to any Holder's status as an affiliate of the
issuer of such securities).
Section 211. Balance of Final Period Distribution Payment.
(a) In the case of a Final Period Distribution within the meaning of clause
(b) of the definition of "Final Period Distribution," the Company shall pay such
Final Period Distribution to the Holders of Debentures that have been repaid in
accordance with the first sentence of Section 204(b) or redeemed in accordance
with Section 208(a)(ii) as of a special record date which shall be the 10th
Business Day after the date of the payment of the relevant Extraordinary
Distribution by the applicable Reference Company; and such payment shall be
distributed on the 10th Business Day following such special record date. The
Company shall give notice regarding such distribution to the Trustee in
accordance with the provisions of Section 206(f).
(b) In the event that the applicable Reference Company fails to make the
Extraordinary Distribution referred to in subsection (a) above at the time or in
the amount expected, the Company shall pursue any claim it has against such
Reference Company, whether as a securityholder or otherwise, on behalf of the
Holders of Debentures. Reasonable costs of
15
<PAGE> 18
such actions by the Company may be deducted from the amount of any Extraordinary
Distribution before any distribution is made to Holders of Debentures pursuant
to Section 211(a).
Section 212. Denominations.
The Debentures shall be issued in denominations of $1,000 and integral
multiples in excess thereof.
Section 213. Applicability of Certain Original Indenture Provisions.
(a) Sections 11.01, 11.02 and 11.03 of the Original Indenture, relating to
defeasance and covenant defeasance, shall not be applicable to the Debentures.
(b) Sections 4.08 and 4.09 of the Original Indenture shall not be
applicable to the Debentures.
Section 214. Security Registrar, Paying Agent and Exchange Agent.
The Trustee shall be the initial Paying Agent, initial Exchange Agent
and initial transfer agent for the Debentures (subject to the Company's right
(subject to Section 4.02 of the Original Indenture) to remove the Trustee as
such Paying Agent, Exchange Agent and/or transfer agent and, from time to time,
to designate one or more co-registrars and one or more other Paying Agents,
Exchange Agents and transfer agents and to rescind from time to time any such
designations), and The City of New York is designated as a Place of Payment for
the Debentures.
Section 215. Global Debentures.
(a) The Debentures shall be issued in the form of one or more temporary or
global Debentures. The initial Depository for the global Debentures shall be
DTC, and the depositary arrangements shall be those employed by whoever shall be
the Depositary with respect to the Debentures from time to time.
(b) The Debentures shall be issued in the form of permanent global
Debentures in definitive fully registered form without interest coupons,
substantially in the form of Exhibit A. Each global Debenture shall be deposited
on behalf of the purchasers of the Debentures represented thereby with the
custodian for the Depositary, and registered in the name of a nominee of the
Depositary, duly executed by the Company and authenticated by the Trustee as
provided in the Original Indenture. The aggregate principal amount of a
Debenture may from time to time be increased or decreased by adjustments made on
the records of the custodian for the Depositary or the Depositary or its
nominee, as the case may be.
(c) The global Debentures will be exchangeable for certificated Debentures
of like tenor and terms and of differing authorized denominations aggregating a
like principal amount, only if (i) the Depository notifies the Company that it
is unwilling or unable to continue as Depository for the global Debentures (ii)
the Depository ceases to be a clearing agency under the Securities Exchange Act,
(iii) the Company in its sole discretion determines that the global Debentures
shall be exchangeable for certificated Debentures or (iv) there shall have
occurred and be continuing an Event of Default under the Indenture with respect
to the Debentures. Upon
16
<PAGE> 19
such exchange, the certificated Debentures shall be registered in the names of
the beneficial owners of the global Debentures which they have replaced; such
names shall be provided to the Trustee by the relevant participants of the
Depository, as identified by the Depository.
Section 216. Sinking Fund.
The Debentures shall not be subject to any sinking fund or similar
provision and shall not be redeemable at the option of the holder thereof.
Section 217. Amendments to Certain Sections of the Original Indenture.
(a) The amendments to the Original Indenture contained in this Section 217
shall apply only to the series of Debentures established pursuant to this Second
Supplemental Indenture.
(b) Clause (a) of Section 6.01 of the Original Indenture is hereby amended
by adding the words "or distributions" following the word "interest" on the
second line thereof.
