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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 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 1-06590
[COX COMMUNICATIONS LOGO APPEARS HERE]
COMMUNICATIONS
COX COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2112281
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 LAKE HEARN DRIVE, ATLANTA, GEORGIA 30319
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 843-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Class A Common Stock, $1.00 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENTS TO
THIS FORM 10-K. [ ]
AS OF MARCH 6, 1997, THE AGGREGATE MARKET VALUE OF THE CLASS A COMMON STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS $1,438,696,301 BASED ON THE CLOSING
PRICE ON THE NEW YORK STOCK EXCHANGE ON SUCH DATE.
THERE WERE 256,511,695 SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF MARCH 6,
1997.
THERE WERE 13,798,896 SHARES OF CLASS C COMMON STOCK OUTSTANDING AS OF MARCH 6,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Stockholders are incorporated by reference
into Parts I and II. Portions of the Proxy Statement for the 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III.
COX COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 36
Item 3. Legal Proceedings........................................................................... 37
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 Financial Data..................................................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 38
Item 8. Financial Statements and Supplementary Data................................................. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................................. 38
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 38
Item 11. Executive Compensation...................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 38
Item 13. Certain Relationships and Related Transactions.............................................. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 39
SIGNATURES.............................................................................................. 42
2
PART I
ITEM 1. BUSINESS
Cox Communications, Inc. ("Cox") is the fifth largest operator of cable
television systems in the United States and is a fully integrated, diversified
media and broadband communications company with operations and investments in
three related areas: (i) U.S. broadband networks; (ii) cable television
programming; and (iii) United Kingdom ("U.K.") broadband networks.
Cox is an indirect 75.2% owned subsidiary of Cox Enterprises, Inc. ("CEI").
CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of
the largest media companies in the United States with consolidated revenues in
1996 of $4.6 billion. CEI, which has a 98-year history in the media and
communications industry, publishes 18 daily newspapers and owns or operates 11
television stations in addition to its interest in Cox. Through its majority-
owned subsidiary Cox Radio, Inc., CEI owns or operates 22 radio broadcast
stations. Through Manheim Auctions, CEI is also the world's largest operator of
auto auctions.
Cox's business strategy is the development and implementation of new services
for its customers by capitalizing on its highly clustered cable television
systems, its industry leading position in upgrading the technological
capabilities of its broadband networks and its commitment to customer service.
Cox believes that an integrated package of existing multichannel video and new
services, such as enhanced video, high-speed Internet access and telephony,
including personal communication services ("PCS"), will enhance Cox's ability to
acquire and retain customers while increasing revenues per customer.
In addition, Cox has sought to utilize its expertise and position as one of
the nation's premier cable television companies to invest in programming,
telecommunications and technology companies which are complementary to Cox's
business strategy. Cox believes that these investments have contributed
substantially to the growth of its core broadband communications business and
that its leadership position in broadband communications has facilitated the
growth of these investments. Cox seeks to utilize insights gained from the
integrated operations of its cable television systems and related programming,
telecommunications and technology investments to continue its leadership in the
broadband communications industry by anticipating and capitalizing upon long-
term industry trends.
U.S. BROADBAND NETWORKS
BUSINESS STRATEGY
Cox's strategy for its U.S. broadband network is to capitalize on the strength
of its current cable television business to provide customers with an integrated
package of existing multichannel video and new services, including enhanced
video, high-speed Internet access and telephony, including PCS. Cox believes
that the long-term competitive advantages of clustering, its aggressive
investment in the technological capabilities of its broadband network and its
commitment to customer service will enhance Cox's ability to acquire and retain
customers while increasing revenues per customer in a competitive environment.
CLUSTERING. As an integral part of its broadband communications strategy, Cox
has continually sought the advantages and efficiencies of operating large cable
television clusters. Including the effects of the exchanges of cable television
systems in the first quarter of 1997, approximately 82% of Cox's customers will
be served by Cox's nine largest clusters. These nine clusters will average over
300,000 customers each. See "-- Cable Television Business -- Operating Data."
Communities served by Cox's systems have an average household income of
approximately $40,000, versus the national average of $33,500. Large cable
television clusters enable Cox to reduce expenses through the consolidation of
marketing and support functions and to place more experienced management teams
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at the system level who are better equipped to meet the new regulatory and
competitive challenges of today's telecommunications industry. Large operating
clusters will also increase the speed and effectiveness of Cox's new product and
services deployment, enhancing its ability to increase both customers and
revenues.
Cox has and will continue to make strategic acquisitions of contiguous cable
television systems to create and expand large clusters, while disposing of cable
operations in non-strategic regions. In the past year, Cox has made the
following acquisitions and exchanges of cable television systems:
In January 1996, Cox acquired a cable television system serving approximately
51,000 customers in Newport News, Virginia, for approximately $122.3 million.
Cox operates this system as part of its cluster in Hampton Roads, Virginia.
In April 1996, Cox exchanged its Williamsport, Pennsylvania cable television
system serving approximately 24,500 customers for $13 million and an East
Providence, Rhode Island system serving approximately 15,500 customers.
In January 1997, Cox and Tele-Communications, Inc. ("TCI") exchanged certain
cable television systems with the result that Cox increased the size of its
existing clusters in Hampton Roads, Phoenix, New Orleans, Rhode Island, and
Omaha and disposed of several non-strategic cable television systems. Cox and
TCI each exchanged more than 300,000 customers.
In January 1997, Cox exchanged its western Massachusetts cable television
systems serving approximately 48,000 customers for Continental Cablevision's
James City and York County, Virginia and Pawtucket, Rhode Island systems serving
approximately 49,000 customers.
In March 1997, Cox exchanged its Myrtle Beach, South Carolina cable television
system serving approximately 42,000 customers for Time Warner's Hampton and
Williamsburg, Virginia systems serving approximately 45,000 customers. This
transaction also included a Texas cable television system serving approximately
7,000 customers which was purchased by Cox and immediately traded to Time
Warner.
Through the exchanges set forth above, Cox has increased the approximate size
of its Phoenix cluster 15% to 513,000 customers, its New England cluster 97% to
410,000 customers, its Hampton Roads cluster 46% to 383,000 customers, its New
Orleans cluster 7% to 271,000 customers and its Omaha cluster 41% to 149,000
customers.
TECHNOLOGY AND CAPITAL IMPROVEMENTS. Cox emphasizes high technical standards
for its cable television clusters. Cox continues to deploy fiber optic cable
and to upgrade the technical quality of its hybrid fiber-coaxial ("HFC")
broadband network. The result is a significant increase in channel capacity,
facilitating the delivery of additional programming and services such as
enhanced video, high-speed Internet access and telephony, including PCS. Cox's
aggressive investment in its broadband network upgrade will allow it to offer
these services more quickly, increasing revenues and cash flows.
Cox strives to maintain the highest technological standards in the industry.
Cox's U.S. cable television systems have bandwidth capacities ranging from
400MHz to 750MHz, which permits carriage of 54 to 112 analog channels. At the
end of 1996, approximately 93% of Cox's network had at least 54-channel
capacity, and 100% of its cable television subscribers were served by
addressable technology. Cox anticipates that approximately 87% of its customers
will be served by broadband networks with at least 78 analog channels of
capacity by the end of 1998. In Cox's nine largest systems, by the end of 1997,
75% of its customers will have access to 550MHz or 750 MHz capacity and 2
million customers will be able to receive two-way services.
In addition, Cox plans to deploy digital compression converters in several of
its markets by the end of 1997. Digital compression will enable Cox to increase
the channel capacity of its cable television systems to more than 100 channels.
Cox believes that the cable television system upgrades, along with the
4
distribution of digital compression technology, will provide its customers with
greater programming diversity, better picture quality, improved reliability, and
enhanced customer service.
In addition to increasing channel capacity, Cox's aggressive investment in
technology has improved the reliability of its service. Cox's HFC broadband
networks had a 99.986% reliability rate in 1996, as measured by average customer
minutes of outage per year, which is comparable to the BellCore standard of
99.989% utilized by the RBOCs. 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. Once ring-in-ring architecture is fully deployed, Cox expects
the reliability of its broadband networks to exceed the BellCore standard, which
will afford Cox the opportunity to provide competitive residential telephony and
other communications services in its systems.
All of Cox's cable television systems utilize addressable technology and
approximately 50% of Cox's customers have addressable converters. Addressable
technology enables Cox to control electronically the services delivered to each
customer. Cox can upgrade, downgrade, or disconnect services to an addressable
customer immediately, without the delay or expense of dispatching a technician
to the home. In addition, Cox is able to offer its customers pay-per-view
programming, generally consisting of recently released movies and special
events. Addressable technology also helps Cox reduce pay service theft and is
an effective enforcement tool in the collection of delinquent payments.
CUSTOMER AND COMMUNITY SERVICE. Strong customer service is a key element of
Cox's long-term business strategy to develop and implement new services for its
customers. Cox has always been committed to customer service and has been
recognized by several industry groups as a leader in providing quality customer
service. In 1996, Cox was distinguished by J.D. Power & Associates for achieving
highest overall customer satisfaction among cable television users in the first
study on the cable television industry. Cox outplaced six other leading cable
television companies in all areas impacting customer satisfaction, including:
cost of service, reception quality, programming, corporate image and customer
service and billing. Cox systems have won the "Customer is Key Award" nine
times, more than all other cable companies combined. The award is presented by
CTAM (Cable & Telecommunications: A Marketing Society) for outstanding customer
service in the cable television industry. Cox anticipates that its high level of
customer satisfaction will help it compete more effectively in the delivery of
new services such as enhanced video, high-speed Internet access and telephony,
including PCS, to its customers. 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 ("NCTA") and the Federal Communications
Commission ("FCC"). Cox also has sought to meet the needs of its customers by
deploying, in many of its U.S. cable television systems, user-friendly
technology such as automatic response units ("ARUs"), automatic number
identification ("ANI") telephone equipment and "impulse" pay-per-view
capability, all of which provide added convenience to customers. The use of
these technologies facilitates the processing of customer inquiries and service
orders and aids in the marketing of existing and new services.
A key element of Cox's community service is enhancing education through the
use of cable technology and programming. Cox currently participates in four
education initiatives. First, Cox participates in a national initiative, Cable
in the Classroom, which offers commercial free programming with lesson plans
free of charge to schools. Second, under the Cox Line to Learning program, Cox
plans to install a cable modem with high-speed Internet access free of charge in
certain schools as it upgrades its broadband network. Third, Cox has
established model technology schools in Chula Vista, California, Omaha,
Nebraska, Warwick, Rhode Island and Norfolk, Virginia, where it is testing
future services, such as interactive fiber optic links to local colleges, to
determine their value in the classroom. Additionally, Cox has established a
Multimedia Academy to train educators, parents, students and community leaders
about the use of multimedia technology as an educational tool.
TELEPHONY. Cox believes that cable television companies are well suited to
take a leading position in the telephony business. Cable television's HFC
5
broadband networks have improved significantly in the past five years with the
advent of low-cost broadband fiber optic technology, which has provided the
level of performance and reliability necessary to compete in the evolving
telecommunications market. By providing local telephony services and reselling
long distance services, Cox will access a portion of a revenue market as large
as $180 million for telephony services, which is more than seven times larger
than the existing cable television market. Additionally, Cox owns an interest
in Teleport Communications Group Inc. ("TCGI"), the nation's largest competitive
local exchange carrier. See "--Telephony and High-Speed Internet Access
Businesses -- Teleport Communications Group Inc."
Cox believes in the revenue opportunities of wireless communications. Cox has
been a leader in developing PCS, an advanced, digital, wireless telephone
technology. For its innovative efforts in developing PCS, Cox was awarded a
pioneer preference license for the Los Angeles-San Diego Major Trading Area
("MTA"), an area with a population of more than 21 million. See " -- Telephony
and High-Speed Internet Access Businesses - Cox Communications PCS, L.P." Cox
believes that the use of the HFC broadband network and new digital wireless
technologies will continue to position the cable industry as a viable competitor
for local exchange carrier ("LEC") services.
Additionally, to enhance Cox's entry into this new wireless communications
market, Cox joined TCI, Comcast Corporation ("Comcast") and Sprint Corporation
("Sprint") to create Sprint Spectrum Holding Company L.P. (with its
subsidiaries, "Sprint PCS") with the goal of gaining a significant share of the
wireless communications market. See "--Telephony and High-Speed Internet Access
Businesses -- Sprint PCS." The partners are developing an integrated, national
wireless voice and data system, which the partners will promote using the
"Sprint PCS" brand name and cross-promote with cable services and products
branded by Cox, TCI and Comcast in their respective cable television systems.
SATELLITE TELEVISION. Cox is involved in the business of delivering
television programming via direct broadcast satellite ("DBS"). Cox owns a 10.4%
interest in PrimeStar Partners L.P. ("PrimeStar"), the nation's second-largest
DBS operator with 1.6 million customers as of December 31, 1996. See "-- Other
Telecommunications and Technology Investments - PrimeStar Partners, L.P." In
addition to being an investor in PrimeStar, Cox, as part of its consolidated
operations, currently distributes the PrimeStar service to more than 130,000
customers.
HIGH-SPEED INTERNET ACCESS. The use of computers, online services and the
Internet has increased significantly over the last few years. For example, over
the last ten years the number of Internet hosts has increased from 10,000 to
over 10 million. Cox believes in the revenue opportunities of Internet related
services and is taking advantage of these opportunities by developing and
providing high-speed Internet access and work-at-home services via its advanced
HFC broadband network. By using a cable modem and the broadband network, users
can access the Internet at speeds up to hundreds of times faster than existing
telephone modems. To enhance Cox's entry into the cable based high-speed
Internet access market, Cox acquired an interest in At Home Corporation. See "-
- -Telephony and High-Speed Internet Access Businesses -- @Home." In December
1996, Cox launched high-speed Internet access, offered as Cox @Home Network, in
Orange County, California. Cox plans to introduce the service in additional
markets in 1997.