(c) A new clause (c) is hereby added to Section 6.01 of the Original
Indenture and supercedes and replaces clause (c) of the Original Indenture. New
clause (c) shall read as follows:
"(c) failure of the Company to comply with its
obligations to deliver cash or Reference Shares or any
combination thereof in exchange for Debentures pursuant to
Section 209 of the Second Supplemental Indenture;"
(d) The seventh line of the fourth paragraph of Section 6.01 of the
Original Indenture are hereby amended by adding the words "and distributions"
following the word "interest" in such line.
(e) Section 9.02 of the Original Indenture is hereby further amended by
adding a new clause (x), to read as follows:
"(x) reduce the amount of cash or Reference
Shares deliverable upon exchange of the
Debentures."
(f) Unless the context otherwise requires, all references to payment of
principal in the Original Indenture shall include the payment of the Maturity
Repayment Amount, and all references to payment of interest shall include
Additional Distributions.
Section 218. Ranking.
The Debentures are, to the extent provided herein and in the Original
Indenture, subordinate and subject in right of payment to the prior payment in
full of all Senior Indebtedness. The Debenture shall rank pari passu with the
PRIZES.
17
<PAGE> 20
Article Three
MISCELLANEOUS PROVISIONS
The Trustee makes no undertaking or representations in respect of, and
shall not be responsible in any manner whatsoever for and in respect of, the
validity or sufficiency of this Second Supplemental Indenture or the proper
authorization or the due execution hereof by the Company or for or in respect of
the recitals and statements contained herein, all of which recitals and
statements are made solely by the Company.
Except as expressly amended hereby, the Original Indenture shall
continue in full force and effect in accordance with the provisions thereof and
the Original Indenture is in all respects hereby ratified and confirmed. This
Second Supplemental Indenture and all its provisions shall be deemed a part of
the Original Indenture in the manner and to the extent herein and therein
provided.
This Second Supplemental Indenture shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
conflicts of laws principles thereof.
This Second Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
18
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the day and year first above
written.
COX COMMUNICATIONS, INC.
By: /s/ Dallas S. Clement
--------------------------------------------
Name: Dallas S. Clement
Title: Vice President and Treasurer
THE BANK OF NEW YORK, as Trustee
By: /s/ Annette Kos
--------------------------------------------
Name: Annette Kos
Title: Assistant Vice President
19
<PAGE> 22
EXHIBIT A
Form of Debenture
A-1
<PAGE> 23
THE SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITARY OR A
NOMINEE OF THE DEPOSITARY. UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART
FOR THE INDIVIDUAL DEBT SECURITIES REPRESENTED HEREBY, THIS GLOBAL SECURITY MAY
NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE
DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER
NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO COX COMMUNICATIONS,
INC. OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
No. R-1 $275,000,000
CUSIP No. 224044 AW 7
Cox Communications, Inc.
3% Exchangeable Subordinated Debentures due 2030
Cox Communications, Inc., a Delaware corporation (hereinafter called
the "Company," which term includes any successor corporation under the Indenture
referred to below), for value received, hereby promises to pay to Cede & Co., or
registered assigns, the amount provided in Section 204 of the Second
Supplemental Indenture referred to herein (such amount being referred to herein
as the Maturity Repayment Amount) on March 14, 2030, and to pay interest on the
Original Principal Amount of this Debenture from March 14, 2000, or from the
most recent date to which interest has been paid or provided for, semiannually
on March 14 and September 14 in each year (each, an "Interest Payment Date"),
commencing September 14, 2000, at the rate of 3% per annum, until the Maturity
Repayment Amount is paid or made available for payment. Interest on this
Debenture shall be calculated on the basis of a 360-day year consisting of
twelve 30-day months. The interest so payable and paid or provided for on any
Interest Payment Date will, as provided in such Indenture, be paid to the Person
in whose name this Debenture (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the March 1 or September 1 (whether or not a Business
Day), as the case may be, immediately preceding such Interest Payment Date. Any
such interest which is payable, but is not paid or provided for, on any Interest
Payment Date shall forthwith cease to be payable to the registered Holder hereof
on the relevant Regular Record Date by virtue of having been such Holder, and
may be paid to the Person in whose name this Debenture (or one or more
<PAGE> 24
Predecessor Securities) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be fixed by the
Company, notice whereof shall be given to the Holders of Debentures not less
than 10 days prior to such Special Record Date, or may be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Debentures may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in such Indenture.
Payment of the Maturity Repayment Amount and the interest on this
Debenture will be made at the office or agency of the Company maintained for
that purpose in The City of New York, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that, at the option of the Company,
interest may be paid by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register; provided,
further, that payment to DTC or any successor Depository may be made by wire
transfer to the account designated by DTC or such successor Depository in
writing.
This Debenture is one of a duly authorized issue of securities of the
Company (herein called the "Debentures") issued and to be issued in one or more
series under an Indenture dated as of June 27, 1995 (the "Original Indenture,"
and together with the Second Supplemental Indenture referred to below and all
other indentures supplemental thereto, the "Indenture") between the Company and
The Bank of New York, as Trustee (the "Trustee", which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Debentures, and of the terms upon which the
Debentures are, and are to be, authenticated and delivered. This Debenture is
one of the series designated on the face hereof, initially limited (subject to
exceptions provided in the Indenture) to the aggregate Original Principal Amount
specified in the Second Supplemental Indenture between the Company and the
Trustee, dated as of March 14, 2000, establishing the terms of the Debentures
pursuant to the Indenture (the "Second Supplemental Indenture").
The Debentures are, to the extent provided herein, in the Indenture and
in the Second Supplemental Indenture, subordinate and subject in right of
payment to the prior payment in full of all Senior Indebtedness (as defined in
the Second Supplemental Indenture), and each Holder of this Debenture by
accepting the same, agrees to and shall be bound by the provisions hereof, of
the Second Supplemental Indenture and of Article XII of the Original Indenture.
The Debentures are redeemable at the option of the Company, in whole or
in part at any time or from time to time on or after March 17, 2004, on the
terms set forth in Section 208(a) of the Second Supplemental Indenture.
The Debentures are exchangeable at the option of the Holders thereof,
on the terms set forth in Section 209 of the Second Supplemental Indenture.
If an Event of Default (as defined in the Indenture, including the
amendments thereto in the Second Supplemental Indenture) with respect to the
Debentures shall occur and be
<PAGE> 25
continuing, the principal of the Debentures may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Original Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities of
each series issued under the Indenture at any time by the Company and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the Securities at the time Outstanding of each series
affected thereby. The Original Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Securities
of any series at the time Outstanding, on behalf of the Holders of all
Securities of such series, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Debenture
shall be conclusive and binding upon such Holder and upon all future Holders of
this Debenture and of any Debentures issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Debenture or such Debentures.
No reference herein to the Indenture and no provision of this Debenture
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the Maturity Repayment Amount and interest
on this Debenture, at the times, place and rate, and in the coin or currency,
herein and in the Indenture prescribed.
The Original Indenture contains provisions for defeasance of (i) the
entire indebtedness of the Debentures and (ii) certain covenants and Events of
Default with respect to the Debentures, in each case upon compliance with
certain conditions set forth therein, which provisions shall not apply to the
Debentures. In addition, provisions for certain covenants specified in Sections
4.08 and 4.09 of the Original Indenture shall not be applicable to the
Debentures.
As provided in the Indenture and subject to certain limitations set
forth therein and in this Debenture, the transfer of this Debenture may be
registered on the Security Register upon surrender of this Debenture for
registration of transfer at the office or agency of the Company maintained for
the purpose in any place where the Maturity Repayment Amount and interest on
this Debenture are payable, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Security
Registrar duly executed by, the Holder hereof or by his attorney duly authorized
in writing, and thereupon one or more new Debentures of this series and of like
tenor, of authorized denominations and for the same aggregate Original Principal
Amount, will be issued to the designated transferee or transferees.
The Debentures are issuable only in registered form without coupons in
the denominations specified in the Second Supplemental Indenture establishing
the terms of the Debentures, all as more fully provided in the Indenture. As
provided in the Indenture, and subject to certain limitations set forth in the
Indenture and in this Debenture, the Debentures are exchangeable for a like
aggregate Original Principal Amount of Debentures of this series in different
authorized denominations, as requested by the Holders surrendering the same.