OTHER ALTERNATIVE REVENUE SOURCES. Implementation of Cox's business strategy
will allow Cox to develop revenue sources ancillary to its core cable
television, telephony and high-speed Internet access businesses. In recent
years, Cox has increasingly generated revenues from additional sources such as
advertising, pay-per-view and home shopping.
Cox derives revenues from the sale of advertising time on satellite-delivered
networks such as ESPN, MTV and CNN. Currently, Cox inserts advertising on
approximately 15 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 strong
growth in this revenue source. In addition, Cox participates in the national
and regional cable television advertising market through its investment in
6
National Cable Communications, L.P. ("NCC"), a partnership which represents
cable television companies to advertisers. NCC is the largest representation
firm in spot cable advertising sales.
Cox believes that the growing number of addressable homes, the addition of
channels offering pay-per-view movies and events (such as boxing matches and
concerts) and its increasing pay-per-view marketing expertise will lead to
increases in Cox's pay-per-view revenue stream. In addition, Cox is continuing
its efforts to increase the performance of the pay-per-view sector through the
use of automated phone ordering procedures and preview channels. With future
impulse ordering technology, Cox hopes to further the growth of pay-per-view
services. The implementation of digital compression technology, and the
resulting increase in channel capacity, will give Cox "near video-on-demand"
capabilities, and further increase pay-per-view purchases.
CABLE TELEVISION BUSINESS
Cox's domestic cable television operations represent the core element of its
integrated broadband communications strategy. Including the effects of the
exchanges of cable television systems in the first quarter of 1997, Cox owns and
operates cable television systems organized into 18 locally managed clusters in
13 states. These clusters pass approximately 5.0 million homes and provide
service to approximately 3.2 million customers. The foregoing excludes
approximately 82,500 customers represented by Cox's 50% ownership interest in a
joint venture with Time Warner Entertainment Company, L.P., which owns two
additional cable television systems in Fort Walton Beach, Florida and Staten
Island, New York, which, as of December 31, 1996, passed approximately 237,000
homes and provided service to approximately 165,000 customers. Cox's U.S. cable
television systems are diversified geographically and are not dependent on the
economic viability of any one particular region.
Cox's U.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 "super stations," numerous
satellite-delivered non-broadcast channels (such as Cable News Network, MTV:
Music Television, USA Network, ESPN, Arts and Entertainment Channel, The
Discovery Channel, The Learning Channel, Turner Network Television and
Nickelodeon), displays of information featuring news, weather, stock and
financial market reports and public, governmental and educational access
channels. In some systems, these satellite-delivered non-broadcast services are
offered at a per channel charge or are packaged together to form a tier of
services offered at a discount from the combined per channel rate. Cox's cable
television systems also provide premium television services to their customers
for an extra monthly charge. Such services (including Home Box Office ("HBO"),
Showtime, Cinemax and regional sports networks) 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.
7
OPERATING DATA. The following table indicates the growth of Cox's cable
television systems by summarizing the number of homes passed by cable, basic
customers, premium service units, penetration levels and average monthly revenue
per basic customer as of December 31 for each of the five years set forth below:
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Homes passed(a).................. 5,016,749 5,005,858 2,878,857 2,838,197 2,745,491
Basic customers(b)............... 3,259,384 3,248,759 1,851,726 1,784,337 1,722,007
Basic penetration(c)............. 65.0% 64.9% 64.3% 62.9% 62.7%
Premium service units(d)......... 2,000,673 1,827,068 1,203,606 1,205,587 1,249,673
Premium penetration(e)........... 61.4% 56.2% 65.0% 67.6% 72.6%
Average monthly revenues per
basic customer(f)(g)........... $37.40 $34.72 $33.75 $33.65 $31.97
- ----------
(a) A home is deemed to be "passed" if it can be connected to the distribution
system without any further extension of the distribution plant.
(b) A home with one or more television sets connected to a cable television
system is counted as one basic service customer.
(c) Basic customers as a percentage of homes passed by cable.
(d) Premium service units include single or multi-channel services offered for a
monthly fee per service.
(e) Premium service units as a percentage of basic customers. A basic service
customer may purchase more than one premium service, each of which is
counted as a separate premium service unit.
(f) Average for each period presented.
(g) Includes revenues associated with competitive access and PrimeStar
operations.
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The following table is a summary of certain operating data as of December 31,
1996 for Cox's U.S. cable television clusters:
ACTUAL PRO FORMA(a)
HOMES BASIC BASIC
TOP NINE CLUSTERS: PASSED CUSTOMERS CUSTOMERS
- ------------------ --------- --------- ------------
Phoenix, AZ..................................... 864,535 450,303 512,965
San Diego, CA................................... 687,531 472,060 472,060
New England..................................... 363,981 258,019 410,355
Hampton, Roads, VA.............................. 410,684 261,226 383,026
New Orleans, LA................................. 427,793 253,741 270,637
Orange County, CA............................... 328,719 248,359 248,359
Omaha, NE....................................... 162,337 98,825 149,352
Pensacola/Ft. Walton Beach, FL (b).............. 193,759 145,218 145,218
Oklahoma City, OK............................... 203,610 116,624 116,624
-------------------- ---------
SUBTOTAL TOP NINE......................... 3,642,949 2,304,375 2,708,596
OTHER SYSTEMS:
- --------------
Santa Barbara/Bakersfield, CA................... 129,613 90,125 90,125
Gainesville/Ocala, FL........................... 116,798 86,606 86,606
Coshocton/Newark, OH............................ 108,898 84,618 84,618
Lubbock/Midland, TX............................. 132,399 76,317 76,317
Middle Georgia.................................. 107,588 72,315 72,315
Cleveland, OH................................... 98,664 70,677 70,677
Roanoke, VA..................................... 77,555 56,773 56,773
Lafayette, IN................................... 49,292 38,124 38,124
Humboldt, CA.................................... 43,231 32,231 32,231
Quad Cities/Cedar Rapids, IA.................... 163,871 111,444 --
Spokane, WA..................................... 132,980 90,600 --
Springfield, IL................................. 71,382 49,139 --
Western Massachusetts........................... 64,475 47,887 --
Saginaw, MI..................................... 54,647 35,916 --
Myrtle Beach, SC................................ 54,551 42,230 --
Washington, PA.................................. 48,253 36,575 --
-------------------- ---------
Subtotal Other Systems..................... 1,454,197 1,021,577 607,786
-------------------- ---------
TOTAL (INCLUDING FT. WALTON BEACH) (b).......... 5,097,146 3,325,952 3,316,382
TOTAL (EXCLUDING FT. WALTON BEACH).............. 5,016,749 3,259,384 3,249,814
- ----------
(a) The pro forma customer count includes the effects of the TCI and
Continental exchanges completed in January 1997 and the Time Warner
exchange completed in March 1997. The actual customer counts for the TCI,
Continental and Time Warner systems will be lower when conformed to Cox's
methodology of counting customers.
(b) Includes the Ft. Walton Beach, Florida system which is managed as part of
Cox's Pensacola cluster. The system is 50% owned by Cox through a
partnership with Time Warner. This partnership also owns a system in
Staten Island, New York which is managed by Time Warner.
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FRANCHISES. Cable television systems are constructed and operated under non-
exclusive franchises granted by local governmental authorities. These franchises
typically contain many conditions, such as time limitations on commencement and
completion of system construction, service standards including number of
channels, types of programming and the provision of free service to schools and
certain other public institutions, and the maintenance of insurance and
indemnity bonds. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as amended by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the
"1996 Act").
As of March 6, 1997, Cox held 225 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 each of 1996, 1995 and 1994, franchise fee payments made by
Cox averaged approximately 4% of gross revenues.
Cox has never had a franchise revoked. The 1984 Cable Act provides for an
orderly franchise renewal process, and it establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. A franchising authority may not unreasonably withhold
the renewal of a franchise. If a franchise renewal is denied and the system is
acquired by the franchise authority or a third party, then the franchise
authority must pay the operator the "fair market value" for the system covered
by the franchise, but with no value allocated to the franchise itself. Cox
believes that it has satisfactory relationships with its franchising
communities.
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.
TELEPHONY AND HIGH-SPEED INTERNET ACCESS BUSINESSES
Cox actively seeks to develop and introduce new services that capitalize on
the capabilities of its advanced broadband platform. Accordingly, business and
residential telephony services and high-speed Internet access are a developing
part of Cox's business strategy. Cox has made commitments to wireline and
wireless telephony and the high-speed Internet access businesses directly and
through its investments in related entities.
WIRELINE. In 1996 Cox began delivering local phone service over its broadband
network in two test markets and commercially offered phone service to residents
of an apartment complex in Orange County, California. In 1997 Cox will launch
local phone service to residential and commercial customers in additional
markets. Additionally, through its wholly-owned subsidiary, Cox Fibernet, Cox
provides access for voice and data services to its customers in three markets
thereby allowing information-intensive businesses alternatives to the local
phone companies for access to an array of telecommunications services. Cox also
owns a 24.6% interest in TCGI. See "--Teleport Communications Group Inc."
10
Cox intends to selectively upgrade its broadband network to provide
residential telephone services. The timing and location of Cox's deployment of
residential telephone services will depend on numerous factors, including
regulatory approvals and technical advances. Cox's residential telephony
subsidiaries have either been certified as a competitive local exchange carrier
("CLEC") or have applications pending for CLEC status in eight states. Cox has
executed interconnection agreements with the incumbent LEC in several states,
has arbitrated several agreements and is in the process of negotiating
interconnection agreements in several others. Competition for residential
telecommunications will be driven by competitive pricing, advanced features and
packaging of services.
SPRINT PCS. Sprint PCS engages in the business of providing wireless
communications services, primarily PCS. Sprint PCS is in the process of
building a seamless integrated nationwide wireless communications network.
Sprint PCS, through WirelessCo, L.P., was the successful bidder for 29 broadband
PCS licenses in the auction conducted by the FCC that was completed in March
1995. The markets covered by the licenses for which Sprint PCS was the
successful bidder include New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The $2.11 billion total purchase price for the 29 licenses has been
paid to the FCC. Additionally, Cox recently assigned its Omaha MTA license to
Sprint PCS, bringing the total number of licenses to 30. As of February 1997,
Sprint PCS had launched its service in thirteen markets.
Sprint PCS's objectives include the penetration of both the current wireless
and wireline telecommunications marketplaces through the use of advanced digital
technology. Sprint PCS and its affiliates have obtained licenses to offer a full
range of wireless telecommunications services to areas with an aggregate
population of approximately 191 million. Sprint PCS plans to penetrate these
markets by offering a competitively-priced product which will be targeted
towards high usage consumers. Sprint PCS believes that the programmable PCS
network will offer long-term competitive pricing, digital call quality, security
and capacity advantages over the current cellular networks. Sprint PCS intends
to use both mass-marketing and specific customer segment marketing to focus its
efforts on consumers who have significant work or personal telecommunications
demands. Sprint PCS expects to own, or to have affiliation relationships with
PCS providers who own, PCS licenses that together will cover a national scope.
The programmable qualities of the PCS network will allow Sprint PCS to offer
packages that will be competitive with those offered by cellular service
providers and the LECs. These packages may include a flat monthly rate for calls
made from a particular micro-cell site (e.g., the neighborhood of a customer)
and a modest additional charge for calls initiated outside of the customer's
neighborhood. In addition, Sprint PCS intends to cross-market its wireless
services with the telecommunications products and services provided by its
partners.
Sprint PCS also owns equity interests in two partnerships that hold PCS
licenses that were issued under the FCC's pioneer preference program. First,
Sprint PCS purchased from The Washington Post Company a 49% limited partnership
interest in American PCS, L.P. ("APC"). APC holds a broadband PCS license for
the Washington-Baltimore MTA. APC has agreed to affiliate its PCS system with
Sprint PCS's systems and to become part of the partnership's nationwide network,
using the "Sprint Spectrum" trademark. In November 1995, APC began the
commercial deployment of its services with PCS customers accessing the network
in the Washington-Baltimore MTA.
Second, Sprint PCS owns a 49% limited partnership interest in Cox
Communications PCS, L.P. ("PioneerCo"), a partnership formed to hold the license
for the PCS system in the Los Angeles-San Diego MTA, using the license awarded
to Cox under the pioneer preference program. See "-- Cox Communications PCS,
L.P." PioneerCo has also agreed to affiliate its PCS system with the Sprint PCS
nationwide network and use the "Sprint PCS" trademark. In December 1996, Sprint
PCS service was launched in the San Diego area.
COX COMMUNICATIONS PCS, L.P. Cox was awarded a broadband PCS license for the
Los Angeles-San Diego MTA in 1995 under the FCC's pioneer preference program.
The amount payable by Cox for the license is $251.9 million which is included in
outstanding debt at December 31, 1996 and 1995. The Los Angeles-San Diego market
11
has a total population of over 21 million and includes most of southern
California, southern Nevada and a small portion of Arizona.
In December 1996, Cox, CEI, TCI, Comcast and Sprint formed PioneerCo to
operate the PCS system in the Los Angeles-San Diego MTA. PioneerCo is owned
approximately 49% by Sprint PCS as limited partner and approximately 51% by Cox
Pioneer Partnership ("CPP") as general partner. CPP is a jointly controlled
partnership owned approximately 78% by Cox and approximately 22% by CEI. Cox,
as managing general partner of CPP, controls the license and has day-to-day
management authority over PioneerCo. Upon FCC approval, the PCS license for the
Los Angeles-San Diego MTA and the related payment obligation to the FCC will be
transferred from Cox to PioneerCo. Beginning on the earlier of December 14,
1997 or completion of the FCC's buildout requirement, CPP has the right to put
its interest to Sprint PCS at fair market value over a five-year period. In
addition, CPP has the right to put its entire interest from the fifth through
the eighth anniversaries of the earlier of December 14, 1997 or completion of
buildout, and Sprint PCS has a call on CPP's interest from the fourth to the
eighth anniversaries of the earlier of December 14, 1997 or completion of the
buildout requirement.