<PAGE> 26
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith, other than
in certain cases provided in the Indenture.
Prior to due presentment of this Debenture for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Debenture is registered as the owner
hereof for all purposes, whether or not this Debenture be overdue, and neither
the Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
This Debenture shall be governed by and construed in accordance with
the laws of the State of New York.
All terms used in this Debenture which are defined in the Original
Indenture or the Second Supplemental Indenture shall have the meanings assigned
to them in the Original Indenture or the Second Supplemental Indenture, as
applicable.
Unless the certificate of authentication hereon has been executed by or
on behalf of the Trustee under the Indenture by the manual signature of one of
its authorized signatories, this Debenture shall not be entitled to any benefits
under the Indenture or be valid or obligatory for any purpose.
<PAGE> 27
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
COX COMMUNICATIONS, INC.
By:
-----------------------------
Name: Dallas S. Clement
Title: Vice President and Treasurer
By:
-----------------------------
Name: Jimmy W. Hayes
Title: Executive Vice President
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Debentures of the series designated herein referred
to in the within-mentioned Indenture.
Dated: March 14, 2000 THE BANK OF NEW YORK,
as Trustee
By:
--------------------
Authorized Signatory
<PAGE> 28
CERTIFICATE OF TRANSFER
To transfer or assign this Debenture, fill in the form below:
I or we transfer and assign this Debenture to
- --------------------------------------------------------------------------------
(Insert assignee's tax I.D. number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or Type assignee's name, address and zip code)
and irrevocably appoint ________________ agent to transfer this Debenture on the
books of the Company. The agent may substitute another to act for him.
Date: Your signature:
-------------------- -----------------------
<PAGE> 29
SCHEDULE A
SCHEDULE OF EXCHANGES
The following exchanges of Debentures represented by this Debenture have been
made:
<TABLE>
<CAPTION>
- ------------------------- ---------------------- -----------------------
Original Principal Change in Original
Amount of this Principal Amount of
Debenture as of March Date exchange this Debenture due to
14, 2000 Made Exchange
<S> <C> <C>
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
$275,000,000
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ------------------------- ---------------------- -----------------------
- ---------------------- ======================
Original Principal
Amount of this
Debenture following
such exchange Notation made by
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
- ---------------------- ======================
</TABLE>
<PAGE> 30
ANNEX A
NOTICE OF EXCHANGE
The Bank of New York
101 Barclay Street
New York, NY 10286
Re: Premium PHONES - 3% Exchangeable Subordinated
Debentures due 2030 (the "Debentures")
Gentlemen:
The undersigned Holder of Debentures hereby gives notice of its
intention to exchange $______________ aggregate original principal amount of
Debentures. This notice, once delivered to the Exchange Agent, is irrevocable.
If Reference Shares or any other securities are to be delivered as part
of this exchange, they should be delivered to:
If cash is to be paid as part of this exchange, it should be sent to:
Any communication to the Holder in connection with this exchange should
be directed to:
[Holder's address]
Very truly yours,
[Name of Holder]
By:
---------------------------
Name:
Title:
Date of Notice of Exchange:
B-1
<PAGE> 1
EXHIBIT 13
SHAREHOLDER INFORMATION
Cox Communications, Inc.
Corporate Headquarters
Cox Communications, Inc.
1400 Lake Hearn Dr., NE
Atlanta, GA 30319
404-843-5000
www.cox.com
Stock Data
Cox's Class A Common Stock is traded on the New York Stock Exchange
Ticker symbol: COX
Daily newspaper stock table listing: CoxComm A
As of February 22, 2000, there were 7,285 shareholders of record of Cox's Class
A Common Stock, two shareholders of record of Class C Common Stock and two
shareholders of record 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 the company's
Annual Report on Form 10-K.
Quarterly Market Information
(Prices prior to second quarter 1999 have been adjusted to reflect a
two-for-one stock split effective in May 1999.)
<TABLE>
<CAPTION>
Class A Common Stock
--------------------
High Low
----- -----
1999
- --------------
<S> <C> <C>
First Quarter 41-9/32 32
Second Quarter 44-7/16 32-25/32
Third Quarter 42-1/4 34-1/4
Fourth Quarter 52 38-11/16
1998
- --------------
First Quarter 21-15/32 17-3/16
Second Quarter 24-3/4 20-13/16
Third Quarter 28-7/16 20-3/4
Fourth Quarter 35-3/8 23-17/32
</TABLE>
Transfer Agent and Registrar
First Chicago Trust Company of New York
Division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
800-519-3111
www.equiserve.com
email: [email protected]
<PAGE> 2
Annual Meeting of Shareholders
May 16, 2000, 9 a.m.
Cox Corporate Headquarters
1400 Lake Hearn Dr., NE
Atlanta, GA 30319
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 Dr., NE
Atlanta, GA 30319
Company Information
Cox Investor Hotline: 888-COX-NYSE (toll-free)
(888-269-6973)
All 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, 800-519-3111. Shareholders of record may
access their accounts via the Internet to obtain share balance, current market
price of shares, historical stock prices and the total value of their
investment. For information on how to access this secure site, call toll-free
877-843-9327. For Shareholders of record outside North America, call
201-536-8071
For other information, contact one of the following:
Analysts/Investors:
Mark Major, Assistant Treasurer, 404-843-5447, fax: 404-843-5939,
[email protected]
Frank Loomans, Financial Analyst, 404-843-5377, fax: 404-843-5939,
[email protected]
News Media:
Amy Cohn, Director of Corporate Communications, 404-843-5769, fax: 404-843-5777,
[email protected]
Independent Auditors
Deloitte & Touche LLP
191 Peachtree St., Suite 1500
Atlanta, GA 30303-1924
404-220-1500
Cox Communications
<PAGE> 3
Copyright 2000 Cox Communications, Inc. All rights reserved. Cox, Cox
Communications, the Cox Communications logo, Cox Digital Telephone, Cox Digital
Cable, Cox Express, Cox Business Services and Now You're Living are registered
service marks or service marks of Cox Communications, Inc. @Home Network is a
service mark of AtHome.Net. The @ ball is a registered trademark of At Home
Corporation. Road Runner is a registered service mark of Time Warner
Entertainment Company, L.P.
<PAGE> 1
EXHIBIT 21
COX COMMUNICATIONS, INC. AND SUBSIDIARIES
(as of March 17, 2000)
Cox Communications, Inc. (a Delaware corporation)
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. (a Delaware corporation)
CP Nevada, LLC
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
Cox Classic Cable, Inc. (a Delaware corporation)
Cablevision of Leander, Inc.
d/b/a Cox Communications, Inc.
Cablevision of Pflugerville, Inc.
d/b/a Cox Communications, Inc.
TAL Financial Corporation
MT Associates, Inc.
Sun Valley Cablevision, Inc.
TCA Cable TV of Missouri, Inc.
TCA Communications, Inc.
TCA Management Company
Telecable Associates, Inc.
Texas Community Antennas, Inc.
TCA Interests, LLC
TCA Holdings, L.P. (1% - TCA
Interests, LLC, general
Partner; 99% - TAL Financial
Corporation limited
partner)
d/b/a Cox Communications,
Inc.
<PAGE> 2
-2-
TCA Cable Partners (75% interest)
d/b/a Cox Communications, Inc.
Teleservice Corporation of America
TCA Interests II, Inc.
TCA Holdings II, L.P. (99% - TCA Interests
II, Inc., limited Partner; 1% - Telecable
Associates, Inc., general partner)
TCA Cable Partners II (80% interest)
VPI Communications, Inc.
Williamson County Cablevision Company
d/b/a Cox Communications, Inc.
Cox Trust I (a Delaware statutory business trust)
Cox Trust II (a Delaware statutory business trust)
Cox RHINOS Trust (a Delaware statutory business trust)
CoxCom, Inc. (a Delaware corporation)
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 Northern Virginia
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
Cablerep Northern Virginia, Inc.
Cox Communications Telecom, Inc.
CP Arizona I, LLC
CP Arizona II, LLC
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, L.L.C.
d/b/a Cox Communications
Cox California Telcom, L.L.C.
<PAGE> 3
-3-
d/b/a Cox Communications
Cox Connecticut Telcom, L.L.C.
d/b/a Cox Communications
Cox Iowa Telcom, L.L.C.
d/b/a Cox Communications
Cox Kansas Telcom, L.L.C.
Cox Missouri Telcom, L.L.C.