PHILLIECO, L.P. AND OMAHA PCS LICENSE. Cox also owns a 17.6% interest in
PhillieCo, a partnership formed by subsidiaries of Cox, TCI and Sprint.
PhillieCo was the successful bidder for a broadband PCS license for the
Philadelphia MTA. The approximately $85 million purchase price for this license
has already been paid to the FCC. PhillieCo will also be affiliated with the
Sprint PCS network and will use the "Sprint PCS" trademark.
Cox was also the successful bidder for a broadband PCS license for the Omaha
MTA in the FCC's 1995 auction. The purchase price for the license was
approximately $5.1 million. In February 1997, following FCC approval, Cox
contributed the Omaha PCS license to Sprint PCS.
TELEPORT COMMUNICATIONS GROUP INC. Prior to June 1996, Cox held a 30.06%
interest in each of TCGI and Teleport Communications Group Partners ("TCGP"),
which both owned and operated fiber optic networks serving several U.S. markets
and provide point-to-point digital communications links to telecommunications
businesses and long-distance carriers. In June 1996, TCGI entered into a
reorganization under which, among other things, TCGI's four stockholders, Cox,
Comcast, Continental and TCI (collectively, the "Cable Stockholders")
contributed to TCGI all of their partnership interests in TCGP, additional
interests in local joint ventures and debt and accrued interest owed by TCGI to
the Cable Stockholders (the "Reorganization"). Following the Reorganization,
TCGI conducted an initial public offering in which it sold 27,025,000 shares
(the "TCGI IPO"). Upon completion of the Reorganization and the TCGI IPO, Cox
owns 39,087,594 shares of TCGI's Class B Common Stock representing 29.8% of
TCGI's Class B Common Stock, 24.6% of total shares outstanding and 29.1% of the
voting power of TCGI. Each share of Class B Common Stock is convertible into
one share of its Class A Common Stock.
@HOME. In August 1996, Cox acquired a 14.2% interest in At Home Corporation.
At Home Corporation is the provider of "@Home," a national Internet "backbone"
service that allows customers access to the Internet at speeds up to hundreds of
times faster than today's telephone modems by using a cable modem and the cable
television broadband network. The other partners are TCI (45.4%), KPCB
Affiliates (13.6%), Comcast (14.2%) and @Home's management (12.6%). At December
31, 1996, @Home had launched its service in four markets.
12
OTHER TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS
A summary of Cox's significant investments in other telecommunications and
technology businesses is set forth below.
COX
PERCENTAGE
OWNERSHIP
INVESTMENT DESCRIPTION INTEREST
- ---------- ----------- -----------
PrimeStar Partners, L.P. Medium-powered DBS 10.4%
StarSight Telecast, Inc. Interactive program guide 8.6
Syntellect, Inc. Supplier of pay-per-view ordering 8.6
technology
PRIMESTAR PARTNERS, L.P. PrimeStar is a provider of DBS services. Cox owns a
10.4% interest in PrimeStar. PrimeStar's direct-to-home television delivery
business served, as of December 31, 1996, approximately 1,566,000 customers
(representing an estimated 40% of the U.S. DBS market) using a single satellite
owned and operated by GE Americom. PrimeStar programming includes 94 channels of
popular cable and network television, professional sports and movies, as well as
14 channels of quality audio services. PrimeStar has secured a long-term
agreement with GE Americom for the use of a new satellite which was launched in
January 1997. The new satellite will increase PrimeStar's offering to
approximately 160 channels. PrimeStar was formed in 1990 by GE Americom and nine
of the nation's largest cable television companies, including Cox, TCI, Comcast,
Continental and Time Warner.
The following table sets forth certain financial and subscriber data with
respect to PrimeStar Partners:
DECEMBER 31
---------------------------
1996 1995 1994
--------- ------- -------
Revenues (millions) ......... $ 413.0 $180.6 $ 27.8
Growth ...................... 129% 550% 155%
Subscribers (thousands)....... 1,565.7 961.2 230.8
Growth ...................... 63% 316% 246%
STARSIGHT TELECAST, INC. In June 1993, Cox purchased an interest in StarSight
Telecast, Inc. ("StarSight"). StarSight has developed a patented on-screen
interactive television guide and VCR service. The StarSight system allows users
of its service to view up to a week of television programming, select a desired
program by channel, program title or theme, record a program or series of
programs with the touch of a button, reset the order of channels by preference
and delete unwanted channels. In December 1996, StarSight agreed to merge its
operations with Gemstar International Group Limited ("Gemstar"). As a result of
this merger, Cox will receive approximately 1,313,421 shares of Gemstar common
stock representing a 3.5% interest in Gemstar. This transaction is expected to
close in the second quarter of 1997.
As of December 31, 1996, Cox owned 2,166,647 shares of StarSight common stock,
representing approximately 8.6% of the equity of StarSight. As of December 31,
1996, the closing price of StarSight common stock was $9.38 per share.
SYNTELLECT, INC. Cox holds 1,150,000 shares of Syntellect, Inc. ("Syntellect")
common stock, representing approximately 8.6% of the equity of Syntellect.
Syntellect designs and markets ARUs. In March 1996, Syntellect merged with
Telecorp Systems, Inc. ("Telecorp"), which also designs, manufactures and
markets ARUs and a full line of cable-specific voice and data products and
services. Applications include inbound and outbound call processing, pay-per-
view ordering, information management and voice production services. Prior to
the merger of Syntellect and Telecorp, Cox held a 24.54% interest in Telecorp.
13
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. A summary
of Cox's significant programming investments is set forth below:
COX PERCENTAGE
OWNERSHIP
INVESTMENT DESCRIPTION INTEREST
- ---------- ----------- --------
Discovery Communications, Discovery Channel, Learning
Inc. Channel, Animal Planet Network,
retail and other ancillary
businesses 24.6%
E! Entertainment Television Entertainment-related news 10.4
Outdoor Life Network Outdoor activities 41.0
Speedvision Network Automotive, marine and aviation
related 39.0
programming
PPVN Holding Co. Pay-per-view, including Viewer's 20.0
Choice
Digital Cable Radio Digital audio services, 13.6
Associates including Music Choice
Home Shopping Network Home shopping 0.1
The Sunshine Network Inc. Sports, public affairs and 5.3
general entertainment
National Cable Cable television advertising 12.5
Communications sales
Product Information Network Infomercial distribution 45.0
UK Gold BBC and Thames syndicated 37.9
programming (UK)
UK Living Talk shows and soap operas (UK) 49.6
European Channel News and entertainment
Management Limited programming in Europe, 10.0
including BBC Europe and BBC
Prime
GEMS Television Spanish-language service 50.0
targeted at women
DISCOVERY COMMUNICATIONS, INC. The principal businesses of Discovery
Communications, Inc. ("Discovery") are the advertiser-supported basic cable
networks The Discovery Channel, The Learning Channel, Animal Planet Network and
Discovery Europe and its retail division consisting primarily of 113 stores of
The Nature Company. The Discovery Channel provides nature, science and
technology, history, exploration and adventure programming and is distributed to
customers in virtually all U.S. cable homes. The Learning Channel broadcasts a
variety of educational and non-fiction programming. In addition, through
internally generated funding, significant investments are being made by
Discovery in building a documentary programming library. The Learning Channel
has increased distribution from fewer than 14 million cable homes prior to its
acquisition by Discovery in 1991 to over 53 million homes as of December 31,
1996. Cox holds a 24.6% interest in Discovery, with TCI, NewChannels Corp.
("NewChannels") and Discovery's management holding interests of 49.3%, 24.6% and
1.4%, respectively. In addition, in March 1995 Discovery announced the creation
of a new division to produce movies for theatrical release under the name
Discovery Pictures.
Cox believes that the documentary profile of Discovery programming makes it
one of the best-positioned U.S. cable networks to expand internationally.
Discovery is expanding the "Discovery" brand name by establishing channels based
in Europe, Latin America and Asia, a substantial portion of the programming for
which will be drawn from Discovery's own documentary programming library.
14
The following table sets forth certain financial and subscriber data relating
to Discovery, The Discovery Channel and The Learning Channel:
DECEMBER 31
-------------------------
DISCOVERY 1996 1995 1994
------- ------- -------
Revenues (millions of dollars).. $661.8 $447.2 $329.6
Growth.......................... 47.8% 35.7% 40.6%
THE DISCOVERY CHANNEL
Subscribers (millions)........ 70.6 66.5 61.5
Growth........................ 6.2% 8.1% --
Nielsen Rating - Avg.......... 0.61 0.63 0.53
THE LEARNING CHANNEL
Subscribers (millions)........ 53.9 43.2 31.5
Growth........................ 24.8% 37.1% 15.3%
Nielsen Rating - Avg.......... 0.38 0.35 0.31
E! ENTERTAINMENT TELEVISION. E! Entertainment Television, Inc. is an
entertainment-related news service with distribution to approximately 42 million
customers as of the end of 1996. E! Entertainment seeks to build value based on
international interest in Hollywood and entertainment industry news, information
and features. Cox owns 10.4% of E! Entertainment Television. Its partners are
Comcast, Continental and TCI, each with a 10.4% interest, and Time Warner with a
58.4% interest. In January 1997, Comcast and The Walt Disney Company agreed to
form a partnership to which Comcast will contribute its 10.4% interest and which
will then acquire Time Warner's 58.4% interest. Cox's interest in E!
Entertainment will not be affected by this transaction.
The following table sets forth certain financial and subscriber data with
respect to E! Entertainment:
DECEMBER 31
----------------------
1996 1995 1994
------ ------ ------
Revenues (millions of dollars).. $97.5 $74.3 $49.1
Growth.......................... 31.2% 51.3% 54.9%
Subscribers (millions).......... 41.9 31.2 26.8
Growth.......................... 34.3% 16.4% 12.6%
OUTDOOR LIFE NETWORK AND SPEEDVISION NETWORK. The Outdoor Life Network, which
was launched on July 31, 1995, presents programming consisting primarily of
outdoor life and participants themes. The Speedvision Network, which was
launched in January 1996, presents a variety of programming of interest to
automobile, boat and airplane enthusiasts including news, historical and other
information and event coverage. Cox owns approximately 41% and 39% of Outdoor
Life and Speedvision, respectively. The other partners include Comcast,
Continental and Times Mirror.
PPVN HOLDING CO. PPVN Holding Co. ("PPVN"), which operates under the brand-
name Viewer's Choice, is a cable operator-controlled buying cooperative for pay-
per-view programming. Cox holds a 20% interest in PPVN, with the remaining
equity interests held by Time Warner (30%), TCI (10%), Comcast (10%),
Continental (10%), Viacom International Inc. (10%) and Walt Disney Pictures and
Television (10%).
DIGITAL CABLE RADIO ASSOCIATES. Digital Cable Radio Associates distributes
audio programming, under the brand name Music Choice, in a digital format via
coaxial cable to more than one million customers in the United States. This
service allows cable television customers to receive compact disc quality sound
in diverse music formats. Cox currently holds a 13.6% interest, with the
remaining interests held in varying proportions by Jerrold Communications, Sony
Music Entertainment, Inc., Continental, Comcast, Time Warner, Adelphia
Communications and EMI Music.
15
NATIONAL CABLE COMMUNICATIONS, L.P. Cox has a 12.5% limited partnership
interest in NCC, a partnership which represents cable television companies to
advertisers. NCC is the largest representation firm in spot cable advertising
sales. It enables advertisers to place advertising in selected multiple systems
on a regional or national single-source basis, and enhances the ability of
affiliated cable television systems to attract advertisers other than purely
local advertisers. The other limited partners in NCC are Continental, Time
Warner and Comcast, each with a 12.5% interest. Katz Cable Corporation is the
sole general partner and has a 50% interest.
THE PRODUCT INFORMATION NETWORK. Cox and Jones International Ltd. formed a
joint venture known as the Product Information Network ("PIN"). PIN was
organized to develop a network for the distribution of multiple direct response
television commercials, or "infomercials," through cable television systems and
other television programming outlets. In January 1996, Adelphia Communications
purchased an interest in PIN, reducing Cox's interest to 45%.
UK GOLD. Cox holds a 38% interest in UK Gold Television Limited ("UK Gold"),
which operates a basic cable programming service in the U.K. UK Gold broadcasts
entertainment programming from the libraries of the BBC and Thames, and
currently has access to over 130,000 hours (14.8 years) of unsyndicated
programming for exhibition in the U.K. on an exclusive basis. As of December 31,
1996, UK Gold had over 5,000,000 customers. UK Gold also is included in the
package of services distributed by British Sky Broadcasting ("BSkyB") to
satellite customers in the U.K., and therefore UK Gold has subscriber fee
revenues from both satellite and cable television customers. UK Gold was
launched by Cox in November 1992 in partnership with BBC, Thames and TCI, which
own interests of 20%, 15% and 27%, respectively.
UK LIVING. In July 1993, Cox invested in UK Living, a new basic cable
programming service that was launched in the United Kingdom in September 1993.
UK Living programming, patterned after Lifetime in the United States, is
targeted at women, with daytime programming consisting of informational shows of
interest to homemakers, original talk shows produced by Thames and rebroadcasts
of popular BBC talk shows. Nighttime programming consists of movies, dramatic
series and game shows. UK Living is also included in the BSkyB package of
services distributed to satellite customers in the U.K. UK Living has subscriber
fee revenues from both satellite and cable television customers, and seeks to
minimize its administrative and support services (including advertising sales)
expenses through a collaborative effort with UK Gold pursuant to a service
contract. UK Living is owned 49.6% by Cox, 35.4% by TCI and 15% by Thames.
In March 1997, Cox entered into an agreement to exchange its interests in UK
Gold and UK Living for an equity stake in Flextech plc, a publicly traded cable
programming company in the U.K. Cox will receive 20,701,084 shares of Flextech,
representing approximately a 12.6% interest. This transaction is expected to
close during the second quarter of 1997.
EUROPEAN CHANNEL MANAGEMENT LIMITED. In January 1995, Cox invested in a new
international programming joint venture in Europe. Cox is a 10% partner in
European Channel Management Limited which delivers BBC World, a 24-hour news
channel, and BBC Prime, an entertainment channel, to European subscribers
outside the United Kingdom. Both channels will seek to serve growing European
demand for programming by accessing the programming expertise and recognition of
the BBC. Strategically, this investment provides another avenue for Cox to
position itself in the international programming arena in association with a
well-known programming brand. The ventures' other partners are the BBC (40%) and
Pearson plc (50%).
GEMS TELEVISION. In June 1994, Cox entered into an equal partnership with
International Television, Inc. ("ITI"), a subsidiary of Empresas 1-BC,
Venezuela's largest media company. Prior to the formation of the partnership,
ITI had licensed and broadcast Spanish-language television programming under the
name of GEMS Television. The Cox-ITI partnership will continue the existing
business of GEMS Television and expand into additional markets in the United
States, South America and other Spanish or Portuguese-speaking regions. The
16
programming of GEMS Television is produced in Venezuela, consists largely of
telenovelas (soap operas) and is targeted primarily to women in Latin America
and to Spanish-speaking women in the United States. The Cox-ITI partnership has
access to more than 10,000 hours of Spanish-language programming for use in the
business of GEMS Television.
UNITED KINGDOM BROADBAND NETWORKS
TELEWEST COMMUNICATIONS PLC. At December 31, 1996, Cox had a 14.7% ownership
interest in TeleWest Communications plc ("TeleWest"), a company that is
currently operating and constructing cable television and telephony systems in
the United Kingdom. Other significant shareholders of TeleWest are US West Inc.,
TCI and SBC Communications, Inc.
TeleWest is the largest cable television and telephony operator in the U.K.
based on the number of homes passed and subscribers. The following table sets
out certain data concerning TeleWest's owned and operated and affiliated
franchises:
DECEMBER 31
CABLE TELEVISION 1996 1995
----------- ---------
Homes passed and marketed.... 2,626,835 2,066,654
Basic subscribers............ 599,599 457,472
RESIDENTIAL TELEPHONY
Homes passed and marketed.... 2,543,041 1,882,559
Residential subscribers...... 686,101 477,655
Residential lines connected.. 693,521 479,465
BUSINESS TELEPHONY
Business subscribers......... 23,297 15,986
Business lines connected..... 78,569 47,518
COMPETITION
CABLE TELEVISION COMPETITION
The cable television systems owned by Cox compete with other communications
and entertainment media, including conventional off-air television broadcasting
service, newspapers, movie theaters, live sporting events and home video
products. 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. 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.
Since Cox's U.S. cable television systems operate under non-exclusive
franchises, other companies 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.
Additional competition may come from private satellite master antenna
television ("SMATV") systems which transmit signals by satellite to receiving
facilities located on customers' premises such as condominiums, apartment
complexes and other private residential developments. The 1996 Act broadens the
17
definition of SMATV 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. A private cable television system normally
is free of the regulatory burdens imposed on franchised cable television
systems. 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.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the satellite-
delivered program services formerly available only to cable subscribers.
Furthermore, the 1992 Cable Act 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 HSDs and roof-top
antennae to receive satellite programming and over-the-air broadcasting
services.
In recent years, 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, DBS and MMDS (as defined below) services.
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. Companies offering DBS services are using video
compression technology to increase satellite channel capacity and to provide a
package of movies, network programming and other program services competitive to
those of cable television systems.
Programming is currently available to the owners of HSDs through conventional,
medium and high-powered satellites. PrimeStar, a consortium comprised of cable
operators including Cox and a satellite company, commenced operation in 1990 of
a medium-power DBS satellite system using the Ku portion of the frequency
spectrum and currently provides service consisting of approximately 95 channels
of programming, including broadcast signals and pay-per-view services. See "--
Other Telecommunications and Technology Investments -- PrimeStar Partners L.P."
In January 1997, PrimeStar launched a replacement medium-power DBS satellite
which will enable it to increase its capacity to approximately 160 channels.
DirecTV, which includes AT&T Corp. as an investor, began offering nationwide
high-power DBS service in 1994 accompanied by extensive marketing efforts, along
with United States Satellite Broadcasting Company which uses capacity on
DirecTV's satellite. Together, both companies offer over 200 channels of
service using video compression technology. Several other major companies,
including EchoStar Communications Corporation ("EchoStar") and American Sky
Broadcasting ("ASkyB"), a joint venture between MCI Telecommunications
Corporation and News Corp., have begun offering or are currently developing high
power DBS services. ASkyB is constructing satellites that reportedly, when
operational, will provide domestically approximately 200 channels of DBS
service.
The ability of DBS service providers to compete with the cable television
industry will depend on, among other factors, the availability of reception
equipment at reasonable prices. Although it is not possible at this time to
predict the likelihood of success of any DBS services venture, DBS may offer
substantial competition to cable television operators.
Recently, EchoStar and ASkyB announced their intention to merge operations,
subject to obtaining necessary federal regulatory approvals. If the merger is
approved, the combined company could provide 50 channels of programing reaching
the continental United States, and over 50 additional channels covering various
areas of the country. This channel capacity could be increased through the use
of channel compression technology. It has been reported that by using such
increased channel capacity and video compression technology, the combined
company could provide 500 channels of programming which would include the
signals of selected television stations that could be received by DBS
subscribers in local viewing areas. Currently, satellite program providers are
18
only authorized to provide the signals of television network stations to
subscribers who live in areas where over-the-air reception of such signals
cannot be received. The offering of local broadcast signals in DBS program
packages would provide substantial competition to the cable industry. However,
implementation of this proposal would likely require the amendment of copyright
laws which currently preclude the retransmission of local signals by satellite
carriers outside of their viewing areas.
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS"),
commonly called wireless cable, which are licensed to serve specific areas using
low-power microwave frequencies to transmit video programming over-the-air to
subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served by
Cox's cable systems. Several Regional Bell Operating Companies ("BOCs") have
acquired significant interests in major MMDS companies operating in certain of
Cox's cable service areas. Recent public announcements and activities by
BellSouth, a BOC operating in the Southeast, indicate plans for that BOC to
compete with Cox through the use of MMDS technology in the New Orleans market.
Pacific Telesis Enterprises, a BOC operating in California, also is providing or
authorized to provide wireless cable services in several California communities
which Cox serves. Additionally, the FCC recently adopted new regulations
allocating frequencies in the 28 GHz band for a new multichannel wireless video
service similar to MMDS but has imposed cross-ownership restrictions of these
frequencies by cable operators and telephone companies. For a three-year
period, cable operators and telephone companies will be precluded from operating
on these frequencies in the same authorized or franchised service areas in which
they provide service. Cox is unable to predict whether wireless video services
will have a material impact on its operations.
The 1996 Act repeals the cable/television cross-ownership ban adopted in the
1984 Cable Act, and contains restrictions on buying out incumbent cable
operators in a telephone company's service area, especially in suburban and
rural markets. The 1996 Act will enable common carriers to provide video
programming services as either cable operators or open video system ("OVS")
operators, a regulatory regime to be established by the FCC in a rulemaking
proceeding.
Other new technologies may become competitive with respect to certain non-
entertainment services that cable television systems can also offer. The FCC has
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.
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 originating
and terminating access to their local networks to interexchange carriers and
mobile radio service providers. Because 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
19
its broadband networks. Among its more significant provisions, the
Telecommunications Act: (i) removes legal barriers to entry in local telephone
markets; (ii) requires incumbent LECs to "interconnect" with competitors,
including the provision of necessary elements for local competition such as
telephone number portability; (iii) establishes procedures for incumbent LEC
entry into new markets such as long distance and cable television; (iv) relaxes
regulation of telecommunications services provided by incumbent LECs and all
other telecommunications service providers; and (v) directs the FCC to establish
a subsidy mechanism for the preservation of universally affordable telephone
service.
Under the 1996 Act, new landline entrants will become subject to additional
federal regulatory requirements when they provide local exchange service in any
market. The 1996 Act imposes a number of access and interconnection requirements
on all LECs, with additional requirements imposed on incumbent LECs.
Specifically, the 1996 Act required the FCC to implement rules under which all
LECs must provide telephone number portability, dialing parity, reciprocal
compensation for traffic transport and termination, the purchase of unbundled
network elements, resale and access to rights of way. The 1996 Act also requires
state commissions to review and approve voluntarily negotiated interconnection
agreements and to arbitrate compulsory interconnection negotiations between new
entrants and incumbent LECs. These requirements also place burdens on new
entrants that may benefit other competitors. In particular, the resale
requirement means that a company could seek to resell the facilities of a new
entrant without making a similar investment in facilities.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The 1996
Act also limits the FCC's ability to review incumbent LEC tariff filings. These
changes will increase the speed with which the LECs are able to introduce new
service offerings and new pricing of existing services, thereby increasing their
flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long-distance
carriers, microwave carriers, wireless service providers, resellers and private
networks built by large end-users.
The FCC has adopted many, but not all, of the rules required to implement the
1996 Act. On August 1, 1996 the FCC adopted a report and order promulgating
rules and regulations to implement the 1996 Act's provision that obligates CLECs
and incumbent LECs to interconnect their networks and to develop a methodology
to translate the 1996 Act's pricing guidelines into incumbent LEC pricing of
interconnection for reciprocal transport and termination, unbundled elements and
resale (the "Local Competition Order"). 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 in their
process of reviewing interconnection agreements. The states are to base rates
for interconnection, the reciprocal exchange of local telephone traffic and the
purchase of ILEC unbundled network elements on a new incremental cost
methodology called Total Element Long-Run Incremental Cost ("TELRIC").
Incumbent LECs may present the states with TELRIC cost studies, while the FCC
adopted interim "default" rates the states could apply pending state review of
TELRIC studies. Additionally, the FCC interpreted the non-discrimination
provisions of the 1996 Act to allow 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.
Many petitions for reconsideration of the FCC's Local Competition Order are
pending at the FCC. Despite the adoption of generally pro-competitive rules
that Cox views as consistent with the requirements of the 1996 Act, the
interconnection rules, particularly those containing the TELRIC pricing
methodology and "default" rates, have not taken effect due to successful motions
for stay filed by incumbent LECs and jurisdictional challenges filed by several
state utility commissions. Review of the FCC's rules is before the Eighth
Circuit Court of Appeals, which in October 1996 granted a temporary stay of many
of the interconnection rules pending court review of the merits of the
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petitioner's challenge. The Eighth Circuit heard oral arguments of the case on
January 17, 1997 and a decision is expected within several months. In the
meantime, the stay only affects certain FCC rules; the independent legal
obligations created by the 1996 Act have not been stayed. As a result, many
states are applying the FCC's interpretations of the 1996 Act as guidelines,
despite the fact that many FCC interconnection rules are not in effect.
The FCC has announced that the Local Competition Order is the first part in a
"trilogy" of orders that will reform access pricing and universal service
consistent with the 1996 Act's goal of encouraging competition. It is
anticipated that the prices incumbent LECs charge for both intrastate and
interstate access services will be substantially reduced as a result of the
FCC's initiative to reform the current access charge regime as well as by reform
of current universal service procedures.
In July 1996 the FCC released an Order promulgating rules implementing the
1996 Act's directive for local telephone number portability (the "Number
Portability Order"). The FCC ordered all LECs to begin phased development of a
long-term service provider portability method in the 100 largest Metropolitan
Statistical Areas ("MSAs") no later than October 1, 1997, and to complete
deployment in those MSAs by March 31, 1998. After March 31, 1998, each LEC must
make number portability available within six months after receiving a specific
request by another telecommunications carrier in areas outside the 100 largest
area MSAs. Until long-term service provider number portability is available,
all LECs must provide currently available number portability measures as soon as
reasonably possible after a specific request from another carrier. Because new
carriers are at a competitive disadvantage without telephone number portability,
the Number Portability Order should enhance Cox's ability to offer service in
competition with the incumbent LECs. It is uncertain how effective these
regulations will be in promoting cost effective and efficient number
portability. The Number Portability Order does not address how the costs of
implementing long-term service provider number portability will be recovered.
This issue is subject to an additional comment period and is not expected to be
decided until later in 1997. The Number Portability Order also is subject to
Petitions for Reconsideration at the FCC and Petitions for Review filed before
the Eighth Circuit Court of Appeals.
A Federal-State Joint Board mandated by the 1996 Act made initial
recommendations regarding universal service in the fall of 1996. The Joint
Board proposed a new regime for funding universal telephone service and for
distributing universal service subsidies. The recommended decision is subject
to public comment and may be changed between now and May 8, 1997, when the FCC
is required to adopt a final order on universal service. If the recommended
decision is adopted, there will be specific subsidies for high cost areas and
carriers, for low income consumers and for advanced services for schools and
libraries. The total amount of these subsidies is expected to range from $5 to
$14 billion annually. Under the proposal adopted by the Joint Board, any
telecommunications carrier that provided all of the services that fall within
the definition of "universal service" would be eligible to receive subsidies, as
would any entity that provided advanced services or infrastructure used by
schools and libraries. Funding for these subsidies would come from surcharges
imposed on all telecommunications carriers, but the exact formula for the
subsidies has not been determined. In addition to the federal universal service
plan, it is likely that most or all states will adopt their own universal
service support mechanisms. Another issue to be resolved is the application of
a "cost proxy" model that identifies those carriers in need of subsidies to
maintain universal service.
While not directly required under the 1996 Act, the FCC has also adopted a
Notice of Proposed Rulemaking to reform interstate access charges that are
generally acknowledged to contain subsidy elements. The Notice suggests as
alternatives market-based and proscriptive reforms to interstate access charges.