Cox Nebraska Telcom, L.L.C.
d/b/a Cox Communications
Cox Oklahoma Telcom, L.L.C.
d/b/a Cox Communications
Cox Rhode Island Telcom, L.L.C.
d/b/a Cox Communications
Cox Fibernet Oklahoma, L.L.C.
Arizona Newschannel, L.L.C. (50%)
Rhode Island News Channel, L.L.C. (65%)
Cox Telcom Partners, Inc. (a Delaware corporation)
Cox Louisiana Telcom, L.L.C. (1% Member - Cox Telcom
Partners, Inc., general partner; 99% Member -
CoxCom, Inc., limited partner)
Cox Florida Telcom, L.P. (1% Member - Cox Telcom Partners,
Inc., general partner; 99% Member - CoxCom, Inc.,
limited partner)
d/b/a Cox Communications
Cox Texas Telcom, L.P. (1% Member - Cox Telcom Partners,
Inc., general partner; 99% Member - CoxCom, Inc.,
limited partner)
CableRep, Inc. (a Delaware corporation)
d/b/a Cox Studio Productions
Cox Consumer Information Network, Inc.
Padres CableRep Advertising Company, G.P.
Cox Communications E.T.E., Inc. (a Delaware corporation)
Cox Communications New York City, Inc.
Cox Communications Florida (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 Communications Gulf Coast, L.L.C.
(Members: 51.82% - Cox Communications
Pensacola, L.L.C.; 44.04% - Cox
Communications Florida; 4.14% - TWC Cable
Partners)
Cox Home Video North, Inc. (a Delaware corporation)
d/b/a Cox Home Video
Cox Satellite Services, Inc. (a Delaware corporation)
Cox DC Radio, Inc. (a Delaware corporation)
Cox Communications NCC, Inc.
Cox @Home, Inc. (a Delaware corporation)
Cox Teleport Partners, Inc. (a Delaware corporation)
<PAGE> 4
-4-
Cox Communications International, Inc. (a Delaware
corporation)
Cox Programming Limited (a UK corporation)
Cox Communications Holdings, Inc. (a Delaware corporation)
Cox Animal Planet, Inc.
TMJV, Inc. (a Delaware corporation)
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. (a California corporation)
Cox Communications Services, Inc. (a Delaware corporation)
Cox Communications Shopping Services, Inc. (a Delaware
corporation)
CCI PCS, Inc. (a Delaware corporation)
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference of our report dated February
February 9, 2000 (March 16, 2000 as to the second paragraph of Note 4 and to
Note 19) appearing in this Annual Report on Form 10-K of Cox Communications,
Inc. for the year ended December 31, 1999, 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:
<TABLE>
<CAPTION>
Form File No.
------ -----------
<S> <C>
S-8 33-80993
S-8 33-80995
S-8 33-91506
S-8 333-44399
S-8 333-85055
S-3 333-03766
S-3 333-82575
S-3 333-82575-01
S-3 333-82575-02
</TABLE>
/s/ Deloitte & Touche LLP
Atlanta, Georgia
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K OF
COX COMMUNICATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,313
<SECURITIES> 0
<RECEIVABLES> 275,301
<ALLOWANCES> (14,783)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,533,366
<DEPRECIATION> (1,495,130)
<TOTAL-ASSETS> 26,614,497
<CURRENT-LIABILITIES> 0
<BONDS> 0
1,150,636
4,836
<COMMON> 603,767
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,614,497
<SALES> 0
<TOTAL-REVENUES> (2,318,135)
<CGS> 0
<TOTAL-COSTS> 734,858
<OTHER-EXPENSES> 715,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,736
<INCOME-PRETAX> 1,480,488
<INCOME-TAX> 579,965
<INCOME-CONTINUING> 900,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 881,928
<EPS-BASIC> 1.54<F1>
<EPS-DILUTED> 1.51<F1>
<FN>
<F1>EPS BASIC AND EPS DILUTED HAVE BEEN RESTATED TO REFLECT A TWO-FOR-ONE STOCK
SPLIT ON MAY 21, 1999. INTERIM FILINGS SUBSEQUENT TO THE STOCK SPLIT HAVE BEEN
ADJUSTED TO REFLECT THE STOCK SPLIT.
</FN>
</TABLE>