Many parties have commented on these alternatives and the FCC is considering
concluding at least the first stage of access charge reform at the same time it
adopts universal service reform. The wide-ranging Notice also tentatively
concludes that interstate access charges should not be imposed on enhanced
services traffic such as Internet access traffic.
WIRELESS TELECOMMUNICATIONS SERVICES. The success of Sprint PCS will depend
on its ability to compete with other wireless communications providers (and
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wired communications providers) operating within its markets. It is anticipated
that the telecommunications industry will become increasingly competitive as new
service providers enter the wireless telecommunications marketplace.
The wireless telephone industry provides a wide range of high-quality, high
capacity communications services to vehicle-mounted and hand-held portable
telephones and other two-way radio devices. Today, the industry comprises many
competing service providers, the most prominent of which are the existing
cellular radio-telephone service operators.
CELLULAR. The U.S. cellular telephone business has been characterized as a
regulated duopoly. The FCC has allocated only two licenses for cellular service
in each cellular service area. One of the two licenses was initially available
only to a company or group affiliated with the local landline telephone carriers
in the market (the "wireline" license), and the other license was initially
awarded to a company not affiliated with any landline telephone carrier (the
"non-wireline" license).
Cellular service providers operating in the PCS markets of Sprint PCS have
already established a substantial customer base. They collectively constitute
the primary initial competitors to the PCS networks of Sprint PCS. Although PCS
promises to offer service capabilities comparable or technically superior to
cellular service at lower cost, the cellular industry continues to enjoy the
benefits of being the incumbent provider of wireless service. Cellular operators
already have in place equipment supplier arrangements and have acquired the
sites necessary to provide service to a substantial portion of their geographic
service areas.
OTHER PCS PROVIDERS. Sprint PCS will face direct competition for PCS
subscribers from other licensed PCS systems within its markets. There are
potentially six PCS providers (not counting resellers and marketing agents for
licensees) in each PCS service area. Three licensees will hold 30 MHz of PCS
spectrum, one of which is licensed for a basic trading area, and the remaining
three licensees will hold 10 MHz of PCS spectrum. Some of the 10 MHz licenses
will be used to provide niche services or will be purchased by existing cellular
providers for added spectrum, while the 30 MHz licenses will be used to offer a
broad range of voice, data and related communications services, and may
ultimately develop into services that include a wireless local loop
functionality.
Sprint PCS may also face competition from other current or developing
technologies. Specialized Mobile Radio ("SMR") systems, such as those used by
taxicabs, as well as other forms of mobile communications service, may provide
competition in certain markets. SMR systems are permitted by the FCC to be
interconnected to the public switched telephone network and are significantly
less expensive to build and operate than cellular telephone systems. SMR
systems, however, are licensed to operate on substantially fewer channels than
PCS systems and generally lack PCS's ability to expand capacity through
frequency reuse by using many low-power transmitters and micro-cells to hand off
calls.
A company holding a considerable number of SMR licenses across the nation is
implementing its digital system to use available SMR spectrum in various
metropolitan areas more efficiently to increase capacity and to provide a range
of mobile radio communications services. The implementation of this proposal,
known as Enhanced Specialized Mobile Radio ("ESMR") service, has resulted in
legislation and FCC rules that regulate ESMR services in a manner that reflects
its potential interchangeability with cellular and PCS 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 PCS. It also recently
decided to license SMR spectrum in contiguous spectrum blocks via the
competitive bidding process. Although wide-area SMR spectrum has not yet been
assigned, the licensing change may further the potential of SMR services to
compete with cellular and PCS.
OTHER. Paging or beeper services that feature voice message, data services
and tones are also available in the targeted markets of Sprint PCS. Advanced
two-way paging systems with nationwide coverage are also under development.
These services may provide adequate capacity and sufficient mobile capabilities
to satisfy the needs of some potential PCS subscribers.
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Several applicants have received and several others are seeking FCC
authorization to construct and operate global satellite networks to provide
domestic and international mobile communications services from geostationary and
low earth orbit satellites. In addition, the Omnibus Budget Reconciliation Act
of 1993 (the "1993 Budget Act") provided, among other things, for the release of
200 MHz of Federal government spectrum for commercial and/or other non-federal
use over a 15 year period. The 1993 Budget Act also authorized the FCC to
conduct competitive bidding for certain radio spectrum licenses and required the
FCC to adopt new rules that eliminate the regulatory distinctions between mobile
common and private carriers who interconnect with the public switched network
and make their services available to a substantial portion of the public for
profit. These developments and further technological advances may make available
other alternatives to PCS service thereby creating additional sources of
competition. An example of this is the FCC's recent order creating a new
flexible Wireless Communications Service, which could potentially compete with
wireless and wired networks for customers.
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 the 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.
CABLE COMMUNICATIONS POLICY ACT OF 1984. The 1984 Cable Act generally became
effective in December 1984. This federal statute, which amended the
Communications Act of 1934 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
FCC, in turn, was charged with responsibility for adopting rules to implement
the 1984 Cable Act. Among other things, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in individual
states) to award one or more franchises within their jurisdictions. It also
prohibited non-grandfathered cable television systems from operating without a
franchise in such jurisdictions. In connection with new franchises, the 1984
Cable Act provides that in granting or renewing franchises, franchising
authorities may establish requirements for cable-related facilities and
equipment, but may not establish or enforce requirements for video programming
or information services other than in broad categories.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992. In October
1992, Congress enacted the 1992 Cable Act. This legislation, which amended the
1984 Cable Act, made significant changes to the legislative and regulatory
environment for the cable industry. The 1992 Cable Act became effective in
December 1992, although certain provisions, most notably those dealing with rate
regulation and retransmission consent, took effect at later dates. The 1992
Cable Act permitted a greater degree of regulation of the cable industry with
respect to, among other things: (i) cable system rates for both basic and
certain cable programming services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels by unaffiliated programming
services; (iv) leased access terms and conditions; (v) horizontal and vertical
ownership of cable systems; (vi) customer service requirements; (vii) franchise
renewals; (viii) television broadcast signal carriage and retransmission
consent; (ix) technical standards; (x) customer privacy; (xi) consumer
protection issues; (xii) cable equipment compatibility; (xiii) obscene or
indecent programming; and (xiv) subscription to tiers of service other than
basic service as a condition of purchasing premium services. Additionally, the
legislation encouraged competition with existing cable television systems by
allowing municipalities to own and operate their own cable television systems
without a franchise, preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area, and prohibiting the common ownership of
cable systems and co-located MMDS or SMATV systems. The 1992 Cable Act also
precluded video programmers affiliated with cable television companies from
favoring cable operators over competitors and required such programmers to sell
their programming to other multichannel video distributors. The legislation
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required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute, the majority of which, including certain
proceedings related to rate regulation, have been completed.
Various cable operators have filed actions in the United States District Court
in the District of Columbia (the "D.C. District Court") challenging the
constitutionality of several sections of the 1992 Cable Act. In April 1993, a
three-judge panel of the D.C. District Court granted summary judgment for the
government and upheld the constitutional validity of the must-carry provisions
of the 1992 Cable Act. That decision was appealed directly to the United States
Supreme Court, which vacated the decision in June 1994 and remanded it to the
three-judge panel for further proceedings. On December 12, 1995, the three-judge
panel again upheld the must-carry rules' constitutional validity. Pending the
Supreme Court's final review of the constitutionality of the must-carry rules,
such rules continue in force. On August 30, 1996, the U.S. Court of Appeals for
the D.C. Circuit upheld the constitutionality of nine other provisions of the
1992 Cable Act. Also on June 6, 1995, the same court of Appeals generally
upheld the FCC's rate regulations which were implemented pursuant to the 1992
Cable Act.
THE TELECOMMUNICATIONS ACT OF 1996. On February 1, 1996, Congress passed the
1996 Act, which was signed into law by the President on February 8, 1996. The
1996 Act substantially revises the Communications Act of 1934, as amended (the
"Communications Act"), including the 1984 Cable Act and the 1992 Cable Act under
which the cable industry is regulated. The FCC has been conducting various
rulemaking proceedings to implement the provisions of the 1996 Act over the last
year.
The 1996 Act has been described as one of the most significant changes in
communications regulation since the passage of the Communications Act. The 1996
Act modifies various rate regulation provisions of the Cable Act of 1992.
Generally, under the 1996 Act, cable programming service ("CPS") tier rates are
deregulated on March 31, 1999. Upon enactment, the CPS rates charged by small
cable operators are deregulated in systems serving 50,000 or fewer subscribers.
The 1996 Act also revises the CPS complaint filing procedures and adds a new
effective competition test under which cable rates may be deregulated. The 1996
Act allows cable operators to aggregate equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category, on a franchise, system, regional,
or company level. The statutory changes also facilitate the rationalizing of
equipment rates across jurisdictional boundaries. These favorable cost-
aggregation rules do not apply to the limited equipment used by basic service-
only subscribers.
The 1996 Act is intended, in part, to promote substantial competition in the
marketplace for telephone local exchange service and in the delivery of video
and other services and permits cable television operators to enter the local
telephone exchange market. Cox's ability to competitively offer telephone
services may be adversely affected by the degree and form of regulatory
flexibility afforded to LECs, and in part, will depend upon the final outcome of
various FCC rulemakings, including the proceeding which will deal with the
interconnection obligations of telecommunications carriers. The 1996 Act also
repeals the cable television/telephone cross-ownership ban adopted in the 1984
Cable Act and permits local telephone companies (also known as LECs) and other
service providers to provide video programming.
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 have
been lifted by state actions over the last few years, but the 1996 Act completes
the task. The 1996 Act also establishes new requirements to maintain and enhance
universal telephone service and new obligations for telecommunications providers
to maintain the privacy of customer information.
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Under the 1996 Act, LECs may provide video service as cable operators or
through "open video systems" ("OVSs"), a regulatory regime that gives them more
flexibility than traditional cable systems. The 1996 Act eliminates the
requirement that telephone companies file Section 214 applications with the FCC
before providing video service. This will limit the ability of cable operators
to challenge the econcomic viability of telephone company entry into the video
market. With certain exceptions, the 1996 Act also restricts buying out
incumbent cable operators in the LECs service area.
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.) Under the V-chip provisions of the 1996 Act,
cable operators and other video providers are required to carry any program
rating information that programmers include in video signals. Cable operators
also are subject to new scrambling requirements for sexually explicit
programming. These requirements have been held constitutional by a three-judge
federal district court, and the United States Supreme Court has been requested
to review the decision. In addition, cable operators that provide Internet
access or other online services are subject to the new indecency limitations.
Two U.S. District Courts have issued final rulings striking down the Internet
access provisions and the U.S. Supreme Court has agreed to hear the appeals of
these rulings. The courts have preliminarily enjoined the enforcement of these
content-based provisions relating to scrambling and Internet access.
Under the 1996 Act, a franchising authority may not require a cable operator
to provide telecommunications services or facilities, other than an
institutional network, as a condition to a grant, renewal, or transfer of a
cable franchise, and franchising authorities are preempted from regulating
telecommunications services provided by cable operators and from requiring cable
operators to obtain a franchise to provide such services. The 1996 Act also
repeals the 1992 Cable Act's anti-trafficking provision which generally required
the holding of cable television systems for three years.
It is premature to predict the effect of the 1996 Act on the cable industry in
general or Cox in particular. The FCC must undertake numerous rulemaking
proceedings to interpret and implement the 1996 Act. Some of these rulemakings
have been completed, but all are subject to pending petitions for
reconsideration, appeals, or both. It is not possible at this time to predict
the outcome of those proceedings or their effect on Cox.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over cable
television, has promulgated regulations covering such areas as the registration
of cable television systems, cross-ownership between cable television systems
and other communications businesses, carriage of television broadcast
programming, consumer education and lockbox enforcement, origination
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
may enforce these 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. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, broadcast signal carriage, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of DBS system
ownership and operation. A brief summary of certain of these federal regulations
as adopted to date follows.
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RATE REGULATION. The 1992 Cable Act substantially changed the regulatory
environment. Although the regulation of premium channels is still prohibited,
the 1992 Cable Act replaced the FCC's effective competition test, under which
most cable systems were not subject to local rate regulation, with a statutory
provision that results in nearly all cable television systems becoming subject
to rate regulation. Additionally, the legislation eliminated the permissible
automatic 5% annual rate increase for regulated basic services previously
allowed by the 1984 Cable Act; required the FCC to adopt a formula for
franchising authorities to enforce to assure that basic cable rates are
reasonable; allowed the FCC to review rates for cable programming service tiers
(other than per-channel or per-event services) in response to complaints filed
by franchising authorities and/or cable customers; prohibited cable television
systems from requiring subscribers to purchase service tiers above basic service
in order to purchase premium services if the system is technically capable of
doing so; required the adoption of regulations by the FCC to establish, on the
basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and permitted the imposition
by the FCC of restrictions on the retiering and rearrangement of cable services,
under certain limited circumstances. The FCC's rules governing rates for the
regulation of basic and cable programming service tiers generally became
effective in September 1993.
In February 1994, the FCC revised its benchmark regulations adopted in April
1993. Effective May 1994, cable television systems not seeking to justify rates
with a cost-of-service showing were to reduce rates by up to 17% of the rates in
effect on September 30, 1992, adjusted for inflation, channel modifications,
equipment costs and certain increases in programming costs. Under certain
conditions systems were permitted to defer these rate adjustments until July 14,
1994. Further rate reductions for cable systems whose rates are below the
revised benchmark levels, as well as reductions that would require operators to
reduce rates below benchmark levels in order to achieve a 17% rate reduction
were held in abeyance pending completion of cable system cost studies. The FCC
recently adopted an order which made permanent its deferral of the full 17
percent rate reduction, and consequently these systems will not be required to
reduce their rates by the full competitive differential previously implemented
by the FCC.
The FCC also revised its regulations governing the manner in which cable
operators may charge subscribers for new channels added to cable programming
services tiers. The FCC instituted a three-year flat fee mark-up plan.
Commencing on January 1, 1995, operators may charge subscribers up to $.20 per
channel for any channels added after May 14, 1994, but may not make adjustments
to monthly rates totalling more than $1.20 plus an additional $.30 to cover
programming license fees for those channels over the first two years of the
three-year period. In year three, an additional channel may be added with
another $.20 increase in rates. Rates also may increase in the third year to
cover any additional costs for the programming for any of the channels added
during the entire three-year period. Cable operators electing to use the $.20
per channel adjustment may not also take a 7.5% mark-up on programming cost
increases, which is otherwise permitted under the FCC's regulations. The FCC has
requested further comment on whether cable operators should continue to receive
the 7.5% mark-up on increases in license fees on existing programming services.
The FCC will permit cable operators to exercise their discretion in setting
rates for New Product Tiers ("NPT") so long as, among other conditions, the
channels that are subject to rate regulation are priced in conformity with
applicable regulations and cable operators do not remove programming services
from existing rate-regulated service tiers and offer them on an NPT.
In September 1995, the FCC authorized a new, alternative method of
implementing rate adjustments which will allow cable operators to increase rates
for programming annually on the basis of projected increases in external costs
(programming costs, local regulatory fees and state and local taxes applicable
to the provision of cable television services), inflation and changes in the
number of regulated channels rather than on the basis of cost increases incurred
in the preceding quarter. Operators that elect not to recover all of their
accrued external costs and inflation pass-throughs each year may recover them
(with interest) in subsequent years. In March, 1997, the FCC implemented
26
regulations that provide cable operators with the option of establishing uniform
rates throughout multiple franchise areas served by the same system. The FCC
will review proposals to implement uniform rates on a case by case basis.
In December 1995, the FCC adopted final cost-of-service rate regulations
requiring, among other things, cable operators to exclude 34% of system
acquisition costs related to intangible and tangible assets used to provide
regulated services. The FCC also reaffirmed the industry-wide 11.25% after tax
rate of return on an operator's allowable rate base, but initiated a further
rulemaking in which it proposed to use an operator's actual debt cost and
capital structure to determine an operator's cost of capital or rate of return.
After a rate has been set pursuant to a cost-of-service showing, rate increases
for regulated services are indexed for inflation, and operators are permitted to
increase rates in response to increases in costs beyond their control, such as
taxes and increased programming costs.
The 1996 Act amends the rate regulation provisions of the 1992 Cable Act.
Regulation of basic cable service continues in effect until a cable system
becomes subject to effective competition. Regulation of CPS rates will be
deregulated in franchise areas with more than 50,000 residents on March 31,
1999. The 1996 Act deregulates rates of small operators upon enactment where a
small cable operator serves 50,000 or fewer subscribers. A small cable operator
is defined as an operator that serves fewer than 1% of all subscribers and is
not affiliated with any entity whose gross annual revenues in the aggregate
exceed $250 million. Subscribers are no longer permitted to file programming
service complaints with the FCC, and complaints may only be brought by a
franchising authority if, within 90 days after a rate increase becomes
effective, it receives subscriber complaints. The FCC is required to act on such
complaints within 90 days. In addition to the existing definition of effective
competition, a new effective competition test permits deregulation of both basic
and CPS tier rates where a telephone company offers cable service by any means
(other than direct-to-home satellite services) provided that such service is
comparable to the services provided in the franchise area by the unaffiliated
cable operator. The uniform rate provision of the 1992 Cable Act is amended to
exempt bulk discounts to multiple dwelling units so long as a cable operator
that is not subject to effective competition does not charge predatory prices to
a multiple dwelling unit.
Franchising authorities in a number of communities in which Cox operates cable
television systems initiated basic service rate regulation pursuant to Section
623 of the Communications Act and corresponding regulations of the FCC and
required Cox to justify its existing basic service rates. In addition, certain
subscribers and franchising authorities filed complaints with the FCC pursuant
to Section 623 of the Communications Act and corresponding FCC regulations
challenging the reasonableness of Cox's rates for cable programming services.
Cox submitted rate justifications to these franchising authorities and filed
responses to the rate complaints with the FCC. Franchising authorities and the
FCC issued a number of rate decisions regarding basic and CPS rates, and the FCC
is currently processing several additional rate complaints.
On December 1, 1995, the FCC issued an order adopting the terms of a rate
settlement in the form of a proposed resolution between Cox and the FCC's Cable
Services Bureau (the "Resolution"). The order resolves the outstanding
programming service rate complaints covering all of Cox's systems as of June 30,
1995. The order provides for $7 million in refunds plus interest and covers one
million subscribers. The fees paid by the former TMCT subscribers for additional
outlets have been eliminated as of January 6, 1996 and account for virtually all
of the refund amount. The order also permits Cox to move as many as four
regulated services to a new tier in each franchise area where an a la carte
package previously was not provided, which provides Cox additional pricing
flexibility for this new tier. In addition, the order confirms that Cox's cable
programming service tier rates, as of June 30, 1995, are not unreasonable and
that the acceptance of the Resolution by the FCC does not constitute an
admission by Cox of any violation or failure to conform to any law, rule or
policy. On January 29, 1996, the City of Irvine and six other cities located in
California filed an appeal to set aside the order in the United States Court of
Appeals for the Ninth Circuit. The FCC is a party to the appeal and Cox has been
granted leave to intervene. In lieu of filing its brief, the FCC asked the Court
to remand the case so that it might issue an order that better explained the
reasons underlying its decision to accept the Resolution. The Court granted the
request, but the FCC has not yet issued a revised order. Cox cannot predict the
outcome of this appeal.
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CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act contains new
signal carriage requirements. The FCC adopted rules implementing the must-carry
provisions for non-commercial and commercial stations and retransmission consent
for commercial stations in March 1993. These rules allow commercial television
broadcast stations which are "local" to a cable system, i.e., the system is
located in the station's Area of Dominant Influence ("ADI"), to elect every
three years whether to require the cable system to carry the station, subject to
certain exceptions, or whether to require the cable system to negotiate for
"retransmission consent" to carry the station. The first such election was made
in June 1993 and the second in October 1996. With the 1996 election , FCC rules
require broadcasters to use their DMA as the relevent television market for
must-carry purposes. A recent amendment to the Copyright Act of 1976 will in
some cases increase the number of stations that may elect must-carry status on
cable systems located within such stations' ADI. Cable systems must obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations" (i.e., commercial satellite-
delivered independent stations such as WTBS). All commercial stations entitled
to carriage were to have been carried by June 1993, and any non-must-carry
stations (other than superstations) for which retransmission consent had not
been obtained could no longer be carried after October 5, 1993. A number of
stations previously carried by Cox's cable television systems elected
retransmission consent. Cox generally reached agreements with broadcasters who
elected retransmission consent or negotiated extensions to the retransmission
deadline and thus far has not been required to pay cash compensation to
broadcasters for retransmission consent. Cox has agreed to carry some services
(e.g., fX and ESPN2) in specified markets pursuant to retransmission consent
agreements which it believes are comparable to those entered into by most other
large cable television operators. Local non-commercial television stations are
also given mandatory carriage rights, subject to certain exceptions, within the
larger of: (i) a 50 mile radius from the station's city of license; or (ii) the
station's Grade B contour (a measure of signal strength). Unlike commercial
stations, non-commercial stations are not given the option to negotiate
retransmission consent for the carriage of their signal. The must-carry
provisions for non-commercial stations became effective in December 1992.
NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local television
station, delete the simultaneous or nonsimultaneous network programming of a
distant station when such programming has also been contracted for by the local
station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television
broadcast stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable system to delete or
"black out" such programming from other distant television stations which are
carried by the cable system. The extent of such deletions will vary from market
to market and cannot be predicted with certainty. However, it is possible that
such deletions could be substantial and could lead the cable operator to drop a
distant signal in its entirety. The FCC also has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract, and to
determine whether such exclusivity rights should be extended to noncommercial
educational stations. It is possible that the outcome of these proceedings will
increase the amount of programming that cable operators are required to black
out. Finally, the FCC has declined to impose equivalent syndicated exclusivity
rules on satellite carriers who provide services to the owners of home satellite
dishes similar to those provided by cable systems.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC.
TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical standards
applicable to the cable channels on which broadcast stations are carried, and
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has prohibited franchising authorities from adopting standards which were in
conflict with or more restrictive than those established by the FCC. The FCC
revised its standards and made them applicable to all classes of channels which
carry downstream National Television System Committee ("NTSC") video
programming. Local franchising authorities are permitted to enforce the FCC's
new technical standards. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 MHz and
225-400 MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. The 1992 Cable Act requires the FCC to periodically
update its technical standards to take into account changes in technology and to
entertain waiver requests from franchising authorities who seek to impose more
stringent technical standards upon their franchised cable television systems.
POLE ATTACHMENTS. The FCC currently regulates the rates, terms and conditions
imposed by certain public utilities for use of their poles, unless under the
Federal Pole Attachment Act state public utilities commissions are able to
demonstrate that they regulate rates, terms and conditions of the cable
television pole attachments. A number of states and the District of Columbia
have so certified to the FCC. In the absence of state regulation, the FCC
administers such pole attachment rates through use of a formula which it has
devised and from time to time revises. Recently the FCC initiated a proceeding
to determine whether it should make other adjustments to the current pole
attachment formula which, if implemented, generally would result in an increase
in pole attachment rates. The 1996 Act extends the regulation of rates, terms
and conditions of pole attachments to telecommunications service providers, and
requires the FCC to prescribe regulations to govern the charges for pole
attachments used by telecommunications carriers to provide telecommunications
services when the parties fail to resolve the dispute over such charges. The
1996 Act, among other provisions, increases significantly future pole attachment
rates for cable 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.
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 $0.55
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 (CARS). 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
customers to purchase video programming on a per-channel or a per-event basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable system is technically incapable of doing
so. Generally cable systems must become technically capable of complying with
the statutory obligation by December 2002. Consistent with its statutory
obligations, the FCC also has adopted a number of measures for improving
compatibility between existing cable systems and consumer electronics equipment,
including a prohibition from scrambling program signals carried on the basic
tier, absent a waiver. The FCC also is considering whether to extend this
prohibition to cover all regulated tiers of programming.
In December 1994, the FCC announced that its longstanding Emergency Broadcast
System rules were to be replaced. The new rules establish cable television and
broadcast technical standards to support a new Emergency Alert System. Cable
operators must install and activate equipment necessary for the new system by
July 1, 1997.
FCC regulations also address the carriage of local sports programming;
restrictions on origination and cablecasting by cable system operators;
application of the rules governing political broadcasts; customer service
standards; home wiring and limitations on advertising contained in nonbroadcast
children's programming. The FCC has initiated a rulemaking to consider, among
other issues, whether to adopt uniform regulations governing telephone and cable
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inside wiring. The regulations ultimately adopted by the FCC could affect Cox's
ownership and access to inside wiring used to provide telephony and video
programming services particularly with regard to the provision of services to
multiple dwelling unit buildings. In a related rulemaking proceeding, the FCC
will consider the appropriate treatment of inside wiring in multiple dwelling
unit buildings. The outcome of that rulemaking could affect cable operators'
access to inside wiring in MDUs which they currently serve.
CONSUMER EQUIPMENT. The 1996 Act requires the FCC, in consultation with
industry standard-setting organizations, to adopt regulations which would
encourage commercial availability to consumers of all services offered by
multichannel video programming distributors, such as converter boxes,
interactive communications equipment and other equipment used by consumers to
access multichannel video programming. The FCC has initiated a proceeding
seeking comment as to how to implement its obligations under the 1996 Act.
Pursuant to the 1996 Act, the regulations adopted may not prohibit programming
distributors from offering consumer equipment, so long as the cable operator's
rates for such equipment are not subsidized by charges for the services offered.
The rules also may not compromise the security of the services offered, or the
efforts of service providers from preventing theft of service. The FCC may waive
these rules so as not to hinder the development of advanced services and
equipment. The 1996 Act also requires the FCC to examine the market for closed
captioned programming and prescribe regulations which ensure that video
programming, with certain exceptions, is fully accessible through closed
captioning and the FCC has initiated a proceeding to prescribe such rules.
FRANCHISE FEES AND OBLIGATIONS. Although franchising authorities may impose
franchise fees under the 1984 Cable Act, such payments cannot exceed 5% of a
cable system's annual gross revenues. Franchising authorities are also empowered
in awarding new franchises or renewing existing franchises to require cable
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
RENEWAL OF FRANCHISES. The 1984 Cable Act established renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal. These formal procedures are mandatory only if timely invoked by either
the cable operator or the franchising authority. Even after the formal renewal
procedures are invoked, franchising authorities and cable operators remain free
to negotiate a renewal outside the formal process. Although the procedures
provide substantial protection to incumbent franchisees, renewal is by no means
assured, as the franchisee must meet certain statutory standards. Even if a
franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
The 1992 Cable Act made several changes to the renewal process which could
make it easier in some cases for a franchising authority to deny renewal. The
cable operator's timely request to commence renewal proceedings must be in
writing and the franchising authority must commence renewal proceedings not
later than six months after receipt of such notice. Within a four-month period
beginning with the submission of the renewal proposal, the franchising authority
must grant or preliminarily deny the renewal. Franchising authorities may
consider the "level" of programming service provided by a cable operator in
deciding whether to renew. Franchising authorities are no longer precluded from
denying renewal based on failure to substantially comply with the material terms
of the franchise where the franchising authority has "effectively acquiesced" to
such past violations. Rather, the franchising authority is estopped only if,
after giving the cable operator notice and opportunity to cure, the authority
fails to respond to a written notice from the cable operator of its failure or
inability to cure. Courts may not reverse a denial of renewal based on
procedural violations found to be "harmless error."
COMPETING FRANCHISES. Questions concerning the ability of municipalities to
award a single cable television franchise and to impose certain franchise
restrictions upon cable television companies have been considered in several
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recent federal appellate and district court decisions. These decisions have been
somewhat inconsistent and, until the United States Supreme Court rules
definitively on the scope of cable television's First Amendment protections, the
legality of the franchising process and of various specific franchise
requirements is likely to be in a state of flux. It is not possible at the
present time to predict the constitutionally permissible bounds of cable
franchising and particular franchise requirements. However, the 1992 Cable Act,
among other things, prohibits franchising authorities from unreasonably refusing
to grant franchises to competing cable television systems and permits
franchising authorities to operate their own cable television systems without
franchises.
CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising authorities
to require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act further requires cable
television systems with 36 or more activated channels to designate a portion of
their channel capacity for commercial leased access by unaffiliated third
parties. While the 1984 Cable Act allowed cable operators substantial latitude
in setting leased access rates, the 1992 Cable Act requires leased access rates
to be set according to an FCC-prescribed formula. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity. The FCC recently reconsidered and revised the formula
governing the rates that may be charged for the use of leased access channels.
The new formula, which will result in a downward adjustment in such rates, has
been appealed by a party seeking a further adjustment.
OWNERSHIP. The FCC rules generally prohibit the direct or indirect common
ownership, operation, control or interest in a cable television system, on the
one hand, and a local television broadcast station whose television signal
(predicted grade B contour as defined under FCC regulations) reaches any portion
of the community served by the cable television system, on the other hand. For
purposes of the cross-ownership rules, "control" of licensee companies is
attributed to all 5% or greater stockholders, except for mutual funds, banks and
insurance companies which may own less than 10% without attribution of control.
This rule prohibits Cox from owning or operating a cable television system in
the same area in which CEI or one of CEI's subsidiaries owns or operates a
television broadcast station. The FCC has requested comment as to whether to
raise the attribution criteria from 5% to 10% and for passive investors from 10%
to 20%, and whether it should exempt from attribution certain widely held
limited partnership interests where each individual interest represents an
insignificant percentage of total partnership equity. The 1996 Act eliminated
the statutory ban on the cross-ownership of a cable system and a television
station, and permits the FCC to amend or revise its own regulations regarding
the cross-ownership ban. The FCC's rule remains in effect. The FCC recently
lifted its ban on the cross-ownership of cable television systems by broadcast
networks and revised its regulations to permit broadcast networks to acquire
cable television systems serving up to 10% of the homes passed in the nation,
and up to 50% of the homes passed in a local market. The local limit would not
apply in cases where the network-owned cable system competes with another cable
operator.
Finally, in order to encourage competition in the provision of video
programming, the FCC adopted a rule in 1993 prohibiting the common ownership,
affiliation, control or interest of cable television systems and MMDS facilities
having overlapping service areas, except in very limited circumstances. However,
the 1996 Act permits co-ownership of MMDS and cable systems in areas where the
cable operator is subject to effective competition. The 1992 Cable Act also
codified this restriction and extended it to co-located SMATV systems, except
that a cable system may acquire a co-located SMATV system if it provides cable
service to the SMATV system in accordance with the terms of its cable television
franchise. Under the 1992 Cable Act, permitted arrangements in effect as of
October 5, 1992 were grandfathered. 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
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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 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 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 system
or the telephone exchange facilities, the cable operator or LEC would be subject
to undue economic distress by enforcement of the restrictions, the 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.
Pursuant to the 1992 Cable Act, the FCC has imposed regulatory ownership
restrictions on the number of cable systems which a single cable operator may
own. In general, no cable operator may hold an attributable interest in cable
systems which pass more than 30% of all homes nationwide. Attributable interests
for these purposes include voting interests of 5% or more (unless there is
another single holder of more than 50% of the voting stock), officerships,
directorships and general partnership interests. The FCC has stayed the
effectiveness of these rules pending the outcome of the appeal of the United
States District Court decision holding the multiple ownership limit provision of
the 1992 Cable Act unconstitutional. The appeal of that decision has been
consolidated with an appeal of the FCC's regulatory ownership restrictions. The
FCC also has adopted rules which limit the number of channels on a cable system
that can be occupied by programming in which the entity that owns the cable
system has an attributable interest. The limit is 40% of all activated channels.
Federal cross-ownership restrictions have previously limited entry into the
cable television business by potentially strong competitors such as telephone
companies. The 1996 Act repeals the cross-ownership ban and provides that
telephone companies may operate cable television systems within their own
service areas.
The 1996 Act will enable telephone companies to provide video programming
services as common carriers, cable operators or open video system ("OVS")
operators. If OVS systems become widespread in the future, cable television
systems could be placed at a competitive disadvantage because, unlike OVS
operators, cable television systems are required to obtain local franchises to
provide cable television service and must comply with a variety of obligations
under such franchises. Under the 1996 Act, common carriers leasing capacity for
the provision of video programming services over cable systems or OVS operators
are not bound by the interconnection obligations of Title II, which otherwise
would require the carrier to make capacity available on a nondiscriminatory
basis to any other person for the provision of cable 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.
Common carriers that qualify as OVS operators are exempt from many of the
regulatory obligations that currently apply to cable operators. However, certain
restrictions and requirements that apply to cable operators will still be
applicable to OVS operations. Common carriers that elect to provide video
services over an OVS may do so upon obtaining certification by the FCC. Among
other requirements, the 1996 Act prohibits OVS operators from discriminating in
the provision of video programming services and requires OVS operators to limit
carriage of video services selected by the OVS operator to one-third of the
OVS's capacity. OVS operators must also comply with the FCC's sports
exclusivity, network nonduplication and syndicated exclusivity restrictions,
public, educational, and government channel use requirements, the "must-carry"
requirements of the 1992 Cable Act, and regulations that prohibit
anticompetitive behavior or discrimination in the prices, terms and conditions
of providing vertically integrated satellite-delivered programming. The manner
32
in which OVS operators will be treated as cable operators for purposes of
copyright liability has not yet been determined by the Copyright Office. Upon
compliance with such requirements and FCC rules that mirror statutory
requirements, an OVS operator will be exempt from various statutory restrictions
which apply to cable operators, such as broadcast-cable ownership restrictions,
commercial leased access requirements, franchising, rate regulation, and
consumer electronics compatibility requirements. Although OVS operators are not
subject to franchise fees, as defined by the 1996 Act, they may be subject to
fees charged by local franchising authorities or other governmental entities in
lieu of franchise fees. Such fees may not exceed the rate at which franchise
fees are imposed on cable operators and may be itemized separately on subscriber
bills.
The FCC has ruled that cable operators may opt to operate OVS systems, but
only if they are subject to effective competition. Under the FCC's rules, a
cable operator may not terminate an existing franchise agreement in order to
become an OVS operator. An appeal of these rules is currently pending in the
United States Court of Appeals for the Fifth Circuit.
TELECOMMUNICATIONS REGULATION. The telecommunications services currently
offered by Cox affiliates and Sprint PCS are subject to varying degrees of
federal, state and local regulation. The FCC exercises jurisdiction over all
facilities of, and services offered by, telecommunications service providers to
the extent that those facilities are used to provide, originate and terminate
interstate or international communications.
LANDLINE TELECOMMUNICATIONS SERVICES. While the current switched voice and
data market is dominated by local exchange companies, also known as incumbent
LECs, the 1996 Act presents new opportunities for new entrants into these
markets. The LECs provide a full range of local telecommunications services and
equipment to customers, as well as originating and terminating access to their
local networks to interexchange carriers and commercial mobile radio service
providers. Because LECs historically have had exclusive state franchises by law
to provide telephone services, they have established monopoly relationships with
their customers. Under the new law and subject to certain exemptions for rural
telephone companies, the FCC is directed to preempt any state law or regulation
that acts to prevent new competitive entry into incumbent LEC markets.
The 1996 Act also eliminates the interexchange (interLATA) restrictions
contained in the Modified Final Judgment, the 1981 consent decree, and
establishes procedures under which a Bell Operating Company (BOC) can enter the
market for interLATA services within its telephone service area. Before a BOC
can enter the landline interLATA market, it must enter into a state-approved
interconnection agreement with a company that provides local exchange service to
business and residential customers predominantly over its own facilities.
Alternatively, if no such competitor requests interconnection, the BOC can
request authority to provide interLATA services if it offers interconnection
pursuant to state-approved terms and conditions. The interconnection provided by
the BOC must comply with a "competitive checklist". Many, if not all, of the
BOCs are currently preparing applications for FCC approval to provide interLATA
services.
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 required the FCC to implement rules under which all LECs must provide
telephone number portability, dialing parity, reciprocal compensation for
traffic transport and termination, resale and access to rights of way. In
addition, the 1996 Act specifies procedures for state commissions to review and
approve both voluntary and compulsory interconnection agreements entered into
between new entrants and incumbent LECs. These requirements also place burdens
on new entrants that may benefit other competitors. In particular, the resale
requirement means that a company can seek to resell the facilities of a new
entrant without making a similar investment in facilities.
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One of the primary goals of the original Communications Act of 1934 was to
extend telephone service to all citizens of the United States. This goal has
been achieved primarily by 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
incumbent LECs that have 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.
Although the details will be determined by the FCC as it considers the
recommendations of a Federal-State joint board of regulators, the legislation
specifies that all telecommunications carriers will be required to contribute
and carriers that serve eligible customers can apply to receive subsidies. State
universal service programs may also continue in effect so long as they are
administered on a competitively neutral basis.
Depending upon how the FCC implements its statutory mandate and states adjust
their existing programs, this subsidy mechanism may provide an additional source
of revenue to those LECs willing and able to provide service to those markets
that are less financially desirable, either because of the high cost of
providing service or the limited revenues that might be available from serving a
particular subset of customers in an area, i.e., residential customers.
Another goal of the 1996 Act is to increase competition for telecommunications
services, thereby reducing the need for continuing regulation of these services.
To this end the 1996 Act requires the FCC to streamline its regulation of
incumbent LECs and permits the FCC to forbear from regulating particular classes
of telecommunications services or providers, including relaxation or potentially
eventual termination of FCC service tariffing requirements.
The 1996 Act eliminates the requirement that incumbent LECs obtain FCC
authorization prior to constructing facilities for interstate services. The 1996
Act also limits the FCC's ability to review incumbent LEC tariff filings. These
changes will increase the speed with which incumbent LECs are able to introduce
new service offerings and new pricing of existing services, thereby increasing
their flexibility to respond to new entrants.
In addition to incumbent LECs and existing competitive access providers, new
entrants potentially capable of offering switched and non-switched services
include individual cable television companies, electric utilities, long distance
carriers, microwave carriers, wireless service providers, resellers and private
networks built by large end-users.
BROADBAND PCS AUCTION. In the 1993 Budget Act, Congress gave the FCC the
authority to preempt states from regulating the entry of or the rates charged by
any Commercial Mobile Radio Service ("CMRS") provider, including PCS 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 PCS) that are for profit and that provide
interconnected service to the public or a substantial portion of the public. At
that time, the FCC preempted state regulation and established a procedure for
states to petition the FCC for authority to regulate CMRS rates. Eight states
submitted requests to continue regulation of cellular providers within their
jurisdictions. On May 19, 1995, the FCC released orders denying the requests.
States are permitted under the 1993 Budget Act to regulate "other terms and
conditions" of CMRS, including the siting and zoning of CMRS equipment. A
petition for rulemaking is pending before the FCC requesting that the FCC
preempt state and local siting and zoning regulation to the extent such
regulation acts to inhibit or prevent entry into the CMRS marketplace. The
petition generally has been opposed by state and local governments and supported
by CMRS providers and potential PCS providers. The 1996 Act contains a provision
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prohibiting state and local governments from discriminating in their zoning
decisions that apply to personal wireless service facilities and enforcing rules
or regulations that prevent the provision of wireless services.
Additionally, the 1996 Act specifically determined that CMRS providers are not
required to provide equal access to interexchange carriers for the provision of
interexchange services. While the FCC has prescribed rules for the unblocking of
access to a preferred interexchange carrier, the legislation does away with the
equal access requirement imposed on the wireless affiliates of the BOCs. In
addition, the 1996 Act permits the BOCs, on enactment, to provide interexchange
service to their cellular customers.
The FCC has allocated 120 MHz of spectrum in the 2 GHz band to be licensed to
competing broadband PCS providers, which it is anticipated will offer advanced
digital wireless services in competition with current cellular and specialized
mobile radio services as well as with landline telephone service. Broadband PCS
spectrum was first auctioned by Major Trading Area (MTA) licenses by the FCC in
an auction which ended in mid-March 1995. Six broadband PCS licenses have been
auctioned in each service area (except that only five licenses were auctioned in
the three markets in which pioneer preference licenses were issued), and FCC
rules permit some aggregation and disaggregation of PCS spectrum by PCS
operators. The first broadband PCS auction included two 30 MHz frequency blocks
of spectrum (Blocks "A" and "B") licensed by MTA. The second auction was for 30
MHz blocks of broadband spectrum, licensed using Basic Trading Areas (Block "C"
auction). Block C licenses were available only to parties that met specific FCC
eligibility criteria. A Basic Trading Area spectrum block, Block "F," was also
auctioned only to parties meeting specific eligibility criteria following the
Block "C" auction. The FCC has recently concluded its final PCS auctions for the
F Block and two Basic Trading Area 10 MHz blocks of spectrum, Blocks "D" and
"E," which will not be subject to the additional eligibility requirements
imposed on Blocks "C" and "F."
STATE AND LOCAL REGULATION
CABLE TELEVISION REGULATION. 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.
Cable television 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 franchise operator 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. The 1984 Cable Act places
certain limitations on a franchising authority's ability to control the
operation of a cable system, and courts have from time to time reviewed the
constitutionality of several general franchise requirements, including franchise
fees and access channel requirements, often with inconsistent results. On the
other hand, the 1992 Cable Act prohibits exclusive franchises and allows
franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities have immunity from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments.
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The specific terms and conditions of a franchise and the laws and regulations
under which it was granted directly affect the profitability of the cable
television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting 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.
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.
The government of Mexico has authorized the allocation of a new broadcast
station on channel 3 in Tijuana, Mexico, which if constructed, will cause
interference with the operations of the Company's cable system serving the San
Diego area. The Company provides its subscribers with converters which are
tuned to channel 3, and ingress from the station's signal wall cause co-channel
interference on the system in those areas of the San Diego market where the
station's signal is received. The United States Government has requested the
Mexican government to modify its proposed allocation. If the Mexican government
declines, the Company would be required to incur significant expenses to retune
subscribers' converters to a different channel. Cable reception in those
franchise areas where the station could be received would be disrupted until the
converters were retuned.
EMPLOYEES
At December 31, 1996, Cox had approximately 7,200 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. 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.
36
ITEM 3. LEGAL PROCEEDINGS
Cox is a party to various legal proceedings that are ordinary and incidental
to its business. Management does not expect that any legal proceedings currently
pending, individually or in the aggregate, will have a material adverse effect
on Cox or its business or operations. See Note 16 to the Consolidated Financial
Statements included in Cox's 1996 Annual Report to Stockholders and incorporated
herein by reference (see Exhibit 13).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Cox held its 1996 Annual Meeting of Stockholders on May 7, 1996. Two matters
were voted upon at the meeting: (a) the election of a Board of Directors of
seven members to serve until the 1997 Annual Meeting or until their successors
are duly elected and qualified; and (b) ratification of the appointment by the
Board of Directors of Deloitte & Touche LLP, independent certified public
accountants, as Cox's independent auditors for the year ending December 31,
1996.
The following directors were elected and they received the votes indicated:
VOTES
IN FAVOR OF WITHHELD
----------- --------
James C. Kennedy 383,026,502 579,883
Janet Morrison Clarke 383,227,225 379,360
John R. Dillon 383,025,987 580,398
David E. Easterly 383,026,481 579,904
Robert F. Erburu 382,994,061 612,324
James O. Robbins 383,026,540 579,845
Andrew J. Young 383,205,099 401,286
Ratification of Deloitte & Touche LLP as independent auditors for the fiscal
year ending December 31, 1996 was approved with 383,544,498 votes in favor,
15,104 votes opposed and 45,783 abstentions.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Except as set forth below, the information required by this Item is incorporated
by reference to the back cover of Cox's 1996 Annual Report to Stockholders (see
Exhibit 13).
In June 1995, concurrent with its public offering of shares of Class A Common
Stock, the Company agreed to issue shares of Class A Common Stock to CEI in a
private placement (the "CEI Purchase"). Pursuant to the CEI Purchase, CEI
acquired 8,298,755 shares of Class A Common Stock at $18.075 per share, the
price offered to the public per share, less the underwriting discounts and
commissions thereon. CEI holds these shares of Class A Common Stock for
investment purposes.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to page 18
of Cox's 1996 Annual Report to Stockholders (see Exhibit 13).
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to pages 19
through 25 of Cox's 1996 Annual Report to Stockholders (see Exhibit 13).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Except as set forth below, the information required by this Item is
incorporated by reference to pages 26 through 48 of Cox's 1996 Annual Report to
Stockholders (see Exhibit 13).
The information required by this Item with respect to Cox California PCS, Inc.
is included at Exhibit 99.1.
The information required by this Item with respect to Sprint Spectrum Holding
Company, L.P. is included at Exhibit 99.2.
The information required by this Item with respect to Teleport Communications
Group Inc. is incorporated by reference to the financial statements contained in
the Form 10-K for the fiscal year ended December 31, 1996 filed by Teleport
Communications Group Inc. (Commission File No. 0-20913) (See Exhibit 99.3).
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 1997 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 1997 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 1997 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 1997 Annual Meeting of Stockholders.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents incorporated by reference or filed with this Report
(1) The financial statements set forth on pages 26 through 48 of the
1996 Annual Report to Stockholders are incorporated herein by
reference (see Exhibit 13). The financial statements required by
Item 8 with respect to Cox California PCS, Inc. are incorporated by
reference herein (see Exhibit 99.1). The financial statements
required by Item 8 with respect to Sprint Spectrum Holding Company,
L.P. are incorporated by reference herein (see Exhibit 99.2). The
financial statements required by Item 8 with respect to Teleport
Communications Group Inc. are incorporated by reference herein (see
Exhibit 99.3).
(2) No financial statement schedules are required to be filed by Items 8
and 14(d) because they are not required or are not applicable, or
the required information is set forth in the applicable financial
statements or notes thereto.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
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):
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger, dated as of June 5, 1994, by and
among The Times Mirror Company, New TMC Inc., Cox Communications,
Inc. and Cox Enterprises, Inc. (Incorporated by reference to
Exhibit 2.1 to Cox's Registration Statement on Form S-4, File No.
33-80152, filed with the Commission on December 16, 1994.)
2.2 -- Amendment No. 1, dated as of December 16, 1994, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC
Inc., Cox Communications, Inc. and Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 2.2 to Cox's Registration
Statement on Form S-4, File No. 33-80152, filed with the
Commission on December 16, 1994.)
2.3 -- Amendment No. 2, dated as of January 30, 1995, to Agreement and
Plan of Merger by and among The Times Mirror Company, New TMC
Inc., Cox Communications, Inc., and Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 2.3 to Cox's Current Report
on Form 8-K filed with the Commission on February 15, 1995.)
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 -- 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.)
4.1 -- Indenture dated as of June 27, 1995 between Cox Communications,
Inc. and The Bank of New York, as Trustee, relating to the 6 3/8 %
Notes due 2000, 6 1/2 % Notes due 2002, 6 7/8 Notes due 2005, 7
1/4 % Debentures due 2015 and the 7 5/8 % Debentures due 2025 of
Cox Communications, Inc. (Incorporated by reference to Exhibit 4.1
to Cox's Registration Statement on Form S-1, File No. 33-99116,
filed with the Commission on November 8, 1995.)
10.1 -- Amended and Restated Agreement of Limited Partnership of MajorCo,
L.P., dated as of January 31, 1996, among Sprint Spectrum, L.P.,
TCI Network Services, Comcast Telephony Services and Cox Telephony
Partnership. * (Incorporated by reference to Exhibit 10.1 to Cox's
Current Report on Form 8-K filed with the Commission on February
9, 1996.)
39
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.)
10.7 -- Tax Allocation Agreement, dated as of February 1, 1995, by and
between Cox Enterprises, Inc. and Cox Communications, Inc.
(Incorporated by reference to Exhibit 10.7 to the Annual Report on
Form 10-K of Cox Communications, Inc., filed with the Commission
on March 31, 1995.)
10.8 -- Asset Purchase Agreement, dated as of November 8, 1994, by and
between Newport News Cablevision, Ltd. and Cox Cable Hampton
Roads, Inc. (Incorporated by reference to Exhibit 10.8 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
10.9 -- Cox Executive Supplemental Plan of Cox Enterprises, Inc.
(Incorporated by reference to Exhibit 10.5 to Cox's Registration
Statement on Form S-4, File No. 33-80152, filed with the
Commission on December 16, 1994.)
10.10 -- Cox Communications, Inc. Long-Term Incentive Plan. (Incorporated
by reference to Exhibit 10.8 to Cox's Registration Statement on
Form S-4, File No. 33-80152, filed with the Commission on December
16, 1994.)
10.11 -- Cox Communications, Inc. Restricted Stock Plan for Non-Employee
Directors. (Incorporated by reference to Exhibit 10.9 to Cox's
Registration Statement on Form S-4, File No. 33-80152, filed with
the Commission on December 16, 1994.)
10.12 -- 5-Year Credit Agreement, dated as of January 24, 1995, by and
among Cox Communications, Inc., Texas Commerce Bank National
Association and Chemical Bank, individually and as agents, and the
other banks signatory thereto. (Incorporated by reference to
Exhibit 10.13 to the Annual Report on Form 10-K of Cox
Communications, Inc., filed with the Commission on March 31,
1995.)
10.13 -- 364-Day Credit Agreement, dated January 24, 1995, by and among Cox
Communications, Inc., Texas Commerce Bank National Association and
Chemical Bank, individually and as agents, and the other banks
signatory. (Incorporated by reference to Exhibit 10.14 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
10.14 -- Assumption and Amendment Agreement, dated as of February 1, 1995,
among Cox Communications, Inc., Texas Commerce Bank National
Association, individually and as agent, and the other bank
signatory. (Incorporated by reference to Exhibit 10.15 to the
Annual Report on Form 10-K of Cox Communications, Inc., filed with
the Commission on March 31, 1995.)
40
10.15 -- Form of Letter Agreement between Cox Enterprises, Inc. and Cox
Communications, Inc. relating to the CEI Purchase. (Incorporated
by reference to Exhibit 10.16 to Cox's Amendment No. 2 to
Registration Statement on Form S-1, File No. 33-92000, filed with
the Commission on June 21, 1995.)
10.16 -- Share Exchange Agreement, dated August 11, 1995, among
Southwestern Bell International Holdings (UK-1) Corporation,
Southwestern Bell International Holdings (UK-2) Corporation, Cox
UK Communications, LP, TeleWest plc, TeleWest Communications plc,
SBC International, Inc., Cox Communications, Inc. and SBC Cable
Comms (UK) relating to the TeleWest Merger. (Incorporated by
reference to Exhibit 10.1 on Form 10-Q of Cox Communications,
Inc., filed with the Commission on November 8, 1995.)
10.17 -- Form of Co-Operation Agreement among Cox U.K. Communications, LP,
Cox Communications, Inc., Southwestern Bell International Holdings
(UK-1) Corporation and Southwestern Bell International Holdings
(UK-2) Corporation, SBC International, Inc. and TeleWest plc
relating to the TeleWest Merger. (Incorporated by reference to
Exhibit 10.2 on Form 10-Q of Cox Communications, Inc., filed with
the Commission on November 8, 1995.)
10.18 -- Form of Share Dealing Agreement among Cox Communications, Inc.,
Cox U.K. Communications, LP, SBC International, Inc., Southwestern
Bell International Holdings (UK-1) Corporation and Southwestern
Bell International Holdings (UK-2) Corporation, Telecommunications
International Holdings, Inc., US West International Holdings, Inc.
and TeleWest plc relating to the TeleWest Merger. (Incorporated by
reference to Exhibit 10.3 on Form 10-Q of Cox Communications,
Inc., filed with the Commission on November 8, 1995.)
10.19 -- Asset Exchange Agreement, dated December 31, 1996, by and among
Heritage Cablevision of Southeast Massachusetts, Inc., Heritage
Cablevue, Inc., TCI Cablevision of St. Bernard, Inc., TCI of
Council Bluffs, Inc., TCI of Virginia, Inc., UA-Columbia
Cablevision of Massachusetts, Inc., United Cable Television of
Sarpy County, Inc., United Cable Television of Scottsdale, Inc.,
and TCI American Cable Holdings, L.P., and CoxCom, Inc.*
10.20 -- Subscription Agreement, dated March 21, 1997, between Cox
Communications, Inc. and Flextech plc
13 -- Portions of the 1996 Annual Report to Stockholders (expressly
incorporated by reference in Part I, Item 3 and Part II, Items 5
through 8 of this Report).
21 -- Subsidiaries of Cox Communications, Inc.
23.1 -- Consent of Deloitte & Touche LLP, Atlanta, Georgia
23.2 -- Consent of Deloitte & Touche LLP, Kansas City, Missouri
23.3 -- Consent of Deloitte & Touche LLP, New York, New York
23.4 -- Consent of Deloitte & Touche LLP, Costa Mesa, California
23.5 -- Consent of Price Waterhouse LLP, Washington, District of Columbia
24 -- Power of Attorney (included on page 42)
27 -- Financial data schedule
99.1 -- Combined financial statements of Cox Communications PCS, L.P.
and Cox California PCS, Inc.
99.2 -- Financial statements of Sprint Spectrum Holding Company, L.P.
99.3 -- Financial statements of Teleport Communications Group Inc.
________
* Schedules and exhibits intentionally omitted.
(b) Current reports on Form 8-K:
Cox filed a Current Report on Form 8-K dated 12/31/96.
41
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 28, 1997
POWER OF ATTORNEY
Cox Communications, Inc., a Delaware corporation, and each person whose
signature appears below, constitutes and appoints James O. Robbins and Jimmy W.
Hayes, and either of them, with full power to act without the other, such
person's true and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Annual Report on Form 10-K and any and all amendments
to such Annual Report on Form 10-K and other documents in connection therewith,
and to file the same, and all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, thereby ratifying and confirming all that said attorneys-in-fact, or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF COX
COMMUNICATIONS, INC. AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES C. KENNEDY Chairman of the Board of March 28, 1997
- ------------------------- Directors
James C. Kennedy
/s/ JAMES O. ROBBINS President and Chief Executive March 28, 1997
- ------------------------- Officer; Director
James O. Robbins
/s/ JIMMY W. HAYES Senior Vice President, Finance and March 28, 1997
- ------------------------- Chief Financial Officer
Jimmy W. Hayes (principal financial officer)
/s/ MICHAEL D. HORAN Vice President and Controller March 28, 1997
- ------------------------- (principal accounting officer)
Michael D. Horan
/s/ JANET MORRISON CLARKE Director March 28, 1997
- -------------------------
Janet Morrison Clarke
42
/s/ JOHN R. DILLON Director March 28, 1997
- -------------------------
John R. Dillon
/s/ DAVID E. EASTERLY Director March 28, 1997
- -------------------------
David E. Easterly
/s/ ROBERT F. ERBURU Director March 28, 1997
- -------------------------
Robert F. Erburu
/s/ ANDREW J. YOUNG Director March 28, 1997
- -------------------------
Andrew J. Young
43